It is critical to fully understand legislative requirements for pension funds, especially when going through a divorce, advises Neesa Moodley
When Mr D Hauptfleisch agreed to pay over 100% of the funds in his retirement annuity to his ex-wife as part of a divorce settlement, he was certainly not aware this would result in penalties being paid.
Hauptfleisch’s retirement annuity was invested in a traditional policy-backed retirement fund and, because the ex-wife had elected to have the full pension amount paid to her in a cash lump sum, a penalty of R37?458 was deducted before she was paid out an amount of R177?932.
Penalties are levied if the policy is cancelled or made “paid up”, if the premiums are reduced or if the policy is transferred to another service provider.
Hauptfleisch complained tothe Pension Funds Adjudicator, indicating he had been advised that no penalties would be imposed and he had not terminated his membership but was continuing to make contributions to the fund.
The fund administrator, however, argued that he was charged a penalty because the policy was automatically discontinued when he assigned 100% of the policy value to his ex-wife.
The fund noted that members had been urged to contact their accredited intermediaries/brokers to obtain all information related to any penalties that might be charged.
Hauptfleisch had been informed his wife might not be able to access the full pension interest.According tothe fund, this was a clear indication the termination charge would first have to be deducted from the pension interest, together with tax, prior to payment being made to his ex-wife.
In her determination, Pension Funds Adjudicator Muvhango Lukhaimane said she had engaged the services of an independent actuary, who found the penalty of R37?458 was within the permissible limits.
Hauptfleisch also had sufficient time to either consult with his financial adviser or remedy the incorrect perception that there would be no termination or penalty charge.
In her determination, Lukhaimane raised the importance of carefully reading the documentation sent by the fund or employing the services of an adviser.
She sounded a warning to members to ensure they were aware of the implications of any instructions that insurers implemented on their behalf.
When dismissing the complaint, she said: “In this instance, an act meant to satisfy the division of matrimonial property ended up being quite costly for the complainant.”
What you need to know about the clean break principle
The introduction of a clean-break principle in 2009 changed the way pension funds are split on divorce.Prior to 2009, the nonmember spouse had to wait until the member spouse made a valid claim before his or her claim against the divorce order could be paid.
For example, if Mr and Mrs Smith were divorced at the age of 38, and Mrs Smith was awarded a portion of her ex-husband’s retirement fund, she would have had to wait until he retired at 55 to receive her portion of his retirement annuity (RA) proceeds.
Today, the clean-break principle allows the nonmember’s portion of the retirement fund proceeds to be paid out or transferred to a fund of his or her choice, as per a divorce settlement. So, the nonmember spouse no longer has to wait until the investment matures.
Despite this amendment, couples continue to find themselves in the predicament where their divorce order has not been worded correctly and one party finds themselves out of pocket as a result.
This is what you and your divorce lawyer need to know:
» When you take out a life assurance retirement annuity, the underlying policy belongs to the fund and not to you. So you cannot “give” the retirement annuity to your spouse in a divorce order.
However, both you and your spouse, in the case of a divorce, are entitled to the pension interest – the value of the fund. Your spouse can then opt to either transfer this to another retirement fund or take the amount as cash, at which point tax is payable.
» If you emigrate and obtain a divorce in another country, you will have to apply to a South African court to have your divorce settlement recognised and enforced in this country. Your divorce order in another country will not be recognised by a retirement fund in South Africa..
» The divorce order must specifically refer to “pension interest”, as per the Divorce Act..
» The divorce order must set out either a percentage of the fund member’s pension interest or a specific monetary amount..
» The retirement fund that has to pay out the pension interest must be clearly and correctly named in the divorce order..
» If the divorce order does not comply with the Divorce Act, it can be overruled and you will only be paid out pension interest as per the retirement fund rules..
» The retirement fund must be ordered to endorse its records and pay the pension interest as per the divorce order.
It is important to note that the pension interest on an RA fund refers tothe total of the amount contributed up to a certain date (the date of the divorce) plus the accumulated interest.
To avoid paying extra legal costs and possibly losing out on money you are entitled to, check that your divorce lawyer is aware of the intricacies.
Consult a financial planner, if necessary.Countless divorce orders have to be set aside because they do not comply with the relevant legislation.If your divorce order is not compliant with the relevant acts, then it can be deemed “unenforceable” and you will incur increased costs.
Your options will be to:?Sue your ex-spouse in court for the value of the pension interest due to you; or:?Apply to the court that issued your divorce order to amend the order so that it complies with both the Divorce Act and the Pension Funds Act.