Pension Interest on Divorce: How It Is Valued and Why Orders Fail

For most South African couples the house has a bond against it, the cars are financed, and the largest unencumbered asset in the marriage is one spouse's retirement fund. Which is why "she gets half my pension" is one of the most common things said in a divorce — and one of the most commonly got wrong.

Three separate things have to line up before a cent moves: the marriage regime has to give the other spouse a claim, the definition of pension interest has to be worth what you think it is, and the divorce order has to say the right words to the right fund. Orders fail on the third point routinely, and on the second point silently.

What the law actually values

Section 1 of the Divorce Act 70 of 1979 defines "pension interest" in two limbs, and they are not the same thing at all.

For a pension or provident fund (excluding a retirement annuity fund), it means:

"the benefits to which that party as such a member would have been entitled in terms of the rules of that fund if his membership of the fund would have been terminated on the date of the divorce on account of his resignation from his office"

That is the resignation benefit at the date of divorce. A hypothetical resignation on that day, valued by the fund's own rules.

For a retirement annuity fund, it means something quite different:

"the total amount of that party's contributions to the fund up to the date of the divorce, together with a total amount of annual simple interest on those contributions up to that date, calculated at the same rate as the rate prescribed as at that date by the Minister of Justice in terms of section 1 (2) of the Prescribed Rate of Interest Act, 1975"

Read that carefully. Contributions plus simple interest. Not the value of the fund. Not investment growth. Not compound returns.

On a retirement annuity that has been running for twenty years through a strong market, the fund value and the sum of contributions plus simple interest can be very different numbers — and the gap belongs to the member spouse, not the other one. The rate applied is the prescribed rate under the Prescribed Rate of Interest Act, which since the 2015 amendment is the Reserve Bank's repo rate plus 3,5 percentage points, and it is simple interest, not compounded.

If the retirement savings in your marriage sit in a retirement annuity rather than an employer fund, this single definition may be the most financially significant sentence in your divorce.

Whether you have a claim at all depends on the marriage regime

Pension interest is only in play if your matrimonial property regime puts it there. Section 7(7)(a) of the Divorce Act:

"In the determination of the patrimonial benefits to which the parties to any divorce action may be entitled, the pension interest of a party shall, subject to paragraphs (b) and (c), be deemed to be part of his assets."

"Deemed to be part of his assets" is the whole mechanism. The pension interest is treated as an asset in the division that your regime dictates — it does not create an independent right to half of anything. (The deeming is expressly subject to paragraphs (b) and (c) of the same subsection, which carry their own qualifications.)

So:

• In community of property — the pension interest falls into the joint estate and is divided with it.
• Out of community, with accrual — it counts in the accrual calculation, and the spouse with the smaller accrual has a claim for half the difference.
• Out of community, without accrual — there is no automatic claim on it at all. A spouse in this position who assumes a right to half the pension is assuming something the law does not give them.

If you are unsure which regime you are married under, our guide to the matrimonial property regimes sets out the three and how to tell them apart.

The order has to be enforceable against the fund

This is where competent-looking divorce orders die.

Section 7(8)(a) is what allows a court to reach past the member and bind the fund itself:

"The court granting a decree of divorce in respect of a member of such a fund, may make an order that—(i) any part of the pension interest of that member which, by virtue of subsection (7), is due or assigned to the other party to the divorce action concerned, shall be paid by that fund to that other party when any pension benefits accrue in respect of that member; (ii) the registrar of the court in question forthwith notify the fund concerned that an endorsement be made in the records of that fund that that part of the pension interest concerned is so payable to that other party and that the administrator of the pension fund furnish proof of such endorsement to the registrar, in writing, within one month of receipt of such notification"

A fund is a stranger to your divorce. It can only act on an order that fits that subsection. In practice that means the order must:

• Name the fund, correctly and specifically. "His pension fund" is not a fund. Get the full registered name and, ideally, the membership number.
• Award a part of the "pension interest", using that term, expressed as a percentage or a rand amount. An order awarding "50% of his pension" or "half of his retirement savings" is not an award of pension interest and funds decline to act on it.
• Direct the fund to pay the non-member spouse.

An order that misses these is not void — but it is not enforceable against the fund, and fixing it means going back to court, often years later, sometimes after the money has already been paid out to the member. That is the most expensive administrative error in South African family law.

Note also subsection (ii): the registrar must notify the fund to endorse its records, and the administrator must furnish proof of the endorsement within one month. Do not assume this happened. Confirm with the fund in writing that the endorsement is on the record.

The clean break: you no longer wait for retirement

Read on its own, section 7(8)(a)(i) says the fund pays "when any pension benefits accrue in respect of that member" — which, before 2007, meant the non-member spouse waited until the member resigned, retired or died. Divorced at 40, paid at 65.

That changed with the clean-break amendments to the Pension Funds Act. Section 37D(1)(d)(i) authorises the fund to:

"deduct from a member's or deferred pensioner's benefit, member's interest or minimum individual reserve, or the capital value of a pensioner's pension after retirement, as the case may be—(i) any amount assigned from such benefit or individual reserve to a non-member spouse"

And section 37D(4) puts that deduction on a timetable that runs from the divorce order rather than from the member's retirement. The sequence the fund must follow:

The election is between taking the money in cash and transferring it to another approved retirement fund. That choice has a tax consequence and it is the next thing to understand.

Who pays the tax

For divorces on or after 13 September 2007, where the election is made on or after 1 March 2009, the tax on a pension-interest award is for the account of the non-member spouse, not the member. The amount paid in cash forms part of the non-member spouse's gross income and is taxed under the withdrawal lump-sum table. SARS sets the mechanics out in its General Note 33, "Divorce Awards".

That matters in two directions:

• If you are receiving, the cash you take is not the cash you get. It is taxed as a withdrawal, in your hands, at your own accumulated lump-sum history.
• If you are paying, the old fear that you would be taxed on money going to your ex-spouse no longer applies to awards under the current regime.

Electing a transfer to another approved fund rather than cash avoids the immediate tax, because nothing is withdrawn — the money moves from one retirement fund to another and keeps its retirement status. For a non-member spouse who does not need the cash today, that is usually the better answer, and it is a decision made once, inside a 120-day window, with no second chance.

Where that transferred money goes is then an ordinary retirement decision — see our comparison of retirement annuities and the complete guide to retirement income in South Africa.

A practical checklist

Before the order is granted

• Get the fund's full registered name and the member's number, in writing from the fund or the payslip — not from memory.
• Ask the fund for a pension interest quotation as at the anticipated date of divorce. For an employer fund that is the resignation benefit. For a retirement annuity, insist on the section 1 figure — contributions plus simple interest — and not the fund value, because those are different numbers and the second one will mislead you about what you are settling.
• Check your matrimonial property regime first. Out of community without accrual means there is nothing to divide here.

When the order is granted

• Confirm the order uses the words "pension interest" and names the fund.
• Send a certified copy to the fund yourself. Do not rely on the registrar.
• Get written confirmation of the endorsement on the fund's records.

After

• Diarise the 45 / 120 / 60 / 30 day windows. The 120-day election window is the one that catches people: miss it and the fund simply pays cash, with the tax consequence that follows, whether or not that was what you wanted.

Frequently asked

Am I automatically entitled to half my spouse's pension? No. Section 7(7)(a) deems the pension interest to be part of that spouse's assets. What you get then depends entirely on your matrimonial property regime. Out of community without accrual, you may get nothing.

My ex has a retirement annuity worth R2 million. Do I get half of that? Not of the R2 million. For a retirement annuity the Divorce Act values the pension interest as contributions to the date of divorce plus annual simple interest at the prescribed rate. That figure is usually materially lower than the fund value, and the difference stays with the member.

How long must I wait for the money? Under the clean-break provisions, no longer until your ex retires. The fund must request your election within 45 days of receiving the order, you have 120 days to elect, and the fund must pay or transfer within 60 days of your election.

Do I have to take it in cash? No, and usually you should not. Electing a transfer to another approved retirement fund avoids the immediate withdrawal tax. Cash is taxed in your hands under the withdrawal table.

Our order says "50% of his pension". Is that enough? Very likely not. A fund can only act on an order that complies with section 7(8)(a) — one that awards a part of the pension interest and identifies the fund. Take the order to the fund now and ask, in writing, whether it will act on it. Finding out years later is the expensive path.

What about a government employees' fund? The Government Employees Pension Fund operates under its own law and its own rules, and the mechanics differ from a private fund. Ask the GEPF directly what wording it requires before the order is made.

Does the pension interest include growth after the divorce? No. The definition fixes the valuation at the date of divorce. What happens to the fund afterwards is the member's gain or loss, subject to the interest the fund adds on the assigned amount under its own rules.