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Divorce Act

In 1989 an amendment to the Divorce Act (section 7) brought retirement fund benefits into the divorce arena for the first time. Previously, a members
interest in a retirement fund was ignored upon divorce because no benefit had as yet accrued to the member.

The amendments provide for the definition of a pension interest in respect of pension and retirement annuity funds. Once determined this interest can be
awarded in whole or in part to the non-member spouse as part of the divorce settlement. One of the biggest problems experienced with the implemen-
tation of this provision is the lack of appreciation of the fact that the benefit can only be paid to the non-member spouse once the member receives a
benefit from the fund. Unfortunately many attorneys have shown complete ignorance of the law in the manner in which divorce settlement agreements have
been drafted. Many of these will be incapable of execution leaving the non-member spouse with an enormous problem.

These provisions apply to all divorces awarded after 1/8/1989. It does not apply to marriages entered into after 1/11/1984 by ante nuptial contract in which
community of property, profit and loss and the accrual system has been excluded.

The pension interest is defined as follows:

• In the case of a pension fund it is the benefit the member would have been entitled to had he resigned from the fund on the date of divorce.
• In the case of a retirement annuity fund it is the contributions paid to the fund until the date of divorce plus simple interest at the prescribed rate of
interest. (The prescribed rate of interest is promulgated in terms of the Prescribed Rate of Interest Act 55 of 1975 and is currently 15,5%)

The benefit awarded to the non-member spouse is only payable once the member becomes entitled to a benefit. This would happen on his death, retire-
ment, resignation, retrenchment or dismissal. This event could occur decades after the divorce has been granted. The benefit payable could be rendered
meaningless because there is insufficient recognition of the time value of money in the calculation of the pension interest.

Additional problems are caused by the fact that it is the member spouse who has to bear the tax on the benefit. The non-member spouse receives the
benefit tax-free.

From an Estate Duty perspective, the member will have any lump sum benefits included as deemed property, but will be allowed a deduction of the
amount paid to the non-member spouse as a debt due by the estate. [Sections 3(3)(a) read with section 4(b) of the Estate Duty Act]

Pension Funds Act

The Pension Fund Act (24 of 1956) is the statute that provides for the registration, incorporation, regulation and dissolution of pension, provident and
retirement annuity funds. The term pension fund in the Pension Funds Act is defined to include all three types of funds mentioned above, with similar
registration requirements and controls.

It is, however, in the Income Tax Act that a distinction is drawn between the different types of funds. As strange as this may seem, this is a function of
the dual approval system that operates. In addition to the rules of a fund being approved by the Registrar of Pension Funds, the rules have to be further
approved by the Commissioner for Inland Revenue, if the fund and the members thereof are to qualify for the tax relief available to them in the Income
Tax Act. Section 1 of the Income Tax Act consequently contains separate definitions of pension fund, provident fund and retirement annuity fund.

This is a highly complex area and we do advise that you seek professional help through ourselves or someone else e.g. lawyer or tax consultant.