What is the Law on Trust Funds and Retirement Annuities?

When we think about saving money or assets for a later date or for another person, we tend to imagine a fairly simple process. Like locking memorabilia in the attic, it’s just a matter of storage, right? Not exactly. There are various schemes and tools available for people who want to save their assets for the future, and each of these estate planning methods comes with a whole host of pros, cons, and tedious legislation.  Do a little research into the world of trusts and annuities and you’ll soon find that there are far more minutiae than first meets the eye.  Obviously, it can be difficult to keep track of all these moving parts, so maybe our best move would be to ask a few choice questions, such as – How do Trust Funds and Retirement Annuities work? What happens to them when you die? And what does the Law say about all of this? What is the Law on Trust Funds and Retirement Annuities?

While both of these arrangements can be loosely described as funds, each possesses a corresponding piece of legislation that goes into more detail. 

Using these documents, we can find a rough description of how they are viewed in the eyes of the law – 

• Trust Funds – A 3-way legal arrangement in which one person (a founder) gives certain assets to another person/s (trustees) who will hold and maintain the assets and eventually hand them over to one or more other people (beneficiaries). 

Trusts are usually used for estate planning purposes and asset protection. 

• Retirement Annuities – These are individual retirement funds that seek to provide benefits to members upon their retirement. They are most easily understood when compared to pension funds. While the latter pools and invests money from multiple employees, the former is not tied to an employer group or employment status. 

Now that we have a basic understanding of our terms and the laws that surround them, we can look at some more nuanced questions.

Are Retirement Annuities Exempt from Estate Duty?

Yes, they are. According to the Estate Duty Act 45 of 1955, retirement annuities do not form part of the deceased’s estate and are thus exempt from estate duty.

What Happens to Retirement Annuities Upon Death?

Upon your death, the trustee/s of the organisation will have to prioritise those who are fully or partially dependent on you and ensure that these individuals are provided for. 

Once these dependents are provided for, or in instances where you have no financial dependents, the money will then go to beneficiaries identified in the beneficiary nomination form. 

If you had no financial dependents and you did not list any beneficiaries, the money will move into your estate but it still won’t be subject to estate duty. 

When can you Withdraw from a Retirement Annuity?

You can make a withdrawal from your retirement annuity in the following scenarios – 

• You are at least 55 years old
• You become permanently disabled
• Your retirement fund value is less than R15 000
• You have been a non-resident for South African tax purposes for at least 3 years

Does a Retirement Annuity Form Part of your Estate?

No, it does not. This means that, upon death, retirement annuities will pass directly to beneficiaries. They do not form a part of your estate and will not be subject to estate duty. 

Do Retirement Annuities Pay Out on Death?

Yes, they do. When you die, unaccessed annuities will be paid out to financial dependents and beneficiaries as a death benefit. As noted, if you have no beneficiaries or financial dependents, the annuity will be paid into your estate but will not be subject to estate duty. 

Are Retirement Annuities Subject to Estate Duty?

No, they are not. 

Are Retirement Annuity Death Benefits Taxable?

Yes, they are. Lump-sum payouts received by your loved ones will be treated as retirement benefits for tax purposes. In such a scenario, the tax rates will proceed as follows – 

As you can see, the first R500 000 of the lump sum is tax-free. This tax relief is a once-off benefit and cannot be used for further withdrawals on the resulting balance. 

Do Retirement Annuity Death Benefits Have to be Received as Lump Sums?

No, they do not. There are other options available to beneficiaries when it comes time to receive death benefits. 

Besides receiving a lump sum and being taxed as noted, beneficiaries can also use the money to buy a living annuity. No money will be taxed when purchasing this annuity, however, annuity income will be taxed from the beneficiary as usual. 

Additionally, the beneficiary can choose a hybrid option and receive part of the death benefits as a lump sum while using other parts to purchase a living annuity. 

What is a Living Annuity? 

Living Annuities are investment products that provide the annuitant with a regular income. 

In other words, instead of receiving a lump sum upon retirement or as a death benefit, you can invest your capital with an investment management company which will then provide you with regular payouts (usually monthly). 

Living Annuities are often confused with life annuities, however, there are major differences between the two. 

There is no right or wrong answer when it comes to choosing between a life annuity and a living annuity. Each individual will need to consider their personal circumstances and make the choice that best suits them. 

In Conclusion – What is the Law on Trust Funds and Retirement Annuities?

Trust Funds and Retirement Annuities in South Africa are governed by the Pension Fund Act and the Trust Property Control Act respectively. After consulting these documents, we can most simply describe the two terms as follows – 

• Trust Funds – A 3-way legal arrangement in which a founder gives certain assets to a trustee/s who will hold and maintain the assets and eventually hand them over to the founder’s beneficiaries. 
• Retirement Annuities – Individual retirement funds which provide benefits to members upon their retirement, usually in the form of a regular income.

Upon the death of the annuitant, retirement annuities pass on to their dependents and/or named beneficiaries in the form of death benefits. If the annuitant did not have any dependents or named beneficiaries, the money is transferred instead into the deceased’s estate, although the amount will be exempt from estate duty. 

Beneficiaries can receive these benefits in a lump sum form, the first R500 000 of which will be tax-free. Alternatively, they can use the money to purchase a living annuity. This purchase will not be taxed, however, the living annuity income will be taxed as usual. Beneficiaries can also hybridise these options and may receive a lump sum payout while also purchasing a living annuity. 

Living annuities are investment products that provide the individual with a regular income. There are many types of living annuities, but the main distinction exists between living annuities and life annuities. Living annuities have flexible income options and can be altered to suit your lifestyle. However, this comes with certain risks as you may be unable to make your money last until your death if you do not budget it properly. Living annuities also pay out your remaining funds to your beneficiaries upon your death.

By contrast, life annuities have a fixed income and the investment company bears responsibility for regular payouts until your death. This feature protects investors from overspending and running out of money but, generally speaking, any remaining money is kept once you die and is not passed on to your beneficiaries. 

Disclaimer LAW101: All of our posts are for research purposes only. Law 101 aims to assist its readers with useful information on the laws of our country that can guide you to make decisions in line with the South African Governmental Laws currently in place. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law. Should you require specific legal advice we advise you to get in touch with a qualified legal expert.

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