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October 8, 2020

Retirement funds: A few things to note

Retirement funds: A few things to note

What happens with your benefits in the event of death or divorce?

By Samuel Rossouw

19 September 2020

Although annual review meetings with your adviser are usually about the performance of your investments and retirement funds, there are a couple of other aspects that need careful consideration.

If inheritance expectations are not met, family havoc may ensue. I refer specifically to how retirement funds are handled in the event of death, the appointment of a secondary beneficiary on living annuities as well as how living annuity benefits are dealt with in the event of divorce.

Dealing with pension, provident and retirement annuity funds (before retirement)

It may come as a surprise that retirement funds are not necessarily distributed according to your discretion (in the form of a beneficiary nomination) in the event of your death.

The Board of Trustees of the fund is responsible for the management of the fund. When it comes to distributing funds of the deceased, they may oppose beneficiary nominations:

  • At death of a member, the trustees will investigate who classifies as dependants and to what extent he/she is affected financially as a result of the member’s death.
  • The possibility of future financial dependence is also taken into account.
  • The trustees have a period of 12 months to decide to whom the benefits shall be paid to, be it dependants, beneficiaries or a percentage to both.
  • The management of the retirement fund takes place on a fund level, not on account level, meaning that if you have 3 different retirement annuities with 1 product supplier or on one platform, the trustees will treat it as though it all forms part of 1 account.

The trustee decision is not necessarily final and the Adjudicator for Pension Funds or the Financial Services Tribunal of the Financial Services Conduct Authority (FSCA) may be involved if beneficiaries are not satisfied with the outcome.

Secondary beneficiaries on living annuities (after retirement)

In the event of death, funds in the deceased’s living annuity will be distributed to his/her beneficiaries without any involvement of the trustees. The beneficiary has the option to take out another living annuity (with no tax implications), or to take the funds in cash (taxable) or to apply a combination of both.

A secondary beneficiary is appointed in the event that the first-choice beneficiary is not able to accept the nomination (for example, in the event of simultaneous or early death).

In the absence of a secondary beneficiary, the funds will automatically be paid to the deceased’s estate.

The problem with the above scenario is that income tax, based on retirement tables, will be applied at a rate of 36% of all amounts above R1 050 000.

Another drawback is that the funds will be paid in cash to the beneficiaries, and effectively  be included in their estates. Years of careful planning can be undone as a result.

Dealing with living annuities in the event of divorce

The value of any living annuity is not included in your estate for estate duty purposes. You may therefore assume that it is also not included in the estate when calculating the accrual in a divorce claim.

In a recent court ruling (Montanari vs. Montanari of May 2020), the court of appeal found that annuity income can be included in the calculation of an accrual claim during divorce.

The reasoning behind it is that the claimant has a vested right to the growth and income from the living annuity. However, the capital cannot be divided as with annuity funds, and a discounted value will need to be calculated based on the future income that need to split in some or other way.

The specifics of the calculation is not yet clear, which may lead to considerable differences due to interpretation.

This ruling holds major implications for persons who are already retired and where the bulk of their money is in a living annuity.

Divorce is already a hefty and uncomfortable process. Anyone going through this process might need to reconsider the options.

In a nutshell

  • Make sure that all your dependants are listed as beneficiaries on your retirement fund, since the trustees have a responsibility to investigate whether any other dependents exist.
  • At death, the distribution of retirement funds can take a long time. Make sure that sufficient provisions have been made for your beneficiaries.
  • While living annuities are not included in your estate, the income will be taken into account as an asset for the accrual calculation in the event of divorce.
  • Make sure that you nominate a secondary beneficiary on your living annuity. If the initial beneficiary is no longer able to accept the funds, the cash will be paid into the estate.

Luckily, most of us would never have to deal with the consequences of not having these aspects of our financial planning in place, but if you do not pay attention to this detail, your family might just find themselves at the end of the shortest straw.

Samuel Rossouw is a certified financial planner and director of ProVérte Wealth and Risk Management. Contact him at info@proverte.co.za.

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.

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