Blue Chip Journal Issue 76

W
e have seen some important
changes in living annuities
over the past couple of
months. One of these
changes was brought about by Covid-19
and its impact on capital values (reduction
in share prices) of living annuities and
another was brought about by the 2020
Montanari Judgement in the Supreme
Court of Appeal.
Looking at the first amendment to living
annuities, it is now possible for retirees to
amend their drawdown rate during the
year for a limited period, where before,
they could only make this amendment
once a year (on the anniversary date of
their policy).
The income band has also widened,
from 2.5% and 17.5% to 0.5% and 20%
respectively, as part of Government’s
temporary regulatory changes to ease the
pain. Covid-19 has affected and will, for a
long time, affect local and international
markets and therefore returns earned on
underlying investments.
This change to the income band of living
annuities is important because some
retirees may decide to reduce the income
drawn from their living annuities to align
with the actual return on the capital
invested and therefore not draw down
capital itself. Some retirees may not be
able to live on the income they have drawn
before, and although not advisable, decide
to increase their income drawdown rate,
which will result in the capital value being
drawn down, to make ends meet.
The second important change in living
annuities was brought about by the 2020
Montanari Judgement in the Supreme
Court of Appeal.
A life annuity is far
easier to value than
a living annuity.
In the past, only the value of retirement
funds and not the value of a living annuity
could be taken into account for a divorce
settlement. This relates to the clean break
principle and allows the non-member
spouse to access their former spouse’s
retirement fund benefit and have an
amount or percentage (as stipulated by
the divorce decree) paid out or transferred
to another fund.
The argument was always that the living
annuity income could not be considered
as a right to an income with a capitalised
value, as the funds were owned by the
insurer, and not the person receiving the
income. The courts had ruled previously
that the income could only be taken into
account for a maintenance claim, not a
divorce settlement.
This has all changed with the 2020
Montanari Judgement in the Supreme
Court of Appeal which acknowledged that
the annuity does have a capital value and
can be taken into account when dividing
assets after a divorce.
The Montonari Judgement is a major
step in the right direction. However,
there is still a problem in that the person
receiving the income has the right to
vary the drawdown from 2.5 % to 17.5 %
(during Covid, between 0.5% and 20%),
and can reduce the drawdown to lower the
capitalised value of the income.
Although this case dealt with the right to
living annuity income, the principle would
apply similarly to a right to income from a
guaranteed life annuity. A life annuity is far
easier to value than a living annuity.
One final change to living annuities is
that previously, smaller annuities with a
value of up to R50 000 (where a third had
been taken in cash) and up to R75 000,
where no cash amount had been taken,
could be withdrawn in full.
This threshold has been increased to
R125 000 across the board. This change
will be permanent and ongoing.
Considering the above changes and
deciding what is best for you and your
family is a daunting process. We suggest
you consult a Certified Financial Planning®
professional who will be able to look at
your situation objectively and suggest the
best course of action.
Cluhein Trubshaw, Technical Specialist, FPI
www.bluechipdigital.co.za
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