John Murphy, the Pension Funds Adjudicator, has drawn up guidelines regarding when your retirement fund should pay out benefits to your family and other people after your death.
The retirement fund industry has been asking Murphy to provide clarity on the issue for months because legislation concerning the matter is poorly drafted and unclear. The issue is whether your fund should wait a year after your death before paying out any death benefits or whether it must make payment within the 12-month period.
The reasoning behind the waiting period is that the trustees must see if any unidentified dependants come forward at or after your death.
Unlike testamentary laws which give you the power to choose who will receive your worldly possessions after your death, the trustees of your retirement fund have a duty to consider not only those you nominate as beneficiaries, but also your dependants.
This means that you cannot, for example, stipulate that all your death benefits be paid to your lover, leaving your dependent children empty handed.
The Pension Funds Act says that dependants come first and if you have also nominated somebody else to receive benefits, then the benefits may be shared between your dependants and those you nominate. The benefits must be split between your dependants and nominees in a way the board decides is fair.
Where the law falls short is in spelling out the time frame for making any death benefit payments.
Murphy has called for a general revision of the section of law relating to the distribution of death benefits because of concerns about the practical difficulties of tracing dependants.
In the meantime, Murphy says the following principles should apply regarding the timing of benefit payments:
* Distribution to dependants: Murphy says that if the board of trustees is satisfied that it has taken all reasonable steps to identify and trace your dependants, it is entitled, and in case of urgent need, even obliged, to distribute your benefits regardless of whether you have been dead for 12 months or not. In other words the benefits can be paid before or after the 12 months.
"The question will always be whether the board took all reasonable steps to comply with its duty to trace dependants," Murphy says.
A board which sits back and does nothing for 12 months and then distributes the benefit to a single dependant may face a claim of maladministration or impropriety from a dependant who could have been traced had reasonable steps been taken, he says;
* Distribution to nominees: Where you have nominated somebody to receive your death benefits and this person is not a dependant, Murphy says the money cannot be paid out within the 12 month period, but the board is obliged to do so immediately afterwards. Remember that you must designate the nominees in writing;
* Distribution to dependants and nominees: Where you have dependants and nominees, and the board is aware of them, the fund is obliged to make payment before the end of the 12-month period;
* Distribution to your estate: If you have not nominated anybody to receive your death benefits and you also do not have dependants, the benefits will go into your estate and the fund has to wait 12 months before paying out the money, Murphy says; and
* Distribution to your estate and one or more nominees: If the fund is unable to find any of your dependants within the first year after your death, the board must at the end of the 12 months, distribute your death benefits between the person(s) you nominated and your estate.