The estate planning implications of using tax-exempt savings vehicles

0
246

Willie Fourie, Head of Estate and Trust Services, PSG Wealth


Weighing up the benefits of retirement annuities and tax-free investments in detail before investing is common, but do consider the estate planning impact of either choice as part of the process. These investment vehicles each have unique characteristics that may have an impact on your estate, so it’s best to understand how these are dealt with.

For many years, retirement annuities (RAs) were the only alternative to employee pension and provident fund schemes, but the various restrictions such as when you can access these, sometimes limit their use.

Tax Free Investment Plans (TFIPs) were introduced in 2015 to add another string to the savings bow. One of the main differences between these and RAs is that the former can be accessed by the investor when required, while an RA can only be accessed before the age of 55 if:

  • its value is less than R7 000
  • the investor emigrates
  • the investor is permanently disabled

RA or TFIP – which is better?

The answer largely depends on the individual circumstances of each investor. Where RAs were originally designed to provide for retirement only, TFIPs can provide for other needs like children’s and grandchildren’s tertiary studies or even a dream holiday. There is no universally correct answer as to which product is better, and it may be a good idea to include both types of investments.

The impact of your investment choice on estate planning

Where does this fit into your estate planning and how do you treat these types of investments in your will? The basic rule is that RAs do not form part of your estate while TFIPs do. The only similarity between the two is the tax-free growth of the underlying investments.

A common misunderstanding relating to RAs is that people can bequeath the benefits of their RAs to their heirs in their wills. While you can nominate beneficiaries for the proceeds of an RA with the financial institution issuing the product, this is only one of the factors that are considered before the benefits are paid out. The trustees of the retirement annuity fund need to consider the beneficiary nomination in terms of section 37C of the Pension Funds Act. However, the trustees have the discretion to decide to whom the benefits are to be paid out. The executor does not have to deal with the proceeds of the RA, as the RA does not form part of your estate. This means you can save on executor’s fees and/or estate duty.

TFIPs, on the other hand, do form part of your estate and can even attract estate duty in certain circumstances – for example, if the value of the TFIP plus other assets is above R3.5 million. If the TFIP is not bequeathed to a specific heir in your will, it will form part of the estate.  

Not all investments are alike, as no two estate plans are the same. Each of the above has its own rules and regulations, and investors should obtain specialist financial and estate planning advice before deciding where to invest.