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By Arin Ruttenberg*
Divorce, just like death, is a life event that has a significant impact on financial planning. Unlike death, however, it is not something planned for which could have a detrimental impact on personal finances.
Divorce is stressful with many legal issues to consider. How finances are to be separated should not be neglected and not be approached emotionally. The distribution of assets is not an easy task and should best be approached with the guidance of an experienced, qualified financial advisor.
One personal finance topic in particular that has surfaced recently is that of living annuities and accrual. It is important to take note of the laws surrounding divorce, specifically in relation to living annuities, as well as an important court case that has brought this to light.
On death, a person’s pension interests are NOT taken into account in the division of matrimonial property if a couple is married in community of property or with accrual agreement. This is set out in section 37C of the Pension Funds Act, which states that on death pension interests does not form part of the deceased’s estate.
On divorce, however, a person’s pension interest/s are taken into account in the division of matrimonial property if a couple is married in community of Property or in the accrual system, not out of community of property.
Too many times has there been advice given to clients going through a divorce to fully retire from their pension funds and set up a living annuity so that the non-member spouse will not be able to attach this capital in the accrual claim. This is not good, even insensitive advice, as it often left the woman of the household at an unfair position after divorce and thus the treatment of living annuities (and as a result, annuity income payments) at divorce has been a contentious point of law for many years.
‘’Pension Interest’’ in terms of the Divorce Act, refers to the benefits to which such member would be entitled in terms of the rules of the fund if his membership of the fund would have been terminated on the date of divorce on account of his resignation from his office. What this basically means is that the member spouse must still hold a pension interest in the fund as at the date of divorce. If a resignation benefit had already become payable to him before the divorce, he could not again be deemed to become entitled to a resignation benefit at the date of divorce and would therefore no longer have a ‘’pension interest’’ for the purposes of sections 7(7) and 7(8) of the Divorce Act.
For spouses married in community of property who get divorced, their pension or provident fund savings are automatically deemed to be part of the joint estate; which means that a spouse’s fund value at the date of divorce do not need to specifically be mentioned in the divorce settlement agreement.
A living annuity, however, is not included in the definition of pension interest, and therefore it is not considered when determining the division of pension interests which brings me to divorce after retirement.
Divorce after retirement
The annuitant’s legal interest in a living annuity is limited to the receipt of an annuity income only and is always subject to the relevant legislation, the most important in this case being that there is no legal mechanism whereby a person can dip into the underlying capital for a lump sum payment of any kind, unless the living annuity is less than R125 000. This is mainly due to the fact that the annuitant does not own the living annuity, a common misconception amongst most annuitants, and the reason for this is that the capital is owned by the platform from which the annuity is purchased and the annuitant only has a right to an income. The annuity income, however, forms part of the annuitant’s total income and can therefore be considered to assess a spouse’s future maintenance needs. It is also important to remember that the income from a living annuity is not guaranteed but depends on the performance of the underlying investment portfolio and draw down rate selected.
Accrual. Two important Court Cases to take not of
In the case of ST vs CT, which took place as recently as 2018 , this was the first time the issue of whether or not a living annuity forms part of the accrual had come before the Supreme Court of Appeal. The court acknowledged that the capital held within the living annuity is possessed by the insurer and does not fall into the assets of the annuitant.
The month to month income generated from the living annuity forms part of the annuitant’s total income and thus has bearing on whether the annuitant has the means to pay maintenance to the other spouse. The court at the time did not give consideration as to whether the right to future annuities is a something to be valued, as evidence was not led by either party on this.
In this case the Supreme Court of appeal accepted the respondent’s version that the capital backing the annuity belonged to the insurer and thus did not form part of the estate for the calculation of the accrual claim. However, it did conclude that the monthly or periodical payment of the living annuities were relevant for purposes of a maintenance claim.
The case of Montanari vs Montanari is the latest case which took place in 2020 and deals with the very important question left open in ST vs CT , i.e. whether a married annuitants right to future annuity payments is an asset which can be valued and included in the accrual calculation upon divorce.
The supreme court of appeal reaffirmed again that once a living annuity is purchased, the underlying capital is no longer accessible to the annuitant ( i.e. it is owned by the insurer). The annuity income does not fall within the definition of ‘pension interest’, together with the fact that an annuitant cannot give all or part of the annuity income to an ex-spouse in terms of a divorce order. However, what the court did find was that this did not disentitle the non-member spouse from any claim whatsoever regarding the respondent’s annuities.
The supreme court of appeal has since ordered this matter to the trial court to investigate on how to value the living annuity income for the purposes of the accrual calculation.
This case has taught us that annuity income is not only relevant for purposes of a maintenance claim, but is also an asset in the annuitants estate which is then subject to accrual (the same will apply to conventional life annuities) and how this will be valued remains to be seen.
Parties can therefore no longer hide their liquid sum of pension capital by purchasing a living annuity and then claiming on the bases of the law that it does not form part of the accrual any longer. From an advisory point of view this would thus not be considered good advice either.
There are various intricacies when it comes to divorce, the issue detailed here is but one aspect. It is important to take ownership of your financial affairs. Many aspects of financial planning can get rather technical thanks to different legislation that govern it. It is highly advisable to consult a professional to understand the different financial products and investments to protect your interests.
- Arin Ruttenberg is based at the Sandton office of Brenthurst Wealth. email@example.com.