What you need to know about Living Annuities

//What you need to know about Living Annuities

What you need to know about Living Annuities

… or hoped not to!

The other day I was speaking to clients who had, sadly, decided to get divorced.  Rob and Judy (for the purposes of my story) were quite determined to split their assets straight down the middle – a good thing since they were married in community of property!  But who would have thought that a simple decision like that would be fraught with difficulties!

The problem, you see, was that 75% of the so-called joint assets were held in a Living Annuity with Rob as the sole and inalterable owner of the policy, and couldnot be split!  (Living Annuities are investments that provide a monthly pension once a person retires from a Retirement Fund – Pension Funds, Provident Funds and Retirement Annuities.)

Now the real irony here is that Retirement Funds (a Pension Fund in Rob’s case), from which he retired, could have been split in the event of divorce, had he not yet retired…!  It’s scary to wonder just how many people know they lose this right when their partner retires.

The answer to why such a discrepancy exists between a Retirement Fund and a Living Annuity lies in the fact that Living Annuities are governed by the Income Tax Act and not by the Pension Fund Act.  So, as you can imagine, SARS is not at all interested in the event of a divorce, in losing revenue from the splitting of income between partners.  This reminds me of the spate
of divorces entered into a few decades ago, purely for tax-planning purposes, when SARS used to tax the combined income of both spouses, in the hands of only the husband!

Despite the intention by Rob and Judy to keep their divorce simple and fair, the Living Annuity remains invested in Rob’s name and, as such, he controls the investment strategy … despite Judy’s now completely different financial situation.

Furthermore, Rob as the owner of the Living Annuity, would have had the right, without a specific clause in the divorce order to the contrary, to determine, at any time, who would receive the benefits (the beneficiaries of the income and/or the lump-sums) of the Living Annuity on his death – an alarming consideration in any divorce, not to mention an acrimonious one.

In Rob and Judy’s case, the clause that was wisely inserted into the divorce order prevented Rob from nominating new beneficiaries entirely at his own discretion.  Judy (and failing her, her children) had to remain at least a 50% beneficiary on the Living Annuity!

I believe this was an unacceptable resolution to an uncomplicated divorce and a tenuous position for Judy to find herself in.  It’s high time that SARS fixed the problem, just as they had to do in the past, by allowing Living Annuities to be split, on divorce, in the same way that Retirement Funds (that create them in the first place) are allowed to be split today.

By |2017-07-11T12:21:23+00:00Feb 12, 2014|News|0 Comments

About the Author:

Barclay is currently Chairman of Chartered Wealth Solutions and he currently practices as a retirement planner and heads up business and strategic development. When it comes to financial planning Barclay believes that Chartered Wealth is a place where meaning and money can meet.

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