Estate planning and retirement planning focus on different life stages and are therefore thought of as separate aspects of financial planning. However, it is important to consider your retirement funds when constructing your estate plan.
Estate planning focuses on how your assets will be managed and distributed after your death. It ensures your wishes are honoured and helps to minimise taxes and legal complications for your heirs.
Retirement planning focuses on accumulating and managing resources to support your lifestyle after you stop working. It helps to provide you with financial security during your retirement years.
Financial advisers use various strategies and products to assist their clients in realising these goals. Your will, for example, is the primary document used to implement your estate plan. Retirement annuities (RAs) are specifically designed for individuals who want to save for their retirement in a tax-efficient manner, providing them with both a cash lump sum and a regular income after retirement, by purchasing either a guaranteed annuity or a living annuity (LA) with the proceeds.
Both retirement planning and estate planning form part of a holistic financial plan, and retirement products – particularly RAs and LAs – play a significant role in estate planning.
Retirement products and deceased estates
From an estate planning perspective, one of the foremost benefits of RAs and LAs is that they generally do not form part of your deceased estate. This means that the proceeds of these products will not be tied up during the process of winding up your estate, and your dependants will have access to these funds to sustain their lifestyle and financial well-being. No executor’s fees will be levied on these products, and the proceeds will not be subject to estate duty.
An often-overlooked aspect of estate administration is contributions made to an RA before retirement. These contributions are tax deductible up to the annual legislative limit. It is possible to contribute more than this limit and still benefit from tax-efficient estate planning. The larger your contributions to an RA, the more substantial the portion of your wealth that will be excluded from your estate when you die.
Furthermore, section 10C of the Income Tax Act allows these excess contributions (referred to as disallowed contributions) to be offset against the income you draw from your LA until your disallowed contributions have been depleted. Because section 10C allows for a tax exemption, you will effectively receive your income back from the South African Revenue Service at the end of the tax year.
Disallowed contributions will also be deducted from any lump sums that your beneficiaries elect to take from the proceeds of your RA or LA when you die, thereby reducing your tax burden in respect of the lump sum. A note of caution, though: the disallowed contributions deducted will be included in your estate for estate duty purposes.
Distribution of proceeds
It is important to understand that you cannot entirely rely on the provisions of your will when it comes to the distribution of the proceeds of your RA.
An RA is a type of retirement fund, and the proceeds will therefore be distributed in terms of section 37C of the Pension Funds Act. The purpose of this legislation is to ensure that those who were dependent on the deceased are not left destitute. Section 37C makes provision for this by requiring the trustees of RA funds to exercise equitable discretion in distributing the member’s death benefit. More specifically, the trustees must:
- Actively investigate to identify and trace potential dependants and assess their degree of dependency on the deceased member. The trustees have 12 months in which to finalise this investigation.
- Make an equitable distribution, taking into account factors such as a dependant’s age, relationship to the deceased and extent of dependency, the deceased’s wishes, and the dependant’s financial position.
- Determine how to effect payment – for instance, paying a minor’s share into a beneficiary fund or a beneficiary share to a trust that was nominated in the will of the deceased.
Importance of nominating beneficiaries
A smooth transfer of wealth is perhaps one of the most important considerations in estate planning. Beneficiary nominations are the most practical and cost-effective way to achieve this. Beneficiaries can be nominated on both an RA and an LA, but with different implications.
In the case of an LA, the proceeds will be paid directly to your nominated beneficiaries, who may elect to take the proceeds as a cash lump sum (subject to tax) or to purchase an annuity in their own name. This enables planning for an uninterrupted income stream after you die. However, if you neglect to nominate a beneficiary, the proceeds will be paid to your deceased estate.
The trustees of an RA fund are legally required to determine your dependants in terms of section 37C; therefore, your beneficiary nomination form will not necessarily be followed. However, it will provide guidance to the trustees as to who your dependants were at the time of your death and the extent of their dependency on you. If you have no dependants (and your estate is solvent), the proceeds will be paid in terms of your nomination form.
Pre-and post-retirement products play a crucial role in your estate plan. Speak to your financial adviser about incorporating your retirement planning into a well-structured estate plan.
Mariska Redelinghuys is legal specialist: advice at PSG Wealth.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is of a general nature and does not purport to be financial planning advice that is appropriate for every individual’s needs and circumstances.
