Your retirement benefits are separate from your estate and are not covered by a will
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Did you know that your will does not determine what happens with your retirement fund benefits? If you die while belonging to a retirement fund, the distribution of death benefits to your beneficiaries is a separate process that bypasses your estate and any instructions in your will.
Shameer Chothia, senior consultant at Momentum Corporate Advice and Administration, says it’s crucial – for the sake of your loved ones left behind – to understand between assets distributed to your heirs through your will and your retirement fund benefits.
Chothia says that Section 37C of the Pension Funds Act governs the distribution and payment of lump-sum benefits paid if a retirement fund member dies. These benefits are known as “death benefits” and, importantly, do not form part of the assets in a deceased member’s estate.
Instead, Section 37C places a duty on the trustees of the retirement fund to allocate and pay the benefit in a manner that is fair and equitable. The benefit may only be paid into your estate in exceptional circumstances.
The retirement fund trustees need to identify your dependants and nominees and facilitate an equitable distribution of the money among them, taking into account all relevant factors.
Your dependants are, in most cases, the people who rely on you financially. Beneficiaries are the people whom you nominate to receive your death benefits after you die. The trustees of your retirement fund will first ensure that your dependants are taken care of financially, before considering your beneficiary nomination form.
It’s important to nominate beneficiaries on the nomination form. “However, the nomination is not binding on the trustees, as the benefit must be distributed strictly in accordance with section 37C, and the trustees will first focus on your dependants,” Chothia says.
Approved and unapproved benefits
There are two components to a retirement fund payout on death: your accumulated savings in the fund and a group life insurance payout. Chothia says employers can provide their employees with life cover through their retirement fund or through an insurance policy in the employer’s name. “If the life cover is provided through the retirement fund, it is known as an approved benefit and is paid according to Section 37C of the Pension Funds Act, as explained. However, if the benefit is provided through a policy in the employer’s name, it is known as an unapproved benefit, and this is paid according to the policy conditions, based on the member’s beneficiary nominations. The trustees have no say in the distribution of unapproved benefits.”
Recent changes to the Insurance Act make it even more important that members eligible for unapproved death benefits, provided by an employer policy rather than the retirement fund, complete a beneficiary nomination form. If you haven’t completed a beneficiary nomination form and the payout is from an unapproved policy, the benefit will be paid to your estate on your death. This means not only will your loved ones not have immediate access to the benefit, but because it is now in your estate it will incur estate duty and executor’s fees.
Chothia says: “It’s really important to get your financial affairs in order by ensuring beneficiary nomination forms are up to date, talking to your loved ones about your benefits and making sure all essential information is in one safe place if you pass away.”
*For more on wills and estates, read the September 2021 issue of our information-packed IOL MONEY monthly digital magazine.