Please accept our condolences for your loss.
The purpose of a retirement fund is to save for retirement, but when a person passes away before retirement, the purpose changes to provide for those who were dependent on the member at the time of their death. The process behind retirement fund death claims is challenging to understand and complex to execute, which is not well understood by beneficiaries.
Every retirement fund is managed by a board of trustees. The trustees are responsible for allocating retirement fund benefits in terms of Section 37c of the Pension Funds Act. The intention of the act is to protect dependants and ensure that no one who was financially dependent on the member is left without support – even over the clear wishes of the member.
The act defines dependants as spouses, children, and anyone proven to have been financially dependent on the member, or entitled to maintenance, as well as anyone who may in the future have become financially dependent on the member. Only when there are no dependants or appointed nominees, will the funds be paid into the deceased’s estate.
Therefore, it is not feasible to assume that the trustees will re-evaluate and apportion the funds between the remaining beneficiaries.
It will be up to the discretion of the trustees to determine to whom the death claim should ultimately be paid. They will possibly consider other beneficiaries or nominees who were not nominated.
We can be assured that the portion will not form part of the late beneficiary’s estate, as the main aim of a retirement fund is to protect the funds.
When a member of a retirement annuity passes away, the nominees/beneficiary will have three options:
- Take the full benefit in cash;
- Take a portion in cash and transfer the remainder into a compulsory annuity; or
- Transfer the full benefit into a compulsory annuity.
From 1 March 2022, one can choose to invest in more than one annuity at retirement, as long as the portion utilised to purchase each annuity exceeds R165 000 and meets the fund rules and requirements of the fund, the rules of the insurers, and any legislative and/or regulatory requirements. Should you wish to invest in a retirement annuity, you will need to take the benefit in cash ( after tax deduction) and use that amount as a contribution to a new retirement annuity fund.
The deceased is liable for the tax on any lump sum that their beneficiaries or nominees choose to receive in cash. The tax amount will be recovered from the lump sum before the payment is made.
The tax portion is taxed as per the below retirement lump sum tax table:
|Taxable income from lump sum benefits||Rate of tax|
|R0 – R500 000||0% of taxable income|
|R500 001 – R700 000||18% of taxable income above R500 000|
|R700 001 – R1 050 000||R36 000 + 27% of taxable income above R700 000|
|R1 050 001 and above||R130 500 + 36% of taxable income above R1050 000|
The tax will only be applicable to the cash benefit portion that was taken and not the whole retirement annuity. The example below explains this in more detail.
Mr Adams had approximately R5 million in his retirement annuity and the trustees have decided to split the benefits among his nominees as per his wish:
- Beneficiary 1 (40% of the death benefit): Elects to have their full R2 million benefit paid as a cash lump sum.
- Beneficiary 2 (20% of the death benefit): Elects to have their full R1 million benefit paid as a cash lump sum.
- Beneficiary 3 (40% of the death benefit): Elects to have their full R2 million cash benefit transferred to a living annuity in their name.
The product provider (such as Allan Gray, Momentum or Sanlam) will apply for a tax directive and capture the cash lump sum amount as R3 million.
This will be taxed in the hands of the deceased according to the above tax table, and the tax as per the tax directive will be deducted proportionately from the cash lump sums paid to beneficiaries 1 and 2. No tax is payable on the transfer to the living annuity.
We do hope that the above has answered your questions. If you are uncertain, please do not hesitate to pop us an email and we will gladly assist you.