I was told there was a recent court case in relation to accruals from living annuities including drawdowns that changed the legal stance significantly. I hope you had sight of this and can give us an explanation of how exactly it will work and how it will be calculated.
I assume the question relates to a recent judgment handed down at the beginning of May by the Supreme Court of Appeal in the matter of CM vs EM Case No: 1086/2018. This was a divorce matter where the parties were married out of community of property, subject to the accrual system. The question before the court was whether the husband’s living annuities form part of his estate for purposes of calculating an accrual.
Before I go into the detail of the judgment, it is important to remember that a living annuity does not fall under the definition of ‘pension interest’ as defined in the Divorce Act and, as such, an annuitant cannot give part or all of the living annuities to an ex-spouse in terms of a divorce order, or agree to split the annuity income with an ex-spouse. This is different from a position where the assets are held in a pension, provident or retirement annuity fund.
In determining if the living annuities held by the husband formed part of his estate for purposes of calculating accrual, the court made a distinction between (a) the capital invested in the living annuities and (b) the right to receive a regular annuity payment from the insurer based on the capital value of the underlying investment. The court confirmed the current position that the capital portion of the living annuity belongs to the insurer who issues the living annuity contract. The capital is reflected on the balance sheet of the insurer and, in return, the annuitant only has a contractual right to receive a regular payment from the insurer. As such, the capital value of the living annuities cannot be taken into account for the determination of a person’s accrual.
Where the judgment did go further was in relation to the contractual right of the annuitant to receive annuity payments from the insurer. The court decided the right to receive annuity payments is an asset in the annuitant’s estate, and therefore can be taken into account for the determination of the accrual. How the value of this right to receive the annuity is to be determined was not decided; this part was reverted back to the trial court.
How the right to receive regular annuity payments is to be valued is still to be seen, but I would assume this will have to take into account factors such as the annuitant’s life expectancy, the level of drawdown and the expected investment return.