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The recent Pension Funds Amendment Act has provided for the ‘clean break’ principle on divorce to apply. Basically this means that where a divorce order attaches a member’s benefit in the fund, the non-member spouse can now request her monies immediately.

This is a vast improvement, as previously, the non-member spouse could only claim her benefit when the member left the fund. This could be 20 years after the date of divorce, when the benefit had been eroded by inflation, as no interest accrued to the non-member spouse’s portion.

What is less clear is whether the clean break principle applies to people who got divorced before the promulgation of the Act. It would seem as though the provisions were intended to apply retrospectively, but the wording of the Act is a little vague.

The Pension Funds Adjudicator recently made a determination in respect of the Cockcroft case that the clean break principle did in fact apply retrospectively.

The taxation of the divorce entitlement is a little more tricky. There has been no corresponding change to the Income Tax Act, which means that although the non-member spouse is entitled to her benefit at date of divorce, the second schedule only provides for a tax event when the member spouse leaves the fund, and then the tax will be paid by the member spouse.

This situation is not ideal, both from the member’s perspective, as he would need to pay the tax, and try and claim it back from the non-member spouse, and from an administrative complexity perspective.

In answer to the question “How do retirement funds handle divorce orders?”:

• We know that the non-member spouse can access her or his monies in the fund as at date of divorce;
• We are reasonably sure that this provision is meant to be retrospective, although it would be comforting if  the FSB could send out a circular confirming the interpretation of the Act; and
• We are uncertain as to the future tax treatment of the non-member spouse’s benefit. As the current      situation is not ideal, it is hoped that changes to the tax legislation will be made, which will complement  the ‘clean break’ principle.

Jennifer Grefen

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