Getting divorced? Here’s what happens to your Pension Fund

A divorce doesn’t just end a marriage. It can also have long-term financial consequences, particularly on your pension and provident fund. Many people are unaware that their retirement savings can be split in a divorce, and many spouses do not realise they have a right to claim a portion. Conversely, some believe they are entitled to a payout when they are not.

When a couple divorces, the spouse who is not a member of the pension fund (the non-member spouse) can potentially claim a share of the member spouse’s pension. Such payouts are made easier by the ‘clean-break principle’, which allows for an immediate payout to the non-member once the divorce is final.

“The clean-break principle has made payouts more accessible for non-member spouses,” says Siphamandla Buthelezi, Head of Platforms at advisory firm NMG Benefits. “They do not need to wait until the member retires, resigns, or dies before they can access their share. This principle was introduced into South African law to provide fairness and financial independence to spouses’ post-divorce. They can be paid as soon as the divorce is granted, and the fund processes the claim.”

How a pension fund is divided depends on the presiding judge or magistrate’s ruling, and the marriage contract in place:

• In community of property: All assets, including pensions, may be shared upon divorce.
• Out of community with accrual: The growth in pension savings during the marriage may be split, but the pre-marriage amount is protected.
• Out of community without accrual: The pension remains with the member, unless otherwise agreed in the divorce settlement.

A fund will only recognise a claim if the if the there is a decree of divorce stamped by the official court, which implies that the marriage was legally valid, whether this is via civil, religious, or customary processes.

A customary marriage is legally valid in South Africa if both parties are over the age of 18 and have consented to the marriage in accordance with customary law. There must be evidence that the marriage was negotiated, entered into, or celebrated in accordance with customary traditions — including lobola negotiations and the formal handing over of the bride. While customary marriages should be registered with the Department of Home Affairs, failure to register does not invalidate the marriage. Polygamous marriages are recognised, provided they comply with applicable customary practices and legal procedures, including applying to the court for approval of a written contract regulating the future matrimonial property system.

It is possible for people to be legally married under customary law without being fully aware, particularly when cultural practices such as lobola or traditional ceremonies have taken place, which may meet the legal requirements for a valid customary marriage even without formal registration or a written agreement. In some cases, individuals may not realise they are legally married under customary law. However, as Buthelezi explains, "Any future marriage is invalid without a legal divorce having occurred first." Furthermore, there have been instances where individuals believed they were legally married, only to discover that their partner was already married. Regardless of whether the partner was aware of their marital status, this invalidates the second marriage, and the ‘second spouse’ loses their rights, including the right to claim pension benefits.

If a member can prove that a marriage is not legally valid and there is no decree of divorce, the pension fund is not obligated to pay the non-member. For example, if a couple believed they were married under customary law but the court agrees that not all necessary traditional steps were completed, there will be no claim against the member spouse’s pension fund.

It is also important to understand the tax implications. If the member spouse takes their portion as a cash payout, it will be subject to tax at the applicable withdrawal tax rates, which may vary depending on the amount. However, if the payout is transferred directly into another retirement savings fund, such as a retirement annuity or pension fund, the transfer will not be taxed at the time, as long as it complies with the relevant regulations

“Divorce is hard enough emotionally, therefore understanding the financial and legal implications, especially around pension and provident funds, can save both parties from the added financial stress and loss later on” concludes Buthelezi.