November 22, 2016

Who gets your retirement fund benefits when you die?

Sabina Chivasa

We spent most of our daily lives at work, where we work towards the golden years where we get to retire and take it a little easier than what we are used to.  A retirement fund offers a safety net for those who have since left the hustle and bustle of the 9 to 5 life. Unfortunately, it sometimes happens that we pass on before we get to enjoy the fruits of our labour. The question thus arises: “Who will get your retirement fund benefits in the event of your death?”

If you’ve nominated someone who is not a dependent as a beneficiary of your retirement fund, chances are your wishes may not be honoured, even if such a person is the only beneficiary in your estate. The reason for this is pension fund legislation often favours dependents above all other claimants. Your spouse, children (whether they are biological, adopted or step children) or anyone who has proven to have been financially dependent on you fall within the definition of “dependents”.

Upon your death, the trustees of the pension fund are legally obligated to identify your dependents. Upon identification of your dependents, their current financial circumstances need to be established and thereafter the trustees will proceed to allocate your retirement benefits as they deem fit. It is only after this point where the needs and claims of those beneficiaries that are not your dependents can be considered.

In cases where the beneficiary is a minor or a legally incapacitated adult, they will be unable to receive the benefit directly. It will have to be paid into the beneficiary fund or to the beneficiary’s parent or someone legally responsible for him/her. The benefit may also be paid to a trust according to your stipulation. If you haven’t specifically nominated a trust, payment can still be made to a trust if your beneficiary or his/her legal representative nominates the trust, and such nomination is approved by the board of trustees.

Where you have nominated a beneficiary and no dependents can be found within a year after your death and your estate is solvent, the trustees of your retirement fund can pay your beneficiary a lump sum which is subject to tax. Alternatively, your beneficiary can also elect to transfer the benefit to a living or life annuity which is exempt from estate duty. In cases where your estate is insolvent, the retirement fund capital will be utilized to fund the shortfall of your estate before benefits will be paid.

In situations where you haven’t nominated a beneficiary and no dependents are found, the trustees will pay out a lump sum to your estate.

This process can end up becoming quite lengthy which can lead to frustration as well as financial difficulty if your dependents and beneficiaries were betting on receiving these benefits a lot sooner.

Trustees must identify all dependents and this can sometimes lead to a situation where skeletons come out of the closet, this is true in cases where you have a love child from an unacknowledged partnership.

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