Proceeds from the retirement fund of a deceased member does not form part of the deceased’s estate. This is important when calculating estate duty.

By removing retirement funds from the estate, the funds are protected in the case of an insolvent estate. This means that beneficiaries will still receive a payment from the retirement fund even if the estate is liquidated.

This makes saving into a retirement fund more attractive from an estate planning perspective.

Income tax on retirement funds

Income tax payable on retirement funds is no longer based on the deceased’s tax rates but on a standardized tax table which has simplified the process. Based on these new tax tables the first R300 000 can be paid out as a tax-free lump sum.

If the beneficiary chooses to have the remaining funds paid out in cash, this would attract tax based on the new tax tables.

Annuities

A beneficiary can choose to use the funds from the retirement fund to purchase an annuity and this will not attract tax at the date of purchase of the annuity. This reduces the tax liability at the date of receiving the payout, but the annuity payments will be taxed as they are received by the beneficiary.

An annuity also removes flexibility that comes with receiving a lump sum. A beneficiary can find a balance between flexibility and taxation by choosing to take the R300 000 tax-free lump sum and purchasing an annuity with the rest of the funds.

This decision should be made based on the needs of the beneficiaries and therefore it is important for them to receive sound financial advice.

Beneficiary funds

In the case where beneficiaries are minor children, the trustees of the retirement fund could insist that the funds are transferred to a separate fund to ensure a regular income to ensure that the lump sum is not squandered.

The trustees would decide whether the funds are paid into a beneficiary fund or an annuity. Most trustees choose a beneficiary fund which allows greater amounts to be paid in the beginning of the year for school books, clothes and fees for example, whereas an annuity pays a fixed monthly amount.

Beneficiary funds have replaced previous umbrella trusts (which were regulated by the Master of the Court) and now fall under the regulation of the Financial Services Board.

Beneficiary nomination forms

Although members are required to fill in nomination forms, these only act as a guide to help the trustees of the retirement fund. Ultimately the trustees make the final decision based on the needs of the member’s dependants. This is important, for example, where a member has nominated a spouse as the beneficiary and both are killed in a car accident simultaneously. The trustees would be able to make the decision to pay the benefits to the children who remain as dependants.

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