A retirement annuity (RA) is one of the most effective long-term savings vehicles available to South Africans as it allows individuals to contribute towards retirement in a tax-efficient manner without needing an employer-sponsored pension or provident fund. For many investors, it also forms a central pillar of their estate plan. That said, it’s important to note that retirement annuities behave very differently from most other assets at death – and understanding those differences is essential if you want your succession planning to work as intended. In simple terms, if you die before retiring from your RA, the money does not automatically fall into your deceased estate. It is distributed as a retirement fund ‘death benefit’’, and that distribution is largely governed by legislation rather than your Will.

Why your RA is treated differently

All pre-retirement retirement funds – including pension, provident, preservation and retirement annuity funds – fall under the Pension Funds Act, and specifically the far-reaching provisions of section 37C. The primary purpose of section 37C is social protection: to ensure that those who were financially dependent on you are not left without support when you die, regardless of what your testamentary documents say. This is a deliberate policy choice, reflecting the substantial tax concessions afforded to retirement fund contributions during your lifetime.

The trustees’ three-part duty

When an RA member dies, the fund’s trustees must: identify and trace potential dependants and nominees; make a fair and equitable allocation among those identified; and determine an appropriate mode of payment. However, this is not a passive process. Trustees are expected to take proactive steps to locate relevant parties and assess the facts of dependency, rather than simply waiting for people to come forward, keeping in mind that the Act gives trustees up to 12 months to complete this investigation. In practice, delays often correlate with incomplete information, outdated beneficiary nominations, or family circumstances that are unclear or contested.

 Who qualifies as a dependant?

A crucial misconception is that only a spouse or minor child can qualify as a dependant. In law, the definition is much broader. Dependants may include:

• Legal dependants – people you were legally obliged to support, such as minor children and, in specific circumstances, adult children, parents, or other family members who relied on you financially.
• Spouses and life partners – which can extend beyond civil marriage to include customary marriages, civil unions and qualifying life partnerships.
• Factual dependants – individuals who were financially dependent on you in fact, even if no legal duty of support existed.
• Future dependants – people you would likely have supported had you not died, such as an unborn child or, in some cases, a fiancé.

A key 2025 development: dependency is tested at the date of death

A recent Constitutional Court judgment has reinforced an important interpretive point for section 37C. In their ruling, the Court clarified that dependency must be determined based on the facts that existed at the time of the member’s death. In other words, trustees must identify who was dependent on the deceased when they were alive, not who might appear dependent months later when the allocation decision is made. While changed circumstances after death may influence the fairness of the eventual allocation, but they do not change the underlying status of a person as a dependant. This ruling strengthens the investigative duty on funds and narrows the scope for speculative or opportunistic claims.

What about nominees?

What is important to note is that your beneficiary nomination (often called an “expression of wish”) remains important, but it is not binding; a nominee being someone you have named in writing to receive benefits. However, if that person is also financially dependent on you, they will be considered a dependant rather than merely a nominee. If they are not dependent, trustees will still consider the nomination, but it does not trump the needs of dependants.

How the allocation typically works

While each case is determined on its own merits, section 37C provides a structured framework:

• If there are dependants only, the trustees allocate the benefit among them in proportions deemed equitable.
• If there are dependants and nominees, trustees may allocate to both groups, but the needs of dependants remain central to the decision.
• If there are no dependants and only nominees, trustees may generally distribute according to the nomination – but only after ensuring no dependants emerge during the investigation period and after checking whether the estate is solvent. If the estate is insolvent, a portion of the benefit may be used to settle the shortfall before anything is paid to non-dependant nominees.
• If there are no dependants and no nominees, the benefit may be paid to the estate, typically after the relevant investigation window. Trustees will consider factors such as each dependant’s age, financial position, earning potential, relationship with the deceased, the extent of dependency, the size of the benefit and the member’s stated wishes.

Payment options for beneficiaries

Once trustees have made an allocation, beneficiaries usually have choices about how to take their share, most commonly as a cash lump sum, a compulsory annuity in their own name (either a living annuity or a guaranteed life annuity), or a combination of the two. If the beneficiary is a minor or a legally incapacitated adult, trustees may pay the benefit to a beneficiary fund, a guardian, or, in appropriate circumstances, a trust—bearing in mind that the objective is to safeguard the beneficiary’s interests and ensure the money is used for their support and development.

The tax reality: the R550 000 threshold

The tax treatment of RA death benefits is another area where outdated assumptions can cause planning errors. A lump sum paid from an RA on death is taxed according to the retirement fund lump sum benefits tax table, which is distinct from the pre-retirement withdrawal table. For the 2025 and 2026 tax years, the first R550 000 of taxable retirement lump sum benefits is taxed at 0%, and amounts above this are taxed on a sliding scale.

Importantly, this tax-free portion is not a fresh exemption per fund, because SARS considers the cumulative history of retirement lump sum benefits and retirement withdrawal benefits received since the relevant dates in the legislation. As such, previous withdrawals or retirement lump sums during your lifetime can reduce the tax-free amount available to your beneficiaries. If beneficiaries choose an annuity instead of cash, no tax is payable at the point of annuity purchase, but the income they draw will be taxed in their own hands at their marginal rates.

Retirement annuities remain powerful estate planning tools, but they require ongoing administration, good recordkeeping and regular updates to your beneficiary nomination. As retirement fund law becomes more rigorous and courts raise the standards expected of trustees, proactive, well-documented planning is the most reliable way to reduce delays, disputes and unintended outcomes.

Have a wonderful day.

Sue