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Providing for your loved ones in time of need through retirement funding

26 July 2021 The Office of the Pension Funds Adjudicator (OPFA)

It is human nature not to want to think about your death but it is important to know what will happen to your pension fund benefits when you are no more.

Offering advice during National Savings Months, Naheem Essop, Senior Legal Advisor at the Office of the Pension Funds Ombudsman, said financial planning is important to ensure loved ones are taken care of after your death.

He said generally pension benefits that become payable upon death do not form part of your estate and will not be distributed according to your Will or in terms of intestate succession (where you die without a Will). Instead, the trustees of the pension fund are tasked with the obligation of deciding how your pension benefit should be distributed amongst your beneficiaries and it is incumbent upon them to do so in a manner that is equitable.

“One must appreciate that the term equitable does not mean an equal distribution of your death benefits amongst your beneficiaries but rather, the trustees of the pension fund are required to look at distributing the death benefit in a manner that is fair, taking into account the individual circumstances of each beneficiary.

“Before doing so, the trustees are required to investigate and identify the persons who should be considered to receive a benefit. Even then, it may happen that not every person identified will end up receiving a benefit. This will depend on the circumstances of each case and what the trustees consider to be equitable.”

Essop said the Pension Funds Act defines who is a dependant and, broadly speaking,
dependants are categorised as ‘legal dependants’ (i.e. someone who you were legally liable to maintain), ‘factual dependants’ (i.e. someone whom you were not legally liable to maintain, but was in receipt of regular financial support from you) and ‘future dependants’ (i.e. someone whom you would have become liable to maintain had you not died).

Spouses, including your permanent life partner, civil union partner, or a spouse that you married in accordance with the tenets of your religion, are all considered to be dependants. Children, including adult children not financially dependent on you, are also considered as dependants in terms of the Act.

You may also nominate persons to receive a portion of your death benefit and such persons will be considered as nominees by the trustees and taken into consideration when deciding on an equitable distribution.

Once all of the beneficiaries have been identified, the trustees must then make a decision about the allocation of your death benefit and the portions that each beneficiary should receive. The amount that becomes available for distribution is calculated in accordance with the rules of your fund and is subject to tax and any deductions that are permitted by law.

“When deciding on an equitable distribution the trustees may consider any factor including, but not limited to, the age of the beneficiaries, their relationship with the deceased, their extent of dependency, your wishes as may be contained in a nomination form and/or last Will, the financial affairs of the beneficiaries including their future earning capacity potential, and the amount available for distribution.

“Benefits available for distribution may not be enough to cover the maintenance needs of all beneficiaries forcing the board to consider other factors when determining an equitable distribution. This may lead to awarding a benefit which is less than the maintenance needs of a beneficiary or a nil benefit in certain circumstances.

“The trustees must also decide on the mode of payment which may include payment as a lump sum, partial payments to a minor, payment into a trust nominated by you, or payment into a beneficiary fund. Beneficiaries and/or their guardians (in the case of a minor) may also nominate a trust for the benefit to be paid into. In each instance, the trustees must be able to justify why they have opted for the mode of payment.”

If your pension fund provides for a spouse’s or child’s pension, such benefit will be dealt with in accordance with the rules of your fund and will not be subject to the equitable distribution that trustees are required to decide on.

“It is important to note that if prior to your death you gave a valid instruction to your pension fund to pay out your benefit then such benefit will also not form part of the equitable distribution and will form part of your deceased estate to be distributed in accordance with your Will or in terms of intestate succession.

“It is important to discuss your provisioning with your dependants so that they are also aware as to where to start looking after your demise,” said Essop.

Quick Polls

QUESTION

As National Treasury mulls a two-bucket retirement system, mandatory contributions and preservation, regulation 28 is being amended to allow up to 40% of retirement fund assets to be invested in SA-based infrastructure… Which of the following retirement fund ‘tweaks’ would you consider most beneficial to your clients?

ANSWER

Give fund members emergency access to retirement savings
Let fund members invest 40% in infrastructure
Let fund members invest 40% offshore
Mandatory preservation when resigning from a fund
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