What happens to your RA when you die?
A retirement annuity (RA) is a savings vehicle that you use to save towards your retirement. But what happens when you die and there are still funds in the RA?
Moneybags journalist Jessica Anne Wood speaks to experts about what an RA is and how it differs to other retirement products, as well as what happens to an RA after you die.
Johan Gouws, head of Absa asset consultants for Barclays Wealth & Investment Management explains: “A retirement annuity is a tax effective pre-retirement investment vehicle for individuals who do not participate in an employer sponsored pension or provident fund and is also used by salaried individuals who want to make additional retirement provision over and above their contributions to their employer sponsored pension or provident fund. Members of retirement annuity funds can claim a tax deduction on their retirement fund contributions of up to 27.5% of gross remuneration or taxable income, subject to an annual cap of R350, 000.”
Your RA on your death
The beneficiary of an RA is the contributing member. Gert van Rensburg, head of distribution at Hollard Investments, notes: “Typically one would only use the term “beneficiary” to indicate the recipient of benefits on death of the RA fund member.”
Upon your death your RA does not form a part of your estate, but rather the funds are entrusted to trustees, who distribute the money fairly and reasonably to the beneficiaries, reveals Gouws. This is according to section 37C of the Pension Funds Act.
Van Rensburg clarifies: “Estate Duty legislation provides that the proceeds of an RA are free from estate duty. However, to prevent abuse, recent amendments now dictate that any contributions to the RA in excess of the allowable tax deductions will indeed be regarded as property in a deceased estate for estate duty purposes.”
An RA cannot be bequeathed via your will and will normally go to a person you have nominated in the RA. Van Rensburg emphasizes the need to regularly review your nominees.
However, the funds will not automatically go to the people nominated by the RA member, but will look at any dependents that the person may have had.
“If the deceased member is survived by both dependents and nominees, the board of management must divide the benefit between such dependents and nominees in such proportions as the board may deem equitable. The objective of this section is to ensure that those persons who were dependent on the deceased member are not left destitute after his/her death, irrespective of whether or not the deceased was legally required to maintain them,” clarifies Gouws.
Geraldine Macpherson, a legal marketing specialist at Liberty, adds that the trustees have 12 months in which to make their decision as to the distribution of the death benefits.
Van Rensburg highlights: “Also relevant, is that an RA cannot be ceded to someone or be attached for any purpose. So it will not form part of an insolvent estate and is also protected against any claims from your creditors.”
The difference between an RA and other retirement products
An RA is suited to an individual wanting to save towards their retirement outside of any company sponsored pension or provident fund that may be available.
Macpherson elaborates: “All other retirement products require an employer/employee relationship, so for example, to be a member of a pension fund you need to be an employee of the employer to which that fund relates. In addition, if you resign or are retrenched or dismissed you are entitled to a taxable withdrawal benefit from the pension or provident fund. When it comes to a RA you may only access your funds at age 55 (or later), except if you formally emigrate or if the paid up value of the RA fund is less than R7, 000.”
Gouws adds: “Whereas other pre-retirement savings vehicles such as pension and provident funds cater for salaried individuals, retirement annuities also cater for self-employed people or for employees of organisations that do not provide a pension or provident fund. It also allows individuals who earn a significant amount of passive taxable investment income (e.g. interest, rent, annuities) to make provision for retirement using alternative sources of income other than a salary.”
Furthermore, an RA also allows members the flexibility of making regular contributions or a once off contribution.
“As a retirement annuity fund is a fund of individual choice and no employer/employee relationship exists, no early withdrawal benefit is allowed from a retirement annuity fund. Benefits will only be payable on retirement. “Retirement” from a retirement annuity fund will be on the date elected as the “normal retirement date” by the member. Nevertheless, retirement (other than as a result of ill health or disablement) may not occur before age 55. This is even so where the member may be unemployed and in dire financial difficulties,” clarified Gouws.
Saving for your retirement
Siyanda Hadebe, associate consultant at Alexander Forbes Financial Planning Consultants, says: “According to research, +/- six percent of people will retire comfortably, so an RA is another form of investment that helps you build capital during the working years so that you enough income when you retire.”
RAs offer people a tax friendly way to make additional provision towards their retirement above those provide by a company. Gouws points out that it is a flexible investment product and people can make monthly contributions from as little as R250 per month (depending on the fund) and there are no penalties if these contributions are stopped on a temporary or permanent basis.
Van Rensburg concluded: “An RA is an invaluable financial planning tool that can secure your retirement, and carries significant tax advantages. However, it also comes with restrictions on what you can do in terms of contributions and accessing the funds, both pre and post maturity. It typically needs consideration of a whole host of factors, from underlying investment portfolio decisions to taxation and retirement planning, for which you would be well-advised to consult with a suitably qualified financial planner.”