RETIREMENT ANNUITIES AND TAX-FREE SAVINGS ACCOUNTS: WHAT TO KNOW WHEN YOU DIE

Making provisions for savings and retirement early is no doubt one of the most prudent personal finance rules to follow.

Those who heed this rule dedicate a chunk of their salary over many years during their working careers into a typical retirement annuity (RA) or the recently introduced tax-free savings accounts (TFSA).

But just like taxes, death is inevitable. And in the latter scenario, what happens to your contributions to an RA or TFSA in the event of your death?

Sygnia Asset Management head of retail administration Charlene Swartz says, because an RA is a retirement fund product, a contributor is allowed to specify a beneficiary upon their death. RAs are governed by the Pension Funds Act and have a dedicated board of trustees, who upon your death would investigate the specified beneficiaries.

“Trustees are required to perform their own investigation to determine all my dependants. They would need to consider for example, if I have specified my husband and son as a beneficiary, do I have any other dependants that I have not specified.

“Once they are satisfied with my beneficiaries being my actual dependants, then the trustees will decide on how to split my retirement fund money between my dependants,” Swartz tells Moneyweb.

Whether a surviving spouse or dependants are included or not as a beneficiary in an RA, it doesn’t matter – as it’s up to the trustees to investigate and determine who a contributor’s dependants are and make the requisite RA payouts, says Swartz.

Trustees under the Pensions Fund Act have 12 months to conduct their investigation on dependants. “However, there are death cases that could take up to a year because they are really complicated. If I specify my husband, child and my mother as a beneficiary, if the trustees find that my mother is not dependant on me, then she might not get any proceeds from my RA.”

But in scenarios where it’s a simple death case and there is one dependant, then the trustees’ investigation and the process for the RA payout is potentially quick. As a beneficiary, you cannot continue your spouse’s RA after their death, but you can use the proceeds for anything.

Tax-Free Savings Accounts

When it comes to TFSAs, which allow for no tax to be paid on your savings and interest earned, it’s a different ball game.

The majority of TFSAs are offered as discretionary investments in underlying unit trusts. If it’s a discretionary investment, Swartz says, then you don’t have the option to specify TFSAs beneficiaries. Thus, your contributions to this investment vehicle form part of your normal estate and is dealt with in terms of your last will and testament.

Swartz says there are some providers in the industry that offer TFSAs products via a life product (or like an endowment type product). “If a tax-free savings account is offered via that product, then you can specify beneficiaries. And then upon death, the proceeds will be paid to those specified beneficiaries,” she says.

The option to continue making contributions depends on the type of TFSA product. If it’s a discretionary product, then you can’t continue making contributions as the proceeds will be distributed according to your will. But on an endowment type of TFSAs, beneficiaries do have the option to be paid out the proceeds or continue making contributions to the account.

Swartz says if you are unsure about how to deal with your finances or options available on how to manage your estate, then seeking the services of a financial advisor is a good idea.

She also emphasises that it’s important to update your will. “People need to review their will every year to ensure it’s up to date. If your will is not up to date, your executor has to abide by what your latest will contains, even though it might not have been your intention,” Swartz explains.

Every RA sends out retirement benefit statements to all members and that includes who your beneficiaries are. Swartz says it’s critical for members of an RA fund to look at those beneficiaries and update them should the need arise.

ADDITIONAL NOTES

**CHARLENE SWARTZ

HEAD OF RETAIL ADMINISTRATION, SYGNIA GROUP**

Charlene completed her articles with Deloitte specialising in the financial services industry. She worked as a manager in the Deloitte Financial Institutions Services focus group Cape Town audit practice from 2005 to 2013. Charlene specialised in servicing the financial services industry, including insurance companies, asset management companies, collective investment schemes, hedge funds and retirement funds. Charlene joined Sygnia in 2013 to head up the retail administration division.

SYGNIA GROUP

The Sygnia Group comprises six operating companies; Sygnia Life, a life assurance company, Sygnia Asset Management, a licensed asset management company, Sygnia Collective Investments, a unit trust company, Sygnia Financial Services, a LISP, Sygnia Securities, an execution-only stockbroker and Sygnia Systems, a financial software development company.