Who will inherit your living annuity funds in the event on your passing? At Citadel, living annuities allow secondary beneficiaries, in addition to primary beneficiaries, to be nominated on your policy.
South African law states on retirement you may withdraw a one-third lump sum, and must purchase an annuity with the remaining two-thirds of the funds, either a living annuity or life annuity. While a life annuity offers a fixed monthly income amount to the policyholder, a living annuity is flexible, which means your income frequency and value – between 2.5% and 17.5% of available funds per annum – can be withdrawn annually, depending on your needs.
Unlike a life annuity, a living annuity allows you to leave the remaining capital value to your nominated beneficiaries once you pass on. Beneficiaries can either choose to receive the value of this investment as an annuity or a commutation of the capital as a lump sum, or a combination of the two. It is important to keep in mind that any lump sum will have tax consequences.
WHY IT IS IMPORTANT TO NAME LIVING ANNUITY BENEFICIARIES?
If you, as the annuitant, fail to name any beneficiaries, the death benefit will automatically be paid into your estate as a lump sum as required by the Income Tax Act, and will be subject to any applicable lump sum tax. This capital will also be unavailable while your estate is being wound up.
It is advisable to nominate beneficiaries on your living annuity policy. If you nominate a beneficiary on your policy, the full value of the death benefit will be issued to your beneficiary after your death as soon as the requirements of the administrator have been met.
The insurer will honour the contract with the deceased to pay the beneficiary and take instructions from your nominated beneficiary as to how they would like to deal with the benefits. They can choose to commute the amount as a lump sum or to have a living annuity or other annuity purchased in their name. This means that the amount is paid directly to the beneficiary and does not form part of the amount on which executors’ fees will be calculated.
It’s also important to note that if the death benefit includes units in a qualified hedge fund with a value of less than R1 million, these units may form part of the death benefit. They must, however, be switched to a different investment fund on the same day that the new policy is issued to the beneficiary.
WHAT IS THE DIFFERENCE BETWEEN PRIMARY AND SECONDARY BENEFICIARIES?
In most cases, an annuitant would nominate their spouse as the living annuity beneficiary. Yet in the event of a couple dying simultaneously or within a short period of one another, a policyholder would then want to ensure that their annuity is passed onto another beneficiary of their choice, usually their children. There has been provision made for the inclusion of secondary beneficiaries in the policy.
When it comes to nominating secondary beneficiaries, it is important the keep the following terms in mind:
- You are free to nominate more than one primary beneficiary. Should one of your beneficiaries die, the full amount will then be paid to the surviving primary beneficiary/beneficiaries, and nothing will go to the secondary beneficiaries.
- Secondary beneficiaries do not automatically inherit funds. They will only be considered as beneficiaries by the underwriter if there are no more surviving primary beneficiaries. In other words, this is a conditional nomination.
- If secondary beneficiaries are the only surviving beneficiaries and one or more of them is deceased, the amount is then split between those secondary beneficiaries who are living.
In other words, secondary beneficiaries will only receive the death benefit if all primary beneficiaries either reject the benefit, pre-decease the annuitant, or pass away before accepting the benefit. The secondary beneficiaries will need to submit documentary proof of death or repudiation (rejection of the benefit) by the primary nominated beneficiaries. Once a primary beneficiary accepts the funds, the rights of all secondary beneficiaries fall away.
If the uncertainty brought on by the COVID-19 pandemic has taught us anything it’s that life can change in an instant. That is why there is flexibility in terms of who you nominate as your living annuity beneficiaries, meaning you can substitute or nominate new primary and secondary beneficiaries of your living annuity death benefit at any time.
It’s also important to understand that the heirs named in your will are not automatically considered as the beneficiaries of your life annuity policy. To receive the death benefit, primary or secondary beneficiaries always need to be specifically named in writing.
As with everything in life, it pays to be prepared. Contemplating your mortality is seldom a pleasant prospect. Yet, by clearly naming living annuity beneficiaries, you can ensure that your loved ones are financially supported in their time of greatest need.