The positive response to our recent article on living annuities and death benefits made one thing clear—many South Africans are looking for clear, accessible guidance on what happens when an annuitant dies. In this follow-up article, we address some of the more technical, but critical, aspects of beneficiary nominations, tax implications and what can go wrong if things aren’t structured correctly. Whether you’re an annuitant reviewing your plan or a beneficiary navigating your options, here’s what you need to know:
Nominating your beneficiaries—why it matters
The owner of a living annuity, referred to as the annuitant, can nominate one or more beneficiaries – whether individuals, trusts or even charities – to receive the remaining value of their living annuity in the event of their death. These nominations can be made directly through the annuity provider or can be facilitated by your financial advisor and can be updated at any time. Importantly, where beneficiaries have been nominated to the living annuity, the funds do not form part of the deceased estate, meaning that they are exempt from estate duty and executor’s fees and are distributed faster.
Don’t forget about alternative beneficiaries
It’s good practice to nominate contingent (or alternative) beneficiaries in the event that a primary beneficiary predeceases the annuitant or passes away shortly thereafter. This is because if a nominated beneficiary dies before the annuitant with no alternative beneficiary listed, that portion of the annuity reverts to the deceased estate, potentially attracting estate duty and executor’s fees – an outcome that could have been avoided with proper planning.
Timing: When do beneficiaries get access to the funds?
If the beneficiary nomination forms are in order and all documentation is submitted promptly, most living annuity providers are able to finalise a death claim within two to four weeks. However, delays can occur if nomination forms are incomplete or incorrect, if the annuity is held in a platform that requires additional compliance, or if there are disputes between beneficiaries. Annuitants are therefore strongly encouraged to check their beneficiary nominations annually and after any major life event such as marriage, divorce, or the birth of a child.
What happens if no beneficiaries are nominated?
If no beneficiary is nominated by the annuitant, the value of the living annuity reverts to the deceased’s estate, with the funds being estate dutiable. Where a valid will exists, note that the proceeds will be distributed in accordance with the will. On the other hand, where the annuitant dies intestate, the proceeds will devolve on the annuitant’s heirs in accordance with the laws of intestacy. It’s important to note that, in the absence of beneficiaries, the proceeds of a living annuity will be subject to taxation in accordance with the retirement fund lump sum tax tables. Estate administration costs will be incurred, keeping in mind that this process could take several months or even years to complete.
Understanding the tax simulation
When a beneficiary chooses to take a lump sum (in full or in part), they are entitled to request a tax simulation from the annuity provider before finalising their election. This simulation provides an estimate of the tax liability based on the annuitant’s lifetime lump sum withdrawal history and the beneficiary’s selection. It’s important to note that the lump sum tax tables apply cumulatively across all retirement benefits, and previous withdrawals—whether from pension funds, provident funds, retirement annuities, or severance packages—must be factored in to determine the correct tax bracket.
What are severance benefits, and why do they matter?
For tax purposes, severance benefits are treated similarly to retirement lump sums and are included in the same cumulative calculation. Severance packages are typically paid to employees upon retrenchment or termination of employment and may have already used up a portion of the tax-free threshold. If a beneficiary has previously received a severance benefit, this could reduce the remaining portion of the R550 000 tax-free allowance available at the time of withdrawing a lump sum from a living annuity, which is why requesting a tax simulation is always a good idea.
How is a beneficiary’s marginal tax rate determined?
If the beneficiary elects to transfer their inheritance to a living annuity in their own name, they become the new annuitant. Any income they draw from the living annuity will be taxed at their marginal income tax rate. This rate refers to the percentage of tax payable on the last rand of their total taxable income, according to the SARS personal income tax tables. For example, if a beneficiary earns R300 000 per year from other sources and elects to draw R60 000 per year from the living annuity, the annuity income will be added to their total taxable income and taxed as part of the whole. It is therefore essential for beneficiaries to understand how this income affects their overall tax liability. Calculating the after-tax value of the drawdown is important, as it impacts their actual disposable income and may influence the sustainability of their chosen drawdown rate.
What if there are multiple beneficiaries?
Where more than one beneficiary is nominated, each one can make an individual choice about how to receive their share—either as a lump sum, a living annuity, or a combination of both. Keep in mind that in such circumstances, each beneficiary’s tax position is assessed independently, allowing for flexibility in meeting their unique financial goals. However, it also means that careful tax planning is required, especially where large sums are involved.
A reminder to review, review, review
Many of the pitfalls associated with living annuities arise from outdated or poorly considered beneficiary nominations. As such, it’s important to make a point of reviewing your nomination forms regularly, particularly after key life changes. Ideally, find an experienced, proactive advisor who checks in on you frequently and insists on regular reviews, as this can prevent significant costs, delays.
While living annuities remain one of the most effective tools for preserving and transferring wealth, keep in mind that they need to be correctly structured and correctly maintained. Whether you’re an annuitant wanting to ensure your legacy is secure or a beneficiary needing to make an informed decision, our advice is to consult with a qualified advisor to ensure that your living annuity can continue to serve its purpose in your bespoke plan.
Have a super day.
Sue
