Losing a spouse is an emotionally challenging experience, and during this difficult time, dealing with financial matters can add further stress. One crucial consideration is the payout of your deceased spouse’s provident fund death benefit. Understanding the available options can help you make informed decisions during this difficult period.
But firstly, we need you to understand that the provident fund is regulated by Section 37C of the Pension Funds Act, which ensures fair and equitable distribution among financial dependants and nominees. The act makes it clear that the member’s will or beneficiary nomination cannot override these regulations, and the fund trustees are responsible for allocating the death benefits. In this case, we are assuming that you are the only dependant, and you will receive the full death benefit.
You will have three payout options:
- Take the benefit as a cash lump sum;
- Take the benefit as a compulsory annuity; or
- Take a portion as a cash lump sum and the balance as a compulsory annuity.
We will explain the available options to you and provide you with investment options.
Take the benefit as a cash lump sum
The most common option is to receive the entire death benefit as a lump sum payment. This allows you to access the entire amount at once, which can be helpful for addressing immediate financial needs. The lump sum payment can be used for settling outstanding debts, funeral expenses, or any other financial obligations. The cash lump sum will be taxed as per the retirement lump sum tax table in the hands of the deceased.
Example: If the provident fund value is approximately R800 000, then it would be taxed as per below:
Retirement Lump Sum Tax Table 2023 / 2024
|Taxable Income (R)||Rate of Tax (R)|
|1 – 550 000||0% of taxable income|
|550 001 – 770 000||18% of taxable income above 550 000|
|770 001 – 1 155 000||39 600 + 27% of taxable income above 770 000|
|1 155 001 and above||143 550 + 36% of taxable income above 1 155 000|
R39 600 + 27% (R800 000 – R770 000) = R47 700 (tax)
R800 000 – R47 700 = R752 300
Therefore, the estimated amount that you will receive after tax is R752 300.
After setting the outstanding debt or any other financial expense, you can consider investing in the following investments:
- Local and offshore unit trusts: A unit trust is an investment vehicle where individuals pool their money to invest in a diverse portfolio of assets, managed by professionals aiming to generate returns. While a local investment is the first option, investing offshore would open a wider geographical horizon. Investing directly offshore requires consideration of tax clearance for amounts exceeding R1 million. Withdrawals and switches from local and offshore unit trusts may trigger capital gains tax, and the investment is included in your estate upon your passing.
- Linked endowment policy: If you are looking to invest long-term, for example, five years and longer, this would be an ideal investment choice. One of the benefits of this investment is that it is tax efficient, as your tax rate is capped at 30%. However, there’s a five-year restriction period during which your investment is locked in, and yearly contributions are limited to 120% of the previous contribution.
- Tax-free savings investment: Suitable for short-term needs, offering tax-free transactions. Annual contributions are limited to R36 000, and the lifetime limit is R500 000. Exceeding these limits will result in a 40% penalty on the excess contribution.
Take the benefit as a compulsory annuity
If you choose to invest the entire amount in a compulsory annuity, you can opt for either a life or living annuity.
A life annuity is an insurance product that offers a guaranteed income for as long as the annuitant lives. This ensures annuitant receives a consistent income through their retirement, independent of market conditions. However, there are some limitations, such as not being able to nominate a beneficiary and change the income structure.
A living annuity is a type of retirement investment product that allows individuals to draw an income while still having control over how their funds are invested. Unlike a life annuity that provides a fixed income for life, a living annuity offers flexibility by allowing annuitants to decide how much they want to withdraw monthly, quarterly, semi-annually and annually, subject to 2.50% to 17.50% per annum.
The annuitants can be diversified by investing in various asset classes to grow their annuity and potentially increase their income over time.
However, the income from a living annuity is not guaranteed and is dependent on the performance of the underlying funds and market conditions, making it important for annuitants to carefully manage their income and investment choices throughout their retirement.
Using the above example, if you invest the full amount of R800 000 into a living annuity drawing a 5% per annum income, you will receive approximately R3 333 per month before tax.
Take a portion as a cash lump sum and the balance as a compulsory annuity
If you would like to receive an income while taking a cash lump sum to pay off outstanding debt and expenses, this option would be suitable for you as it will allow you to take a portion as a cash lump sum and invest the balance in a compulsory annuity.
Using the above example, if you take R300 000 as a cash lump sum and invest the balance into an annuity with a drawdown of 5% per annum:
There may not be any tax implication on the lump sum as we are assuming that your deceased spouse has not utilised their R550 000 tax-free portion. If they have utilised it, the South African Revenue Services will be able to calculate the tax on the cash lump sum.
Estimated income from your annuity: R500 000 * 5% = R25 000 /12 = R2 083 per month .
Therefore, the estimated income that you will receive before tax is R2 083 per month.
The payout of your deceased spouse’s provident fund death benefit is a major decision that requires careful consideration. Your choice will depend on your individual financial circumstances, immediate needs, and long-term goals. It is advisable that you consult with a financial advisor to make an informed decision.