Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
103. The importance of Beneficiary nominations on living annuities
Unlock the mysteries of living annuities with industry experts Craig Finch and Bronwyn Waner from Growth Financial Planning as they sit down with Felicia, a seasoned legal advisor from Allan Gray. Discover the crucial role of psychology in financial decisions and learn how to navigate the complex world of living annuities. Felicia brings her legal expertise to the table, offering invaluable insights on the importance of nominating beneficiaries and the intricate tax implications involved. This episode promises to equip you with the knowledge needed to make informed decisions, ensuring that your financial future is secure.
Join us for an enlightening conversation as we dive into the technical aspects and recent legislative changes impacting living annuities. Felicia sheds light on what happens to annuity proceeds upon a policyholder's death, emphasizing the need for proper beneficiary nominations to avoid unnecessary estate fees. Understand the processes involved when beneficiaries are not named and how these proceeds are managed within an estate. With insights from Warren Grimsley of Rogue Media, we aim to demystify these complex topics and provide clarity, empowering you to take control of your financial planning with confidence.
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Welcome to Know your Money, where we will explore our relationship with money and how the psychology of it impacts our financial decisions, as everyone thinks about money differently. In our podcast, we'll be presenting a variety of financial topics in an easy to understand way, which we hope will assist you with managing your money.
Speaker 2:Hi, I'm Craig Finch, co-owner of Growth Financial Planning, an independent financial planning practice, and I've been a financial planner since 1986.
Speaker 1:Hi everybody. I'm Bronwyn Wehner, co -owner of Growth Financial Planning. I'm a certified financial planner and our philosophy at our company is to grow yourself to grow your wealth.
Speaker 3:Hi everyone. My name is Warren Grimsley. I'm a director at Rogue Media and help facilitate this wonderful podcast. My main goal here is to try and understand what these two lovely people are saying, so that we can all understand.
Speaker 1:Hello everybody, welcome to Know your Money. Today with us, we have a special guest from Alan Gray. It is Felicia, and she joined in 2021. She's a legal advisor in the retail legal team at Alan Gray and she holds a Bachelor of Law degree from the University of Cape Town and a postgraduate diploma in financial planning from the University of Cape Town and a postgraduate diploma in financial planning from the University of Stellenbosch Business School. Felicia was admitted as an attorney of the High Court and obtained a right of appearance in the High Court in 2018. Thank you so much for coming on our podcast and just helping us unpack a few different areas around the legal implications of sort of products and wrappers. I think it is more Today what we thought we can maybe address is beneficiaries when it comes to a living annuity and unpacking a whole bunch of those areas. So welcome, felicia, and thank you for being here.
Speaker 4:Thank you, thanks for having me, guys Hi.
Speaker 2:So the living annuity we spoke about last week, we're just going to continue the theme. Yeah, so just for the listeners, a living annuity is once your retirement annuity has matured or your pension fund has matured, you have to take two-thirds of that money and purchase a life or a living annuity. A life annuity we've done episodes, we'll chat about that in the future again and the living annuity just means that the money that's in the living annuity, you draw a monthly pension from it and you can draw between 2.5% and 17.5% of the capital. So what's also happened recently, since our episode last year, the two-part system is coming to law and it's happening now and it doesn't matter if you're on a provident fund or a pension fund. When you reach retirement from now onwards forward, you have to buy a pension with two-thirds of your money and that pension can be a living annuity. And we're chatting about living annuities with some technical aspects of it. Ronan, you asked a few questions the other day. We were chatting about it.
Speaker 1:Yes, for sure, and I think it's just about nominating beneficiaries and if there are children and all of those kind of things. So I don't know what questions you normally get that you can maybe unpack for us Okay.
Speaker 4:So I think maybe let me just start off by saying that, on the death of a policyholder, those proceeds, that living annuity death benefit, becomes payable to their nominated beneficiaries, if they have nominated beneficiaries, which we always encourage.
Speaker 1:So let's start, if they didn't nominate and then unpack.
Speaker 4:Okay, so if they didn't nominate, then those proceeds would be due to the estate. So that brings then executive fees implications, because obviously an executor then has to administer those proceeds, whereas if there were beneficiaries that would fall outside of the estate and there would be no executor fees.
Speaker 2:So if that does happen, it gets paid into the estate. That means the wall will take care of that money. How does Alan Gray pay that money? Do they pay it monthly or as a lump sum?
Speaker 4:No, we pay it as a cash lump sum on the death of the policyholder, and then tax implications will be in play.
Speaker 2:Yes, yes.
Speaker 4:And then the executor then will have to administer the proceeds and distribute them according to the will, so the money will go into the estate bank account and then the people running the will, the executors of the will, will, pay it out accordingly.
Speaker 2:Yes, correct, but now you do have a beneficiary nomination. What happens?
Speaker 4:then. So there is no legal restrictions with regards to primary or secondary beneficiaries. I just want to say that at the outset. So different service providers treat secondary beneficiaries differently. But at Alan Gray you can nominate primary and secondary beneficiaries. So what happens is your secondary beneficiaries. So what happens is your secondary beneficiaries only come into play once all your primary beneficiaries have either pre-deceased the policyholder or they've renounced their benefits. So I'm going to give an example. We have a wife, she has an ade. She nominates her husband and her two kids as primary beneficiaries and then she nominates her grandchildren as secondary beneficiaries. If the husband were to, for example, pre-decease her, that benefit would fall on her two children. Her grandchildren don't come into play. Her grandchildren as secondary beneficiaries would only come into play once all the primary beneficiaries have pre-deceased or renounced the benefit.
Speaker 2:But you can have a spouse as primary and you can have another child as primary secondary right yes, you can, yes, you can but you let's say you didn't want your other child to get it doesn't matter. You've nominated spouse first and then one child.
Speaker 4:Yes, okay yeah, you can exclude anybody yeah, you can exclude.
Speaker 2:You can include anybody, it's a very good idea to have beneficiaries nominated. Yes, and secondary secondary does help if the family, if the whole family, passes away.
Speaker 4:Yes, if something tragic happens, for example, and they all pass away at the same time, then those secondary beneficiaries can Come into play and obtain the benefits, and it doesn't have to go through the estate.
Speaker 2:So if there are no secondary beneficiaries and the primary beneficiary Also passes away, what happens to the money? Falls into the estate. It's paid to the wall.
Speaker 1:Yes, and the reason why you wouldn't want it to go to the estate like. One of the main reasons is because then it has to come out as a lump sum and pay a heavy amount of tax right.
Speaker 4:And also then it takes. It also then takes a while to actually pay out because we have to wait for executors letters to be issued and we know the master's office is just. Everything takes a lot there, so a long time there. So that's why we encourage beneficiaries being nominated, because then it's a quicker payout for them if they want to obtain the cash or if they obviously want to open a new living annuity in their own names and also to keep that money going, you know.
Speaker 5:So when you are receiving a payment, whether it's monthly or annually, so you call it the 2.5% are you paying a certain rate of tax because it's a living annuity, or is it just considered income?
Speaker 1:So you'd pay income tax.
Speaker 5:So it's considered an income and then'd pay income tax. So it's considered an income and then you pay income tax.
Speaker 1:And then this is also why we say, and we try, every time we have meetings with our clients, we show them who they have listed as beneficiaries. Because keeping this beneficiary list up to date your primary and secondary is so important, because these things can change, like if you get divorced and you've left your old wife on there. So I think beneficiaries is an element of a product that isn't highlighted enough sometimes.
Speaker 2:Yes, exactly, very important.
Speaker 5:It's very important. It's a safe planning, very much so. Have you ever come across somebody who's renounced money? Yes what was their reason?
Speaker 4:funny enough, it was a situation where the client had nominated their spouse at the time and then they subsequently had a divorce. So he had nominated that spouse and some children and that ex-spouse renounced and she said no, she doesn't want the money um, the children can have the money good person yes, so yeah, it does happen sometimes um beneficiaries can they are they renounce?
Speaker 2:not for sure what happens if the, if the person receiving the living annuity decides to keep it as a living annuity. Somebody passed away and they they, they're still working and they're earning a good salary themselves, they're under 55, for example. And they say no, I don't want to receive this 2.5%, I want to have no tax, I want to receive no income. So no income because it's going to push my tax rate to the highest level. Can they say no?
Speaker 4:Unfortunately not Unless they're renounced completely. Oh no, I think you had said he now has. He's opened his own living annuity.
Speaker 2:So the beneficiary is going to receive the money. Yes, they don't want the lump sum because they don't want to pay all this tax or keep it as an income. But they say, no, I don't want my income now, but rather have no income until much later.
Speaker 4:Unfortunately not. No income until much later? Unfortunately, not. So a contextual feature of a living annuity is it paying you an income. So what that person can do is they can maybe opt to receive the lowest percent, which is 2.5, and maybe then make it an annual frequency.
Speaker 5:And if this person was under 18, would that the burden of tax fall on their guardian?
Speaker 4:Generally, minors don't pay tax because they don't work, so they don't have tax numbers. In that instance, alan Gray would make an application. We would apply to SARS for a tax number in the name of the minor beneficiary, so they then would receive that income and then, depending on the tax tables, it would be taxed in their name.
Speaker 5:So, but Alan Gray would pay the tax on their behalf.
Speaker 4:Yes yes yes, yes, we would.
Speaker 1:And then it can then still obviously pay into the guardian's bank account, or would it? I don't know if you know. Would it have to go into the child's bank account, or would it? I don't know if you know, would it have to go into the child's bank account?
Speaker 4:No, so if the minor does have a bank account in their own name, which is possible these days, then we would pay into that bank account in the minor's name. If not, we would pay into the bank account of the legal guardian. Okay, yeah.
Speaker 1:And then in terms of beneficiaries and a trust and for minor children, can you nominate a trust as a beneficiary or a testamentary trust? How does that sort of work with living in your test?
Speaker 4:Yeah, so you can nominate a trust or testamentary trust as a beneficiary and especially I think it's recommended where you have minor children, because then that benefit will be administered by the trustees and the trustees would then be able to safeguard those assets for especially minor children.
Speaker 2:But then does it still pay out as a lump sum.
Speaker 4:Depends what the trust wants to do. So if your beneficiaries are a natural person or South African registered trust, then they have the option to obtain a cash lump sum. They have an option to open a living annuity in their own name or a combination of both that's awesome.
Speaker 1:I think any other things that you think on in terms of beneficiaries and living annuities that we should touch on um.
Speaker 4:A question that we get um every now and again is whether we can administer usufructs on living annuities. So we currently do not.
Speaker 1:Can you explain what a usufruct is, because I'm pretty sure what yeah, what a use of fact is, because I'm pretty sure Warren is like what.
Speaker 4:So a use of fact is basically a right of use. So, for example, if your father left you a house but he wants to give your mom right of use of the house, so your mom has a use of fact over the house. You own the house, but your mom can live in the house, that's a use of fact. That's an example of a use of the house. So your mom has a use of fact over the house. You own the house, but your mom can live in the house. That's a use of fact.
Speaker 2:That's an example of a use of fact Makes sense, yeah.
Speaker 4:Yeah, yeah, so right of use, basically. So, yeah, a question that we get every now and again is whether we can administer use of facts over living annuities.
Speaker 1:So would that be like you are going to give the mom the income?
Speaker 4:but the living annuities in the name is actually yes, exactly so we can't do that so say for okay.
Speaker 1:Well, just to break that down, say for example it sounds like a good tax dodge, doesn't it not necessarily tax? Dodge. It's like he doesn't want to leave it to his spouse because that spouse must go get remarried and then all of his inheritance would go, maybe, to her new husband.
Speaker 5:Okay.
Speaker 1:But he doesn't want the mother of his child to not receive an income while his child's around. So he would say, like I'll give you the income until our child is 18, and then the whole policy belongs to our child.
Speaker 5:Right.
Speaker 1:As an example, but what you're basically saying is that Alan Gray can't do a use of.
Speaker 4:We can't do that, because what we do is we can only take an instruction and we can only pay to the policy holder, so the person whose name the policy is in. What we then suggest in order to sort of get around that is, rather than just nominate a trust, have the trust hold the living annuity and then the trustees can then administer that income to whoever needs to get that income.
Speaker 1:So does that make sense, like you want? Yeah, I understand, yeah, you want her to still get it, but you don't want her to.
Speaker 3:She could still blow it.
Speaker 1:But not necessarily because she can only do that drawdown between 2.5% and 17.5%.
Speaker 3:She could go wild.
Speaker 1:Yeah, she could potentially. But, they can't Well as wild as 17.5% Pretty wild.
Speaker 3:There's a can. That's how much?
Speaker 1:money is there. Cool, I think that makes sense.
Speaker 2:So the important thing is to nominate beneficiaries and review that every year. 100% or as your circumstances change.
Speaker 4:Yes, as a life event happens. Review those beneficiaries, make sure that they're up to date Great.
Speaker 2:Thank you.
Speaker 1:Thank you guys, awesome, thank you guys have, yes, have a good one.
Speaker 2:Thanks. Thank you for listening. If you have enjoyed this podcast or would like to subscribe, please visit our website, wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.