A late-life divorce settlement must still work after the dust settles

Question

My husband and I are divorcing after a long marriage. I took time out of working to raise our now adult children, so my retirement savings are much smaller than his.

What claim might I have on his pension, and what should I be looking at in the broader divorce settlement?

He has offered me a cash amount, but I am not sure whether it is fair and will be sufficient to provide for me in the long term.

Answer

Divorce later in life requires very careful navigation. This is particularly true when one spouse spent years earning, contributing to retirement funds and building wealth, and the other stepped back from paid work to raise children and keep the family going

Before you can work out what may be fair, you need to know what legal regime applies to your marriage. Were you married in community of property, out of community of property with accrual, or out of community of property without accrual?

This matters enormously. In community of property means there is a joint estate.

With accrual means the growth in each spouse’s estate during the marriage is compared, and the spouse whose estate grew less may have a claim.

Without accrual generally means there is no automatic sharing of assets simply because the marriage is ending.

In other words, before you debate whether a cash offer is fair, you need to know what your legal entitlement may be.

Retirement funds

In many divorces, the retirement fund is one of the biggest assets in the marriage, yet it is often overlooked or poorly dealt with.

South African law allows a non-member spouse to be awarded a share of the other spouse’s pension interest on divorce. But this is where wording matters. The settlement must identify the fund properly, refer specifically to pension interest and state clearly what percentage or amount is being awarded. If the wording is loose, the fund may reject it or delay payment.

If you are awarded a share of pension interest, the next question is whether to take the money as cash or preserve it in a retirement structure.

A non-member spouse can generally elect to receive a lump sum or transfer the amount to another approved retirement fund. A cash withdrawal is taxed in the hands of the non-member spouse under the withdrawal tax tables, whereas a transfer to another approved fund is generally tax-neutral.

In most cases, preserving the money is the better decision.

You also need to check whether the retirement money is still inside a retirement fund. If it has already been transferred to a living annuity, the position may be different.

Cash settlement

If you have been offered a cash settlement, test whether the capital can support your future lifestyle.

Start by drawing up a realistic monthly budget for life after divorce. Include items such as accommodation, food, transport, medical aid, insurance, municipal costs, household expenses and a sensible allowance for irregular costs such as car repairs, maintenance and emergencies.

Once you have that monthly number, multiply it by 12 to get your annual income need. Then do a rough capital check by dividing that annual amount by 5%.

If you need R30,000 a month, that is R360,000 a year. Divided by 5% suggests you may need about R7.2-million of capital to support this level of income sustainably over time. It is not a perfect formula, but it is an excellent sense-check. It helps you see very quickly whether an offer is realistic or only sounds impressive.

Of course, the real answer is more nuanced than that. Tax, inflation and investment returns must be considered. That is why this is the stage where a certified financial planner can add real value.

A planner can help you test the offer properly, work out what income it may realistically produce, flag the tax consequences and help you judge whether the settlement is sustainable rather than merely acceptable.

Late-life divorce has a way of making ­people want it over with. That is understandable. But it is dangerous. Before signing anything, get advice so you can:

• Understand the marriage regime;
• Understand the pension claim;
• Build a proper budget; and
• Test the lump sum.

A good divorce settlement is not the one that sounds fair on the day. It is the one that still works when the dust has settled and real life begins again. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpadvice.co.za

This story first appeared in our weekly DM168 newspaper, available countrywide for R35.