What happens to your retirement benefits when you pass away?
By Johan Strydom, Product Head at FNB Fiduciary
For many people, their pension funds are their single most valuable asset. It's therefore no surprise that these pension funds are often top of mind for those considering their estate planning and setting up their Wills.
In South Africa, many pension fund members mistakenly believe that since we have freedom of testation, they can specify who should receive the benefits from their retirement funds in their Wills.
Retirement funds, which include retirement annuities, pension funds, provident funds, and preservation funds, are governed by the Pension Funds Act. Section 37C of the Act stipulates what should happen with the death benefits payable on the death of a member. New employees are often requested to complete a beneficiary nomination for their pension fund and employee benefits. It is important to know that this nomination of nominees is not binding on the trustees of the pension fund when allocating death benefits but can assist them in identifying dependants more quickly.
In terms of s37C, pension fund trustees must ensure that a member's death benefits are distributed to dependants and/or nominees. Dependants refer to any person to whom the member was legally liable for maintenance, a person financially dependent on the member before death, the spouse, and/or the child/ren of the fund member.
Trustees have 12 months to identify and trace all dependants. Where there are dependants and nominees (who are not dependants), s37C (1)(bA) stipulates that the trustees pay the benefit, or such portion thereof, to such dependant or nominee, and in such proportions as the board may deem equitable. Where the fund cannot trace any dependants within 12 months of the member's death, and the member didn't nominate a beneficiary/nominee, the death benefits will then be paid into the deceased member's estate. Beneficiaries (dependants and/or nominees) receiving death benefits can decide to receive their benefits in a lump sum (in which case, tax will be deducted) or purchase an annuity with the benefits.
But what about group life cover? Most employee benefit schemes include membership to a pension fund and some type of group life and disability cover. The life cover amount is usually a lump sum equal to three to five times an employee's annual salary. With these typical "approved schemes", the life cover amount at death forms part of the death benefits, which, along with the pension fund value, will be distributed to dependants in terms of s37C.
With post-retirement fund values or benefits, it depends on the option that was selected at retirement. Life annuities, which guarantee a pension for the rest of your life, normally cease at death with no lump sum payments to beneficiaries. Where the option was selected for the continued pension payment to a spouse, the pension payments will cease at the death of the spouse. With living annuities, the investor can nominate beneficiaries. This allows the beneficiaries to elect to transfer the remaining fund value into a living annuity in their own names or take the funds in cash or a combination of the two options.
