What is the position of a spouse’s pension in the case of a divorce?
A pension fund or pension benefit, as defined by the Pension Fund Act, 24 of 1956, includes not only a Pension Fund but also an Annuity Fund and a Provident Fund. Section 7(7) of the Divorce Act7 of 1989 (as amended) provides that, in the determination of the patrimonial benefits to which the parties in any divorce action may be entitled, the pension benefits of a party shall be deemed to be part of his/her assets. Thus in any divorce action, a party’s pension benefits shall also form part of his/her estate in the determining the patrimonial benefits to which a party in a divorce action will be entitled.
The position regarding the pension benefits in the different marital regimes is therefore as follows:
Marriages in community of property
Where the parties have entered into a marriage in community of property, one joint estate is formed. When the marriage dissolves through divorce, each spouse will be entitled to 50% of the joint estate, which joint estate includes the parties’ pension benefits as well. The only exception would be if the Court made an Order in terms of Section 9 of the Divorce Act to the effect that one party forfeits in favour of the other, either wholly or in part his/her patrimonial benefits due to substantial misconduct during the divorce.
Marriages out of community of property without the accrual system
When a marriage out of community of property without the accrual system ends through divorce, each spouse will retain his/her own estate. The basic rule is that neither spouse will have a claim against each other spouse, but Section 7 of the Divorce Act provides that a Court may, on application by one of the parties, order that a part of one-spouse’s assets be transferred to the other spouse. The spouse’s assets, which are to be transferred to the other, shall then also include his/her pension benefits.
Marriages out of community of property with the accrual system
At the dissolution of a marriage out of community of property with the accrual system through a divorce, a redistribution of assets will be done according to a prescribed formula, which means that the spouse whose accrual during the marriage was smaller is entitled to half of the difference of the accruals between the spouse’s estates. The accrual is calculated by deducting the beginning value of the estate from the end value of the estate. A spouse’s pension benefits will therefore in this be taken into account when the accrual is calculated.
In terms of Section 1 of the Divorce Act, a spouse is only entitled to the other spouse pension benefit as at date of divorce, a spouse is not automatically entitled to any interest accrued to the other spouse pension benefits. This means by implication that any benefits of whatever nature including the interest accrued upon a pension benefit, does not form part of a person’s estate for the purposes of divorce.
The parties are however entitled to enter into an agreement between themselves regarding the interest accrued to a spouse’s pension benefit.
Who pays the tax?
In terms of Section 37A of the Pension Fund Act 24 of 1956, a person’s pension benefits are taxable. The parties are entitled to enter into an agreement, which provides that the tax payable on that part of the pension benefits, to which the non-members spouse is entitled, shall be recovered from such spouse.
In the case of divorces granted before 13 September 2007, the member is responsible for any tax in respect of the spouse’s benefit, irrespective of whether it is paid to the spouse or transferred to another retirement fund.
In the case of divorce orders granted on or after 1 March 2009, any tax is payable by the spouse on the benefit that he or she receives.
In respect of divorce orders granted from 13 September 2007 to 28 February 2009, the person liable for the tax on the pension interest depends on the date the spouse made his/her election as to whether he/she wants the benefits to be paid in cash or be transferred to another retirement fund of the spouse’s choice:
• for an election before 1 March 2009 the member has to pay the tax.
• for an election from 1 March 2009 the spouse has to pay the tax
The Income Tax Act provides the member with a right to recover tax that the member had to pay in respect of the spouse’s benefit, from the spouse.