The impact of retirement planning on one’s estate and beneficiaries

However, retiring comfortably is no easy feat for the vast majority of our country’s working population. Interestingly, statistics have shown that very few South Africans (as little as six percent) are able to retire comfortably¹, and many retirees go without the essentials that most take for granted.

Nevertheless, adequate planning can put you on track to become a ‘six percenter’. This is where sound financial advice and planning will always add value, as your needs and goals will be analysed and appropriate products can be identified and recommended by a qualified financial adviser.

Before giving any advice, a financial adviser will make sure they understand your goals and needs, what is important to you and your family, and what recommendations you are comfortable with.

One product that may be very useful as part of your retirement planning is a retirement annuity (RA). RAs are powerful investment vehicles which most have heard of, but many may not be fully aware of their benefits within a well-structured financial plan.

Let’s Recap Some of the Benefits of RAs

• Contributions to RAs are tax deductible up to 27.5% of remuneration or taxable income, up to a maximum of R350 000 per year.
  
  
• Excess contributions above the maximum threshold may roll over for future deductions in subsequent tax years, so you don’t ‘lose’ the benefit. In fact, under some circumstances, the tax benefit may even roll over into your pension payments after retirement.
  
  
• No tax is paid within an RA, i.e. no capital gains tax (CGT) or income tax is payable within the fund. This allows returns to grow tax free over time.
  
  
• Proceeds from an RA do not form part of the deceased estate on the member’s death. Estate duty and executor’s fees are therefore not applicable to these products.
  
  
• The recent introduction of the two-pot retirement system allows members of RAs to access the ‘savings pot’ component of their retirement savings before retirement, should they need to do so. Members are allowed one withdrawal from their savings pot per tax year.
  
  This is subject to a minimum withdrawal amount of R2 000, but there is no maximum. At retirement, the lump sum taken will be taxed according to the retirement lump sum table.
  
  

Beneficiary Nomination and the Implications Thereof

Retirement annuity funds are governed by the Pension Funds Act, and the distribution of death benefits held in these vehicles is done in terms of this Act.

The aim of this legislation is to ensure that the financial dependants of a member of a retirement annuity fund receive these proceeds if the member passes away. Trustees of retirement funds are required to investigate who was financially dependent on a member at the time of his/her death.

If you are a member of a retirement fund, a financial adviser can help you ensure that the trustees of your retirement fund have sufficient records of your dependants, as well as any additional information that you feel may assist them in their decision-making, thereby ensuring that such an investigation is a quick process if the need arises.

Recipients of death benefits may choose how they wish to receive the benefits. Options available to them would be to:

• take the entire benefit as a cash lump sum (subject to taxation, which your financial adviser can advise on), and/or
  
  
• purchase a compulsory annuity (in which case tax will be payable by the income recipient on the income received from the compulsory annuity, similar to how a salary is typically taxed).
  
  

Estate Planning and the Role of Retirement Funds

A key component of your overall financial plan is an estate plan. This plan sets out how you want your estate to be structured to help ensure that your financial goals and dreams for your family will be achieved, even after your death.

Important aspects of an estate plan include making sure that your wishes are very clearly recorded in a valid will and that you have provided for estate duty and other estate costs to ensure that none of your assets need to be sold to cover these expenses.

If you have a retirement annuity, this must be included as part of your estate plan – even though the benefits at death are paid in a somewhat different manner. Equally, things like trusts may play an important role. Your financial adviser can introduce you to other experts, such as a fiduciary adviser, who can work with your financial adviser to assist with your estate plan.

In Closing

Retirement planning is an important aspect of a comprehensive financial plan. One needs to carefully consider how this ‘piece of the puzzle’ fits into one’s overall financial plan. As always, remember that everyone’s situation is unique, and your goals will require individualised planning. Speak to a financial adviser to help you achieve your goals.

¹Source: Today’s Trustee

Frequently Asked Questions

What is a retirement annuity (RA), and why is it important for retirement planning?

A retirement annuity (RA) is a tax-efficient investment vehicle designed to help individuals save for retirement. It offers benefits such as tax-deductible contributions, tax-free growth within the fund, and protection from estate duty, making it a crucial component of a well-structured financial plan.

What are the tax benefits associated with retirement annuities?

Contributions to an RA are tax-deductible up to 27.5% of your remuneration or taxable income, with a maximum of R350,000 per year. Excess contributions can roll over for future deductions. Additionally, no capital gains tax or income tax is payable within the fund, allowing your savings to grow tax-free.

How does the new two-pot retirement system impact RAs?

The two-pot system allows members to access a portion of their retirement savings, known as the "savings pot," before retirement. Members can make one withdrawal per tax year, subject to a minimum of R2,000, with no maximum limit. Withdrawals are taxed according to the retirement lump sum table.

What happens to my RA benefits if I pass away?

RA benefits do not form part of your deceased estate, avoiding estate duty and executor's fees. The Pension Funds Act governs their distribution, ensuring financial dependants are prioritised. Beneficiaries can choose to receive the benefits as a lump sum or purchase a compulsory annuity, both subject to taxation.

How do RAs fit into estate planning?

RAs are an essential element of estate planning, as they ensure financial security for your family. While not directly part of your estate, RAs should be included in your overall estate plan. A financial adviser can guide you in aligning your RA with other estate planning tools, such as trusts and wills, to meet your financial goals.