It’s no secret that the financial planning industry is highly regulated, as it should be – and managing your financial affairs is as much about grasping the numbers as it is understanding the applicable legislation. In this article, we explore 4 pieces of legislation that impact on your financial affairs and how they affect your financial planning.
1. Section 37C of the Pension Funds Act: What happens to your retirement funds when you die?
If you’re contributing towards an approved retirement fund, it is important to understand the impact of Section 37C of the Pension Funds Act, specifically the extent to which it affects your succession planning. If you’ve been contributing towards a retirement fund for most of your life, these funds are likely to form a large portion of your wealth. When developing your estate plan, keep in mind that your retirement fund benefits fall outside of your estate and within the ambit of the Pension Funds Act. Section 37C of this Act regulates the distribution and payment of lump-sum benefits payable on the death of a member of a pension, provident, preservation and retirement annuity fund.
Practically, this means that if you die before you retire from the fund and a lump sum is payable on your death, the trustees of the fund have a duty to allocate and pay the benefits in a manner that they deem to be fair and equitable. So, while you can indicate who you would like the funds to be paid to on your beneficiary nomination form, ultimately the decision rests with the trustees of the fund, whose decision will be guided by identifying those who are either wholly or in part financially dependent on you. As such, your beneficiary nomination will be used by the fund trustees as a guide only – meaning that there is no guarantee that your funds will be allocated in line with your intentions.
Remember, the primary reason that government provides significant tax benefits for retirement fund investors is to encourage South Africans to save for their retirement years, thereby reducing the burden on the state. Thus, in the event of your premature death, Section 37C ensures alignment with government’s intention by ensuring that your financial dependants are provided for. In exercising their duty, your retirement fund trustees will conduct an investigation to determine who is financially dependent on you, irrespective of whether or not you were legally required to maintain them. Your ‘financial dependants’ can include children, parents, grandparents, spouses, life partners, same-sex partners, step-children, foster children, unborn children, and anyone else who your trustees determine relies on you for financial support.
2. Section 18A of the Income Tax Act: Get rewarded for giving
If you make donations to charitable organisations, be sure that your charity is an approved Section 18A Public Benefit Organisation so that you can receive a tax deduction on your donation. In terms of the Income Tax Act, individuals can donate up to 10% of taxable earnings towards an approved Public Benefit Organisation (PBO) on a tax-deductible basis, but to receive the tax exemption, you need to ensure that the non-profit is duly registered with SARS and that the tax exemption is approved by the SARS Tax Exemption Unit (TEU). If approved, you can claim a tax deduction if you are in receipt of a Section 18A certificate issued by your PBO.
In order to become an approved PBO, the company, trust or association must have been incorporated, formed or established in South Africa. If you are donating towards a charity, it is important to understand the difference between a PBO and a non-government organisation (NGO) that is not an approved Section 18A institution. While a donation to an approved PBO has tax benefits, donations to an NGO are not tax-exempt and may in fact attract donations tax if you exceed the annual threshold.
3. What counts as a spouse? The legal grey areas in cohabitation
If you live together with your life partner but are not legally married in terms of South African law, it is important to know that the definition of what constitutes a ‘spouse’ differs depending on the applicable legislation. Let’s take, for example, the Medical Schemes Act, which recognises your cohabiting partner as an adult dependant on your medical aid regardless of your marital status. For tax purposes, the Income Tax Act determines that a spouse includes ‘a same-sex or heterosexual union which the Commissioner is satisfied is intended to be permanent’. Falling within this definition means that the donations tax exemptions apply to you and your life partner, as does the Section 4q estate duty abatement. Further, if your life partner bequeaths immovable property to you, in the event of their death you will not be liable for transfer duty.
As life partners, you are free to nominate your partner as a beneficiary to any domestic life policy. In the event of your death, the proceeds of the policy will be paid directly to your partner and, as you fall within the definition of ‘spouse’ for tax purposes, the proceeds will not be considered deemed property in your estate and will not attract estate duty.
On the other hand, there are several important pieces of legislation which take a stricter view on what constitutes a spouse, such as the Divorce Act, the Marriage Act, and the Maintenance of Surviving Spouses Act. For instance, the right to claim a share of your member spouse’s pension interest is limited to those couples who are legally married. Partners to a legal marriage have the right to claim against the member spouse’s retirement fund for their share of the pension interest, which is the total benefit the member would have been entitled to if their membership ended due to resignation at the date of divorce.
Another consideration is that a legal marriage creates what is referred to as a duty of support, which is not the case when it comes to cohabitation. If your life partnership comes to an end, there is no legal obligation on either partner to provide the other with any form of maintenance or financial support. Similarly, where the Maintenance of Surviving Spouses Act provides a mechanism for surviving spouses to claim against the estate of their deceased spouse to the extent that their spouse failed to provide for them financially, no such mechanism is available for the surviving partner in a cohabiting relationship.
4. Regulation 28 of the Pension Funds Act: How much risk can you take?
Regulation 28, which falls under the Pension Funds Act, is designed to protect retirement fund members by limiting the extent to which their savings can be exposed to high-risk or overly concentrated investments. The objective is to ensure that retirement portfolios are appropriately diversified across asset classes, reducing the risk of significant capital loss, especially for long-term investors who rely on these funds to provide income in retirement.
Regulation 28 applies to pension, provident, preservation, and retirement annuity funds and imposes limits on the percentage of the portfolio that can be allocated to various asset classes such as equities, property, and offshore investments. Changes to these regulations which took effective in January 2023 increased offshore exposure to 45% and exposure to local and foreign property to 25% combined. These changes reflect National Treasury’s efforts to encourage long-term investment into economic development projects, while still protecting individual investors through diversification.
Although these limits may feel restrictive to some investors, they are balanced by the significant tax advantages associated with investing through an approved retirement fund. Contributions are tax-deductible up to the allowable threshold, returns grow tax-free within the fund, and there is no capital gains tax on switches between investment portfolios. For most long-term investors, these benefits outweigh the constraints imposed by Regulation 28.
It’s also important to remember that factors such as fund performance, fees, and investor behaviour can have a greater impact on long-term returns than asset allocation limits alone. Rather than viewing Regulation 28 in isolation, consider it part of a broader framework designed to support disciplined, tax-efficient retirement investing, while safeguarding your capital against unnecessary risk.
Understanding the legislation that underpins your financial planning is critical to making informed, confident decisions about your money. Whether it’s ensuring your retirement benefits are distributed fairly, claiming tax deductions on charitable donations, recognising the legal rights of your life partner, or navigating investment limits within your retirement portfolio, these laws form the foundation of sound financial strategy. As the regulatory landscape evolves, staying informed—and partnering with a qualified financial advisor—will help you align your financial affairs with both your goals and the law.
Have a great day.
Sue
