It seems simple. You fill in a name on your pension plan or retirement fund form, and you’re all sorted with naming a beneficiary. But it’s a more important task than that. Naming the right person, or people, to receive the proceeds of your death benefits is a decision that could have effects on your loved ones long after you’re gone.
A beneficiary is someone you name to receive all, or some, of the money in your retirement account. You can nominate one or more people and the percentage you want each beneficiary to receive.
It’s important to get this right. Ensuring your beneficiary nomination reflects your wishes eliminates any uncertainty when administering your inheritance. This is a vital element of estate and succession planning.
The law says your retirement fund’s board must decide how to distribute your lump-sum death benefit between your dependants and your nominees if you die while you are a member of a retirement fund. The board has a duty to share the death benefit fairly and focus on providing for your dependants. To do this, it will find out who your dependents are; look at who you have nominated to receive the death benefit, and then decide how to pay the benefit fairly.
The board must decide who to pay, how much to pay each person and how to pay them. It will use your beneficiary nomination as a guide when it shares out the death benefit, but it does not have to follow your wishes if it finds that you have excluded some dependants, for example. That’s why it’s critical that your spouse or partner, children, and anyone financially reliant on you should all be included as beneficiaries.
Things to consider when choosing a beneficiary
Before you nominate a beneficiary, ask yourself the following questions:
- Who is financially dependent on me? Which of their expenses would I like to cover?
- Do I want one or more beneficiaries?
- How will nominating my beneficiaries impact my relationship with my family? Are there going to be fights and debates around my nomination, or will everyone be happy with my wishes?
Simply naming ‘my spouse and children’ as beneficiaries can cause misunderstandings. Be specific. Include the names of the individuals and how much of the benefit you would like each beneficiary to receive.
Nominating a minor as your beneficiary
Parents frequently name their children as beneficiaries on their life insurance plans. But if your child is still a minor, the policy proceeds will often be paid to the child’s guardian – which means they may never see the money. Other insurers insist on distributing the proceeds to a trust established for the child’s benefit.
A trust is basically a relationship that involves a grantor (the person leaving the money), a trustee (the person looking after the money), and a beneficiary (the person benefiting from the money). It can help ensure that your assets are safely transferred to your heirs and that they get the most benefit from the assets you have worked so hard to achieve.
Trusts have several advantages. They can protect your family’s assets in the event of bankruptcy or divorce. They can provide for children or other relatives who may be unable to care for themselves or manage their own finances. Most of all, they provide financial stability to your loved ones, as the governing board will act on behalf of your beneficiaries after you die or are unable to manage your own affairs.
Don’t ‘set it and forget it’
Things change in life. Like a will, it’s essential to update your beneficiary nomination form after any significant life events like getting married, having a child, getting divorced, or if one of your nominated beneficiaries passes away. That way, you ensure the people that you want to benefit from your assets do so.