What happens to my retirement savings if I die before retirement?

The aim of saving for retirement is that you accumulate enough to support yourself in your later years.

However, should you die before retirement, your savings could be a lifeline for your dependants. If you don’t have dependants, you can nominate any one you want to receive the money.

The savings in your fund together with any group life benefits (from an approved group life scheme) are referred to as your death benefits.

The Pension Funds Act in section 37C specifically excludes these benefits from your estate and from being distributed in terms of you will.

Instead, the Act obliges the trustees of your fund to identify your dependants and to distribute your death benefits equitably to your dependants, after which any remaining benefits may be paid to anyone else you name as a beneficiary who is not a dependant.

The intention behind this section of the Pension Funds Act is to ensure that your dependants are not left without financial support.

Only if you have no dependants and you have not named any other beneficiary, can the benefits be paid to your estate.

Nominate beneficiaries

When you join a retirement fund, you will be asked to fill in a form nominating your dependants and any other beneficiary or beneficiaries to whom you would like to leave your savings should you die before retirement.

The beneficiary nomination form you fill in should help the trustees quickly identify your dependants and how you want your savings distributed among them.  However, if you do not include all your dependants, the trustees need to identify them. Finding beneficiaries who were left off the nomination form is an expensive job and these costs must be deducted from the benefit amount payable.

The Pension Funds Act states that the trustees of your fund must identify your dependants within 12 months of your death.

The dependants who the trustees are obliged to identify include:

• People you were legally liable to maintain, such as your children, parents, and grandparents.
• Your spouses from customary or religious marriages, civil unions, or permanent life partners.
• Factual dependants, such as same sex partners, step-children, foster children, illegitimate children, adopted children, unborn children, former spouses, adult children, siblings or former employees. Factual dependants are those who received regular financial support – including rent-free accommodation, groceries, or support with medical expenses from you – not just once-off payments.

Divide savings equitably
Once the trustees have identified your dependants, the Act requires the trustees to decide how to divide your savings equitably among your dependants and anyone else you have named a beneficiary, taking all the relevant factors into account.

The relevant factors the trustees have to consider in relation to your dependants include:

• Their age;
• Their current financial position;
• Their other sources of income and financial support;
• Their future income or ability to earn an income;
• Their ongoing financial needs;
• Their once-off financial needs such as education;
• The value of the death benefits; and
• Your wishes on how to allocate your savings.

If you name a beneficiary who is not a dependant, the trustees will prioritise the care of your dependants and only if there is sufficient money after your dependants' needs have been met, will they allocate to that nominee.

The trustees must then also select the most appropriate way to pay the benefit. They can decide to pay:

• The dependent or nominated beneficiary directly.
• The guardian or caregiver of a dependant.
• Instalments to a minor beneficiary.
• A beneficiary fund that will manage the money for the benefit of dependants. A beneficiary fund is a regulated fund governed by trustees.
• A trust you have nominated to manage benefits on behalf of your dependants. This is a good idea if you are concerned about the money being paid to a guardian or caregiver. Any such trust may have no other beneficiaries if it is to comply with the requirements.
• A person appointed by a court to manage the affairs of your dependants.

No dependants
If a year after your death, the trustees find you had no dependants, but you have nominated a beneficiary, the trustees must then consider whether your estate is solvent and only if it is, can they pay the money to the beneficiary.

If you had no dependants, nor did you nominate any beneficiaries, your savings can be paid into your estate to be distributed in line with your wishes in your will or according to the law of intestate succession.

Providing your fund with a comprehensive list specifying everyone you are supporting financially and their contact details can speed up the trustees’  investigation. Give your family a copy of the list and review it annually.

As it takes time to finalise the distribution of your retirement savings after your death, it is important to have the immediate protection that life insurance can offer your family.

A policy can pay out in days, while the distribution of your death benefits can take more than a year. Your family will only be able to access money in your bank and investment accounts when your estate is wound up, which can also take more than a year.

Death benefits and tax

Beneficiaries can choose to take the death benefits as a lump sum or as an annuity (monthly pension). Benefits taken as a lump sum are subject to tax as if you, the member, retired the day before your death.

The lump sum will be taxed on the retirement tax table, which means that the first R500 000 will be tax free, unless you were paid a previous lump sum benefit by a retirement fund.

If that is the case, the tax-free amount will be reduced by the amount that was paid to you previously.

If your dependants or nominated beneficiary choose to receive the benefit or a portion of it as an annuity or monthly pension, they can choose the annuity provider. The pension paid will be subject to income tax at the beneficiary’s marginal tax rate.