How Does Divorce Impact Your Retirement Savings?

Not only an emotional landmine, divorce has myriad financial implications. These will affect your present income as well as also your future finances – in the form of your retirement savings. 

Just how strong is your antenuptial contract (ANC)? Do you even have one? It’s something a couple seldom thinks about after they’re married … unless one of them dies or they decide to divorce. When it comes to the division of retirement savings, your ANC – or lack thereof – generally determines how much you hold onto.  

Understanding pension interest

Pension interest, the share of the retirement benefit awarded to a non-member spouse, is calculated according to the benefit the fund holder would have received had they left the retirement fund on the date of divorce. This applies regardless of the length of your marriage or whether you were married when you first opened the retirement fund. 

Pension interest is defined in the Divorce Act, where a distinction is made between pension interest in a retirement annuity (RA) fund, and pension interest in any other retirement fund – for example, a pension, provident or preservation fund. In the case of a RA, pension interest is calculated based on the total amount of the member spouse’s contributions to the fund up to the date of divorce plus simple interest at the prescribed rate. For any other retirement fund, the pension interest is the total benefit to which the member spouse would have been entitled in terms of the fund rules had they terminated their membership at the date of divorce. 

Since 2007, a “clean break principle” has been in place when it comes to retirement benefits and divorce. This allows for the non-member spouse to receive pension interest at the time of divorce, eliminating the need to wait for their partner to reach retirement age. Retirement funds therefore deduct an amount from a member’s benefit and either pay it directly to the non-member spouse – in which case they will be taxed accordingly – or to a retirement fund of his or her choice.  

The amount the non-member spouse is awarded is either determined by a couple’s marriage contract or divorce settlement.  

Marriage contract matters

Couples are either married in or out of community of property. If you choose not to have an ANC, you are automatically married in community of property. Here the estates (the sum total of assets and liabilities) of each partner are consolidated to create one joint estate. Each partner has an equal share in this joint estate, regardless of how much they each initially brought into the marriage.

Here, in the case of divorce, everything is divided 50/50 between the couple. Naturally, this also applies to retirement funds which automatically form part of the joint estate and are therefore split equally. Yet, there is one exception to this rule which occurs when a legal forfeiture order in terms of Section 9 of the Divorce Act is granted. Here spouse one’s pension interests could be awarded to spouse two if it is ruled that spouse one disproportionately benefited from the marriage. 

When a couple signs an ANC before they wed, they are married out of community of property. Each partner retains control of their own assets and liabilities. There is therefore no joint estate, and should you divorce, you each keep what is yours, as will be the case with your retirement funds.  

Yet if you married out of community of property before 1 November 1984, Section 7(3) of the Divorce Act says that a spouse may bring an application for a redistribution of assets if that spouse can demonstrate that they contributed directly or indirectly to the other spouse’s estate during the marriage. This would include each parties’ retirement funds.  

If you marry out of community of property with the accrual system, you essentially have a combination of these two systems. The assets and liabilities with which you entered the marriage, remain your own but the assets you have both accrued during the marriage, will be combined, and then divided equally between you and your former spouse should you divorce. In this case, the value of the couple’s respective retirement funds will included when calculating the accrual, which is then divided evenly. 

Unique implications

The law makes allowance for the fact that no two couples are the same. That’s why you can tailor your ANC to your specific needs within legal parameters. Couples can therefore specify that they wish to have their retirement funds excluded from the accrual system, which means these funds will remain the exclusive domain of each individual spouse even in the event of divorce. 

In the case of an amicable divorces, couples are of course free to negotiate their own divorce settlements in which they agree on the division of assets and retirement fund benefits regardless of the stipulations of their ANC.