We 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.
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.
A life annuity is far easier to value than a living annuity
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.
