The new Pension Funds Amendment Act (PFAA) was recently signed into law, which will seriously impact divorce proceedings in South Africa.

New retirement fund rules have changed how pensions are divided between divorced South Africans.

“Before the PFAA it has been a well-established principle in our law that a divorce order is only enforceable against a pension fund as long as the member is still a member of the fund,” said Wright Rose-Innes.

“Now, with the introduction of the PFAA and the two-pot retirement system and accompanying insertion of the definition of ‘pension interest’, the PFAA allows for a non-member to claim from the pension fund of a member irrespective of his/her membership status with the said pension fund.”

The two-pot system was launched on 1 September 2024 and, as the name suggests, divides retirement savings into two separate pots.

The “savings pot” holds one-third of all retirement savings after implementation and will be accessible before retirement. If needed, this pot allows for one withdrawal per year (of at least R2,000) before retirement.

The “retirement pot” will hold the remaining two-thirds and will only be accessible after retirement, death or ill health.

A third “vested pot” will hold all the savings, minus R30,000 used as seed capital in the savings pot and will follow preexisting legislation.

Last week, the South African Revenue Service (SARS) announced that it received 1,213,646 applications for tax directives for withdrawals from the two-pot system’s Savings Withdrawal Benefit. 1,148,729 of these tax directives were approved for funds to be released.

The taxman said that a total gross lump sum of R21.4 billion has been paid out to date.

Changes for Divorce

“Once a pension fund receives a divorce order mandating the payout of a sum of money to a non-member spouse, the fund will reduce each component of savings, retirement and vested pot proportionally,” said Wright Rose-Innes.

“The PFAA further provides that should a member wish to withdraw from his savings pot while divorce proceedings are underway, the other spouse’s consent must first be sought.”

This is extremely different from the prior position, where pension funds would pay out without the other spouses’ consent, with the only remedy being an urgent interdict against the pension fund to retain the funds pending the divorce’s finalisation.

“How this will all unfold in practice will depend on the rules of the various funds.”

“The amendments introduced by the PFAA will raise questions regarding all pending divorce cases where the pension interests of spouses are involved in the division of the marital estate.”

Two-pot dangers

Although the two-pot system will potentially help South Africans in an emergency, serious long-term consequences exist for those who withdraw early.

“While the two-pot system offers flexibility for accessing funds during emergencies, early withdrawals come with significant long-term financial consequences that could drastically reduce a member’s standard of living in retirement,” said Coronation’s Rael Bloom.

“The immediate consequence is that withdrawals from the savings pot are taxed at the member’s marginal tax rate, meaning a portion of each withdrawal is lost to taxation.”

“Members who wait until retirement to withdraw benefit from preferential lump sum tax tables. By withdrawing early, they effectively forfeit this valuable tax advantage.”

On top of the tax losses, there are also investment gain losses.

“Members disrupt the powerful effects of long-term compounding when they withdraw early. Compounding enables retirement savings to grow exponentially over time, as returns generate further returns,” said Bloom.

“For every R1 withdrawn from a retirement fund 30 years before retirement, the future value of a member’s savings is reduced by around R6 in real terms due to the opportunity cost of foregoing compounded growth.”

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