If you're thinking about getting a divorce, personal finance guru Paul Roelofse reckons you should consider these factors relating to your spouse's pension fund ...
In what is know as the “Clean Break Principle” recent regulations entitle divorced spouses to claim from the pension fund of the ex before retirement. These rules apply to government pension funds which have left members with interest bearing debts which have to be repaid to the fund. The problem rests with the time it will take to put the fund back in a position to honour its obligations to pay future pensions.
A defined benefit pension fund takes on the obligation to pay a member a specific pension at retirement based on the number of years that the member has contributed to the fund. It is a very onerous task for the fund as it needs to be in a sound financial position at all times to ensure that all members during retirement receive their pension benefits. The problem is compounded by the fact that members are living longer which puts enormous pressure on the present and future values of the fund. The sustainability of many funds is questionable as it is, so these premature payouts in divorce claims will cause serious problems for actuaries and trustees.
The claims against pension funds is on the rise and there is even a suggestion that many members are arranging their divorce just to get their hands on the cash. Ideally, the funds should not be cashed in and, instead it should be preserved. It takes time to catch up on the value accumulated through compound interest on the investments made in the fund and quite often there isn’t enough time left for most to catch up before reaching retirement.
So the message is clear. Your entitlement to the pension fund should you get divorced, should rather be preserved and included in your retirement provisions for the future. As a divorcee, your financial independence is even more crucial into the future as you are all on your own. Your pension claim should therefore be protected at all costs and should not be seen as a windfall.
Keep a close eye on the future value of your pension after a divorce claim and make adjustments sooner than later. The defined benefit funds in the latest changes charge the member interest on the debt and in many cases members won’t have enough months left before retirement to pay back the money. This is a dilemma for the trustees on defined benefit funds and serious adjustments will have to be made for future benefits.
Read more from Paul Roelofse at www.investforlife.co.za