Article written by Maya Fisher-French
Court case highlights the lack of rights for spousal claims when it comes to a living annuity.
When it comes to retirement vehicles such as a provident fund, pension fund or retirement annuity, depending on the marriage regime, a spouse could have a claim to the funds on divorce. Based on the “clean break” principle, the non-member ex-spouse could receive a lump-sum payment from the fund.
The rules of the Pension Funds Act require the trustees to consider all financial dependants when the member dies. If the spouse is a financial dependant, he or she would receive benefits from the retirement fund. This is not however the case with living annuities, which are purchased post-retirement, as living annuities do not fall under the Pensions Fund Act.
A recent court case further confirmed that on divorce, the spouse would not have a claim on the capital amount of a living annuity. The Supreme Court of Appeal ruled that the capital of a living annuity does not form part of the assets of the annuitant (the person with the living annuity) on divorce. This is very different from a pension or provident fund where the spouse could have a claim.
The court determined that as the living annuity is part of an insurance contract, the underlying capital value cannot be included as part of the annuitant’s accrual. In other words, the capital belongs to the insurer and not the annuitant.
While the spouse does not have a claim on the capital, he or she could have a maintenance claim on the monthly income from the annuity. However, according to Jenny Gordon, Head of Retail Legal at Alexander Forbes Retail, the problem with the court ruling is that while the annuity income can be used in the assessment of a maintenance claim in the case of divorce, “what is not clear is how this income is calculated since the annuitant can choose an income of between 2.5% and 17,5% of the capital.” This means that the annuitant could select the minimum income of 2.5% in order to avoid paying significant maintenance.
The court case also ruled that this payment from the income of the annuity can only be paid for as long as the annuitant is alive. On death, unlike a retirement fund which falls under the Pension Funds Act, the annuitant does not have to select the spouse as a beneficiary and could in fact leave all the funds to another individual if he or she chooses. If the annuitant has not selected a beneficiary, then the living annuity is paid to the estate.
“There is obviously a level of unfairness in the law at present,” says Gordon, who explains that during membership of a retirement fund, the law recognises the 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.
Gordon says 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.