By Johan Strydom, Fiduciary Product Head
For many people, their pension funds are their single most valuable asset. It's, therefore, no surprise that these pension funds are often top of mind for those considering their estate planning and setting up their Wills.
Retirement Funds, which include retirement annuities, pensions funds, provident funds and preservation funds, are governed by the Pension Funds Act. Section 37C of the Act stipulates what should happen with the death benefits payable on the death of a member. New employees are often requested to complete a beneficiary nomination for their pension fund and employee benefits. It is important to know that this nomination of nominees, is not binding on the trustees of the pension fund when allocating death benefits but can assist them in identifying dependants quicker.
In terms of s37C, pension fund trustees must ensure that a member's death benefits are distributed to dependants and/or nominees. Dependants refer to any person who the member was legally liable for maintenance, a person financially dependent on the member before death, the spouse and/or the child/ren of the fund member. Trustees have 12 months to identify and trace all dependants.
Where there are dependants and nominees (who are not dependants), then s37C (1)(bA) stipulates that the trustees pay the benefit for such portion thereof, to such dependant or nominee, and in such proportions as the board may deem equitable. Where the fund cannot trace any dependants within 12 months of the member's death, and the member didn't nominate a beneficiary/nominee, the death benefits will then be paid into the deceased member's estate. Beneficiaries (dependants and/or nominees) receiving death benefits, can decide to receive their benefits in a lump sum (in which case, tax will be deducted) or purchase an annuity with the benefits.
But what about group life cover? Most employee benefit schemes include membership to a pension fund and some type of group life and disability cover. The life cover amount is usually a lumpsum equal to three to five times an employee's annual salary. With these typical "approved schemes", the life cover amount at death forms part of the death benefits, which along with the pension fund value, will be distributed to dependants in terms of s37C.
Key take-away
In South Africa, many pension fund members mistakenly believe that since we have freedom of testation, that they can specify who should receive the benefits from their retirement funds in their Wills. This discussion will focus mainly on what happens with pre-retirement pension benefits and how these funds are distributed.
