Pensioners breakin’ up shouldn't be so hard to do
The Supreme Court of Appeal has gone some way towards addressing the inability of divorced people to access funds in the living annuities of their ex-spouses
For too long divorced people have been unable to access funds in the living annuities of their ex-spouses. A recent judgment in the Supreme Court of Appeal goes some way towards addressing this inequity, though more still needs to be done.
The court has ruled that the right to the income from a living annuity can be considered for the purpose of splitting assets when married couples part ways.
Divorce and retirement savings
First, let's recap the laws pertaining to divorce and the sharing of marital assets: The Divorce Act states that retirement fund savings do form part of a person's assets in the event of a divorce and must be considered when dividing up the marital assets.
The non-member spouse may be entitled to a share of these assets ranging from 0% to 100%, depending on how the other marital assets will be shared post-divorce. (None of this applies to a marriage out of community of property, which excludes the accrual system.)
The Pension Funds Amendment Act introduced the clean-break principle in 2007. This allows the non-member spouse to access their former spouse's retirement fund benefit and have an amount or percentage (as stipulated by the divorce decree) paid out or transferred to another fund. Do be aware that since 2009, the non-member spouse is liable for tax if they withdraw their share. If the funds are transferred to another retirement fund, no tax is payable.
The sticky problem
A challenge arose when divorce occurred later in life, after the proceeds of retirement funds had been converted into a living annuity that provided the former pension member with an income.
Historically, the courts ruled that the living annuity income could not be considered as a right to an income with a capitalised value, as the funds were owned by the insurer, and not the person receiving the income. The courts ruled that the income could only be taken into account for a maintenance claim, not a divorce settlement.
This has all changed with the judgment this year in the Montonari case in which the Supreme Court of Appeal acknowledged that the annuity does have a capital value and can be taken into account when dividing assets after a divorce.
Could this much-needed change go further?
Although the Montonari judgment is a major step in the right direction, there's still a problem in that the person receiving the income has the right to vary the drawdown from 2.5% to 17.5%, and can reduce the drawdown to lower the capitalised value of the income. This is not unlikely as people tend not to do the right thing when dealing with the trauma of a divorce.
In the spirit of fairness, I firmly believe the courts should take things a step further and allow the capital underlying a living annuity to be split into two, regardless of the ownership by an insurer.
After all, the source of the money is retirement funds. If the clean-break principle applies to retirement funds, surely it should also apply to living annuities?
Besides, there is already precedent for living annuities to be shared among multiple parties. When a person receiving income from a living annuity passes away, multiple beneficiaries can access the capital. These beneficiaries can choose to continue with the living annuity in their own name but can also make a lump-sum tax payment and withdraw the capital.
What about life annuities?
Though this case dealt with the right to living annuity income, the principle would apply similarly to a right to income from a guaranteed life annuity. In fact, a life annuity is far easier to value than a living annuity.
The bottom line
This case is a step in the right direction. It is quite simply unjust that a non-member (ex)-spouse has a right to share in the pension interest before retirement but not after it. The solution to the inequity is legislative intervention - as proposed by industry organisations. I sincerely hope that legislators will do something about this imparity as a matter of urgency.
Don't allow your separation to be any sadder or more complex than it needs to be - seek help from a qualified financial planner, ideally one who holds the certified financial planner accreditation.
• Swart is a director of Autus Private Clients and the Financial Planner of the Year 2019