Retirement fund death benefits: why trustees have the final say

When a member of a retirement fund dies, it is common for families to assume that the death benefit will be distributed in line with the member’s wishes, as set out in their beneficiary nomination. In practice, retirement fund death benefits are treated very differently from other assets.

In South Africa, these benefits are governed by section 37C of the Pension Funds Act, a provision designed to protect current and future dependants. Understanding how section 37C works – and where its limits lie – is critical for advisors in helping clients plan effectively and managing the family’s expectations.

Why retirement fund death benefits are treated differently

Retirement fund death benefits do not form part of the deceased member’s estate. Instead, they fall under the control of the fund’s trustees, who are legally required to investigate and distribute the benefit to dependants and/or nominated beneficiaries in a manner they consider equitable. This means that:

• The member’s will does not determine how the retirement fund death benefit is distributed.
• The executor of the estate has no authority over the benefit.
• Trustees must prioritise dependency and fairness, even where this differs from the member’s stated wishes.

While this can feel counterintuitive to investors, section 37C exists to ensure that dependants – for example, people who were financially reliant on the deceased – are not left without support.

The trustees’ responsibilities under section 37C

Section 37C places three key duties on a fund’s board of trustees:

• To identify and trace all dependants of the deceased member, as well as any nominated beneficiaries
• To allocate the death benefit equitably among those parties, taking all relevant factors into account
• To determine the most appropriate method of payment for each beneficiary

Trustees are given up to 12 months from the date of death to complete their investigation and make an allocation. They may finalise the distribution sooner if they are satisfied that all dependants and nominees have been identified. An important exception applies where no dependants are identified. In those circumstances, trustees must wait the full 12 months before paying the benefit to nominees, or if there are no nominees, to the deceased member’s estate.

Beneficiary nominations: influential but no guarantees

Members are encouraged to complete and regularly update beneficiary nominations on their retirement fund contracts. These nominations play an important role, but they are not necessarily binding.

A beneficiary nomination is only one of several factors trustees consider when determining an equitable allocation. Nominating a person does not guarantee that they will receive the benefit, or that they will receive it in full. Trustees are required to ensure that dependants – even those not nominated – are properly considered.

This distinction often comes into play in complex family situations, such as blended families, second marriages, or where adult children are financially dependent.

Who qualifies as a dependant?

The Pension Funds Act recognises several categories of dependants, including:

• Legal dependants, i.e. spouses and minor children whom the deceased member had a legal duty to support at the time of death
• Factual dependants, persons who were not legal dependants but were financially dependent on the member at the time of death based on regular and ongoing support
• Future dependants, persons whom the member would likely have become legally liable to maintain in the future, such as a fiancée, elderly parents or an unborn child
• Adult children of the member who were not factually dependent on the member (i.e. self-supporting)

Qualifying as a dependant does not create an automatic entitlement to a benefit. Rather, it gives that person the right to be considered by the trustees when the benefit is allocated.

How trustees decide what is “equitable”

In determining an equitable distribution, trustees weigh a range of factors, including:

• The extent of each person’s financial dependency on the deceased
• The age of the beneficiaries and their future earning potential
• The nature of their relationship with the deceased member
• Their current financial position and foreseeable future needs
• The wishes expressed by the member through beneficiary nominations or other documentation

No single factor is decisive. Trustees must balance all relevant considerations in the context of each specific case.

Where do trusts fit in?

Trusts are often misunderstood in the context of retirement fund death benefits. Under section 37C, a trust cannot be nominated as a beneficiary, as only natural persons may be nominees. However, trusts can still play an important role. Once retirement fund trustees have decided to allocate a portion of the death benefit to a dependant or nominee, they may consider requests to pay that share into a trust for that person’s benefit. This is commonly considered where beneficiaries are minors, vulnerable, financially inexperienced, or where longer-term oversight is required.

Trusts are sometimes referenced in beneficiary nomination forms or letters of wishes. In these cases, retirement fund trustees are required to “look through” the trust structure to identify the underlying individuals and assess dependency and fairness before making an allocation.

The key point is that trusts influence how benefits are paid, not who is entitled to them.

When is the benefit paid to the estate?

If trustees are not aware of any dependants and the member has not nominated any beneficiaries, the death benefit will be paid to the deceased member’s estate after the expiry of the 12-month investigation period. Importantly, retirement fund death benefits are exempt from estate duty, even where they are paid to the estate. However, the deceased member’s excess retirement fund contributions will be included in the dutiable estate if the benefit is taken as a lump sum.

How are retirement fund death benefits taxed?

Where a benefit (or part of a benefit) is taken as a lump sum, it is taxed in the hands of the deceased member in accordance with the retirement tax table. Alternatively, a beneficiary may elect to use their allocated share to purchase a compulsory annuity in their own name. In this case, the transfer is tax neutral, and the annuity income is taxed in the hands of the beneficiary at their marginal tax rate as it is received.

The advisor’s role

Section 37C makes it clear that retirement fund death benefits are not purely a matter of instruction, but of discretion. Advisors play a crucial role in:

• Helping clients keep beneficiary nominations up to date
• Encouraging the use of a letter of wishes where there are special circumstances to consider
• Explaining how trustee discretion works in practice
• Preparing beneficiaries for the decisions they may need to make regarding any benefits allocated to them

These conversations can help reduce uncertainty and support better outcomes for families when they matter most.