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Legal Hurdle to splitting divorcee's pension

By Staff Writer


From Personal Finance
october 20 2007
By Laura du Preez

Divorcees, many of whom may have already waited some time for the right to access their portion of their former spouses' retirement fund savings, may face another hurdle that could prolong the time they will be denied growth on the money they are owed.

This is despite the fact that:


Lawmakers intended to improve their lot immediately with an amendment that was meant to apply retrospectively; and

A recent ruling by the Pension Funds Adjudicator that applied the amendment retrospectively in favour of a woman who claimed access to her share of her ex- husband's pension fund.

At least one retirement fund administrator, Old Mutual, has advised the retirement funds it administers that it believes a recent amendment to the Pension Funds Act is not retrospective.

As a result, Old Mutual will not pay out former spouses who have claims against fund members' retirement savings in terms of divorce orders made before September 13 this year, unless the fund absolves the administrator of any potential claims.

The Pension Funds Act was amended with effect from September 13 to give divorcees immediate access to pension benefits awarded to them in terms of divorce orders - what is known as a "clean break" of pension fund interests.

Previously, former spouses - usually former wives - had been able to access their portion of the benefits only when their former husbands resigned or retired. From the date of divorce until either event, they were denied growth on their portion of the benefits.

But although the National Treasury has confirmed in a letter to the Life Offices' Association, which represents life assurers - many of which administer retirement funds - that it intends the amendment to apply to all divorce orders, some retirement fund administrators, consultants and advisers are of the view that the amendment has been worded in a way that makes it apply to divorce orders made after September 13 only.

Jonathan Dixon, the National Treasury's chief director of financial sector policy, says to ensure certainty about the retrospective nature of the amendment, the treasury will consider a further amendment to the Pension Funds Act by way of the General Financial Services Laws Amendment Bill, which is expected to be tabled before the end of the year but will be considered by Parliament only next year.

On October 3, Mamodupi Mo- hlala, the Pension Funds Adjudicator, in a case before her, Cockcroft versus the Mine Employees' Pension Fund, ruled that the amendment should be applied to divorce orders made before and after September 13.

Mohlala's office said this week that former spouses who approach pension funds about the payment or transfer of divorce benefits and are unhappy with the funds' response can lodge a written complaint with the adjudicator's office.

Doubting the ruling 

Old Mutual says although it and some other administrators support the "clean break" principle for all divorce orders, they have doubts about the correctness of the adjudicator's ruling because they do not interpret the amended law as applying retrospectively to divorce orders made before September 13.

In a newsletter to funds and intermediaries, Old Mutual says the application of the amended Pension Funds Act to existing divorce orders could be challenged.

Jenny Gordon, a senior legal adviser at Old Mutual, says Old Mutual is concerned that if the funds it administers pay out former spouses in terms of divorce orders made before September 13 without having certainty on how the amendment should apply, the funds and Old Mutual may be held liable to members for any losses that occur.

Some funds may seek legal clarity by asking the High Court for a declaratory order on the correct legal position.

In addition, Old Mutual's newsletter to funds says tax legislation "has not yet caught up to the new Pension Funds Act amendments" and there is "a great deal of uncertainty regarding how the funds should apply the tax" if retirement funds pay out former spouses before proposed changes to the tax laws are implemented.

Changes to tax law
Hearings on the Revenue Laws Amendment Bill continued in Parliament this week. The bill proposes that payments from funds to former spouses in terms of divorce orders be treated as withdrawals by the fund member for tax purposes.

This means that once this is enacted, if a non-member former spouse is paid a portion of a member's retirement savings, the member will be taxed on the withdrawal at his or her average rate of tax in the tax year in which the money is withdrawn or in the previous tax year - whichever rate is the higher.

Lawyers say the current proposed bill could result in members facing large tax bills, which they will have to pay out of their pockets because the tax cannot be paid from their retirement savings. But Gordon says comments on this issue are being considered and it is unlikely that the law when enacted will result in such a situation.

The amended Pension Funds Act provides for pension fund interests granted to non-member former spouses in terms of divorce orders to be transferred to another retirement fund. However, Gordon says the tax consequences of such a transfer are still unclear, and non-member former spouses should proceed with caution and seek professional advice on this issue before exercising this option.

Until the tax law is amended, current tax legislation prevails, which, Gordon says, means if benefits are paid to a former spouse, the member could be taxed on this amount only when he or she retires or withdraws from the fund at the member's average rate of tax in that year or the preceding year.

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