The Government Employees Pension Fund (GEPF) Member Guide sets out how pension interest is dealt with upon divorce of one of its members.

What is “pension interest’’, and why is it so important that the retirement fund clauses are correctly drafted?

For purposes of the GEPF, the Divorce Act 70 of 1979 defines pension interest as “the benefits to which a member would have been entitled to in terms of the rules of the fund if his/her membership had terminated, due to resignation, at date of divorce”.

It often happens that the retirement fund clauses in divorce settlement agreements are poorly drafted, resulting in the rejection of a claim by the fund’s administrators. Once a divorce settlement agreement is made an order of the court, the only remedy to rectify the agreement is to approach the courts to amend or vary the wording. These court applications are extremely expensive and time-consuming. Ensure that careful consideration goes into the choice of attorney in matters of divorce.

The clean break principle

Previously the parties at divorce could agree regarding the division of the pension interest, but the non-member spouse could not access the benefits until the member spouse exited the fund. The non-member spouse also could not lay claim to any investment growth on their allotted portion.

This all changed with the introduction by the Pension Funds Amendment Act, 2007 of the so-called clean break principle. With effect from September 13 2007, a non-member spouse had immediate access to the pension interest benefit awarded to them in terms of the divorce order. The non-member spouse also received all future investment growth on their portion.

The GEPF, which is not subject to the Pension Funds Act, was amended on December 14 2011 to allow for the clean break principle.

Options available to the non-member spouse when receiving their portion of the pension interest

The pension fund administrator will grant the non-member spouse the option to either receive the benefit in cash or have it transferred to an approved retirement fund. The non-member spouse would be required to complete a so-called “choice” form to convey the decision to the GEPF.

Taxation of pension interest allocations

The date of the divorce order payment/deductions from the fund determines the tax implications, and it is therefore important that parties to a divorce action obtain professional advice.

Divorces granted before September 13 2007 would result in the member spouse having to pay the tax on the withdrawal of the pension interest by the non-member spouse. Divorces granted after September 13 2007 on the other hand would result in the non-member spouse having to pay the tax on the withdrawal. It is important to note that the pre-1998 tax-free amount would apply to the non-member spouse’s share of the benefit proportionately irrespective if a cash award is taken or whether the full amount is transferred to an approved fund.

Cash withdrawals will attract tax based on the following scale:

Withdrawal tax table

1 – 25 000​	​0%
​25 001 – 660 000	​18% of taxable income above 25 000
​660 001 – 990 000	​114 300 + 27% of taxable income above 660 000
​990 001 and above	​​203 400 + 36% of taxable income above 990 000

Source: The South African Revenue Service

Divorce debt

The current GEPF member’s guide still includes the so-called divorce debt on page 24. Previously when a member got divorced, the GEPF would subject a member to a debt model in a divorce settlement. The debt model was treated as the GEPF having made an interest-bearing loan to the member equal to the amount paid to the non-member spouse in the divorce settlement or court order.

The divorce debt model resulted in an amount of interest on the loan which was then deducted from the member’s pension interest upon resignation, death, or retirement. This resulted in GEPF members being treated differently than private sector pension fund members as far as divorce is concerned.

A new dispensation was introduced and from May 22 2020 all members who have a legal divorce claim against their pension will be subject to a service reduction model.

According to the “Latest News” section on the official GEPF website the amendment will be treated as follows:

“The amendment now ensures that rather than creating a debt, there will be an adjustment to the member’s pensionable service following the payment of a divorce settlement by the GEPF. This means that the benefit that will be paid to the member upon retirement will now be decreased by reducing the members ‘years of pensionable service to take into account the pension interest of the member that was given to the spouse upon divorce”.

The new dispensation allows for a much more just and equitable treatment of divorce pay-outs. Please take note however that the Member’s Guide has not been updated to include the new treatment and this could result in confusion for members.

 

Article credit https://www.moneyweb.co.za/financial-advisor-views/dealing-with-gepf-pension-interest-upon-divorce/