What does it mean if my group scheme is approved or unapproved?

Key takeaways

  • If group life benefits are provided through your retirement fund, it is known as an approved group life scheme.
  • If group life benefits are provided by an employer in a standalone scheme that is not part of your retirement fund, it is known as an unapproved group life scheme.
  • If you are a covered by an approved scheme and you die, the trustees of the retirement fund must identify your dependants and decide how to equitably distribute the life benefits to them and any one else you nominated.
  • These benefits will be added to your retirement fund lump sum and taxed.

Your group life benefits may be provided for through the rules of your retirement fund as part of what is known as an approved scheme.

An approved scheme is one that operates through a retirement fund registered with the Financial Sector Conduct Authority and approved by the Commissioner of the South African Revenue Service.

In this case, your retirement fund owns the policy and pays the premiums from the contributions you and your employer make to the fund.

Alternatively, your employer may offer these benefits in a standalone scheme. In this case the scheme is known as an unapproved one.

Your employer will own the policy and pay the premiums.

There are some important things to note about the two types of schemes:

  Approved scheme through your employer-sponsored pension or provident fund* Unapproved scheme through your employer
What happens if you die while you are still employed The benefit is paid to the fund and distributed to your dependants along with the fund value. The trustees will decide how to distribute the money (in terms of section 37C) of the Pension Funds Act. Read more: What happens to my retirement savings if I die before retirement? The benefit is paid to the beneficiary you name in the policy, or, if no beneficiary is named, the money should be paid into your deceased estate
What happens if you are disabled while you are still employed You will take Ill-health early retirement. A lump sum benefit will be paid to the fund and paid to you together with the value of the fund. You will then be required to buy a pension with any part of the fund you cannot take in cash. If there is an income benefit, it will be paid directly to you for as long as you remain disabled. The lump sum will be paid to you if you are permanently disabled, or an income benefit will be paid to you as long as you remain disabled typically until, you reach retirement age.
Income tax implications on premiums you pay   Contributions to the fund, including group life premiums paid by your employer, are a taxable fringe benefit. However, all your and your employer’s contributions to your retirement fund, including those for group life and lump sum disability cover, are tax deductible up to 27.5% of your taxable income or remuneration (whichever is greater). The deduction is capped at or limited to R350 000 a year. Contributions paid for an income protection benefit are not tax deductible, but the benefit is paid tax free. Contributions paid by your employer for group life are added to your income for tax purposes as a taxable fringe benefit.
Tax implications of the benefit paid in the event of your death before retirement
  • If a lump sum benefit is to be paid to your dependants or nominees, they can choose to receive the benefit all in cash or as an annuity (ongoing pension), or a combination of the two.
  • Any lump sum paid to your dependants, nominees or estate will be tax free up to R500 000. This R500 000 will be reduced if you have enjoyed a tax-free withdrawal from your fund previously on resignation, retrenchment or retirement. The balance taken as a lump sum will be taxed at either 18%, 27% or 36% depending on how much you take above R500 000.
  • Any income benefit will be subject to income tax.
  • The death benefit will be free of estate duty.
  • The benefit, will be tax free since it was bought with after-tax money.
  • The benefit will be a treated as a deemed amount in your estate even if it is paid directly to a beneficiary. It will therefore potentially attract estate duty.

    Estate duty is levied on the net amount in your estate that is greater than the R3.5 million estate duty exemption (or up to R7 million in the case of a second-dying spouse when the first dying spouse did not use all their estate duty exemption).

    After the exemption is deducted, the first R30 million in your estate attracts estate duty at 20%. Amounts  above R30 million, attract estate duty at 25%.

    Amounts left to a spouse do not attract estate duty.
Tax implications of the disability benefit paid
  • An income benefit will be taxed at your marginal tax rate as and when it is paid to you.
  • Any lump sum paid to your dependents, nominees or estate will be treated as if it was paid to you the day before you died. The lump sum will be tax free up to R500 000. This R500 000 will be reduced if you have enjoyed a tax-free withdrawal from your fund previously on resignation, retrenchment or retirement. The balance taken as a lump sum will be taxed at either 18%, 27% or 36% depending on how much you take as a lump sum above R500 000. Amounts used to purchase an annuity will be taxed at your marginal rate as and when you receive it.

Remember: you can only take one-third of any lump sum from a pension fund as a cash sum. The same rule applies to provident fund contributions made after March 1 2021, but amounts contributed below a certain limit are excluded from this rule and it does not apply to members who were 55 or older on March 1 2021.

  • Income benefit will be tax free when it is paid to you.
  • Lump sum disability benefit will be tax free.

*Funds under the Pension Funds Act – not those under other laws such as that governing the Government Employees Pension Fund

REMEMBER 

Naming your dependants or nominees on a group life scheme is important. Even if the trustees have a duty to find your dependants, you can speed up the process by naming them.

If your group life scheme is not approved, here’s why is it important to name beneficiaries on your life policy.