Tax may be the last thing on your mind when you and your soon-to-be-former
spouse are fighting over the marital assets. But forgetting to take tax
into account when it comes to sharing your pension can cause you to lose
money.
Retirement savings in pension and provident funds often form a large part
of your divisible assets when you get divorced.
A divorce settlement normally has a clause stating that your former spouse
will get half (or whatever you agree to) of your pension.
But as the member of the retirement fund, you are responsible for paying
tax on any withdrawals from your fund, including withdrawals of money
allocated to your spouse, when it is paid out.
For example, if your full pension is R500 000 and you and your spouse agree
to share it equally, your spouse could walk away with R250 000, but you
could end up with only R75 000 after paying the tax of R175 000. (This
example assumes you have an average tax rate of 35 percent and that you
also leave your fund at the date of divorce.)
Kobus Hanekom, a pension lawyer with Sanlam Employee Benefits, says that
tax should be taken into account either when you and your spouse calculate
the pension part of your divorce settlement, or when the pension money is
paid out.
The best arrangement, he says, is that the amount in the divorce settlement
should be calculated on an after-tax basis.
If no mention is made of tax in the divorce court order, it is assumed that
the amounts are pre-tax amounts and tax due will have to be paid by the
fund member.
So saying nothing about tax could cost you dearly.
There is new legislation on the cards - the Divorce Amendment Bill - which
will separate pension assets from the rest of the assets that can be
divided and will sort out various problems that arise under the present
system.
It will also give spouses automatic rights to a fair share of the pensions
of their spouses accumulated during their marriage.
The present situation is that your pension forms part of your joint estate
if you are married in community of property or can form part of your
accrual claim, if you are married under the accrual system. So you and your
spouse can agree on how to share your pension assets , or failing that,
fight it out in the law courts.
Points to bear in mind:
* The ``pension interest`` referred to in divorce orders is the cash
resignation benefit in the pension and provident fund or the total
contributions plus 15,5 percent simple interest in the case of retirement
annuities. Any housing loans, previous divorce orders and tax due will be
deducted first before the money is paid out;
* Your spouse can only receive his or her allotted share of your fund in
cash when you resign from your company and leave the fund, or when you die
or retire. You can of course, agree to make an upfront cash payment from
other assets at the time of your divorce; and
* Current legislation makes no provision for interest to accumulate on the
pension portion allocated to your spouse between the date of divorce and
the date of payment, which may be many years down the line. To be fair,
your divorce order should state what interest rate is payable.
But remember that the paying of interest will be a matter between your and
your former spouse.
Your fund will not pay the interest.
The case of Mr W
Personal Finance reader Mr W of Durban will have to foot a tax bill when
money allocated to his former wife at their divorce last year, is paid out.
According to the divorce order, his former wife is entitled to half of his
pension, but no mention is made of the tax liability. He is now faced with
the difficult task of getting his former wife to agree that they will share
the tax burden (although the fund will deduct it from his portion before
any money is paid out).
If he can`t, he will have to pay tax on the entire withdrawal, including
his wife`s share.
Walter Kasimov, an attorney at Johannesburg-based Kasimov and Associates,
says Mr W` has made a mistake and the law does not treat mistakes
sympathetically.
``If you agree to something in ignorance the law will not help you unless
you can prove you have been tricked.``
Rod Stevenson, secretary of the Retirement Funds Committee of the Life
Offices Association, says an amendment to the Tax Act in March last year
gives people like Mr W the right to recover the tax from his former wife.
But this right only applies to divorces that took place after November 1999
and Mr W was divorced in May.
To avoid financial complications if you end your marriage, it is far
simpler to sort matters out at the time of divorce and to pay careful
attention to the wording of your divorce agreement.