Investing for retirement is the focus of the strategies of South African investors and they invest large portions of their total wealth or investable assets in retirement vehicles. These include retirement annuities, corporate pensions, or provident funds. Once retired, they often select living annuities to provide them with an income, in addition to using various offshore structures.

Astute investors are very aware that estate and succession planning is a critical component of an overall financial plan. When a strategy is devised, there is a strong emphasis on asset allocation, risk management, diversification, etc. But more often than not, a very important aspect is neglected – the importance of nominated beneficiaries on investment portfolios, specifically retirement structures regulated in SA.

Beneficiaries or not?

Where a beneficiary is nominated, the beneficiary has the option to select a lump sum payment or to continue with an annuity. Where the lump sum is selected, that lump sum will be subject to income tax (as if it accrued to the deceased the day immediately prior to their death).

If there is no beneficiary, the fund value in the living annuity is payable to the deceased estate as a lump sum. There is no alternative – the legislation is clear, and the executor cannot make another selection. The executor will receive the after-tax lump sum, which will be dealt with in terms of the deceased’s will.

The consequences of not having beneficiaries

  • The asset will be a deemed asset in the estate of the investor and, therefore, attract estate duty. When no beneficiary is nominated on the living annuity or retirement annuity, the proceeds of the investment will be paid to the annuitant’s estate after the relevant taxes have been deducted, which can be as high as 36%, depending on the investor’s situation.
  • Because the asset will form part of the estate, executors’ fees will apply. This will have a detrimental effect on the overall portfolio value. From here on, the executor will have to decide and allocate where the portfolio’s proceeds will go according to the annuitant’s will, which will attract executors’ fees of between 2% and 4%.
  • A further drawdown of not having a nominated beneficiary for a portfolio is the time it will take to finalise the transfer of the investment to the beneficiaries. Distributions can only take place after an executor has been appointed by the Master of the High Court and after the final distribution account is submitted. If all goes well, this will only happen after about six months, but it can be much longer, in some cases years. This becomes an even bigger issue when the annuity is a very large part of the investor’s overall wealth, and this is where issues in terms of liquidity creep in. Where beneficiaries opt to invest their proceeds into a new living annuity, no retirement taxes will apply.

It is important to consult your financial advisor to ensure that you have nominated beneficiaries on your annuity investments to protect your wealth and its succession planning against all the above. It is also important to discuss the implications of how beneficiaries wish to receive the proceeds on your living annuity, as this will have a big impact on the successful transfer of generational wealth.

The importance of nominated beneficiaries can not be overstated! And, as with other issues related to investments, should circumstances change (e.g. should the nominated beneficiary die before the owner of the investment) the nominated beneficiaries must be updated.