Why can I not make a charity a beneficiary of my retirement annuity?
When a member of a retirement fund dies before reaching retirement age, the death benefit – 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.
Before answering your question, a good place to start is to understand the intention behind Section 37C.
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 among their financial dependants and/or nominees. 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 their death, regardless of whether the member was legally required to maintain them or not.
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 be used to provide for the member’s surviving spouse, children, and other financial dependants in the event of their 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.
As is evident from the above, the primary reason you cannot make a charity a beneficiary to your retirement annuity is that Section 37C requires that the death benefit be paid to your financial dependants to ensure that they are not left financially destitute should you pass away.
As you would have enjoyed tax benefits by contributing towards your retirement annuity, Section 37C is designed to ensure that your financial dependants benefit from these funds so that they do not become dependent on the state.
Remember, although you are able to nominate a beneficiary to your retirement annuity, this nomination will only be used as a guide by the fund trustees when making a determination. In the event of your death, the first job of the fund trustees will be to identify and trace all your dependants with a view to establishing their financial dependence on you.
A ‘dependant’ is anyone who was financially dependent on you at the time of your death including children, parents, or grandparents. It can also include life partners, civil union partners, same-sex partners, or customary marriage partners, as well as stepchildren, foster children, adopted children and unborn children. The definition of ‘dependant’ also extends to anyone entitled to claim maintenance from you, or someone who may in future have become financially dependent on you.
Once your financial dependants have been identified, the trustees are required to apportion the funds among your dependants and/or nominees, with their primary goal being to ensure that no one who was financially dependent on you 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 you, their future earning potential, and the value of the death benefit available to apportion. Lastly, where you have 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 you at the time of your death.
In a situation where you make no beneficiary nomination and you have no financial dependants, the fund’s 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 your estate.
If your will makes provision for your chosen charity to inherit your estate then, in such a case, the proceeds from your retirement fund will be distributed to that charity in terms of your will.