Finding clarity on the division of living annuities during divorce

November 1st, 2020

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The South African law relating to the status of living annuities when spouses are divorcing is not entirely clear. Unfortunately, neither the legislature nor the courts have provided the much needed clarity on how living annuities should be dealt with when spouses are divorcing. There is neither a legislative provision, nor court decision that deals with the division of living annuities on divorce when parties are married in community of property. Nonetheless, South African courts have pronounced themselves in relation to the division of living annuities when parties are married out of community of property with the application of the accrual system. The Supreme Court of Appeal in ST v CT [2018] 3 All SA 408 (SCA), generally held that living annuities do not constitute part of annuitants’ estates and cannot be taken into account for purposes of calculating the growth of their estates during divorce. This decision created an impression that generally living annuities are out of the reach of non-member spouses during divorce. However, the SCA appears to have partially reconsidered its position in CM v EM [2020] 3 All SA 1 (SCA). In this article, we discuss the latter decision with a view to determine its implication on the law regarding the division of living annuities when spouses are divorcing, particularly when married in accordance with the marital regime that enables sharing of assets.

In CM v EM the parties were married out of community of property with application of the accrual system in 1999. In 2008, the husband used a portion of his retirement benefit, to purchase a living annuity from an insurance company. In 2012, after his retirement, the husband used the remainder of his retirement benefits to purchase his second living annuity with the same insurance company. In 2014, the husband instituted divorce proceedings. In 2015, while the divorce proceedings were still pending, the husband purchased a third living annuity, the details of which were not entirely clear from the judgment (CM v EM at para 2). The SCA was called on to determine whether the husband’s living annuities were susceptible to the wife’s accrual claim on divorce (CM v EM at para 18).

The husband, with the assistance of three witnesses, argued that the capital of a living annuity did not belong to him but the insurance company that provided the benefit, thus, did not form part of his estate (CM v EM at para 6). The essence of this argument is that once the amount, which constitutes the accrued retirement benefits has been used to purchase living annuities, the capital value thereof is owned by either the insurance company (or the retirement fund) that has sold the living annuity to the member spouse. This is notwithstanding, any right that the non-member spouses may have had to the member spouses accrued retirement benefits immediately before living annuities were purchased. It is unfortunate that none of the cases dealing with living annuities in the context of divorce, including CM v EM, paid attention to claims or potential claims that non-member spouses had to their member spouses’ accrued retirement benefits before living annuities were purchased in accordance with their applicable matrimonial property regimes. This was indeed a necessary evaluation due to the potential prejudice that would result once living annuities are purchased and strict insurance principles are applied.

For instance, in terms of s 15(2)(c) of the Matrimonial Property Act 88 of 1984, spouses cannot without the written consent of the other spouses’ in marriages in community of property alienate, cede or pledge financial assets that constitute the parties’ joint estates (Van den Berg v Van den Berg [2004] JOL 12404 (T) at para 10). This provision is meant to ‘protect the one spouse against the illicit selling or alienation of property forming part of the joint estate by the other spouse who does that without the knowledge and/or consent of the innocent spouse’ (Visser v Hull and Others 2010 (1) SA 521 (WCC) at para 5). It cannot be denied that once retirement benefits accrue to member spouses who are married in community of property, they will also accrue to their joint estates. It is thus, difficult to understand what provides the member spouse with the power to decide to purchase living annuities without the written consent of the other spouse. Perhaps this might be due to the incorrect application of s 1 of the Income Tax Act 58 of 1962, which is applied without regard to the matrimonial obligations that bind member spouses as a result of the marital regime applicable to their marriages. When applied purely from a pension law perspective, the definition of living annuities in s 1 of the Income Tax Act clearly enables retirement fund members to purchase annuities either from their retirement funds or insurance companies. Once such annuities are purchased, a contractual relationship between the non-member spouse, who becomes an annuitant, and the provider of the annuity will be established. In terms of living annuities, the provider will be obliged to provide monthly payments from the invested amount and the annuitant will be entitled to receive payment (CM v EM at para 19). This interpretation does not take into account the entitlement (if any) that non-member spouses have to their member spouses accrued retirement benefits, which constitutes the capital amount used to purchase living annuities.

It is clear that the legislature when drafting the definition of the term ‘living annuity’ in the Income Tax Act did not consider the implication of this definition on the financial interests of non-member spouses of retirement fund members who are married in community of property. While Maya P sought refuge from cases that dealt with a marriage in community of property in CM v EM, nonetheless, this case was concerned with a marriage out of community of property with the application of the accrual system. It does not appear as if non-member spouses married in terms of the accrual system have a clear legislative provision, which they can invoke to protect any claim they may have when accrued retirement benefits are used to purchase living annuities before divorce. It appears, however, when divorce is contemplated, that their clear right to share in the accrual is prejudiced by the unilateral decision to purchase living annuities. Unfortunately, there is no court that has interrogated the prejudice (if any) that non-member spouses experience regarding their spouses’ estates, which are diminished when accrued retirement benefits, which would ordinarily increase such estates, are used to purchase living annuities before divorce.

In CM v EM, in arguing that the living annuities should be taken into account for the purposes of the calculation of the accrual, the wife challenged the insurance company’s ownership of the living annuities (CM v EM at para 11). She was ill-advised and incorrectly argued that living annuities constituted trust property as defined in terms of the provisions of the Financial Institutions (Protection of Funds) Act 28 of 2001, and thus, remained property of the husband, which constituted part of this estate (CM v EM at para 12). In rejecting this argument, Maya P held that the insurance company’s relationship with the husband is purely contractual and there is no indication in any of the legislation that applies to living annuities that they can be referred to as ‘trust property’ (CM v EM at paras 33 and 34). The court agreed that living annuities are owned by insurers and confirmed the SCA earlier finding in ST v CT that living annuities cannot be taken into account for the purposes of calculating accrual on divorce (CM v EM at para 38).

However, Maya P decided to deal with the issue that was left open in ST v CT regarding whether the non-member spouse can claim future annuity payments that are made from living annuities. In answering this question, Maya P sought guidance from Clark v Clark 1949 (3) SA 226 (D) where it was accepted that a member spouse’s interest in the retirement benefits provided by the fund, which had not yet accrued, and the pension right which has accrued formed part of the community estate. Maya P also relied on De Kock v Jacobson and Another 1999 (4) SA 346 (W) at 349, where the court was of the view that the member’s accrued right to be paid their retirement benefits should form part of the community of property between the spouses. Maya P aligned herself with the reasoning of these two cases, which she applied in CM v EM to declare the value of the husband’s future annuity payments in respect of his living annuities to be assets in his estate for the purposes of calculating the accrual (CM v EM at paras 38 and 39). It is surprising, however, that Maya P did not see the need to use these authorities to assess the right (if any) of the member spouse at the time the living annuities were purchased, but chose to apply them with reference to the time the future payment from living annuities will be made.

In conclusion, while we generally agree with the conclusion of the SCA, we are nonetheless, not convinced by its reasoning. This approach raises two fundamental problems. First, it negates the much sought after clean break principle between the parties. It forces the parties to continue to be in each other’s lives. It is not clear whether the non-member spouse can interfere with the draw down rate chosen by the annuitant regarding the level of income and the income frequency based on the formula prescribed by the minister in the Government Gazette. With this approach, there is a possibility of further post-divorce litigation between the parties, particularly when the non-member spouse feels that their right to payment is prejudiced by the annuitant.

The second problem relates to the SCA’s failure to evaluate the rights (if any) of non-member spouses at the time living annuities are purchased. It is at that time that non-member spouses are deprived of their right to claim their portions of their member spouses’ accrued retirement benefits, which are immediately locked into living annuities, thus, making them beyond the non-member spouses’ reach. This is the injustice that we hope will be attended to by the legislature. We are of the view that Maya P’s judgment in CM v EM, is important in that it has opened the debate about the status of living annuities during divorce. We hope that with this article, the legislature, with the assistance of the South African Law Reform Commission can investigate the perceived or real prejudice that results when living annuities have been purchased and the parties’ later divorce.

Dintoe Kgole LLB LLM (NWU) is a candidate legal practitioner at Rambevha Morobane Attorneys and Clement Marumoagae LLB LLM (Wits) LLM (NWU) Dip Insolvency Practice (UP) is a legal consultant at Rambevha Morobane Attorneys and a senior lecturer at the University of Witwatersrand in Johannesburg. Mr Marumoagae is also a council member of the Legal Practice Council.

This article was first published in De Rebus in 2020 (Nov) DR 18.