Why it is vital to review who you want to inherit your belongings

The Covid-19 pandemic has stress-tested everything in our lives, from the strength of our relationships to our financial resilience. It has also reminded us of how suddenly we could die, which makes it an important time to review who you want to inherit your savings.

Major life events, such as death and divorce, signal the need to review who you have nominated to receive the proceeds of your pension fund or funeral and life policies in the event of your death. In other words, who you have named as your beneficiaries.

Financial services provider Fedgroup says there has been an increase in the number of people updating their beneficiaries since the start of lockdown. 

You need to nominate beneficiaries if you have a funeral, life or endowment policy, and/or contribute to a group life policy, company-sponsored retirement fund or retirement annuity fund. This is so your benefits can be paid out according to your wishes.

Walter van der Merwe, CEO of Fedgroup Life, says that maintaining an up-to-date beneficiary list is a way of making sure that your family and loved ones will be financially taken care of after your death, and that everyone should update their beneficiaries at least once a year.

“In addition, it’s critical that you update your beneficiaries immediately following any major life event, such as the birth of a child, marriage, divorce or if one of your designated beneficiaries passes away.”

In the midst of a pandemic, your beneficiaries, too, are at risk of dying.

If one of your beneficiaries dies and you haven’t removed their name from your list of nominated beneficiaries, their portion of your life insurance benefit will be paid into your estate when you die, says Elmien Pols, a fiduciary practitioner at Private Client. 

And if you fail to name a beneficiary, your entire benefit will be paid into your estate when you die. This means that the benefits will get distributed in line with your will, and if you don’t have a will your money gets distributed in line with the law of intestate succession.

If the benefits go into your estate, it will attract estate duty if it is a life assurance payout. Retirement benefits, however, are taxed before they are paid out so the after-tax benefit goes into the estate. While you won’t pay estate duty on your retirement benefits, they will attract executor’s fees, Pols says.

If you have a named beneficiary, the money can be paid to them quickly, whereas if your benefits are paid into your estate it can take a long time to get it to those who need it due to the time it takes to wind up an estate.

Dependants and minors

While you’re free to appoint anyone as a beneficiary, Van der Merwe says you should consider every family member and person who is financially dependent on you to ensure they continue to be financially cared for after your death.

Remember that the trustees of your retirement savings in a pension or provident fund will use your beneficiary nomination as a guideline only. They have a duty to distribute your savings equitably among your dependants in line with their needs. They can override your wishes if you have failed to nominate anyone who is financially dependent on you. 

You can also have any number of beneficiaries. If you choose more than one, you must decide on the percentage of the benefit you want each of them to get. 

A word of caution about naming a minor as a beneficiary: if they are still minors when you die, different rules apply to different benefits. With a retirement benefit, the trustees of the fund have the discretion to pay your benefit to the minor’s guardian or to a trust. If your benefit is in a life policy, it will be paid to the minor child’s guardian. 

Pols says this isn’t always ideal in the case of divorced parents. In this instance, it may be better for your estate to receive the money — provided that you have made provision in your will for a testamentary trust to be set up.