This is a novel question as living annuities only become a contentious issue after retirement of a spouse whom is also party to Divorce litigation. A living annuity is defined in the Income Tax Act as –
“living annuity” means a right of a member or former member of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund, or his or her dependant or nominee, or any subsequent nominee, to an annuity purchased from a person or provided by that fund on or after the retirement date of that member or former member in respect of which—
A living annuity is essentially an insurance contract which supplies the annuitant with a monthly source of income for as long as he/she is alive. When the annuitant passes on, the balance of the contract must be paid to a beneficiary. It is an insurance contract in that it is based on risk and asset value.
It can also be purchased by someone when he or she has reached retirement age and his or her retirement policy matures. The annuitant would then purchase a living annuity with the proceeds of that fund which guarantees the annuitant a monthly stipend from that living annuity.
However, the contract itself has no surrender value and would only have a value upon death, which is then paid to nominee. It has some similarities to a life insurance contract but they operate very differently.
That being said, if a spouse purchases a living annuity with his/her pension, preservation or retirement annuity proceeds, how does that affect his/her estate for the purposes of divorce?
The answer to the question is that it has no asset value during that spouse’s lifetime; bear in mind that, as I stated above, it has no surrender value, which means that the actual value of the contract is indeterminate.
Even though this is a relatively novel concept, it has already come to the attention of our Courts in two cases:
The first was in 2016 where the High Court was tasked with determining the “asset nature” of a living annuity – does it have an asset value for the purposes of a Party’s accrual value? In this case, the annuitant (who was the husband) retired from his employment whilst the Parties were still married. Using the proceeds from his retirement benefit, he purchased a living annuity which then became his monthly stipend.
Both spouses agreed that it was not a “pension interest” as is defined in the Divorce Act. Neither of them agreed, however, as to the “asset nature” of the living annuity. The husband submitted that it is an “investment product that provides income upon retirement from a pension fund.” He further went on to state that, “in a retirement annuity fund, the member becomes unconditionally entitled to a living annuity, which means he has a right to the annuity and not the capital value. The capital is owned by the insurer on behalf of the member and is reflected on the insurer’s balance sheet.”
Upon purchasing this annuity, the husband was then prohibited from reclaiming the capital funds. He can only insist on his stipends. He concluded by stating that, “the money from the annuity can never accrue to [him] as capital. Therefore, [he] can never enjoy the capital amount of the annuity.”
In contrast, the wife stated that there were characteristics of the policy which could be interpreted to mean it has an “asset nature” i.e. the annuitant may nominate a beneficiary during his lifetime; the annuitant has control over the drawn-down value of his payments in the policy; and the capital from the policy is payable to his estate or his nominee.
The Court, when scrutinising the characteristics of a living annuity, ruled that the living annuity does not form part of the husband’s estate and is only relevant insofar as his means was concerned for the purposes of determining a maintenance obligation.
The second decision came from the Supreme Court of Appeal in May 2018. In opposing the decision of the High Court, the Respondent submitted authority which held that, “an accrued pension is an asset of the joint estate of parties married in community of property.” In this specific matter, the value of the annuity was determined solely by reference to the value of the assets specified in the contract – the opening value was the amount used to purchase the annuity.
The Court noted that the amount is not guaranteed and the assets themselves belong to the insurer, they fluctuate with market conditions and is reduced as the annuity is drawn down upon. There are limitations as to the monthly amount which the annuitant can draw therefrom.
However, his purchase of an annuity did not result in him becoming a member of the “pension fund organisation” as per the Pension Funds Act. This status ended when he applied his proceeds to that of an annuity. Therefore, the provisions in the Divorce Act which apply to “pension interest” do not apply to a living annuity.
The Court held that the “supposed capital value” cannot be included as an asset for the purposes of calculating the accrual. The ultimate reason for this was that the Court observed what would happen if they did include it: it would have the anomalous outcome that he would be obliged to pay half its value to the other spouse in circumstances where he has no right to claim half the capital from the insurer. The Court noted with concern that the insurance industry erroneously treats annuities as pensions which practise must stop.
In summary, the proceeds of a living annuity can only reach an annuitant’s hands through his/ her monthly stipends. The capital value, whoever, is owned by the insurance company, until the annuitant’s passing, by which time it is then transferred to the annuitant’s nominee or (in the case of no nominee) the estate of the annuitant. It is never transferred back into the annuitant’s own hands.
Therefore, in determining the value of a spouse’s accrual, one may not include a capital sum paid into or remaining in a living annuity contract if the spouse has a living annuity. It may only be considered for the purposes of determining the annuitant’s means.