What happens to your retirement annuity if you die?

A retirement annuity is a retirement savings vehicle which allows you to invest money that will be used for an income in retirement. By regularly contributing to a retirement annuity, you can build up your savings, which can then be used to provide you with an income during your retirement years in the form of a life or living annuity. A retirement annuity can help you establish a financial foundation for retirement by leveraging the power of compound interest. 

You should be aware of the rules regarding retirement annuities upon death and the implications of these rules on your dependents and beneficiaries. The rules are set by Section 37C of the Pensions Fund Act, and these rules apply specifically to retirement annuities (and potentially other pre-retirement vehicles). The rules applied to retirement annuities relating to tax and legal issues differ from some of the rules applied to other investment products.   

In this article, we discuss everything you need to know about retirement annuities and what happens to the balance of your RA upon death. At 10x, we believe in giving you the facts about your investments, low fees and straightforward investment strategies focused on the long term to give you financial stability throughout your retirement years. 

Understanding retirement annuities in South Africa 

A retirement annuity is a long-term investment product where you can contribute a lump sum amount or do a regular debit order contribution. Unlike a pension or provident fund, a retirement annuity is not required to be linked to an employer and can be taken out privately. At 10X, we know your circumstances might change, and so we empower you to amend the contributions to your retirement annuity as your needs and requirements change over time.   

Retirement annuities are tax-deductible (subject to annual limits of 27.5% of annual income or R350,000). The growth within the retirement annuity is also tax-free, meaning that there is no tax on any growth, which then allows for more of the returns to be reinvested and contribute to the potential growth of the retirement annuity. Upon or after the retirement age of 55, up to one third can be taken as a lump sum subject to retirement benefit lump sum tax tables, and the balance of the retirement annuity may be transferred to either a life or living annuity. The life or living annuity will then provide you, the retiree, with income during your retirement years. 

What happens to your retirement annuity when you die? 

Legal and administrative process 

Retirement annuities are governed by the Pensions Fund Act and not solely dictated by your will. As such, your will does not solely decide who is to receive funds from your retirement annuity upon death. The fund trustees of the retirement annuity are assigned the task of deciding how the death benefit will be allocated. They will look at both the nominated beneficiaries and also financial dependents, in order to make a fair decision that is in line with the Act. 

Nominated beneficiaries and financial dependents 

According to the legislation, a member’s death benefit is to be allocated between the spouse, children and any financial dependents that there may be. Part of the trustees’ role would be to actively search for any dependents. Once all dependents and nominees have been identified, the trustees need to decide who to allocate the death benefit to, in accordance with the rules of the Act. If there are no dependents or nominees, the death benefit will be paid into the deceased’s estate as long as it is solvent, but only after a period of 12 months has elapsed. This is to make sure that no dependents are identified during that period.   

There are various options available to the recipients of the death benefit. The beneficiary may request:  

1. The benefit to be paid out to them in cash,  
2. The funds to be used to purchase a life or living annuity  
3. Both a cash lump sum amount and a life or living annuity.  

Tax treatment upon death  

As always, you should understand the tax implications of each of the options available to you, so you can make an informed decision as an investor or beneficiary.  

1. The lump sum benefit is currently taxed according to the retirement tax tables. This allows for the first R550,000 to be tax-free. 
2. Funds used to purchase a life or living annuity will not be taxed. However, any income drawn from the annuity will be taxed. 

It’s important to note that dependents or nominees are not liable for any estate duty on death benefits paid directly to them, as retirement annuities fall outside of the member’s estate.

How trustees decide on the RA death benefit distribution  

When allocating the death benefit, the fund trustees look at both the nominated beneficiaries and the financial dependents. The nominated beneficiaries are the beneficiaries whom the member has chosen to nominate to receive the death benefit in the event of their passing. This would be expressed in writing. They will look at both the factual and legal dependents. Factual dependents would be all dependents whom the member was supporting financially, even though this was not legally required by the member.   

Legal dependents refer to all dependents whom the member had a legal obligation to support, such as a minor child. When deciding how to allocate the death benefit, the trustees will look at a range of factors. These factors will include factors such as how reliant the dependents were on the member, the age of the dependents, how the dependents were related to the member and similar. If there are only nominees elected, the trustees are obliged to wait for 12 months before allocating the death benefit to ensure that no dependents can be identified.  H2: RA death benefits vs other investments (e.g. TFSAs, Unit Trusts) Different investment products have different rules governing how they are treated upon an investor’s death and subsequent distribution. Let’s look at these rules in more detail: 

Retirement Annuities: Retirement annuities do not form part of your late estate, so they are not subject to estate duties when paid directly to a dependent/nominee. However, the beneficiary will pay tax on any cash received (according to the lump sum benefit tax tables) or income drawn once those funds have been transferred into a living annuity. 

Unit Trusts: Unit trusts form part of your estate and may be subject to estate duty. They may also be subject to capital gains tax. 

Tax Free Savings Accounts: Tax Free Savings Accounts do form a part of your estate, so estate duties may be levied on them. There is no tax paid on withdrawals.  

Retirement annuities and death: Key takeaways and practical checklist 

It’s important to remember that the fund trustees decide who the death benefit will be paid out to after a careful assessment of all nominated beneficiaries and dependents. Your will does not automatically determine how the death benefit will be allocated. Beneficiaries should be regularly reviewed and updated to ensure that your will is a correct representation of your wishes. 

 As you can see, an RA is a tax-efficient means of wealth transfer to dependants, especially if they opt for the living annuity option or a mix of cash and living annuity.  

Below, we will recap other key considerations for your retirement annuity. 

How is the money in your retirement annuity invested? 

Investment Funds and Asset Allocation 

As is the case with any investment, your money is invested in an investment fund made up of a mix of assets. The ‘asset allocation’ refers to the mix of different asset classes in which your funds will be invested. This will usually be a range of equities, bonds, real estate, cash, with both local and offshore exposure. A diversified asset allocation across the various asset classes aims to outperform inflation over time, in order to protect your capital and grow your investment. After careful consideration, you would select a fund with a mix of assets that suits your risk profile and the time horizons you require for the investment.  

You may wish to consider including more equities in your portfolio if you are looking at a longer time horizon, and also if you are more risk-tolerant. If you are more risk-averse or if you are looking at a shorter time horizon, you may wish to include more bonds to add more stability to your portfolio. 10x offers a range of well-structured funds, which have been carefully picked to ensure that your portfolio is well-diversified across the asset classes. You have the freedom to customise your underlying investment portfolio by selecting from our range of carefully chosen investment funds. To find out more about the funds on offer at 10x, follow this link. 

By selecting the appropriate underlying fund in your retirement annuity, you can potentially maximise the returns and growth of your savings. Thus, also possibly maximising the retirement fund value you have available to pass on to your beneficiaries, if this situation occurs. 

Rebalancing your portfolio

It’s important to regularly assess your retirement annuity and ensure that the selected funds are still meeting your financial goals, as well as ensuring that they are suited to the current market conditions. As you move through the various life stages, you may see fit to change the fund(s) in which you are invested in order to give you different levels of exposure to different asset classes.  

A well-structured portfolio can help you navigate market fluctuations while still aiming for growth in your portfolio. If you would like to learn more about asset allocation, the experienced 10X investment consultants are happy to speak to you at no cost. They are just a phone call away, and you won’t need to deal with any call centres.  

Why retirement annuity fees matter 

Fees can affect your returns over time, so it’s important to be fully aware of everything you are being charged for. These charges may include administration fees associated with admin tasks, like reporting and tax tasks, management fees associated with the management of the fund, and advisor fees relating to any financial guidance or services from a financial advisor.  

In 2015, ASISA introduced the Effective Annual Cost (EAC). This allows you, as an investor, to see all of the costs and fees associated with your investment product over a one-year period. You can then compare and evaluate the various offerings from the different service providers. All factors being equal, we can expect to see higher fees having more of an effect on your returns and lower fees potentially allowing for more of your returns to be reinvested to compound over the long term.  

High fees, when compounded over time, can affect the capital growth of your retirement annuity. You may therefore wish to choose a service provider, such as 10x, who keeps fees transparent, simple and low. By charging just a single management fee, you can be sure there are no extra costs to surprise you. 10x understands the importance of keeping more of your funds invested and allowing for these to potentially compound over time. Please refer to our fee schedules on our website for product-specific details. 

How to protect the value of your RA  

Choose a low-fee RA provider: By choosing a low-fee service provider, you can reinvest more of your returns, as you would potentially be paying less of these returns in fees. High fees can have the effect of potentially diminishing your returns over the long term. By using a provider like 10x, which offers transparent and low fees, you can potentially grow your savings at a faster rate over time. 10x makes use of index-tracking strategies, which result in lower fees, as there are fewer costs associated with this kind of investment strategy compared to a more active approach.  

Optimise asset allocation over time: Ensuring that you regularly review and adjust your asset allocation to check that it still meets both your risk tolerance level and time horizons will help to optimise your investment to hopefully meet your financial needs and goals. It’s important to review your asset allocation as you pass through the various life stages, to ensure that any changing needs and goals are being met.   

Review your beneficiary nominations regularly: You may also need to review your beneficiary nominations after major life events and update these accordingly. Events such as births, deaths and/or divorces may trigger the need to update your beneficiaries. 

Regularly reviewing and adjusting your asset allocation to meet your needs and to strive for capital growth is essential. Being aware of the fees you are being charged by your service provider is important. Low fees may result in more of your returns being invested and could possibly result in more capital growth over the long term. Partnering with a service provider like 10x, which charges low and transparent fees, is a option to consider. To find out more about our fee structure at 10x, please visit our website or speak to one of our knowledgeable investment consultants, who will be happy to chat. 

Retirement annuities and death: make sure you've planned well

It’s important to be well educated on the handling of your retirement annuity death benefit upon your passing. You want to ensure that your beneficiary nominations are up to date, especially after any major life events, so that the people you care about are taken care of if you are not around. By regularly reviewing your retirement annuity’s asset allocation and making necessary tweaks, you are protecting both your own financial future and that of your loved ones in the event of your untimely passing.  

At 10x, we believe in straightforward investments focused on the long term. We simplify your retirement with low fees and a proven track record. With a 10x Retirement Annuity, more of your money goes to work for you. To learn more about 10x and our funds, visit our website or reach out.