A judgment by the Supreme Court of Appeal has put an end to any doubt about whether or not the capital of a living annuity may be split on divorce. It may not be split, says the court, because it belongs to the life assurance company, not the annuitant.
This means that while, on divorce, you may claim a portion of your spouse’s accumulated savings in a retirement fund if married in community of property or if the accrual system applies in a marriage out of community of property, the same does not hold once those retirement savings have been used to buy a living annuity.
The issue of whether a living annuity forms part of the assets of a divorce came before the High Court in the Montanari divorce case in 2016, but it came before the Appeal Court only in May this year, in the case of ST v CT.
In an article in a recent edition of Lighthouse, published by Alexander Forbes, Jenny Gordon, the head: retail legal at Alexander Forbes, says the court held that:
- Having regard to the nature of the assurer contract, the underlying capital value cannot be included as part of the annuitant’s assets. The capital belongs to the assurer and not the annuitant.
- The annuitant’s only contractual right is to be paid an annuity in an amount selected by him or her within the range specified by law.
- The right to receive an annuity instalment is subject to the annuitant being alive on the date on which the instalment becomes payable.
- If the annuitant dies, the fate of the (residual) capital is determined by whether or not he or she has nominated a beneficiary. The capital may be paid to the annuitant’s estate if there is no such nomination.
- The monthly income derived by the annuitant forms part of his or her total income, which has a bearing on his or her means to pay maintenance, if any, to the other spouse.
Gordon says the court correctly noted that the provisions in the Divorce Act dealing with a member’s “pension interest” (accumulated savings) in a pension fund do not apply to a living annuity, which is typically bought with the proceeds of a retirement fund.
She says the court considered that if the capital value of the living annuity were included in the annuitant’s accrual (the couple was married out of community of property with accrual), the “anomalous outcome” would be that he or she would be obliged to pay half its value to the other spouse without having the right to claim this amount from the assurer.
The court did not have to consider whether future annuity payments were an asset or a right capable of valuation, Gordon says. “Evidence was not led by the parties on this, so the issue was not strictly before the court.
“The court noted that there are a number of factors which would affect this valuation, such as the annuitant’s life expectancy and the rate at which he has drawn down in the past and is likely to draw down in the future. Therefore, valuing this right would be extremely difficult.”
However, the court noted that even if the right to a living annuity could be valued, it might be protected by the creditor protection provisions of the Pension Funds Act, which are generally accepted to apply to a living annuity bought in the name of a member of a retirement fund.
On the question of whether a divorcing spouse can claim maintenance based on the annuity income of the annuitant, Gordon says: “The judgments have simply stated that the living annuity can be taken into account for the purposes of maintenance, even though the capital is not an asset in the estate of the annuitant. However, neither this case nor the Montanari case discussed how one determines the income stream, since the annuitant can choose an income of between 2.5% and 17.5% of the capital. So the complexity of living annuities has not been considered, as this aspect was not argued before the court, and I am not aware of any case where it has been.”
There is a level of unfairness in the law at present, Gordon says. “During membership of a retirement fund, the law recognises pension interest as being an asset in the estate of the member spouse for the purposes of divorce. However, as soon as the member exits the fund and buys a living annuity with the benefit, the other spouse loses those rights.
“Industry organisations have made submissions to the regulator for the law to be changed to recognise a way for the pension to be split between divorcing spouses after membership of the retirement fund has ended. Feedback on this is still awaited,” she says.