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10 Saturday, May 16 2020 | PERSONAL FINANCE
Clearing up the confusion about annuity products
• ASSETS
New legal
position on
living annuities
on divorce
A RULING this week by the Supreme Court
of Appeal (SCA) has overturned the existing
legal position on what happens to a living
annuity on divorce. Although pre-retirement
assets must be split between the two parties
in a divorce, until now this has not applied to
post-retirement assets in an annuity.
Jenny Gordon, head of technical advice
for investments, product and enablement
at Alexander Forbes, says a 2016 ruling by
the Johannesburg High Court that a living
annuity cannot be taken into account for the
purposes of calculating the assets on divorce
was overturned on appeal by the SCA.
The court ruled in the case of Montonari
v Montonari that the right to the income of a
living annuity formed part of the assets of a
marriage for the purposes of divorce.
The court ordered that “the value of the
annuitant’s right to future annuity payments
under a living annuity is an asset in his estate
for the purposes of calculating the accrual in
his estate”.
Gordon says although the legal principle
that a right is capable of valuation and
capitalisation is sound, the practicalities of
applying this to living annuity income is
extremely difficult. This is because variables
such as the investment return assumptions,
the level of drawdown and the annuitant’s
mortality had to be taken into account. It does
also not change the fact that the income from
the living annuity can still be paid only to the
annuitant.
She says although this case dealt with
a living annuity, “the principle would
apply similarly to a right to income from a
guaranteed (life) annuity, which might be
easier to value than a living annuity”.
“Despite the difficulties in valuation, this
is a step in the right direction. The solution
is legislative intervention, which has been
proposed by industry organisations,” Gordon
says. | Staff Reporter
u For a detailed account by Gordon on
this matter, see www.iol.co.za/personal-finance
PERSONAL FINANCE MAGAZINE
WE REGRET that, owing to the disruption
caused by the Covid-19 pandemic and
restrictions imposed by the lockdown, the
second-quarter edition of Personal Finance
magazine, which was due to appear on the
shelves earlier this month, is not available
in print. However, a digital edition of the
magazine will be available free to subscribers
and at a discounted price to non-subscribers
on our digital platform https://digital360.
africa/ from Monday, May 25.
UNIT TRUST PRICES: As a result of space
constraints, we are unable to publish the unit
trust prices. The performance data can be
found online at www.fundsdata.co.za/navs
THIS WEEK, I was to have focused
on life annuities, but input from
readers has persuaded me to change
tack slightly. It seems there is a lot of
confusion among consumers about
the various retirement products, and,
considering the terminology, I am
not surprised.
There are essentially three
“annuity” products on the market,
of which one contains the word
“living” and another the word “life”.
That in itself is confusing. Living
and life annuities are post-retirement
products that use the term “annuity”
in its strict sense of something that
provides regular income payments –
in other words, a pension.
The third “annuity” on the
market is not a pension product
at all, but a pre-retirement savings
vehicle.
1. Living annuity: An
investment-linked living annuity
(illa), to give it its full name, is a
pension product that you “buy”
with your retirement savings when
you retire. It sits on an investment
platform that offers a choice of
underlying funds.
You have full control over both
the underlying investments and your
drawdown (the percentage of capital
you draw annually as income, which
• SURVEY
can be paid to you in monthly
instalments), within limits. You take
on the investment risk and the risk
of running out of capital before you
run out of life.
Because you buy the product
with the proceeds of a retirement
fund (to which contributions are
tax-deductible), you pay income tax
on your income. Whatever capital is
left over when you die goes to your
beneficiaries.
2. Life annuity: So called because
it is a pension product provided by
a life insurance company, a life (or
guaranteed) annuity is literally a
life insurance policy in reverse: you
give the insurer a lump sum (your
retirement savings or a sum from
discretionary savings) and the insurer
pays you an income for the rest of
your life. This may be a fixed rand
amount, or it might be inflationlinked,
and it may also cover your
spouse. It gives you and your spouse
the security of never having to worry
about your income for the rest of
your days. But a life annuity dies
when you (or your spouse) dies –
there’s nothing left over. If bought
from retirement fund savings, you
pay income tax on your pension.
3. Retirement annuity (RA): This
is a pre-retirement product in which
you accumulate savings. It’s basically
your own personal retirement fund,
and was designed primarily for the
self-employed, but now used by
many to supplement their retirement
savings. It enjoys the same tax
status as retirement funds, with your
contributions being tax-deductible
up to certain limits.
You cannot draw an income
from an RA – at age 55 or at any
later age you can take one-third
of it as cash (on which there are
tax implications), but the other
two-thirds must be used to buy a
pension in the form of a living or life
annuity.
In none of these products are
investment returns and capital gains
taxed.
Covid-19 decimates
household income
Consumers under pressure as ability to service debt and pay for shelter diminishes
GEORGINA CROUTH
georgina.crouth@inl.co.za
THE COVID-19 pandemic is causing
significant financial hardship
the world over, with the biggest
impact felt among millennials and
Generation X.
The latest weekly TransUnion
global report, which compares
the impact of the pandemic on
household finances of 9 215
respondents in seven regions on five
continents, found that household
incomes of 84% South African
millennials have been hurt by the
pandemic, compared with the global
average of 76%, while 79% of all
other generations in South Africa are
affected and 64% are globally.
Millennials make up a third of
the world’s labour force, and their
consumption habits contribute
significantly to economic demand.
Typically, they would have entered
the job market during the last global
recession and, compared with other
generations, they entered the Covid-
19 crisis with less income, assets and
wealth – as well as more debt. The
pandemic has hit this generation
during their peak-earning years,
when they were already on track
to be the first generation in history
to earn less than their parents,
TransUnion says.
In South Africa, the financial
choke-hold is tightening, as nearly
a third of workers say their work
hours have been reduced and 88%
of consumers say they are concerned
WORDS ON WEALTH
MARTIN HESSE | martin.hesse@inl.co.za
about their ability to service their
debt. On average, respondents will
be short about R7 000 in the near
future and they expect to experience
a shortfall in less than four weeks.
The survey, comparing South
Africa, Canada, Colombia, Hong
Kong, India, the UK and the US,
tracks how consumers are affected
differently by the economic fallout
of the pandemic based on employer
size, generational differences,
government interventions and
income dynamics.
The research has shown that
while many consumers are worried
about their finances, millennials
(ages 26 to 40) globally are under the
most pressure: 22% of millennials’
household incomes have been
affected due to job losses compared
with 16% for all other generations,
while 45% have seen their work
hours reduced compared to 35% of
other generations. In South Africa,
11% of millennials have lost their
jobs, and 34% have had their work
hours reduced.
Dependent children add to the
pressure on millennials. Globally,
61% of millennials have dependent
children living at home (compared
with 39% for other generations),
while 66% of South African
millennials have dependent children
at home, compared with 48% for
other generations.
Millennials are also experiencing
bigger problems with some of their
debt obligations: 63% say they will
not be able to make their rent or
mortgage bond payments, compared
to 54% for other generations.
In South Africa, 47% of affected
millennials are unable to pay for
shelter compared with 43% for other
generations.
Despite their financial struggles,
consumers are coping relatively well.
The study showed that five in six
(85%) global respondents indicated
they plan to deal with their financial
gap (regardless of generation), while
in South Africa 75% said they have
a plan.
Those employed by small
businesses across the globe are
feeling the most pain, because small
and medium-sized enterprises supply
and anchor economies around the
world. The researchers noted that
when income grinds to a halt, “debt,
rent and other obligations continue”.
Compared with large enterprises,
small businesses have less access to
resources to absorb the pandemic’s
shock, leaving them with far greater
risk of shuttering for good.
The TransUnion survey’s results
are born out by a local survey
conducted by personal finance
website, JustMoney.
Its survey, conducted last month,
asked respondents about the
pandemic’s effect on their finances.
Of the 1 986 participants, more
than 11% work in retail, nearly
9% in government, and 8% in
construction. The rest (43%) selected
“other”, with many specifying
they worked in manufacturing,
communications and the informal
There are variants among the
first two, including hybrid products,
such as a with-profit annuity, which
is essentially a life annuity that gives
you increases related to the returns
of its underlying investments, over
which you may have a certain
amount of choice.
LIVING TO LIFE
A living annuity can be converted
to a life annuity, but not the other
way around. Once you are in a life
annuity you are literally in it for life.
Personal Finance put the
following questions to Segabe Ditodi,
head of legal and compliance at Just
in South Africa, about converting
your living annuity to a life annuity:
u Can you outline the
procedure involved in transferring
from a living annuity to a life
annuity with a different provider?
You or your adviser must notify
the provider (Provider A) of your
intention to transfer out of the living
annuity. This is usually accompanied
by a signed quote and application
form from the life annuity provider
(Provider B). Provider A drafts a set of
annexures which is sent to Provider
B, who in turn also drafts a set of
annexures. Both sets of annexures
must be signed by the client.
| Freepik
sector or were unemployed.
Just under half of the respondents
(43%) earned under R10 000 a
month and about 10% earned more
than R40 000 each month.
Almost three-quarters of the
respondents say the pandemic has
“significantly or very significantly”
affected their family earnings
and most of them can afford an
u What transfer costs are
involved? None. Regulations
stipulate that there can be no costs
associated with transfer of a living
annuity to a life annuity. Your
adviser can charge a fee, but it
should be invoiced separately and
settled by you.
u Can you convert a portion of
the living annuity to a life annuity
or must it be the entire amount?
No, you cannot transfer a portion of
a living annuity to a conventional
life annuity. However, if you transfer
the full amount to a living annuity
where a life annuity is available as
a portfolio (often referred to as a
blended living annuity offered by
some product providers), you can
allocate a portion of retirement assets
to the lifetime income portfolio in
tranches at any time.
u How long does it take? The
timing of the process varies between
providers and depends on factors
such as delays in tax directives or the
signing of annexures. The best-case
scenario is two to four weeks, but it
can take about eight weeks.
u If the provider with which
you have the living annuity also
offers a life annuity, is the process
easier? Not necessarily. The process
still needs to follow the same steps.
emergency payment of less than
R5 000, while fewer than 10% can
afford an emergency payment of
R10 000.
JustMoney says considering these
income brackets, just over 68% of
participants said they would not
be able to survive for more than a
month on their savings. And many
would struggle to survive a week.
Trustees as shareholders or directors of a company
A TRUST may hold shares in a
company for asset protection and to
ensure the continuity of ownership
of assets. The trustees owe, both in
common law and in terms of statute,
a fiduciary duty (a legal obligation of
one party to act in the best interests
of another) to the trust’s beneficiaries.
The trustees are required to administer
the trust, including any shares held
by the trust in a company, solely for
the benefit of the trust’s beneficiaries.
Often, estate planners and trustees
are uncertain about the role trustees
have to play in such companies,
particularly when the trust is not the
only shareholder and not all directors
are trustees of the trust.
A trust does not have legal
personality and therefore cannot vote
as a shareholder, because it is only an
accumulation of assets.
Despite its lack of legal personality,
a trust has legal capacity, and the
trustees, on behalf of the trust, may
perform juristic acts relating to trust
assets, such as managing investments
in companies, as long as the trust
deed allows for that. The trustees
therefore may own shares on behalf
of the trust and are able to vote and
attend to the trust’s business. They act
as shareholders in this capacity and
should always act in the best interests
of the trust. A company is managed
by its directors and other officers. The
directors at all times have to act in
the best interests of the company and
not a particular shareholder (who may
have appointed them).
The director has a fiduciary duty
towards the company (and not the
beneficiaries of the trust he or she may
represent as trustee) and may incur
personal liability if he or she breaches
this duty towards the company. This
may cause conflict if a director is
expected to act in the best interests
of a particular shareholder (trust) that
appointed him or her and for which
he or she is a trustee.
THE MEMORANDUM OF
INCORPORATION (MOI)
The MOI is an important document
in establishing the balance of power
between shareholders and directors.
Unless a matter is specifically excluded
from the authority and powers of
the directors by the company’s MOI
or the Companies Act, the directors
must manage the business and affairs
of the company. The shareholders
are not involved in the business and
affairs of a company unless the MOI
or the Companies Act requires their
involvement or their approval of a
decision of the directors.
ALL ABOUT TRUSTS
PHIA VAN DER SPUY
Companies frequently set out
additional matters, which would
have to be effected through a special
resolution of shareholders. These
have historically been contained in a
shareholders’ agreement.
Under the new Companies Act,
the principal governing document
is the company’s MOI, and so
companies with additional special
resolution requirements (for example,
the changing of the auditors or the
incurring of certain types of debt)
should transfer these into their MOIs
in order for them to remain effective.
It is therefore important for the
board of trustees, which manages
the trust assets to be involved in and
apply their minds when the MOI is
entered into or amended. When a
board of trustees invests in an existing
company, they should study the MOI
and request changes to the extent of
protecting the trust’s investment and
minimising risks.
TRUSTEES AS SHAREHOLDERS
AND DIRECTORS
The board of directors and the general
meeting of shareholders (such as
trustees of the trust) are separate
organs of a company.
The directors exercise the
managerial and executive powers
of the company, save to the extent
that their rights are limited by the
company’s MOI. Shareholders can
remove the directors or change the
company’s MOI, but they cannot
otherwise control the management of
the company placed in the hands of
the directors.
As a trust cannot operate as a
person distinct from the trustees, it
is important to name the trustees on
behalf of the trust, as the registered
shareholders in a company share
register. This should be done in
accordance with the provisions of
the trust deed and the required duly
approved trustee resolutions. The
listed trustees therefore have to act as
the representative shareholders of the
trust.
A share register sets out the
classes of shares; who all the
shareholders are; the amounts
paid for the shareholding; and the
changes in shareholding over time.
Every company is obliged to keep
and maintain a share register at its
registered offices.
A share certificate is merely
evidence that a person may be a
shareholder, but it is the share register
that will ultimately provide conclusive
proof. In our law, a company can
rely only on its share register, which
means that the company cannot allow
anyone but the person whose name is
on the share register to cast a vote.
If this person is holding the
shares as a nominee for another
(such as a trust), the company cannot
be concerned with that fact. Any
disagreement between a nominee
shareholder (a trustee) and the
beneficial shareholder (the trust) is a
matter to be decided between them,
and the company cannot be party to
their dispute or question the validity
of decisions taken by the board of
trustees. The company can rely only
on the share register to ascertain who
is authorised to act as shareholder, and
cannot rely on any other evidence to
question the validity of the actions of
trustees on behalf of a trust.
Shareholders only own shares and
do not participate in the day-to-day
management of the company. The
shares are their property and they
have voting rights attached to the
shares they hold. In essence, the
shareholders can do as they please
with the shares they own and, as such,
they do not have a fiduciary duty
towards the company.
The Companies Act prescribes
certain matters that need the
shareholders’ approval and in these
circumstances the shareholders
will participate in the control of
the company. The only limit the
Companies Act places on shareholders
is that they must not act oppressively
(burdensome, harsh and wrongful)
towards other shareholders and
directors. Other than that they are free
to do and vote as they please.
u This is a shortened version of
“Trustees as shareholders or directors
of a company” on www.iol.co.za/
personal-finance, which details
shareholders’ and directors’ duties and
responsibilities.
u Phia van der Spuy is a registered
Fiduciary Practitioner of South Africa, a
Master Tax Practitioner (SA), a Trust and
Estate Practitioner, and the founder of
Trusteeze, a professional trust practitioner.