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The distribution of retirement death benefits

In this article, we explore the impact of Section 37C on the distribution of death benefits and what this process entails.

When a member of a retirement fund dies before reaching retirement age, the death benefit – which is the lump sum benefit that becomes payable – must be paid to the member’s dependants and/or nominees, and this process is strictly governed by Section 37C of the Pension Funds Act. The primary goal of this piece of legislation is to ensure that those who were financially dependent on the member are not left destitute after his death.

Section 37C, which is applicable to all retirement funds including pension, provident and retirement annuity funds, places a duty on the retirement fund trustees to ensure that the member’s death benefits are distributed fairly and equitably amongst his financial dependants and/or nominees. However, the process – which is largely manual – can be lengthy and cumbersome, leading to frustration on the part of the member’s family. In this article, we explore the impact of Section 37C on the distribution of death benefits and what this process entails.

While South Africans enjoy the freedom of testation, this freedom has a number of limitations, with Section 37 being one of them. The Act makes it clear that the member’s will or beneficiary nomination cannot override the provisions of Section 37C, and that the distribution of the member’s death benefits remains the responsibility of the fund trustees.

When understanding the reasons for this, it is important to remember that in saving for retirement, the state allowed major tax concessions to the member – with the intention that the money is used to provide for the member’s surviving spouse, children, and other financial dependants in the event of his death, thereby reducing the burden on the state. As such, it remains the job of the retirement fund trustees to identify and trace the member’s dependants, and to allocate the death benefit according to their respective financial needs.

In the event of a retirement fund member’s death, the fund trustees are required to follow the following process:

1. Identify and trace the dependants of the deceased member

The first job of the trustees is to identify and trace all dependants of the deceased member. In this regard, however, it is important to understand who qualifies as a ‘dependant’ and ‘nominee’. A ‘dependant’ is anyone who was financially dependent on the member at the time of his death including children, parents, or grandparents of the member. It can also include life partners, civil union partners, same-sex partners, or customary marriage partners. It also includes factual dependants such as step-children, foster children, adopted children or unborn children.

The definition of ‘dependant’ also extends to anyone entitled to claim maintenance from the member, or someone who may in future have become financially dependent on the member. On the other hand, a ‘nominee’ is any party who the member nominated on this retirement fund beneficiary nomination form, bearing in mind that a ‘nominee’ may not necessarily be financially dependent on the member.

The process of identifying and tracing the member’s dependants is largely a manual one and can be time-consuming and labour intensive, especially because the trustees have a fiduciary duty to investigate the circumstances of every possible dependant. They are required to undertake a thorough investigation, to apply their mind, exercise discretion and act in good faith at all times, with a view to reaching a fair and equitable determination.

Because the process is a cumbersome one, fund trustees have a 12-month period in which to make a determination, although it is their duty to ensure that the determination is made as quickly as possible. During the course of their investigation, the trustees will need to obtain input from a number of parties depending on the complexity of the member’s family structure and the number of financial dependants.

Trustees need to be acutely aware that opportunists may make fraudulent representation as to their financial dependency and, as such, every potential financial dependant needs to be thoroughly investigated. Poor response times and lack of communication from potential dependants can lead to unnecessary delays, as can other factors such as if the member died of unnatural causes. In such circumstances, the trustees will need to wait until the cause of death has been established.

2. Allocate the death benefits amongst the dependants and/or nominees in a fair and equitable manner

Once the financial dependants of the member have been identified, the trustees are required to apportion the funds amongst the dependants and/or nominees, with their primary goal being to ensure that no one who was financially dependent on the member is left without support.

In making a determination, the trustees must take into account the financial position of each person, their sources of income, and other financial support available to them. They will also consider the age of the person, their relationship to the deceased, their future earning potential, and the value of the death benefit available to apportion.

Lastly, where the deceased has nominated a beneficiary on this retirement fund benefit, this nomination will be taken into consideration by the trustees, but only to the extent that the nominee was financially dependent on the member at the time of his death.

Where the member made no beneficiary nomination, the benefits will be distributed and allocated amongst the identified dependants at their discretion. Where the member nominated beneficiaries and the trustees identified financial dependants, the trustees will make an allocation although there is no guarantee that those nominated will receive any part of the benefit.

In a situation where a deceased member made no beneficiary nomination and has no financial dependants, the trustees are required to wait for a period of 12 months in case any untraced dependants come forward, failing which the benefit will be paid into the member’s estate.

3. Determine the most appropriate method of paying out the death benefit

Having made their allocation, the final duty of the trustees is to determine the most appropriate manner in which the benefits should be paid to the dependants and/or nominees, with there being a number of options available.

The funds can be made available in the form of a compulsory living or life annuity with a South African registered insurer in the name of the dependants and/or nominees. Secondly, the dependants and/or nominees may take the full benefit as a cash lump sum, although it is important for them to understand potential the tax implications of doing so. Lastly, the dependants and/or nominees can take the benefit in the form of a combination of a cash lump sum and a compulsory life or living annuity. Where the beneficiaries are minors, the trustees may pay the benefit to a beneficiary fund, to the parent/guardian of the minor or to a trust.

As is evident from the above, the payout of a deceased member’s death benefits can be time-consuming and laborious, and it can realistically take up to a year before the member’s dependants receive their share of the funds. It is therefore important for the member to ensure there is sufficient liquidity in his estate to tie his dependents over financially until the retirement fund benefits become available.

Further, it is also advisable that the member revises the beneficiary nominations on his fund as and when his personal circumstances change. Many nominees are unaware of the provisions of Section 37C that govern the distribution of the member’s retirement fund benefits, and it is only after the member’s death that they realise how the process works and how long it takes. As such, if you are contributing to a retirement fund, ensure that your advisor undertakes an estate planning exercise to ensure that your loved ones are adequately provided for in the period leading up to your death benefit payout.

ADVISOR PROFILE

Eric Jordaan

Crue Invest (Pty) Ltd

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