Financial Services Laws General Amendment Act changes: Living Annuities and divorce

Financial Services Laws General Amendment Act changes: Living Annuities and divorce

Section 37D(1)(d) of the Pension Funds Act previously permitted for deductions (in terms of a divorce order as contemplated in section 7(8) of the Divorce Act) to be made from the member’s benefit or minimum individual reserve.

The section was recently amended by the Financial Services Laws General Amendment Act. As of 28 February 2014, Section 37D(1)(d) of the Pension Funds Act states that a registered fund may:

"deduct from a member’s or deferred pensioner’s benefit, member’s interest or minimum individual reserve, or the capital value of a pensioner’s pension after retirement, as the case may be – ”

What is the effect of the amendment?

The effect is that the deductions in section 37D in respect of maintenance and divorce orders as well as income tax have been extended to the "member’s interest and capital value of a pensioner’s pension after retirement”.

The question now really is whether "capital value of a pensioner’s pension after retirement" includes annuities purchased post-retirement, like an Investment-Linked Living Annuity (ILLA). If so, does this mean a non-member spouse may now claim from such annuities as part of a divorce order? The answer is no if regard is had to the below:

1. Pension Funds Act 24 of 1956

As a general rule a fund may only make a deduction from a member’s benefit if such a deduction is permitted in terms of the Pension Funds Act, the Income Tax Act and the Maintenance Act. This general rule however has exceptions as set out in section 37D.

Section 37D(1)(d)(i) now reads that a registered fund may deduct from "a member’s or deferred pensioner’s benefit, member’s interest or minimum individual reserve, or the capital value of a pensioner’s pension after retirement as the case may be) any amount assigned from such benefit or individual reserve to a non-member spouse in terms of a decree granted under section 7 (8) (a) of the Divorce Act, 1979 (Act No. 70 of 1979)”.

The key terms (underlined above) are defined in the Pension Funds Act as follows:

·         "Deferred pensioner” is defined as a member who has not yet retired but left the service of the employer concerned prior to normal retirement date leaving in the fund the member’s rights to such benefits as may be defined in the rules.

·         "Member” is defined as meaning, in relation to --

-       a fund referred to in paragraph (a) of the definition of "pension fund organisation”, any member or former member of the association by which such fund has been established;

-       a fund referred to in paragraph (b) of that definition, a person who belongs or belonged to a class of persons for whose benefit that fund has been established,

(a) but does not include any such member or former member or person who has received all the benefits which may be due to him from the fund and whose membership has thereafter been terminated in accordance with the rules of the fund;

·       "Pensioner” is defined as meaning a person who is in receipt of a pension paid from the fund.

Once a member retires and purchases a member owned annuity, he is no longer a member of the fund – he has effectively received all the benefits which may be due to him from the fund and his membership will thereafter be terminated in accordance with the rules of the fund.

Moreover, the words "the capital value of a pensioner’s pension after retirement” explicitly refers to "pensioner”, which in turn refers to the fund.

Even if you argue that this aims to include a pension paid by the fund (i.e. a fund owned annuity), where the fund still has commitments to the member, it would still not have any force or effect until the definition of "pension interest” in the Divorce Act is amended to include this.

It’s also interesting to note that section 37D(6) of the Pension Funds Act has been amended only to add the reference to "deferred pensioners”:

"(6) Despite paragraph (b) of the definition of "pension interest” in section 1 (1) of the Divorce Act, 1979 (Act 70 of 1979), the portion of the pension interest of a member or a deferred pensioner of a pension preservation fund or provident preservation fund, that is assigned to a non-member spouse, refers to the equivalent portion of the benefits to which that member would have been entitled in terms of the rules of the fund if his or her membership of the fund terminated, or the member or deferred pensioner retired on the date on which the decree was granted.”

2. Divorce Act 70 of 1979

Section 7(7) of the Divorce 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”

The wording of section 7(7) makes it clear that the non-member spouse is only permitted to a portion of the member spouse’s notional benefit if it qualifies as "pension interest” as defined.

"Pension interest” is defined in section 1 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, i.e. 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 Divorce Act read together with section 37D(4)(a) of the Pension Funds Act.

The Financial Services Law General Amendment Act has not made any amendments to the definition as quoted above and ccordingly, annuities purchased post-retirement remain excluded.

Conclusion

It might have been the intention of the legislature to close the "loophole” whereby someone can retire from a fund and purchase an annuity thereby effectively excluding it from the scope of section 7(7) and 7(8) of the Divorce Act. However, until the definition of "pension interest” in section 1 of the Divorce Act is accordingly amended, the changes will not affect annuities purchased upon retirement.