Your retirement products can make a notable financial difference in the lives of your loved ones when you pass away.
Most consumers know by now the importance of having a will, even if they have little money. However, there is one important thing consumers still forget: their retirement products.
Which is why it is important to make retirement planning and estate planning a part of your holistic financial plan.
Estate planning and retirement planning are rarely discussed in the same breath, Mariska Redelinghuys, legal specialist for advice at PSG Wealth, says. “This happens because they 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 is the process of preparing your will, which outlines how your assets will be managed and distributed after your death. It ensures your wishes are honoured and helps minimise taxes and legal complications for your heirs.
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Using retirement products to plan for your retirement
“Retirement planning, on the other hand, 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 help their clients realise these goals. She says your will, for example, is the primary document used to implement your estate plan.
“Retirement annuities are products that 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 buying either a guaranteed annuity or a living annuity with the proceeds.
“The reality is that both retirement planning and estate planning form part of a holistic financial plan and retirement products, particularly retirement annuities (RAs) and living annuities (LAs), play a significant role in estate planning.”
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Retirement products and deceased estates
Redelinghuys says 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 when you pass away.
“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 much-needed funds to sustain their lifestyle and financial wellbeing.
“No executor’s fees will be levied on these products, and the proceeds will not be subject to estate duty.”
She warns that 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 limits (currently 27.5% of taxable income, capped at R350 000).
“It is possible to contribute more than these limits 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 pass away.
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Tax and your retirement products
“In addition, 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 Sars at the end of the tax year, making these funds available to further your financial goals and aspirations.”
Redelinghuys says 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 pass away, thereby reducing your tax burden for the lump sum.
However, she warns, the disallowed contributions deducted will be included in your estate for estate duty purposes.
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Distributing the proceeds of your retirement products
She points out that 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 retirement annuity funds to exercise equitable discretion in distributing the member’s death benefit.”
Redelinghuys says more specifically, the trustees must:
- Actively investigate to identify and trace potential dependents and assess their degree of dependency on the deceased member. The trustees have 12 months to finalise this investigation.
- Make an equitable distribution, considering 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.
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Why is it important to nominate beneficiaries?
A smooth transfer of wealth is perhaps one of the most important considerations in estate planning, Redelinghuys says.
“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 RA, 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 buy an annuity in their own name. This enables you to plan for an uninterrupted income stream after you pass away.
However, if you neglect to nominate a beneficiary, the proceeds will be paid to your deceased estate.
Redelinghuys also points out that, as the trustees of a retirement annuity fund are legally required to determine your dependents in terms of section 37C, your beneficiary nomination form will not necessarily be followed.
“However, it will provide guidance to the trustees about 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.”
She says pre- and post-retirement products play a crucial role in your estate plan, and it is a good idea to speak with your financial adviser about incorporating your retirement planning into a well-structured estate plan.