Retirement annuity and the payment of death benefitss
13 August 2009

The payment of a death benefit from a Retirement Annuity Fund is regulated by section 37C of the Pension Funds Act 24 of 1956. Due to the nature of a Retirement Annuity Fund, a member of the Fund has a mere claim against the Fund and does not have ownership of the policy. The policy is in fact owned by the Retirement Annuity Fund and any benefit payable to the member is linked to the relevant insurance policy.

When a claim is made against the Fund when the member dies, the trustees of the Retirement Annuity Fund must follow the requirements for the payment of a death benefit as set out in the Pension Funds Act and cannot merely follow the beneficiary nomination made by the member. It is therefore of vital importance that the provisions of Section 37C are analysed to determine how trustees should go about determining the beneficiaries of the death benefit payable by the Retirement Annuity Fund.

Determining who will receive the benefit on death of a member

Firstly, section 37C grants the trustees a 12 month period from the death of the member to search for dependants of the deceased member. This is notwithstanding any beneficiary nomination that was done by the member on the insurance policy.

Section 37C then grants certain discretionary powers to the trustees in awarding the death benefits, but this discretionary power is tempered with a responsibility to apply 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 takes away 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.

The manner, in which the payment of a death benefit can be made, is also regulated by section 37C and currently makes provision for the following options:

• Payment directly to the dependant or nominee;
• Payment to a trust nominated by either the member, a major dependant or a guardian/curator, as the case may be;
• Payment to a guardian or caregiver of the dependant or nominee; or
• Payment to a beneficiary fund.

Payment to a minor

The option of making payment to a beneficiary fund was introduced in November 2008. Prior to this date, trustees had the discretion to pay death benefits to a trust. This discretion was taken away in 2008, allowing only for death benefits to be paid to a trust where a trust was nominated by the member or the beneficiary/nominee.

The amendment in 2008 introduced a new option to trustees where death benefits can be paid at their discretion, i.e. to beneficiary funds. A beneficiary fund is defined as a “pension fund organisation”, and is regulated by the Pension Funds Act and can only receive death benefits paid in terms of section 37C of the Act. If a death benefit is paid to a beneficiary fund, the beneficiary becomes a member of that fund.

When dealing with a death benefit that is payable to a minor, the trustees will now have the option to either pay the benefit to the guardian of the minor or to a beneficiary fund. Since a guardian has a common law right to administer the financial affairs of the minor, the trustees cannot without properly applying their minds to the facts, pay money into a beneficiary fund as apposed to the guardian. According to the Pension Fund Adjudicator, the following factors need to be taken into account when deciding whether to pay the death benefit to the guardian of the minor:

• The amount of the benefit
• The ability of the guardian to administer the money
• The qualifications of the guardian to administer the money
• The benefit should be used in such a manner that it can provide for the minor until he/she become an adult

A beneficiary fund must be registered with the FSB and approved by the Receiver of Revenue before any benefit can be paid to these funds by the trustees.

Who will receive the benefit if the deceased has no dependants?

Should no dependant be found by the trustees within the 12 month period and the deceased member did indicate a beneficiary on the insurance policy, the benefit will be paid to the beneficiary. If no beneficiary is nominated, the death benefit will be paid to the deceased’s estate, or if no inventory was received from the Master of the High court, then to the Guardian’s Fund.

Will the benefit be paid as a lump sum or an annuity?

Recent amendments to the Income Tax Act have made it possible for a Retirement Annuity Fund to pay the full death benefit as a lump sum and beneficiaries are no longer forced to buy an annuity with part of the death benefit. Once the beneficiaries have been determined by the trustees, the form of the payment (lump sum, compulsory annuity or a combination of the two) can be selected by the trustees, in conjunction with the beneficiaries.

For the latest information from Group Advisory Services, visit the Group Advisory Services webpage. Click on the following url: https://www.blueprintonline.co.za/msblueprint/focus/index.asp. This site is updated weekly with all the latest articles, presentations and documents which have been produced by the Investment, Risk and Legal Focus teams.

Should you have any queries regarding this or any other Legal Focus article, please contact the Legal Marketing Specialist in your area. Any compliments or complaints can be sent to legalfocus@liberty.co.za