I have some good news and some bad news…

However, let me start with the bad news. In the unfortunate situation where a member of a retirement, pension or provident fund passes away, there is no guarantee that the nominated beneficiaries will receive a cash payout as per the wishes of the deceased. By law, the trustees of the retirement fund can override the wishes of the deceased despite the fact that the deceased may have nominated beneficiaries of their choice. A common misconception is that if the fund member has his or her wishes stated in a Will in relation to a retirement death benefit, such wishes will be followed. The truth is that the deceased member’s Will does not bind the trustees of the fund.

To understand how the trustees allocate the benefit, it is useful to understand the difference between a dependant and a nominee

Dependant: The Act defines dependants as spouses, children, anyone proven to have been financially dependent on the member at the time of their death, anyone entitled to maintenance, as well as anyone who may in the future have become financially dependent on the member.

Nominee: A nominee is any party whose details the member provided to the retirement fund in writing indicating that the trustees should consider them for a possible allocation of the death benefit. Examples would be one or more dependants, or a person who is not a dependant, such as a friend, aunt or uncle of the member.

How are death benefits paid out for pension, provident, preservation and retirement annuity funds?

The payout of the retirement fund death benefit is a controversial, complicated and a slow process, which is not well understood by fund members and their dependants and families. I’ve seen and heard of families that are not on speaking terms because of the allocation of death benefits. Therefore, we will say it now: no family member can influence the payment of retirement death benefits; this is an independent process performed by the trustees of the retirement fund.

Trustees are required to perform the following three duties:

1. Identify and find all of your dependants.

Dependants are defined as spouses, your children, anyone proven financially dependent on you at the time of death, anyone entitled to maintenance, as well as anyone who may in future become financially dependent on you.

2. Decide how to divide the benefit based on an investigation.

Your chosen ‘nominees’ will also be taken into account. A nominee is any party whose details you provided to your retirement fund in writing indicating that they should be considered by the trustees along with all the other qualifying dependants, for example, a dependant, or a person who is not a dependant, such as a friend. A nomination does not guarantee that the person will receive all, or a part, of the benefit.

3. Decide how the benefit will be paid.

For example, whether payment will be made directly to a dependant, to a legal guardian of a minor dependant, or a trust for the benefit for such dependant.

The trustees have a responsibility to consider the following:

• Age of the nominee;
• Nature of relationship with the deceased member of the fund;
• Determine the extent to which the individual is dependent on the deceased;
• Financial standing of the individual – do they earn an income?
• Consider their future earning potential (are they likely to find employment if unemployed; are they students; are they disabled etc.)

In addition, the trustees also need to take into consideration:

• Parties the deceased had a legal duty to support (spouses, children; parents, grandparents, unborn children etc.)
• Factual dependants (common-law spouses, same-sex partners, stepchildren, foster children);
• Customary law spouses;
• Major children who the deceased had a legal responsibility to support.

The way that the death benefit is paid is also regulated by Pension Funds Act and currently allows for the following options:

• Payment directly to the dependent or nominee;
• Payment to a trust;
• Payment to a guardian or caregiver;
• Payment to a beneficiary fund.

To avoid frustration, retirement fund members must update their beneficiaries on a regular basis and ensure that all individuals that are financially depended on them are nominated. Upon death, fund trustees have up to 12 months to identify the dependents of the deceased. Should it be found that there is an individual who is financially dependent on the deceased, that person can be allocated a death benefit even if they were not nominated.

How are death benefits distributed for post-retirement products like living and guaranteed life annuity?

When you retire from your retirement fund, you have the option of transferring your investment to a product that can provide you with an income in retirement, such as a living or guaranteed life annuity.

One of the key features of a living annuity is that your investment is left to your nominated beneficiaries. So you decide in writing who will get your money at death, and the trustees are not involved in this process. The death benefit from a living annuity is paid out to your nominated beneficiary (ies) and can be taken as a lump sum payment, transferred to another living annuity or a combination of both.

This contrasts to guaranteed life annuity that usually ends when you die. Some variations of a life annuity pay a portion of your monthly income to your spouse as a monthly income until she dies. However, if there’s no spouse nominated, the life assurer keeps all the money in the account.

Sphelele Mncube

Head of Investments

Sphelele joined Inkunzi Wealth Group in 2013 and has 9 years’ experience in the investment management industry, having had previously worked for Allan Gray and Regarding Capital Management. Apart from being an active member of our investment team, Sphelele is also responsible for the management of our business. He holds a BCom degree in Economics from the University of Pretoria.