By Celeste Frank and checked by Jeannique Booysen
This is an application for special leave to appeal in which the Supreme Court of Appeal overturned ﬁndings and orders made by the Gauteng Division of the High Court, Johannesburg regarding living annuities and the calculation of accrual claim at date of divorce. Mrs Charmaine Montanari (“the Applicant”), and Mr Emillio Montanari (“the Respondent”) were married in December 1999, out of community of property with the inclusion of the accrual system. In 2008, 2012 and 2015, the Respondent used his pension benefit, which arose from his employment, to purchase “living annuities” from Glacier Financial Solutions (Pty) Ltd, a member of the Sanlam Group (Glacier by Sanlam). In 2014, the Respondent instituted divorce proceedings against the Applicant. In addition to a claim for spousal maintenance, the Respondent, sought a declaratory order that living annuities which provide his monthly source of income were not assets in his estate and were not subject to the Applicant’s accrual claim. The Applicant lodged a counterclaim seeking an order against the Respondent for the payment of an amount equal to half the difference in the accrual of the respective estates of the parties.
The Respondent argued that living annuities were deemed an asset in a parties estate for purposes of calculating the accrual as a living annuity is not considered to be a pensionable interest as defined in terms of the Divorce Act 70 of 1979 (“the Act”). Moreover, the ownership of the capital value of the annuity’s vests in the insurer, “Sanlam” and he is only entitled to the annuity income. At trial, the essence of the evidence made by the Respondent’s expert witnesses, was that the capital of a living annuity belongs to the provider of the benefit and not the annuitant and therefore does not form part of the annuitant’s estate for the calculation of the accrual. The Court accepted the Respondent’s version and, in its reasoning, indicated that if the contrary to the above is found, it would defeat the purpose of a living annuity which is to provide income to pensioners so that they do not become a burden on the State. The Court further concluded that the payment of the living annuities received by the pensioner is relevant and could be taken into account to assess the Applicant’s future maintenance needs.
On appeal, the Applicant raised a number of contentions. She argued that the court erred in finding that ownership of funds invested in the annuities which belonged to Sanlam and that the annuities did not form part of the Respondent’s estate for the purposes of accrual. The consequence of that finding was that a married person who had accumulated R100 million before a divorce could invest the whole amount in a living annuity and thus, the estate for the purposes of calculating accrual would be diminished by the sum. There was no indication in contracts concluded between the Respondent and Sanlam that ownership of the invested funds would vest in the insurer. The Applicant relied on the judgment in Commissioner, South African Revenue Service v Higgo (“Higgo”) in which she argued that the trial court misinterpreted. She also relied on the provisions of the Financial Institutions (Protection of Funds) Act 28 of 2001 which, she contended, apply to the living annuities as they constitute ‘trust property’ as defined in that Act. She argued that the attention of this court was obviously not drawn to these authorities in ST v CT as it would otherwise not have found that the annuities belonged to the insurer.
The court agreed that there was no dispute that the living annuities were contracts complying with the requirements of the Income Tax Act. The annuity contracts state that once a living annuity is purchased the underlying capital in it is no longer accessible to the annuitant. The proceeds or annuity income do not fall within the ambit of the ‘pension interest’ as defined in the Act. Therefore, the annuitant cannot give part or all of the living annuities to an ex-spouse.
The Court considered whether or not the case of ST v CT was wrongly decided as indicated by the Applicant. In that case the court held that the capital value cannot be included as part of the Appellant’s accrual. The capital belonged to Sanlam and the appellants only contractual right is to be paid an annuity in an amount selected by instalment is subject to a condition of survivorship. The Applicant relied on the case of Higgo to challenge the decision made in ST v CT. The court found that the Applicant’s reliance on the case of Higgo is of no assistance in casu. The abovementioned case concerned what was described as a life annuity, but was incorrectly referred to as a living annuity within the judgment. The contract was concluded prior to the introduction of the definition of life annuity in the Income Tax Act in 2008 and allowed the tax payer to manage the investment of the funds with the assistance of a financial adviser, whose fees he sought to set off against the income generated by the life annuity. This is impermissible with a living annuity under the present definition. The case of Higgo does not have any authority nor does it provide any assistance to the Applicant in this case because it dealt with a contract that was not a living annuity of the type now regulated by the Income Tax Act.
Subsequently, the court considered whether the underlying capital of the Respondent’s living annuities constituted ‘trust property’ as envisaged in the Financial Institutions Act and remained his asset held by Glacier by Sanlam on his behalf. The only basis by the Applicant for her contention is that the living annuities that constituted trust property were owned by the insurer which held them on behalf of the annuitant to provide him with regular annuity income. According to expert evidence, it was held that the annuity and not the capital is the asset that would be reflected in his or her balance sheet. The amount of annuity is not guaranteed by the person or the fund from whom the annuity is purchased. This was replicated in the Glacier documents in which the insurer disavows any responsibility for the preservation of the underlying capital and the income is not guaranteed by Glacier. Therefore, is no obligation on the insurer to repay the capital paid for the annuity, merely the agreed annuity. Further to the above, the court looked at the nature of Sanlam and indicated that it is an unambiguously profit-driven business entity and thus, the insurer’s relationship with the annuitants is purely contractual in nature. The court contended that there is no indication in legislation that applies to living annuities and there is no relationship between the parties in the legislation. Therefore, the Financial Institutions Act does not add to the Applicant’s case.
The court stated that the above findings do not prevent the Applicant from claiming in respect of the Respondent’s annuities. The court made reference to the decision made in De Kock v Jacobson, in which the court had to determine whether a pension that the husband was receiving was an asset in the joint estate of a couple married in community of property. The court affirmed that the accrued right to pension should form part of the parties property. The court sited two judgements. Firstly, Clark v Clark in which the court accepted that a spouse’s interest in a pension which was not yet accrued did form part of the community estate, as did a pension right which had accrued. Secondly, the Commissioner for Inland Revenue v Nolan’s Estate, reaffirmed that the right to a pension right which vests in the parties to a marriage in copy in undivided shares. De Kock concluded that there was no logical or legal reason why both cash components and the accrued right to the pension should not form part of the community of property existing between the parties prior to the divorce. The SCA agreed with the reasoning mentioned above. The court stated that the Respondent has a clear right to investment returns yielded by his capital re-investment with Sanlam, in the form of future annuity income which he draws from the agreement. Such annuity is evidently an asset which can be valued. The court held that the court a quo perpetuated the misdirection by dismissing the appeal. Thus, there is no basis to deviate from the ST v CT judgment.
The appeal was upheld with costs. The value of the Respondents right to future annuity payments is an asset in his estate for the purposes of calculating the accrual in his estate.
This decision undeniably transformed the legal position in terms of the Divorce Act 70 of 1979 (“the Act”), in South Africa. Living annuities acquired by the Respondent when he retired from his pension fund during the marriage, formed part of the accrual in his estate on divorce.
The primary issue that the court had to determine in this matter was an interlocutory application to determine whether the Respondent’s living annuities when he retired from his pension fund during the marriage should form part of the accrual of his estate on divorce.
Divorce, Pension benefit, pensionable interest, annuity income, living annuities, accrual, Divorce Act 70 of 1979, income tax, annuitant, insurer.