What happens to your retirement annuity when you die
When you take out a Retirement Annuity (RA), you should be asked to name a beneficiary or beneficiaries.
However, the beneficiaries whom you nominate will not necessarily s because, in terms of section 37c of the Pension Funds Act, the benefits from any registered retirement fund, including an RA fund, must be distributed first to the people who are dependent on you. This means that if you have nominated the proverbial cats' home as your beneficiary and not your spouse and six children who are dependent on you, the trustees of the RA fund have both a right and an obligation to ignore your request and pay the money to your dependants.
McCulloch warns that if you have no dependants, you must still nominate someone as a beneficiary or else the money will go into your estate. The Income Tax Act then limits the payment to a return of contributions plus a reasonable rate of interest - seven percent is the norm.
Your dependants are entitled to a limited cash lump sum (part of which will be tax-free), but must purchase an annuity with the rest of the benefit payout.
Gordon says no estate duty or capital gains tax is payable on your death on the portion of the benefit payout used to purchase an annuity. Your beneficiaries will pay tax on the monthly annuity at their marginal rate of taxation. Estate duty is payable on any lump sum portion of the benefit payout.
To learn more about the top ten things to know before buying a retirement annuity