Saving for retirement is something that most people know they should do, but which many often postpone. Thus, by the time many people start saving, they have sadly lost valuable time – and the powerful benefit of compound interest that comes with it.
Statistics show that only a small percentage of the working population in South Africa will be financially independent when they retire. Of this small percentage of financially independent retirees, the majority are unlikely to have achieved this exclusively through contributions to an occupational retirement fund (such as their employer’s pension or provident fund). Additional investments are often required to ensure a comfortable retirement.
Supplementing retirement savings – what to consider
Retirement annuities (RAs) are a popular choice to supplement retirement savings since contributions are tax deductible, like those of occupational retirement funds. Unlike occupational retirement funds, however, RAs are completely independent of your employer, meaning you have greater freedom of choice in terms of the funds you can invest in (subject to retirement fund regulations).
It is also important to understand the effect that retirement fund beneficiary nominations will have, and the impact of certain elections on your estate. Your deceased estate comes into existence when you pass away and your estate will be administered either in terms of your will, or (in the absence of a valid will) the Intestate Succession Act. A further factor to consider is that certain assets will not be administered as part of your estate.
The power of the trustee
If a member of a retirement fund dies before reaching retirement age, the death benefit will be paid to dependants as determined by the trustees of the retirement fund in accordance with Section 37C of the Pension Funds Act. While you may have nominated beneficiaries to your retirement fund, the trustees of the fund are not legally bound to follow your wishes. They will take your nominated beneficiaries into account, but there are other factors they need to consider. They will also take into consideration anyone who is a dependant – including people you have not nominated as beneficiaries. This can be quite a lengthy process, as trustees have a period of 12 months from the date of death in which to make their determination, so you need to consider the financial stress that this delay can cause for dependants.
In light of this, a key consideration is the effect of possible maintenance obligations from previous marriages (and other financial dependants) on the distribution of your retirement fund benefit at death. When providing for the maintenance of your family in your estate plan, be sure to take this into consideration to avoid unintended consequences that can cause your family unnecessary financial stress. To err on the side of caution, adequate provision needs to be made in your estate plan.
The impact of beneficiary election
Once the trustees have made the election, dependants must decide how they wish to receive the benefit. There are three choices available:
They can choose to take the entire benefit as a cash lump sum (in which case the payment will be taxed according to the retirement tax tables applicable to the deceased).
They can purchase a compulsory annuity (in which case no tax will be paid on the benefit, but tax will be payable on the income received from the compulsory annuity, as per the income tax tables).
They can choose a combination of these two options, i.e. they can elect to receive part of the funds as a lump-sum cash payment and purchase a compulsory annuity with the balance.
In 2008, the maximum age at which members could contribute to their retirement annuities was removed and, at the same time, retirement fund benefits were excluded from estate duty. This created a loophole where clients could contribute large, tax-free lump sums to their retirement annuities.
However, this loophole was closed, and any lump sums taken by the beneficiaries up to the value of the non-deductible contributions will now be included as property in the estate for estate duty purposes. This needs to be considered in your estate plan, as this inclusion can affect estate liquidity.
Single life annuities and living annuities
When selecting an appropriate annuity, you need to be aware of the differences between single life annuities and living annuities. Single life annuities are designed to provide a guaranteed monthly income until the death of the annuitant, and therefore come to an end on the death of the annuitant, leaving no capital payable into the deceased’s estate.
A living annuity, by contrast, is an investment held in the name of the annuitant. The annuitant accepts all the risk, and income is not guaranteed until death. A living annuity does not fall within the ambit of Section 37C of the Pension Funds Act and the capital will be paid to the nominated beneficiaries elected on the death of the annuitant. It is important to note that if no beneficiaries are nominated, the proceeds will be paid into the deceased estate.
Navigating the world of retirement funds and the effect of beneficiary nominations can become very complex and needs to be carefully considered to avoid unintended consequences. A qualified financial planner can help you navigate this maze to ensure that you understand the impacts of your decisions and make adequate provision in your estate plan, ultimately giving you the peace of mind that your loved ones will be provided for in the event of your death.
PSG is a leading financial services group, listed on the Johannesburg (JSE), Namibian (NSX) and Mauritius (SEM) stock exchanges, with adviser offices in South Africa and Namibia. Listed on the JSE as PSG Konsult, the company has been in operation since 1998, and offers a value-orientated approach to clients’ financial needs, from asset and wealth management to insurance.
PSG Wealth, a division of PSG, provides a comprehensive wealth management offering, designed to meet the needs of individuals, families, and businesses