Understanding the retirement fund death benefit

12 January 2017

Below, we explain how the process works, the issues trustees must take into account, and what you, as the fund member, can do, to expedite the process.

Process regulated by Pension Funds Act

The payment of death benefits from a Pension, Provident or Retirement Annuity fund is regulated by section 37C of the Pension Funds Act 24 of 1956. When a member dies and a claim is made, the trustees of the fund must follow the requirements as set out in the Act and cannot merely follow the beneficiary nomination which was made by the member.

In determining who will receive the benefit on the death of a member, the trustees are granted 12 months from the date of death to search for any dependents of the deceased member. This must be done despite the presence of a beneficiary nomination.

The trustees have the final say concerning the distribution of the death benefit, however, they must ensure that there is equitable distribution.

The beneficiary nomination acts merely as a guideline to the trustees as to the wishes of the member and will be taken into consideration when investigating the claim.

The trustees need to consider the following matters:

  • The age of the parties involved
  • Their relationship with the deceased
  • The extent of their dependency on the deceased, if any (did the deceased provide any money to them)
  • The financial status and affairs of the dependants (employment, capability of managing money)
  • The future earning potential of the dependants (are they likely to find employment if unemployed; are they students; are they disabled etc.)

In addition, the trustees also need to take into consideration:

  • Parties the deceased had a legal duty to support (spouses, children, parents, grandparents, unborn children etc.)
  • Factual dependants (common law spouses, same-sex partners, stepchildren, foster children)
  • Customary law spouses
  • Major children whom the deceased had a legal responsibility to support

The way that the death benefit is paid is also regulated by section 37C and currently allows for the following options:

  • Payment directly to the dependent or nominee
  • Payment to a trust
  • Payment to a guardian or caregiver
  • Payment to a beneficiary fund.

Other considerations

When a death benefit is payable to a minor then the trustees may only pay the benefit to the guardian of the minor or to a beneficiary fund. As a guardian has the right in terms of law to administer the financial affairs of the minor, the trustees cannot, without applying their minds to the facts, pay the benefit into a beneficiary fund and not the guardian.

Should the trustees not find a dependent within the 12 month period following the death of the member and a beneficiary was nominated by the member then the trustees may pay the benefit to the nominated beneficiary. If no beneficiary was nominated then the benefit will be paid into the deceased’s estate.

The most effective way to speed up the process is to ensure that, as a fund member, your beneficiary nomination form is kept up to date all the time and lists ALL your financial dependants. This helps the Fund trustees greatly in their investigation and therefore minimises the delay.

Taxation of benefits

The beneficiaries who will receive a share of the death benefit can choose to receive their benefit either as a cash lump sum or as an annuity (or as a combination of the two). The annuity income will be taxed in the hands of the recipient per the prevailing income tax tables. Cash lump sums are taxed according to the retirement lump sum tax table, as though they had been received by the deceased on the day before their passing.

10X Investments is an authorised Financial Services Provider (FSP number 28250). The content herein is provided as general information and is not intended as nor does it constitute tax, legal, investment, or financial advice as defined by the Financial Advisory and Intermediary Services Act, 2002.

The 10X Living Annuity is underwritten by Guardrisk Life Ltd.

10X Fund Managers (RF) (Pty) Ltd is an approved manager of collective investments schemes in securities in terms of Section 42 of the Collective Investments Schemes Control Act, 45 of 2002.

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