Mariska Redelinghuys | Legal Specialist | Advice | PSG Wealth | mail me |
Estate planning and retirement planning rarely appear in the same discussion. This separation often obscures the importance of retirement and estate planning as a connected process. This is because they focus on different life stages.
People often treat them as separate aspects of financial planning. However, it remains important to consider your retirement funds when constructing your estate plan. Effective retirement and estate planning requires this integrated view.
Why you must include retirement products in an estate plan
Estate planning focuses on how your assets will be managed and distributed after your death. It ensures your wishes are honoured. It also helps minimise taxes and legal complications for your heirs.
Retirement planning, by contrast, focuses on accumulating and managing resources to support your lifestyle after you stop working. It helps provide financial security during your retirement years. Together, these disciplines form the foundation of sound retirement and estate planning.
Financial advisers use various strategies and products to help clients achieve these goals. Your will, for example, serves as the primary document used to implement your estate plan. Retirement annuities are products designed for individuals who want to save for retirement in a tax-efficient manner. They provide both a cash lump sum and a regular income after retirement. This income is created by purchasing either a guaranteed annuity or a living annuity with the proceeds.
In practice, both retirement planning and estate planning form part of a holistic financial plan. This holistic approach lies at the heart of effective retirement and estate planning. Retirement products play a significant role in this structure. This is particularly true for retirement annuities (RAs) and living annuities (LAs).
Retirement products and deceased estates
From an estate planning perspective, RAs and LAs offer several important benefits. Most notably, they generally do not form part of your deceased estate when you pass away.
This feature makes them especially valuable within retirement and estate planning strategies. As a result, the proceeds do not become tied up during the estate winding-up process. Your dependants can access these funds to sustain their lifestyle and financial wellbeing. In addition, no executor’s fees apply to these products. The proceeds also remain exempt from estate duty.
Another often-overlooked aspect of estate administration involves contributions made to an RA before retirement. These contributions are tax-deductible up to the annual legislative limits. The current limit is 27.5% of taxable income, capped at R350,000. You may contribute more than these limits. Doing so can still support tax-efficient retirement and estate planning.
The larger your RA contributions, the greater the portion of your wealth that will be excluded from your estate when you pass away. Furthermore, section 10C of the Income Tax Act allows excess contributions to be offset against income drawn from your LA. These excess amounts are referred to as disallowed contributions. This offset continues until the disallowed contributions are fully depleted. Because section 10C allows for a tax exemption, you effectively receive this income back from SARS at the end of the tax year. These funds then become available to support your financial goals and aspirations within a broader retirement and estate planning framework.
Disallowed contributions will also be deducted from any lump sums that your beneficiaries choose to take from your RA or LA proceeds after your death. This deduction reduces the tax burden on the lump sum. However, a note of caution applies. The deducted disallowed contributions will be included in your estate for estate duty purposes.
Distribution of proceeds
It is important to understand that you cannot rely entirely on the provisions of your will when distributing the proceeds of your RA. This distinction is a critical consideration in retirement and estate planning.
An RA qualifies as a retirement fund. As a result, the Pension Funds Act governs how the proceeds are distributed. Specifically, section 37C applies. The purpose of this legislation is to ensure that dependants are not left destitute. Section 37C achieves this by requiring trustees to exercise equitable discretion when distributing death benefits.
More specifically, trustees must meet several obligations. First, they must actively investigate and identify potential dependents. They must also trace these dependents and assess their level of dependency on the deceased member. Trustees have 12 months to complete this investigation.
Second, trustees must make an equitable distribution. In doing so, they must consider factors such as the dependant’s age, relationship to the deceased, and extent of dependency. They must also consider the deceased’s wishes and the dependant’s financial position.
Third, trustees must determine how payment should occur. For example, they may pay a minor’s share into a beneficiary fund. Alternatively, they may direct a beneficiary’s share to a trust that the deceased nominated in their will.
The importance of nominating beneficiaries
A smooth transfer of wealth remains one of the most important considerations in estate planning. Beneficiary nominations offer the most practical and cost-effective way to achieve this outcome. They are a key tool within retirement and estate planning. You may nominate beneficiaries on both an RA and an LA. However, each product carries different implications.
In the case of an LA, the fund pays the proceeds directly to your nominated beneficiaries. These beneficiaries may choose to receive the proceeds as a cash lump sum, which is subject to tax. Alternatively, they may use the proceeds to purchase an annuity in their own name. This flexibility enables planning for an uninterrupted income stream after your death. However, if you fail to nominate a beneficiary, the proceeds will be paid into your deceased estate.
Because trustees must legally determine dependents under section 37C, they will not necessarily follow your beneficiary nomination form. Even so, the form provides important guidance. It informs trustees of who your dependants were at the time of your death and the extent of their dependency on you. If you have no dependants and your estate remains solvent, the fund will distribute the proceeds according to your nomination form.
Pre- and post-retirement products play a crucial role in an effective estate plan. Speak to your financial adviser about integrating retirement planning into a well-structured retirement and estate planning strategy.
