Death benefits from Approved Retirement Funds vs Policies
One of the most misunderstood areas of financial planning in South Africa is how trustees of retirement funds deal with death benefits of the funds. Most people either have their own benefits or have to deal with family members or staff who are frustrated when a claim either takes too long or the benefits aren’t paid out as stipulated in the beneficiary nomination form.
The beneficiary nomination form for an approved retirement fund benefit does not carry the same weight as one for a life policy. When you nominate a beneficiary on a life policy or an unapproved group scheme, the insurer will pay the proceeds of the policy directly to your nominated beneficiary, whether it is your mistress, your brother or the SPCA. This is not the case with a beneficiary nomination on death benefits on an approved retirement fund.
Death benefits on a retirement fund are paid out in accordance with the stipulations of section 37C of the Pension Funds Act. It grants the trustees a 12 month period from the death of the member to search for dependants of the deceased member. This needs to be done despite the existence of a nominated beneficiary. The trustees are granted discretionary powers in awarding the death benefits; however, the overriding consideration is equity in distributing the death benefit. The trustees cannot merely follow the beneficiary nomination that the member placed on the policy or pay the benefit to the dependants found by them, but must exercise their discretion provided to them by section 37C in doing so. The beneficiary nomination will act as a guideline to the trustees as to the wishes of the member, but in no way diminishes their responsibility in determining who should receive the death benefit.
In a Pension Fund Adjudicator decision of S Segal v Lifestyle RA Fund, the adjudicator stated that in order for the trustees to act equitably, they should give regard to the following factors:
• The age of the parties;
• The relationship with the deceased;
• The extent of dependency;
• The financial affairs of the dependants, and
• The future earning potential and prospects of the dependants.
The adjudicator then goes on to provide a class of potential claimants, which includes:
• Those whom the deceased had or would have had a legal duty to support, namely spouses, children, parents, grandparents, and unborn children;
• Factual dependants, such as so-called common law spouses and same-sex partners;
• Customary law spouses and those married under Islamic law, Hindu, Buddhist, Confucian, or Taoist rites;
• Major children of the deceased whom the deceased had no legal duty to support; and
• Beneficiaries nominated in writing after 30 June 1989.
A nominated beneficiary, for example a brother, who is not financially dependant on the deceased, will have very little chance of receiving the benefits if the deceased had a wife and children. This is an example of where customary law and legal statue are directly in conflict with one another, because it is common practice amongst Zulus that the oldest brother / oldest son must inherit and he will then look after the remaining dependants. Unfortunately, for customary law legal statute carries more weight.
Therefore, when you are nominating beneficiaries for your retirement fund’s approved risk benefits, take note of the parameters, which the trustees must use when allocating benefits. They are not trying to be difficult if they do not follow your wishes, they are just following the law.
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