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Retirement Planning
Thursday, January 1, 2009
Don’t spoil the sharing

The spouse of a member of a retirement fund may be entitled to share in the retirement savings of that member immediately on divorce. Whether the spouse is entitled to a share, and the extent of the share, depends on the provisions of the specific divorce agreement and the law.

When provision for this was added to the Pension Funds Act in 2007, many lawyers and funds interpreted the legislation to apply only to divorce orders finalised after 13th September 2007, and this interpretation was subsequently confirmed in the High Court. As a result of its ruling, however, the Pension Funds Act was recently amended, and divorce orders which were issued before 13th September 2007 are now included in the new dispensation.
Previously, when a divorce agreement awarded a share of the retirement fund to the non-member spouse, the share had to remain invested in the fund until the member exited the fund. There was no provision for investment growth.
In terms of the amendments to the Act a non-member spouse is now entitled to access his/her pension interest despite the fact that the member has not yet exited from the Fund and the pension benefits have not yet accrued to the member.
In terms of the act, non-member spouses have the option either to have their share paid directly to them, or else have the money transferred to an approved pension fund whose rules allow for such a transfer.
It is important to note that it is the non-member spouse’s responsibility to initiate the claim process.
The fund will require the following in order to effect payment to the non-member souse’s share:
1. A certified copy of the divorce order.
2. A formal request in writing to pay the award in cash or transfer it to another retirement fund.
3. Details of the fund or payment details to enable the fund to give effect to the order, failing which the fund may retain the money. Non-member spouses should provide full names, address, contact telephone numbers (especially cell phone numbers), policy numbers, and bank account details.

In light of the need to accumulate capital at retirement, Old Mutual advises divorcees to consider their options carefully and to seek guidance from a financial adviser. A number of factors need to be considered, including the implications of the Income Tax Act. Currently the tax payable on the non-member’s withdrawal amount is deducted from the member’s benefits, but the member may recover the tax from the non-member spouse.
“Gaining access to funds pre-retirement is an opportunity to reassess your retirement needs and potential shortfalls,” says Mark Cronje, Advice Manager at Old Mutual Personal Financial Advice & Private Wealth Management.
“Having access to the extra capital should be identified as an opportunity to plan and save for the future and to ensure financial wellbeing,” he suggests.
Cronje advises fund members to evaluate the sufficiency of their retirement savings following payments to their former spouses.  Any projected capital shortfalls should be addressed and supplemented with further appropriate investment products.
Similarly, non-member spouses should take stock of their personal situation with the assistance of a financial adviser. This is an opportunity either to transfer the pension interest amount to an approved fund or to invest the newly acquired money into a growth vehicle to meet future retirement needs.
Should the member spouse neglect to address the reduction in his or her retirement savings, or should the non-member spouse neglect to reinvest the capital in a suitable savings vehicle, either or both of them could both end up being unable to retire comfortably.
This point is illustrated quite clearly by a simple measure, called the replacement ratio, which is the ratio of one’s sustainable income level after retirement as a percentage of one’s current salary.
For example, a replacement ratio of 38% means that one will only be able to sustain 38% of their current income at retirement, after allowing for inflation.
A typical replacement ratio for someone retiring at age 65 after contributing to a retirement fund for 20 years is 30%. On the other hand, a replacement ratio of around 80% can be expected when retiring at 65 after contributing to a retirement fund for 40 years. This illustrates how true it is that the earlier one starts to save for retirement, the better the chances of building up one’s replacement ratio and of retiring comfortably.
The replacement ratio can also be increased significantly by making additional contributions into an appropriate investment vehicle.
“Old Mutual financial advisers are available to help you structure a financial plan with your goals in mind. Important additional considerations are budgeting, settling debt, changing or drafting a new will - as well as identifying and addressing other needs such as life and disability cover which provide essential financial protection in time of need,” concludes Cronje.

Copyright © Insurance Times and Investments® Vol:22.1 1st January, 2009
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