Allan Gray | How to think about beneficiary nominations for your retirement funds

Ian Barow, one of the trustees of the Allan Gray retirement funds, reminds members about the laws governing retirement fund death benefit payouts, and the importance of making beneficiary nominations and keeping them up to date.

Retirement funds, which include the Allan Gray Umbrella Pension Fund, Umbrella Provident Fund, Pension and Provident Preservation funds and Retirement Annuity Fund, are pivotal to ensuring financial security after your working years. However, if you die while you are a member of a retirement fund, the trustees of your fund are responsible for ensuring your retirement investment is distributed fairly – in accordance with section 37C of the Pension Funds Act (section 37C). These so-called death benefits do not form part of your estate, and section 37C overrides any provision you make in your will relating to these benefits.

The primary objective of section 37C is to protect individuals who depend on you financially (your dependants). These include spouses, children (including legally adopted children), anyone financially dependent on you at the time of your death, and anyone legally entitled to support, for example in the case of a maintenance order.

It is important to submit clear written nominations to your retirement fund through their official channels – and to keep these up to date.

While the trustees are not bound by the information you provide, it is nevertheless important that you submit written nominations of your beneficiaries, as these help guide the trustees, who must conduct an enquiry to identify and trace all dependants and nominees, and establish various determining factors – including financial position, age and future income potential – before allocating your death benefit.

Importance of beneficiary nominations

Here are some key reasons why it is crucial that you nominate beneficiaries:

Provides guidance for trustees. Trustees must consider your nominations when making their decisions; clear and accurate nominations help them understand your intentions and make more informed decisions.

Reduces delays. Providing complete and transparent information assists trustees in conducting timely investigations in the given 12-month distribution window.

Avoids legal complications. In the absence of written nominations, if the trustees cannot identify any dependants, the death benefit may be paid into your estate, which can result in adverse tax implications and higher estate duty and executor fees.

Common mistakes and shortcomings in beneficiary nominations

It is important to submit clear written nominations to your retirement fund through their official channels – and to keep these up to date.

Try avoiding these common errors:

Neglecting to update beneficiary nominations. Life changes, including changes in your financial situation and events such as marriages, divorces, births and deaths, can significantly impact your wishes. Review and update your nominations regularly to ensure they reflect your current circumstances and intentions.

Supplying incomplete beneficiary information. Forgetting to nominate all intended beneficiaries can lead to conflict and hurt feelings. Ensure you list all individuals you want the trustees to consider, especially from a financial dependency point of view.

Supplying inaccurate or ambiguous beneficiary details. Providing incorrect or unclear information about nominees can cause delays and legal battles. Ensure all details are accurate and unambiguous.

Supplying incomplete paperwork. Nominations not made in writing cannot be considered, and incomplete nominations are also problematic. Double-check that all nominations are completed and submitted properly.

Not getting professional advice. Consider getting sound, independent financial advice to ensure your intentions align with legal requirements. An adviser can also assist with your overall estate planning.

If your nominees include individuals who are not your dependants, it is important to remember that the trustees can only give effect to these nominations once the financial needs of all your dependants have been fully met.

How to update beneficiary nominations

At Allan Gray, you can review and update your beneficiary nominations by logging in to your Allan Gray Online account. Ensure all details about your nominees are accurate and comprehensive, including their full names, relationship to you, and contact information. For other providers, contact your retirement fund to confirm the process for updating your nominations.

The death claims process

The death claims process varies between retirement fund administrators. Allan Gray’s process is summarised below and explained in more detail in the document Understanding the death claims process of retirement funds.

Although death is a sensitive matter, it will help your dependants immensely if you share this information with them while you are able to. Part of the process requires an action from them; other aspects of the process may be lengthy and confusing and more easily understood when they are not grieving.

What your dependants/beneficiaries need to do on your death

Notify Allan Gray of your passing by submitting the relevant forms and documents. Either your dependants, their financial adviser or the executor must complete the Death claims form for retirement funds and submit it with the supporting documents listed on the form.

Await the trustees’ decision. The trustees must conduct a thorough investigation to identify and trace all dependants and nominees before making allocations. This involves direct contact with your family members, dependants, and other third parties, and can take up to 12 months from the date the fund is made aware of your death. The trustees will communicate their decision and the reasons for it to your dependants and nominees in writing.

Submit objections and complaints. Any dependant or nominee who disagrees with the trustees’ decision can submit a complaint to the principal officer of the fund, and subsequently to the Pension Funds Adjudicator.

Decide on a payment option. Your beneficiaries must choose how they wish to receive their benefit: They can either take the full benefit as a cash lump sum, purchase an annuity, or opt for a combination of a cash lump sum and an annuity.

Case study: Why keeping beneficiary nominations up to date matters

Background: A retirement fund member passed away suddenly without having updated their written beneficiary nominations, which had been submitted to the fund 10 years earlier. The member had nominated their spouse and children to receive the total death benefit. However, the member’s family situation had changed significantly since first joining the fund, as they had divorced their first spouse and remarried. The member had children from both their first and second marriages.

Issue: After the member’s passing, the trustees of the pension fund were tasked with distributing their death benefit in accordance with section 37C of the Pension Funds Act.

Conflict: The trustees had to navigate a situation involving competing claims. The member’s first spouse and their children claimed a significant portion of the benefit, arguing not only that they were financially dependent on the member, but also that the member had nominated them to receive the full death benefit, i.e. they were relying heavily on the written nominations, arguing that the member never intended to allocate any of the benefit to their second spouse or children from that marriage. Meanwhile, the second spouse and their children – who were not named in the written nominations – also claimed dependency.

The lack of updated nominations led to disputes and delays in the distribution process, as well as to frustration on the part of the member’s first spouse and children from that marriage, who were under the impression that the written beneficiary nominations were all that mattered. This lack of clarity led to conflict with the member’s second spouse and children that might otherwise have been avoided.

Outcome: After a thorough investigation, the trustees decided to distribute the benefit between the two families, considering the financial needs and dependency of each party. This decision, while equitable, led to dissatisfaction among the beneficiaries, particularly the first spouse, who felt that their share was insufficient, especially when considering the member’s nominations. The member’s first spouse lodged a complaint with the Pension Funds Adjudicator, which was dismissed. The Adjudicator ruled that the trustees duly and properly executed their duties under section 37C.

Lesson: This case highlights the importance of regularly updating beneficiary nominations to reflect current family circumstances. While impossible to know whether the member did revisit their nominations once they had remarried and decided not to change their nominations, providing more up-to-date information in their nominations could have gone a long way towards preventing, or at least reducing the conflict and frustration experienced by their families.

It should be noted that, had the member nominated their second spouse as the sole beneficiary, the trustees would have been obligated to go through the same process, stipulated in section 37C, and had the same information about financial dependency been provided, this would likely have led to the same outcome.

For more information about or assistance with the death claims process at Allan Gray, please contact our Client Service Centre, or seek advice from an independent financial adviser.