My last blog was on what happens to your Debts on your death but the week before an article had appeared in the same Personal Finance section of The Mercury on 6 September 2022 telling what happens to your investments. It was written by Jaco Prinsloo, a Certified Financial Planner at Aleander Forbes.
There are 3 types of Investments – Discretionary, Compulsory and Policies. How an investment is distributed to the heirs is dependent on the type of investment so each will be considered individually.
1. Discretionary Investments
These are investments made at your own discretion with money which you have available after tax. There are 6 forms of discretionary investment:
- Unit Trusts
- Money Market accounts
- Fixed Deposits, including bank accounts
- SA Retail Bonds
- Share Portfolios
- Tax-Free Savings account
All of these form part of your estate and so are subject to Estate Dury and Executor’s fees. They are frozen as at the day of death and cannot be accessed, added to or withdrawn from until all of their proceeds have been paid into the Estate and the Executor has all of the information. They will then be distributed to your heirs in accordance with your Will.
2. Policies
Examples of these are Life Insurance, Living Annuities and Endowment Policies. Life Insurance is a type of contract into which you pay regular Premiums. On your death, the life cover is paid to your nominated beneficiary which may be a person or your Estate. Each of the others has nominated beneficiaries and the money is paid directly to them. They are not included in your Estate and so are not liable for Estate Duty or Executor’s fees. The big advantage is that with your heirs receiving a lump sum giving them ready cash to pay immediate costs, such as, for a funeral. What they do need to know is that if they do take it as a lump sum there will be tax to be paid. Otherwise, they could leave it invested and use the interest or whatever other payment is made.
3. Compulsory Investments
These could be classed as “retirement funds” and are governed by Regulation 28 which spells out how they may be used and how much can/shall be invested in the different asset classes. These classes include a Pension Fund, Provident Fund, Retirement Annuity and Preservation Fund. On your death, funds in Pension Funds are distributed in accordance with Section 37C of the Pension Fund Act, meaning that the Trustees of the Fund use their discretion to distribute the proceeds of your retirement savings to ensure all dependants and beneficiaries receive fair benefits. You will have been required to nominate beneficiaries but these are only a guideline to the Trustees who have the final discretionary power.
In some cases, employers have included either approved or unapproved Life Cover as part of your employment contract. If it is approved, it is paid out in terms of the Trustees decision and is subject to tax at the same rate as the retirement benefits. If it is unapproved, it is paid out in terms of your nomination form and not subject to tax
As you can see from the information above, it is very important to keep your will and nominated beneficiaries up to date, especially regarding your pension and other investments. Also, ensure that someone knows about ALL of your investments and record the policy numbers with your Will.