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By Sonia du Plessis* 

When looking at retirement products, one needs to differentiate between “pre-retirement” and “post retirement” products, as their treatment and options are different in the event of the owner’s death. It is also important to know what taxes are involved when money gets transferred to the beneficiary.

“Pre-Retirement”

Sonia du Plessis

RA’s, Provident, Pension and preservation funds. The value of the investment is excluded from the estate of the deceased.

On death prior to retirement the fund will be paid to the nominated beneficiaries (subject to Section 37C of the Pensions Fund Act) or to your estate. This is vitally important in that under S37C, the Trustees of the fund have the right (and obligation) to determine who the dependants of the deceased are and allocate the investment to the dependants. The trustees have up to 12 months to make this determination. The importance of this is that the trustees can “overrule” the beneficiary nominations of the deceased.

A trust can also be nominated as a beneficiary, again subject to Section 37C of Pension Funds act.

The beneficiaries may elect to receive the investment in a number of ways:

  • As a cash lump sum subject to tax (the first R500,000 being tax free and the balance subject to a sliding tax scale starting at 18% and going to 36%. This tax is applied in the hands of the deceased).
  • In the form of the RA/Preservation fund (this is a tax free transfer)
  • Or commute to a Living Annuity (tax free with the annuity income then being taxed in the hand of the beneficiary going forward)
  • A combination of the above.

“Post Retirement”

Life (Compulsory) Annuities

The treatment of a life annuity on death depends on the structure of the product. There are a few iterations but generally:

  • A Life Annuity pays an annuity income for the life of the owner. On their death the annuity stream stops, and the original capital investment is kept by the insurer.
  • A joint life annuity continues to pay an annuity (or a % thereof) after the death of the owner until the death of the second life (typically a spouse), at which point the annuity stops and the capital is kept by the insurer.
  • In both cases the value of the life annuity is excluded from the deceased estate
  • Investment Linked Living Annuity (ILLA)
  • You may nominate a beneficiary or beneficiaries (natural persons or trusts) to receive the benefits on your death. Unlike retirement funds, the beneficiary nominations are not subject to review by trustees (Section 37C) as is the case for RA’s.

In the event where a beneficiary predeceased the annuitant, and the beneficiary had not been changed prior to the annuitant’s deaths, the predeceased beneficiaries share will be divided between the surviving beneficiaries.

With some product providers, annuitants are also able to nominate alternative beneficiaries, these alternative beneficiaries will only inherit when the primary beneficiaries are not able to- i.e.: primary beneficiaries have passed on or passed away together with the annuitant.

Beneficiaries may choose to receive the benefit as an annuity, a lump sum (subject to tax) or a combination of the two. If there are multiple beneficiaries, each beneficiary will have the option to select either a lump sum or an annuity.

Both lump sum and annuity benefits are free from estate duty.

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Should a beneficiary elect to receive a lump sum this amount will be taxed in the hands of the deceased in accordance with the Retirement Tax Tables (R500,000 tax free and then sliding scales thereafter). The benefit received will be aggregated with retirement lump sums taken post 1 October 2007.

Should a beneficiary elect to receive the benefit an annuity, the annuity will be taxed as income in his or her hands.

By nominating beneficiaries on your Pre- or Post-retirement monies, is the smart thing to do. It will also give you peace of mind that the beneficiaries can get access to the funds quite quickly, as appose to receiving a distribution from your estate – which is usually quite a lengthy process.

Read more about estate planning.