“Two main categories of people are needed in your circle; those who give you the necessary support to accomplish your dreams and those who become beneficiaries of what you achieve.” (Unattributed)
Pension and provident funds and retirement annuities
All retirement funds are governed by the Pension Funds Act, which prioritises financial dependants when distributing death benefits. Nominated beneficiaries may not necessarily receive a portion of the death benefit, as it must provide for surviving spouses, children and other dependants. Your dependants shouldn’t be left destitute.
However, non-dependants can be awarded some of the proceeds. The Pension Funds Act is clear: if there are nominees and dependants, then the benefit must be allocated equitably amongst them.
The good news is that the pension funds fall outside your estate and are not subject to estate duty. Beneficiaries can be paid the benefit as a cash lump sum, taxed at the retirement lump sum rates, and they can purchase a life or living annuity. Or they can opt for a combination of cash and an annuity.
Living and Life Annuities (LAs)
When you retire, you need to transfer at least two thirds of your retirement funds to a LA (Living Annuity or Life Annuity).
A Living Annuity is a financial product that pays you a regular income when you retire from your pension or retirement fund. You can choose how much income you want to receive each year (between 2.5 and 17.5 %) and where to invest your savings. You have greater flexibility and control over your money, but also bear more risk and responsibility.
Living Annuities are post-retirement funds but are not subject to the Pensions Fund Act. They allow members to nominate beneficiaries directly, without any risk of the pension fund trustees intervening. They too bypass the deceased’s estate and are not subject to estate duty.
However, if you do not nominate any beneficiary or your beneficiary cannot be traced, your Living Annuity will fall within your deceased estate and be subject to your Will. In that case, your Living Annuity may also be liable for estate duty.
A Living Annuity is different from a Life Annuity, which is a contract with an insurance company that guarantees fixed or variable payments for the rest of your life. A Life Annuity transfers the risk of outliving your savings to the insurer, and because it ends with your death, nothing goes to your estate, nor can you nominate beneficiaries
Sometimes, when a person has had two marriages, they provide for the first spouse in their Will and the other as a beneficiary of an LA to prevent squabbling.
Tax-Free Savings Accounts (TFSAs)
TFSAs are also considered as a retirement product and they are not subject to the Pension Funds Act. You can freely nominate beneficiaries.
But unfortunately, the investments do form part of your estate as defined in the Estate Duty Act so attract estate duty. In addition to the tax implications, this also means your beneficiaries will have to wait for the estate to be wound up before accessing the funds.
And what about life assurance beneficiaries?
Life policies are excellent estate planning tools, especially for providing liquidity in your estate and making financial provision for your loved ones. Domestic policies are considered as deemed property in your estate and thus are subject to estate duty. (Deemed property is essentially any property that did not exist at the date of death, but which comes into existence as a result of that person’s death.)
Nominating your estate as the beneficiary of your life assurance can have both benefits and drawbacks.
The benefits are that the proceeds can provide liquidity in your estate to cover expenses such as outstanding debt and taxes. The drawbacks are that the proceeds are seen as deemed property in your estate. It may take time to wind up the estate, delaying payment to family members or heirs.
If you want the proceeds to go directly to specific beneficiaries (e.g. minor children), consider naming them as beneficiaries on your policy. Setting up a testamentary trust and nominating the trust as beneficiary is a great way of ensuring effective administration for minor beneficiaries.
Can your Will override your beneficiary nominations?
Your Last Will and Testament cannot override pension fund nominations. Nominating beneficiaries for your pension fund is done via a separate legal document that is excluded from your estate. The board of trustees of the pension fund is thus not bound by the wishes of the deceased as expressed in his or her Will.
Your Will cannot override a beneficiary nomination on any policy unless specifically ordered to do so by the court.
Change – the one constant in life
Regular review of your beneficiary nominations is an essential part of any successful estate plan. Major life changes (marriage, divorce, birth, etc.) should prompt an immediate review of the beneficiaries on retirement funds and assurance policies. It goes without saying that at moments such as these you should also revisit your Last Will and Testament to make sure it still reflects your wishes.
If you have absolutely any questions about this important topic, please consult your financial advisor.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.