If you think divorce, retirement and tax aren’t interlinked – think again. Here’s all the information you will need to make the best possible decisions, says Emile Van Der Spuy of Gravitas Tax.
Divorce is sadly very common today, and financial planners are likely to be faced with the issue on a regular basis.
A Psychology Today article by Jessica Schrader points out that, although first-time marriages have a 75% success rate, people who have previously been divorced and then remarry have an up to 75% chance of divorcing again in the future. Although hope springs eternal, reality doesn’t quite live up to common expectations, it seems.
Financial advisers must therefore research the topic thoroughly, so they can advise their clients on the impact divorce may have on their pension payouts – along with its tax implications.
The clean-break principle
The clean-break principle came into effect on 13 September 2007. This principle – in which the parties seeking divorce are facilitated with becoming financially independent of each other as soon as it is possible – has found resonance in the South African courts for many years.
While modern couples tend to have separate retirement savings, the tendency would be for the higher-earning partner to either pay rehabilitative maintenance to the lower-earning spouse for a period of time after the divorce; or to permit the spouse without retirement savings to access the higher-earning spouse’s retirement annuity, pension or provident fund.
The impact on retirement
While freeing up these funds should allow the lower-earning spouse to maintain their standard of living for a period of time while seeking employment (in the case, for example, where that individual was not working at all) – it would obviously have a significant impact on the retirement plans of both parties.
If the husband was the higher earner, for example, he would lose a portion of his retirement savings to the non-member spouse.
Using the example of a R3 million retirement investment, where the marriage had been lodged in community of property, the non-member spouse would immediately be entitled to the sum of R1.5 million.
Crucially, the divorce order would only state the sum to which the non-member spouse would be entitled. It would obviously not specify the withdrawal options available to that individual.
The impact on tax
This is where consulting a financial planner is paramount – not just to discuss the possible options available, but also to find out what their tax implications may amount to.
Option 1: The non-member spouse opts to transfer the portion of their former spouse’s retirement investment, to which they are entitled, into a preservation fund. Their financial planner will advise them on the tax-neutral nature of this transaction, i.e. that no tax would be applicable on the transfer. The individual would then be permitted one pre-retirement withdrawal before the age of 55, subject to withdrawal tax and according to the relevant tax tables.
Option 2: The non-member spouse elects to withdraw the funds, immediately, in cash. When taking this option, the financial planner should explain that withdrawal tax would be applicable, according to the non-member spouse’s tax tables.
Why you need a simulation
Your financial planner will be acting from a blind spot if they attempt to advise you on the tax you will be liable for – related to a R1.5 million withdrawal on divorce, for example – without carrying out a tax simulation on your behalf.
At Gravitas Tax, we offer clients the facility of a digital tool directly integrated with SARS. This tool carries out a tax simulation on that client’s behalf, which will determine – as accurately as possible – what they are liable for related to a previous divorce order, retrenchment, and any other withdrawals over their career and lifespan, which they may not accurately recall.
In conclusion, this tax simulation facility allows a financial planner to help a non-member spouse to make an informed decision when they are deciding whether they require these court-allocated retirement funds right now; or whether it would be preferable to place them in a preservation fund.
In the latter case, should they be gainfully employed and not in need of the cash immediately – they would be able to withdraw these funds when future need arises.
For more visit: https://gravitastax.co.za/
