By Nicola Langridge
According to Stats SA 2019 Marriages and Divorce report, nearly 25 000 couples divorce every year in South Africa. Divorce is never a decision taken lightly, and couples that have opted to go this route have many choices to make as they settle their affairs and split their lives in two – often one of the biggest, and most contentious, of these revolve around money.
To minimise stress it is important to engage a financial planner or wealth manager in the early stages of a divorce – before a divorce agreement is reached – to support the lawyer in terms of joint and individual financial decisions made.
A stumbling block often encountered in divorce is when the financial understanding of the marriage balance sheet is not equal. We still see that often one spouse relinquishes much of the financial responsibility during the marriage to their partner, allowing them to manage the money and control the financial decision making. As a result, they are all too often left in the dark and have no clear picture of the financial plan, overall assets, pension funds or strategy that they, as a happy couple, were using to grow their investments.
This is a real challenge in the event of divorce. According to a blog by financial planner, Kim Potgieter, statistics show that 27% of women experience a drop in their living standards after divorce, while 10% of men experience a rise.
It is extremely important that both partners are actively involved in the financial planning of the marriage. There are three things that you absolutely need to know in a marriage or partnership. These are: what your partner earns, what investments you have individually and together, and an agreed monthly budget, saving and spending plan.
If you and your partner are in the process of divorcing, start by engaging with a Certified Financial Planner or wealth manager. He or she can conduct a cashflow analysis, split your medical aid cover as well as your short-term insurance; make necessary changes to the beneficiaries of any policies held, advise on decisions regarding the transfer of pension savings, assist you to register for tax if necessary, and ensure that your will has been updated accordingly.
Generally, living annuities are out of the reach of spouses in a divorce as they do not constitute part of one’s estate, but often form a big part of a couple’s retirement savings.
A recent ruling by the Supreme Court of Appeal in 2020, however, indicates that while the capital of the living annuity does not form part of the estate to be divided, the future annuity stream does. Your financial planner or wealth manager can assist with the calculations to determine the present value of these future flows due to you as a lump sum, or you could agree to receive a percentage of these cash flows on a monthly basis for the duration that your ex-spouse receives these payments.
Pension fund transfers
An agreed-on percentage of savings in a pension fund are transferable to an ex-spouse, either in cash (subject to withdrawal tax) or to a retirement product in the ex-spouse’s name (no tax on transfer; normal retirement tax tables would apply at retirement).
There are tax considerations to take into account during divorce. When couples make a 50/50 split on assets, it does not always result in a 50/50 split when taking tax into account. Receiving a property may have capital gains tax implications and may include agency fees that reduces the value of the capital when needing to access it.
Insurance on life of maintenance payer
If a proposed settlement agreement makes provision for a spouse to pay maintenance for your shared children, it is worth including a clause that states that the maintenance paying ex-spouse will take out sufficient life cover to protect their future maintenance obligations in the event of their death or disability. This life policy must be correctly structured with the maintenance payer as the life insured and the other partner as the owner or beneficiary of the policy.
It is worth noting that, according to our laws of succession, if a person dies within three months of his/her divorce, their former spouse will not inherit. If the will leaves everything to the former spouse and makes no substitute, it can lead to intestacy or partial intestacy (in other words, the same conditions as dying without a will). This rule applies automatically unless it is clearly stated in the will that the former spouse must be a beneficiary in spite of the termination of the marriage. After this period, if the will has not been updated, your ex-spouse will inherit according to the conditions of your will.
When it comes to divorce settlements, partnering with a financial planner or wealth manager who has experience with divorce settlements and who will provide an objective opinion is fundamental. The amount offered in terms of the settlement agreement might seem like a sizeable sum of money, but it is important to understand in real terms exactly what the proposed settlement means over the longer-term.
A suitably qualified financial planner or wealth manager will be able to prepare various investment scenarios for you to demonstrate what level of income you would be able to draw from your investment, assist in drafting a post-divorce budget, taking account of any maintenance payments and ensuring that the modelling is inflation-adjusted, quantifying any shortfalls, and establishing your income objectives going forward.
Nicola Langridge is a Wealth Manager at Private Client Holdings.