How the two-pot retirement system changes divorce settlements in South Africa

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While the rise in divorces isn’t new, the scale suggests more South Africans are choosing to leave unhappy marriages. With this trend, and the introduction of the two-pot retirement system in 2024, what should investors know about the impact of divorce on their retirement savings?

“When marriages end, dividing assets can be complex – especially retirement savings. The introduction of the two-pot retirement system in September 2024 has significantly changed the rights of divorcing fund members and their spouses,” says Reo Emmett, senior legal adviser at Allan Gray.

Stats SA data also shows that many divorces take place within the first decade of marriage, with the median ages being 46 for men and 42 for women. Interestingly, younger women (below 45 years) were more likely to seek divorce than men in the same age range. However, the trend reverses among older age groups, with more men divorcing after 45.

“Most divorces occur after the age of 40, and this is typically when investors start ramping up their retirement-saving efforts. Divorce can lead to major financial setbacks in retirement, especially if it occurs during the crucial period of accumulating retirement savings,” says Emmett.

Understanding the Divorce Act and the Pension Funds Act in the context of retirement-fund investments

Emmett says that two pieces of legislation interplay when it comes to divorce and your retirement-fund investments: the Divorce Act and the Pension Funds Act.

“If you are a member of a retirement fund, your pension isn’t like cash in the bank – it technically belongs to the fund until you retire. But the Divorce Act allows a non-member spouse to claim a share of it in certain types of marriages.”

He explains that this typically applies to couples married in community of property or out of community of property with accrual. “If you are married out of community of property without accrual – especially after 1984 – your non-member spouse can’t claim a share of your pension,” says Emmett. “And even if both parties agree to split it, the fund can’t enforce it because the law does not allow for it.”

Emmett says the two-pot retirement system has brought in a new definition of “pension interest”, which is more flexible than what is contained in the Divorce Act and ensures that pension interest is based on real fund value at account level.

He adds that the two-pot rules include benefits for the spouses of people who are no longer contributing – such as paid-up or deferred members, and even in-fund pensioners. “Previously, if you left your job before the divorce, your spouse couldn’t claim anything, even if money was still sitting in the fund. This has now changed.”

How the two-pot rules account for divorce claims and savings-withdrawal benefits

Emmett explains that under the two-pot framework, since 1 September 2024, all contributions made to retirement funds are split as follows: One-third is allocated to a savings component and two-thirds to a retirement component. If you were a member of a retirement fund before 1 September 2024, your existing savings (less an amount used to seed your savings component) have been put into a vested component.

“This restructuring has significant implications for how pension interests are calculated and divided during divorce proceedings.​” Emmett notes. “If a divorce settlement includes a pension-interest split, the deduction must be made proportionately from all three components, as set out in the tax rules.”

He gives an example: “If the total pension interest is R900,000 and half is awarded to the non-member spouse, R450,000 would be split across the components proportionally – not just taken from one.”

Importantly, Emmett notes, couples can’t choose which part of the fund the money should come from. “Even if the divorce order says otherwise, the fund is legally required to deduct the amount proportionally. However, the member can still decide which portfolios the deduction comes from. If they don’t specify, it’ll be split across all portfolios automatically.”

Savings withdrawal benefits are also impacted by divorce. “Under the two-pot system, members can withdraw from their savings component once a year – as long as the amount is more than R2,000,” says Emmett. “But things change if you’re going through a divorce.”

He explains that retirement funds are not allowed to pay out a savings withdrawal if there is proof that divorce proceedings have started or if a court application for asset division has been made.

“This rule is there to protect the non-member spouse’s potential claim,” Emmett says. “If both spouses agree, though, the fund can go ahead with the withdrawal – but consent must be clearly given.”

The non-member spouse’s options once a valid order is provided to the fund

Emmett says that for a retirement fund to give effect to a divorce order, the order needs to be valid, meaning it needs to comply with specific requirements set out in the Divorce Act and Pension Funds Act.

When a retirement fund receives a valid divorce order, the non-member spouse has two options: They can either take the payout as a lump sum or transfer it to another approved retirement fund. However, there are several technical nuances that apply when it comes to tax calculations, deductions and the transfer of benefits.

“When going through a life-changing event such as divorce and its impact on your finances, it is always a good idea to speak with a financial adviser to help navigate the complexities,” concludes Emmett.