Living Annuities at divorce – The impact of the Montanari judgement
The treatment of living annuities (and resultant annuity income payments) at divorce has been a contentious point of law for years. A recent Supreme Court of Appeal judgement has shed new light on the treatment of an annuitant’s right to future income payments for the purposes of calculating accrual. In this article we will assess the impact of this judgment on the future treatment of living annuity income payments at divorce.
The Divorce Act No. 70 of 1979
Section 7(7) of the Divorce Act No. 70 of 1979 (“the Act”) provides that a “pension interest” as defined in section 1 will be deemed to be a part of the assets at divorce:
“7) a) In the determination of the patrimonial benefits to which the parties to any divorce action may be entitled, the pension interest of a party shall, subject to paragraphs (b) and (c), be deemed to be part of his assets”
Section 7(8) of the Act goes on to state that:
“Notwithstanding the provisions of any other law or of the rules of any pension fund –
(a) the court granting a decree of divorce in respect of a member of such a fund, may make an order that-
(i) any part of the pension interest of that member which, by virtue of subsection (7), is due or assigned to the other party to the divorce action concerned, shall be paid by that fund to that other party when any pension benefits accrue in respect of that member;
(ii) the registrar of the court in question forthwith notify the fund concerned that an endorsement be made in the records of that fund that that part of the pension interest concerned is so payable to that other party and that the administrator of the pension fund furnish proof of such endorsement to the registrar, in writing, within one month of receipt of such notification…’
If one looks at the wording of section 7(7) and 7(8) it is clear that the non-member spouse is only entitled to a portion of the member spouse’s notional benefit if it qualifies as “pension interest” as defined. It is therefore important that one understands what is meant by “pension interest”.
“Pension interest” is defined in section 1 of the Act as referring to the benefits to which such member would have been entitled in terms of the rules of the fund if his membership of the fund would have been terminated on the date of the divorce on account of his resignation from his office. Simply put: it refers to a notional benefit that would have been payable to the member spouse had his membership terminated at the date of divorce.
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. He would therefore no longer have a “pension interest” for the purposes of sections 7(7) and 7(8) of the Act.
At retirement, a member of a retirement fund (excluding a provident fund) is entitled to withdraw up to a maximum of one-third of the underlying fund value as a lump sum. A minimum of two–thirds of this value must be used to buy a compulsory annuity. This compulsory annuity can be provided by the retirement fund or, alternatively, the retirement fund can transfer the obligation to provide an annuity to a registered insurer. In terms of the arrangement with the insurer, the insurer undertakes to provide an annuity income to the former member.
The annuity to be provided may, depending on the former member’s election, either be a conventional annuity or a living annuity as defined in section 1 of the Income tax Act 58 of 1962.