Your Beneficiaries -
Make Sure Your Real Dependants Benefit

The Weekender / Business Day 6/7 May 2006

Have you thought about the definition of beneficiaries and dependants? There are many benefits to accumulating capital in your retirement fund. Firstly, you get the tax break on the amounts put into the fund, secondly, the investment benefits from no capital gains tax and a nominal 9% fee on interest. Your funds are also protected from creditors in the event of insolvency. The fund does not form part of your estate and will also save you a lot in gains tax and estate duty.

While in most “normal” circumstances you nominate your wife and children as beneficiaries of your fund, and they would get the benefits on your death, the actual beneficiaries could be substantially different if your circumstances are a little more complex. The Pensions Funds Act sets out to protect all your dependants.

Put your hand up if you know the correct answer to what a “dependant” is.

The fact is that the answer seems so obvious that we would never give it a second thought.

However, consider this piece of legislation: section 37C of the Pension Funds Act 24 of 1956 (PFA) states that the trustees of your retirement fund are obliged to ensure that your dependants are beneficiaries of your retirement savings in the event of your death. Now read it again … slowly! Tread lightly … there is more to this piece of legislation than meets the eye.

The definition of a dependant in the PFA stretches further than merely those persons who are direct dependants.

The PFA provides that even your previous spouse, your parents, or children born out of wedlock (or even your mother-in-law) may be included in the definition of a dependant and may be entitled to receive benefits from your retirement savings.

For example, if Mr. Smith died and was a member of a retirement fund and leaves two children from a previous marriage, his former wife and his current wife, the trustees of the retirement fund will have to consider the claims of all four persons as beneficiaries.

The needs of your previous spouse, your parents, or children born out of wedlock, may override your decisions on how your retirement savings should be distributed. Therefore, the trustees of your retirement fund may ignore those provisions of your will providing for the distribution of your retirement savings.

The testator’s freedom of testation is limited.

This is extraordinary if you consider that most individuals’ retirement savings will constitute a large portion of their wealth. One reason for government’s policy on retirement fund benefits is that government does not want your dependants to become dependent on the state.

It is the unenviable task of the trustees of your retirement fund to determine who your dependants are and how much each dependant should benefit. Before your death you may assist the trustees of your retirement fund to make determinations as to who shall be beneficiaries. Section 37C allows you to nominate persons whom you wish to benefit from your retirement savings in the event of your death.

You should also stipulate the amount each person should receive from your retirement savings. Note that while the trustees of your retirement fund should take your nomination into consideration, it serves as a guide only.

The trustees have to act within the confines of the PFA or they may face possible legal action. In making distributions, the retirement fund trustees may take into account the amount available for distribution, the beneficiary’s relationship with the deceased, the financial status and future earnings potential of the beneficiares, as well as the age of the individual beneficiary.

It is a good idea to furnish the retirement fund trustees with as much information as possible. In other words, write them a dated and witnessed letter and attach it to your beneficiary nomination form. In our example, if Mr. Smith’s two children were qualified and self-sufficient and his former wife had received a generous divorce settlement, it would be very different to the situation if they were factually dependant on Mr. Smith at the time of his death.

Due to the fact that circumstances continually change, it is a good idea to draft a letter to the retirement fund trustees on an annual basis and inform them of any changes. This may be done with the assistance of a qualified financial planner. This would assist the retirement fund trustees to make an equitable distribution in line with your wishes.

Tread lightly.

Debbie Netto-Jonker, CFP™, is founder of Netto Financial Services and was financial planner of the year in 2001.