The payment of retirement benefits on death ‒ it’s complicated
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WORDS ON WEALTH
A recent article on Personal Finance, "Your retirement benefits are separate from your estate and are not covered by a will", has received a large number of views, suggesting that this is a fact about savings in retirement funds that many people are unaware of. Shameer Chothia, a senior consultant at Momentum Corporate Advice and Administration, who is quoted in the article, says it is only in exceptional circumstances that, if you die while a member of a retirement fund (and this can be an occupational pension or provident fund, a preservation fund, and even your retirement annuity investment), the benefit is paid into your estate.
This is because retirement funds are governed by the Pension Funds Act, which is quite explicit on how benefits must be distributed on the death of a member. It applies to working people who belong to a retirement fund, who die prematurely, before they reach retirement age.
As with a life insurance policy, your retirement fund requires you to nominate beneficiaries on a beneficiary nomination form. But ‒ and this is a big but ‒ it is up to the trustees of the fund to determine who gets what, and while they will take your nominated beneficiaries into account, these are not the only people they will consider when making a distribution, which must be “equitable”. The trustees are obliged to take into account anyone who is a dependant, including people you have not nominated, such as children from a previous marriage and even any illegitimate children they may happen upon in tracing your relatives and offspring.
Let's take a look at the relevant section of the Act, Section 37C:
“Notwithstanding anything to the contrary contained in any law or in the rules of the registered fund, any benefit (other than a benefit payable as a pension to your spouse or child in terms of the rules of the registered fund...) payable on the member’s death, shall ... not form part of the assets in the member’s estate, but shall be dealt with in the following manner (and here I deviate from the exact wording of the Act for brevity):
a) If the fund, within 12 months of your death, becomes aware of or traces a dependant or dependants of the member, the benefit shall be paid to such dependant or, as may be deemed equitable by the fund, to one of such dependants or in proportions to some or all such dependants.
b) If the fund does not become aware of or cannot trace any dependant of the member within 12 months, and the member has designated in writing a nominee who is not a dependant ... the benefit or [nominated] portion of the benefit will be paid to the nominee.
If the member has a dependant and has also designated a nominee, the fund shall pay the benefit or portion thereof to such dependant or nominee in such proportions as the board may deem equitable.
c) If the fund does not become aware of or cannot trace any dependant and the member has not designated a nominee, or if the member has designated a portion of the benefit to a nominee, the benefit (or remaining portion of it) will be paid into the estate of the member.”
There is another proviso under (b): if there are no dependants (nominated or not nominated but found by tracing), and your estate is in debt, the benefit may be used to offset the debt. But this is only if you have no dependants. It will apply if you have a nominated beneficiary who is not a dependant - in this case the nominated beneficiary will get anything left over once the debt has been paid.
How is a dependant defined in the Act? The definition is quite broad:
a) Someone to whom you are legally liable for maintenance.
b) Someone to whom you are not legally liable for maintenance, if that person is:
i) in the opinion of the board, dependent on you for maintenance;
ii) your spouse;
iii) a child of yours, or an adopted child, or a child born out of wedlock.
c) someone to whom you would have become legally liable for maintenance.
So, all quite complicated, as you can see, and what must often be a nightmare for retirement fund trustees, especially when obscure “dependants” start popping out of the woodwork after a member’s death. No wonder the Pension Funds Adjudicator gets so many complaints about how trustees have distributed benefits.
A solution is to list all your known dependants (according to the definition in the Act) as beneficiaries on your nomination form. It will make things much easier for the trustees and the benefit is likely to be paid out sooner rather than later.