Retirement investments have a role to play, both in funding for one’s retirement and in achieving one’s estate planning goals. As such, understanding what happens to the proceeds of your retirement funds in the event of death is an estate planning imperative. In this article, we take a closer look at how the proceeds from your various retirement investments will be distributed in the event of your passing.
(i) Pre-retirement
Pre-retirement investment vehicles governed by the Pension Funds Act include pension, provident, preservation and retirement annuity funds and are unique in that the distribution of death benefits held in these vehicles is strictly regulated by Section 37C of the Act. Because of the massive tax incentives provided to taxpayers when investing through approved retirement funds, the aim of this piece of legislation is to ensure that the fund member’s financial dependants are recipients of these proceeds, thereby reducing the burden on the State. As such, on the death of the fund member, the retirement fund trustees are required to conduct an investigation to determine who was financially dependent on the member at the time of his/her death. Once a thorough investigation has been conducted, the trustees will meet to determine the most equitable allocation amongst the deceased’s dependants, bearing in mind that this could include parents of the deceased, siblings, adult children, or anyone else who relied on the deceased for financial support. Because of the nature of the investigation, the trustees have a period of twelve months in which to make a determination and this delay is important when it comes to one’s estate planning. As important is the understanding that those whom you have nominated on your retirement fund policy may not necessarily receive a portion of the death benefits as the ultimate distribution is dependent on the findings of the trustees.
In the context of one’s estate plan, note that once the trustees have made their determination, the proceeds will be paid directly to the beneficiaries and/or nominees and, as such, these assets fall outside of the deceased estate and are excluded from the estate duty calculations and executor’s fees. The identified beneficiaries have a number of options in terms of how they choose to receive the death benefits and are required to notify the fund trustees timeously of their option. One option is to take the benefits in cash although it is important to note that, while the first R550 000 is free from tax (in the event that no previous withdrawals have been made), the balance will be subject to tax in the hands of the deceased member on a sliding scale between 18% and 36%. Alternatively, a beneficiary can use the capital to purchase a life or living annuity in their own name in which case no tax will be payable, although the annuity income will be taxed in the hands of the beneficiary. Finally, a beneficiary can opt to implement a combination of both where, for instance, they take a tax-free cash withdrawal and invest the remaining balance in an annuity structure.
(ii) Post-retirement
Unlike pre-retirement funding vehicles, annuities are dealt with differently in the event of the policyholder’s death although the manner depends largely on whether the policy is a life or living annuity. We unpack the differences below:
Living annuities
Although living annuities are colloquially referred to as ‘policies’, they are in fact investments held in the name of the individual investor and, as such, are not insurance policies. As a post-retirement vehicle that does not fall within the ambit of the Pension Funds Act, the funds held in a living annuity can be allocated at the discretion of the investor and there is no requirement that the beneficiary or beneficiaries are financially dependent on the owner. Where the proceeds of a living annuity are allocated to nominated beneficiaries, the assets (to the extent that they were made with tax-deductible contributions to an approved retirement fund) do not form part of the deceased’s estate and are therefore excluded from estate duty and executor’s fees, which is one of the reasons why living annuities make useful estate planning tools. Another advantage is that the annuitant can nominate a trust as the beneficiary of the investment, provided that the beneficiaries of the trust are natural persons, in which case the proceeds will be paid directly to the trust in the event of the annuitant’s passing.
Where the annuitant does not nominate a beneficiary on his/her policy, the proceeds will be paid into the deceased’s estate in the event of death and, similarly, to the extent that the proceeds are in respect of tax-deductible contributions, they will not be estate dutiable – although note that the executor is entitled to charge a fee on the value of the assets that he/she is required to distribute. Generally speaking, the payout of living annuity proceeds following the death of the annuitant is a fairly quick and efficient process, with the beneficiaries having a number of options available to them. A beneficiary can choose to take a cash lump sum, with the lump sum amount being taxable in the hands of the deceased in accordance with the retirement tax tables. Where there are multiple beneficiaries, tax will be applied in respect of the total lump sums paid to all beneficiaries. A beneficiary also has the option to transfer the annuity into a compulsory annuity in his/her own name with there being no tax implications for doing so – although keep in mind that annuity income will be taxed in the hands of the beneficiary. A beneficiary may choose to make a lump sum withdrawal from the investment and purchase a compulsory annuity with the balance.
Life annuities
Being an insurance policy, a life annuity comes to an end on the death of the policyholder except in the case of a joint life annuity which ceases on the death of the second-dying spouse. Generally speaking, the insurer continues to pay an annuity (or a percentage thereof) until the death of the second life assured, at which point the insurer stops paying the annuity.
The process is slightly different in the case of a fixed-term life annuity where the annuitant guarantees his annuity income for a period of, for example, ten years. In such a case, if the annuitant dies before the end of the term, the remaining annuity income will be considered deemed property in the annuitant’s estate and, as such, may be estate dutiable. Generally speaking, on the death of the annuitant, the insurer will capitalise the future annuity payments and pay the amount into the deceased estate. The executor of the estate will distribute the proceeds as per the deceased’s will or, failing that, in accordance with the laws of intestate succession.
Have an awesome day.
Sue
