What is a beneficiary?
A beneficiary is a nominated person or entity who is due to receive all, or a percentage, of a financial product that is owned by someone else on death, or when an investment reaches its maturity date.
When can I nominate a beneficiary?
The option to nominate a beneficiary is dependent on the type of investment you choose. This choice is an integral part of the investment planning process. Understanding the implications of your decision is central to looking after your loved ones financially.
The following allow beneficiary nominations:
- Life Insurance Policies – subject to the Long-term Insurance Act
- Endowment & Sinking Fund Policies – subject to the Long-term Insurance Act
- Living Annuities – subject to the Long-term Insurance Act
*Beneficiary nominations are only applicable on a Life Annuity product if there is a remaining guarantee period. If no guaranteed option was chosen, any remaining capital belongs to the insurer and will not pay out.
- Pre-retirement Products (Any) – subject to the Pension Fund Act
Other investment products, like Share Portfolios, Collective Investment Schemes, and Unitised Investments, do not allow the option to nominate a beneficiary unless packaged in a life wrapper (an endowment policy).
Whom can I nominate as a beneficiary?
Policies and Living Annuities
Any natural person or trust can be nominated as a beneficiary. This is however subject to the terms and conditions of the specific policy or product. It is advisable to check with the specific platform where you invest your funds.
A juristic person such as a company or a non-profit organisation can take out a sinking fund policy, however, it can be the only beneficiary. No other nominations are allowed.
Under a recent Prudential Authority directive to tighten money laundering and terrorist financing risk, both policyholders and beneficiaries are now considered clients of an insurer. If a beneficiary is found to be politically exposed, have significant public influence, or be a high-risk individual based on the merits of the case, the insurer may refuse to provide the applicant (policyholder) with life cover, a living annuity, or an endowment/sinking fund policy and they can report it to the Financial Intelligence Centre.
If no beneficiary nomination is made, the estate of the deceased will receive the policy or proceeds.
Pre-retirement products
Any natural person can be nominated as a beneficiary. A juristic person and the deceased’s estate cannot be nominated as a beneficiary. The benefits are only payable to the estate when:
- The trustees could not find any dependents within twelve months of the member's death and no nominations were made.
- The deceased estate is insolvent, where a non-dependent beneficiary is named, and the trustees could not find any dependents within twelve months of the member's death. Benefits to the value of the outstanding debt will flow to the estate while the remainder will flow to the non-dependent nomination.
Nominating a trust as a beneficiary on a retirement fund benefit is only allowed if the beneficiary has a vested right to receive trust benefits in accordance with the trust deed. A vested right is a legal right that a person has to something.
Discretionary trusts are therefore not allowed to be nominated as a beneficiary of a retirement benefit.
A few general things to note:
- If a minor is nominated as beneficiary, it is important to ensure that they have a legal guardian - otherwise the funds will be paid to the government-run Guardian Fund. Alternatively, a testamentary trust can be drafted and then nominated as the beneficiary. The minor children can be the nominated beneficiaries of the trust.
- In fund-owned Living Annuities, the trustees can override beneficiary nominations under Section 37C of the Pension Funds Act.
- One or more beneficiaries are allowed and changes to beneficiary nominations can be made at any time. It is essential to review and update beneficiary nominations to ensure they reflect your current wishes.
How do beneficiaries receive the benefit of a living annuity?
Beneficiaries have no right to any benefit before the policyholder dies.
The benefit accruing to the beneficiary of life insurance policies, living annuities, and investments with a life wrapper will only accrue at death.
In the event of death, the beneficiary will receive the proceeds. Beneficiaries of living annuities can receive the proceeds in cash or transfer the living annuity into their own name.
How do beneficiaries receive the benefit of an endowment?
Endowment policies will distribute proceeds to the beneficiary on the earlier of the policy maturity date or death of the life assured. If there is more than one life assured, the policy will pay out on the death of the last surviving life assured or maturity date. Sinking funds, on the other hand, will distribute proceeds at maturity only.
Under the recent Prudential Authority directives, insurers are required to follow a risk mitigation process before proceeds are paid out to the beneficiaries flagged as potentially high risk.
How do beneficiaries receive the benefit of a retirement annuity?
The distribution of retirement product benefits is governed by section 37C of the Pension Funds Act.
The legislation states that the trustees of a fund are responsible for identifying a member’s financial dependents and then equitably distributing the benefit among them.
Beneficiary nominations made can guide the trustees, however, the recipients of the proceeds may differ. The trustees’ investigation process is time-consuming; one should not rely on these proceeds to satisfy the dependent’s cash flow needs over the short term.
What are the benefits of making beneficiary nominations?
The ability to nominate beneficiaries is beneficial for several reasons.
- Provides peace of mind knowing that the benefits of your financial product will be distributed according to your wishes or at least guided by them, rather than being subject to default rules or laws.
- Provides clarity, reducing the risk of disputes or uncertainty.
- Ensures quick and easy access to capital; this is product and beneficiary dependent.
- Provides potential cost savings on tax, executor’s fees and estate duty.
The Foundation approach
At Foundation, we review the beneficiaries of all our clients who have living annuities or endowments on a regular basis. We take utmost care to remind our clients of who their current nominated beneficiaries are.
If your personal circumstances change, or you want to amend your beneficiaries, please contact us and we will consult on what is appropriate for your circumstances.
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