For years, South Africa’s financial legislation has followed the “clean-break” principle regarding a couple’s finances on divorce. This means that ongoing financial obligations – apart from the payment of child and spousal maintenance, if part of the divorce agreement – are avoided, and each partner can start life afresh through the immediate, and hopefully fair, splitting of the couple’s assets.
While some ongoing financial issues after a divorce may be inevitable, the law is clear on retirement savings: a retirement fund – and that may be a pension, provident, preservation or retirement annuity fund (RA) – must pay the non-member spouse an agreed percentage of the member spouse’s benefit if required to do so by a court order.
The clean-break principle for private-sector retirement fund benefits on divorce was introduced through an amendment to the Pension Funds Act that took effect on November 1, 2008. Before the principle was introduced, divorcees had to wait until their former spouses resigned or retired from their funds before they could receive their portion of any retirement benefit awarded to them.
This benefit is referred to as “pension interest” in the Pension Funds Act and in the Divorce Act. Although “pension interest” is defined as the member’s withdrawal benefit amount at the date of divorce, there were differences between types of retirement funds on the calculation of this amount.
For funds other than RAs, “pension interest” referred to the accumulated amount after compounded returns. For RAs, it referred to total contributions plus annual simple interest calculated at a given rate.
This has now been changed so that all retirement funds are treated equally.
In an article titled “Divorce orders and pension interest: what you need to know”, Dionne Nagan, legal counsel for asset manager Ninety One, explains that, for divorce orders granted before 1 September 2024, pension interest is defined in Section 1 of the Divorce Act as follows:
“In the case of a member of a pension fund or provident fund (including preservation funds), it refers to the benefits the member would have been entitled to under the rules of the fund, had their membership been terminated on the date of the divorce due to resignation.
“In the case of a member of a retirement annuity fund, it refers to the total amount of the member’s contributions to the fund up to the date of divorce, plus the accumulated simple interest on those contributions, calculated at the rate prescribed as of that date by the Minister of Justice under Section 1(2) of the Prescribed Rate of Interest Act, 1975, provided it does not exceed fund return.”
Nagel says this simple interest rate is calculated as the repurchase (repo) rate, as determined by the South African Reserve Bank, plus 3.5% per year. “For example, if the repo rate is 7%, then the interest rate used to calculate pension interest will be 7% plus 3.5% which equals 10.5%.”
She says a new definition of pension interest was introduced in Section 1 of the Pension Funds Act, effective 1 September 2024.
“For divorce orders granted on or after this date, pension interest is calculated as the member’s benefit in the fund, as determined by the rules of that fund, on the date that the court order is issued. This new definition aligns the calculation of pension interest for RAs with that for pension, provident and preservation funds, applying the same basis for all fund types,” Nagel says.
The apportioning of this amount, once calculated, is dependent on what the two parties have agreed to in their divorce agreement and the marital property regime under which they were married.
