How are retirement fund benefits paid when someone dies?

Most people assume that money in a pension fund, provident fund or retirement annuity works like money in a bank account: you say in your will who gets it, or you fill in a nomination form, and that is the end of it.

Neither is correct, and the gap between what people expect and what the law does is probably the single most common surprise in South African estates.

A retirement fund death benefit is governed by section 37C of the Pension Funds Act 24 of 1956. That section does three things that catch families out. It takes the benefit out of your estate, so your will does not govern it. It makes your nomination form a guide rather than an instruction. And it hands the decision to the fund's board of trustees, who are required by law to look after your dependants, whether or not you named them.

Why the law works this way

Section 37C is a social protection measure rather than an inheritance rule. Parliament's concern was not with honouring the deceased's wishes but with making sure that people who actually depended on the deceased are not left destitute.

That is why the section overrides both the will and the nomination. A member who nominated a new partner and forgot a child from an earlier relationship, or who nominated a parent and left a financially dependent spouse unprovided for, would otherwise be able to leave dependants with nothing. Section 37C prevents that outcome by giving the trustees a duty that the member cannot override.

Once you understand that purpose, the rest of the section stops looking arbitrary.

What the trustees actually have to do

When a member dies, the board of the fund must:

Identify the dependants. This is an active investigation, not a review of the paperwork. Funds advertise, write to employers, contact family members and ask for documents. A "dependant" is wider than most people expect and is not limited to people living in the household.

Consider the nomination form. The trustees must establish whether the member nominated anybody, and they must take the nomination into account. They are not bound by it.

Decide on an equitable distribution. Where there are dependants, the benefit goes to them. Where there are both dependants and nominees, the trustees may allocate proportions between them. Where there are no dependants at all and a valid nomination exists, the nominee may be paid.

Decide how to pay. The trustees also decide the form of payment: a lump sum, payment into a beneficiary fund, or payment to a guardian or caregiver where a minor is involved.

The trustees are exercising a discretion, and the law requires them to exercise it properly: to gather the relevant facts, to consider each beneficiary's actual circumstances, and to be able to justify the split.

Who counts as a dependant

This is where families are most often surprised. The Act's definition reaches beyond the people named in a will. It includes:

• a spouse, including a partner in a customary or religious marriage
• children, including adopted children, children born outside marriage and children from an earlier relationship
• anyone who was in fact financially dependent on the member, whether or not there was a legal duty to support them
• anyone the member was legally liable to maintain, including through a maintenance order
• anyone who would have become legally entitled to maintenance had the member not died

A partner the member never married, a child nobody in the family knew about, and an elderly relative the member supported can all qualify. None of them needs to appear on the nomination form.

The meaning of dependency has been litigated repeatedly, right up to the highest courts, precisely because the boundaries matter so much to the people on either side of them.

Why it takes so long

Families frequently expect payment within weeks and are told to wait a year. The delay is built into the process: the fund traces dependants over a period of up to twelve months before making its decision, so that someone who only comes forward at month ten is not simply missed.

The twelve months is a tracing period rather than a waiting period for its own sake. Trustees can and do pay earlier where they are satisfied that the picture is complete, and many funds make an interim payment to a dependant in financial distress while the investigation continues. If a family is struggling, ask the fund about an interim payment rather than waiting in silence.

What this means for your will

Because the benefit falls outside your estate, drafting your will as though it does not is one of the more useful things you can do.

Three practical consequences follow. First, a bequest in your will of "my pension" achieves nothing, and can create confusion and litigation between heirs. Second, your estate planning arithmetic should exclude the fund benefit, because the executor will never handle it. Our executor fees and estate duty calculator works on the assets that do fall into the estate, and a fund benefit is not one of them. Third, because the benefit is outside the estate, it is generally protected from your creditors in a way that estate assets are not.

Life policies behave differently again. A policy with a named beneficiary pays that beneficiary directly, outside the estate, and the nomination on a policy does bind the insurer in a way a fund nomination does not. So a family can find that the policy follows the form exactly while the pension does not, which is confusing at exactly the wrong moment.

So is the nomination form pointless?

No, and it is worth filling in properly.

The trustees must consider it. Where dependants and nominees both exist, the nomination is direct evidence of what the member wanted, and trustees do give weight to it. Where there are no dependants, the nomination effectively decides the outcome. And an up-to-date form tells the trustees where to start looking, which shortens the investigation.

What the form cannot do is disinherit a dependant. If you want somebody to receive money regardless of anyone else's dependency, a life policy with a named beneficiary is the instrument for that, not a fund nomination.

Update the form after every significant life event: marriage, divorce, a birth, a death, the start or end of a relationship. A stale nomination naming an ex-spouse causes real trouble even though it does not bind anybody.

If you disagree with the trustees' decision

You are not stuck with it. A person who believes the trustees got it wrong may complain to the Pension Funds Adjudicator, an independent office that investigates complaints about funds at no cost to the complainant. There is no need for an attorney, although complex cases benefit from one.

The Adjudicator can and regularly does set aside distribution decisions and send them back to the board for reconsideration, typically where the trustees failed to investigate properly, ignored a dependant, applied a mechanical formula instead of exercising a discretion, or could not explain their reasoning.

Complain in writing to the fund first and give it a chance to answer. If the answer does not come, or does not satisfy you, take it to the Adjudicator, and do it promptly.

Worked example

This example is illustrative. Thandi dies with R1.2 million in her employer's provident fund. Her will leaves everything to her sister. Her nomination form, completed when she joined the company eleven years ago, names her mother.

She is survived by her mother, her sister, a partner of six years she never married, and a nine-year-old daughter.

The will is irrelevant to the fund money, because the benefit never enters the estate. The nomination form naming her mother must be considered but does not decide anything. The trustees must investigate, and they will find a minor child who was factually and legally dependent, a life partner who may have been factually dependent, and a mother who may or may not have been.

The likely outcome is that the bulk goes to the daughter, probably into a beneficiary fund rather than to an adult on her behalf, with allocations to the partner and the mother depending on what the investigation shows about actual dependency. The sister, to whom Thandi left everything she owned, receives nothing from the fund at all.

Nothing has gone wrong here. This is the section working exactly as designed. But it is not what Thandi expected, and telling her family that in advance would have been worth a great deal.