Divorce and retirement: What you need to consider

While it is not something that people want to think about, the reality is that approximately half of marriages across the world end in divorce. Figure from Statistics South Africa (Stats SA) indicate that divorce rates in the country have been increasing year-on-year.

When you get divorced, you are legally entitled to a portion of your spouse’s retirement money. However, you need to be prudent about what you do with this money, as it was initially intended to provide you and your spouse with a comfortable retirement.

Bev van Nijkerk, a market segment specialist at Sanlam, highlights that the financial implications of divorce need to be considered. It is important to consider the bigger picture when evaluating your financial situation and making decisions, as these can have an impact on you later in life when it comes time to retire.

“For starters, where just one person was the breadwinner in a household, divorce will often result in the other person now having to find a job. These scenarios mean divorce often accompanies difficult decisions about where you are going to live – whether to buy a new home or to rent for a while,” says van Nijkerk.

What to consider during and after the divorce

While it may be hard to consider when you are in the midst of a divorce, planning for your retirement as a now single person is important. You need to be sure that you will be financially secure.

Following a divorce, van Nijkerk reveals that you need to ask yourself what your retirement will look like if you take the money and buy a property. While some people will buy a house, raise their children and then sell the house at a profit in the future and put that money back into their retirement savings, this takes discipline.

“Whatever decision you make, make sure that you base it on a holistic picture which takes into account your living expenses today and your retirement needs in future. Don’t try to guess what your retirement needs are going to be – get a professional financial adviser to calculate this for you,” advises van Nijkerk.

During and after a divorce you also need to consider how you will boost your retirement provision, as this would have been impacted by the divorce. This also needs to be balanced with your immediate needs. Van Nijkerk highlights that following a divorce people often have to redouble their savings efforts in order to make up for the retirement settlement withdrawals. You also miss out on the effect of compound interest after withdrawing money from your retirement savings.

Drafting the divorce order

There are several considerations that need to be looked at when drawing up a divorce order, especially if you are to receive spousal maintenance, to ensure that your future finances are not impacted by the divorce and you are left worse off.

In a situation where a spouse receives spousal maintenance, the consideration of what happens when the spouse that is paying the maintenance dies needs to be considered. If it is not specified in the divorce order, the spouse receiving the spousal maintenance will not receive any future income.

Sanlam provided the following example to illustrate: “Sally is a divorced mother of four living in Cape Town. Since she had been a stay-at-home mom during their 20-year marriage, her ex-husband Jake had agreed to pay monthly spousal maintenance after their divorce. When Jake died unexpectedly Sally found herself in severe financial straits – the payments stopped and, as an ex-spouse, she had no claim on Jake’s estate.”

In such a situation, Clive Hill, legal adviser at Sanlam Trust, notes that it could be avoided by drafting your divorce order differently. “While dealing with the emotions of divorce, women often overlook crucial aspects of the settlement agreement – which if handled correctly, can prevent needless hardship down the line.”

When getting a divorce, both parties need to consider the following:

• Including security for spousal maintenance in the divorce order:Where one spouse will be paying the other spousal maintenance, this needs to be provided for in the divorce order. “. In the event of the ex-spouse dying, his minor children will be able to claim for maintenance against the deceased estate, but his ex-wife will not. This can be addressed by stipulating in the settlement agreement to be made an order of court that spousal maintenance obligations will be binding on deceased estate. A lump sum, based on life expectancy, can then be paid out to the ex-spouse from the estate,” explains Hill.
• Specifying that benefits in the divorce order be inflation-linked: This relates to all costs that can and will increase, such as maintenance, but also medical and education costs. “A more sophisticated approach to annual escalation rates than CPI is needed when calculating these benefits – one needs to look at actual costs,” emphasised Hill.
• Wording the divorce order to give access to an ex-spouse’s retirement savings: A divorce order needs to be worded in a specific way to grant an ex-spouse access to a pension fund. In other words, the order must specify that the ex-spouse is entitled to pension interest, as well as state the exact share of the interest that they are to receive. It is also important that the specific pension fund is stated in the divorce order.
• Undertaking a thorough valuation of all assets:It is important to ensure that accurate valuations are done on all assets, especially when it comes to the high net worth market. A professional appraiser should be appointed to the task. “It is not necessarily a good idea to convert all assets to cash. It may be prudent to transfer the assets themselves to the ex-spouse instead of liquidating them. For instance, it may not be the best time in the market to sell the family house, or to sell shares in a rising stock market,” reveals Hill.
• Conducting a detailed investigation of business assets: This can be tricky, as a business owner may appear to be wealthy, but the business may have debts that the spouse is not aware of. When it comes to the businesses assets, the business owner may be not able to dispose of the assets without the approval of co-shareholders and without affecting his income-earning capacity.
• Ensuring that all assets and benefits are transferred without delay:If a former spouse dies before the transfer has taken place, the ex-spouse may themselves at the end of a list of claimants to the deceased estate. No matter what the divorce order states, creditors are entitled to their share of the estate. “This also applies if the ex-spouse is still alive and gets into financial trouble – creditors can attach assets which were supposed to have been transferred to the ex-wife,” says Hill.
• Employing a qualified financial adviser as well as an attorney: The drafting of a divorce order is a complex matter that can require the input of both an attorney and a financial adviser to find a solution for the best possible divorce settlement agreement. Each party involved in the process will have their own area of expertise.

 
Planning for retirement

The 2015 Sanlam Retirement Benchmark survey revealed that only ten percent of retirement fund members consider the impact that divorce could have on their retirement planning. Of the female respondents, 15% did not consider the implications of divorce or their spouse passing away before them when considering their retirement planning, and therefore have not made provision for these occurrences.

On average, women can expect to live four years longer than men, and are therefore in retirement for a longer period, and as a result require more during retirement. At the same time, research has shown that women invest their retirement savings more conservatively than men.

Van Nijkerk acknowledges that it may be difficult for women who are not used to making financial decisions to suddenly be responsible for their financial future. However, she encourages women to ask questions and be involved in the process so that they understand the financial implications of the decision that they make. It is also important that you seek the services of a qualified financial adviser who can assist you in making the best decision for your financial needs.

“You need to find someone to help you walk the path. You may need to rethink your whole retirement philosophy because the retirement plans you had with your ex-spouse may not be realistic now – given your new financial realities. This is especially true if you find yourself in the ‘silver-hair divorce’ situation which is now a growing trend. When you divorce later in life, you’ll need to be more conservative in your investment approach,” adds van Nijkerk.

When going through a divorce it is important to seek expert assistance in both the legal and financial aspects to ensure that you get the best possible results and are not left unsuspecting when something you thought you were entitled to, does not materialise.