Divorce is sadly very common today and financial planners may face this issue on a regular basis.
a psychology today An article by Jessica Schrader points out that while first marriages have a 75% success rate, people who have previously divorced and remarried are up to 75% more likely to divorce again in the future. Hope is forever springing up, but reality doesn’t seem to quite live up to popular expectations.
Therefore, financial advisors should research this topic thoroughly so that they can advise their clients on the impact a divorce may have on pension payments and its tax implications.
clean break principle
The Clean Break Principle came into force on September 13, 2007. This principle encourages parties seeking a divorce to become financially independent from each other as quickly as possible. This principle has resonated with South African courts for many years.
Modern couples tend to have separate retirement savings, but for a period of time after a divorce, the higher-income partner tends to pay the lower-income spouse for rehab maintenance. Or allowing a spouse with no retirement savings to access the retirement, pension, or provident fund of a higher-income spouse.
Freeing up these funds would allow low-income spouses to maintain a standard of living for a period of time while they are looking for work (for example, if the individual is not working at all), but clearly impact on both parties’ retirement plans.
For example, if your husband had a higher income, you would lose some of your retirement savings to your nonmember spouse.
Using the R3 million retirement investment example, if the marriage is submitted to the property community, the non-member spouse will be immediately entitled to receive a total of R1.5 million.
Importantly, the divorce order only states the amount that the nonmember spouse is entitled to receive. Obviously, it does not specify the withdrawal options available to that individual.
This is the most important place to consult a financial planner. It’s important not only to discuss the options available, but also to know what their tax implications will be.
Option 1: A non-member spouse chooses to transfer a portion of a qualifying former spouse’s retirement investment to the Conservation Fund. Their financial her planner advises the tax-free nature of this transaction, meaning that there is no tax on the transfer. The individual is then permitted to make one pre-retirement withdrawal before her age of 55 and is subject to withdrawal tax in accordance with the relevant tax schedule.
Option 2: Non-member spouses choose to withdraw their funds immediately in cash. If you choose this option, your financial her planner should explain that a withdrawal tax will apply according to the tax table for non-member spouses.
Why do we need simulation?
Your financial planner is acting blind-spot when he tries to advise you on the taxes you owe, for example in connection with a R1.5 million withdrawal in a divorce, without running a tax simulation on your behalf.
Gravitas Tax offers clients the power of a digital tool that is directly integrated with Sars. This tool performs tax simulations on behalf of its clients. This determines, as accurately as possible, who is responsible in relation to previous divorce orders, terminations, and other withdrawals in career and life. These may not be accurate. recall.
In conclusion, this tax simulation feature will help financial planners make informed decisions when determining whether a nonmember spouse needs court-allocated retirement benefits now. increase. Or whether it is desirable to put them in a conservation fund.
In the latter case, if you are in paid employment and don’t need the cash right away, you can withdraw these funds when you need them in the future.