– Jennifer Lopes (Director, Cornerstone Employee Benefits)
The world of employee benefits can be complicated and sometimes very difficult to understand. Whether you are an employee, an employer or a HR/payroll manager, it’s important that you understand the risk benefits that you are providing to staff or receiving from your employer.
Group risk benefits should not be confused with pension or provident funds. Risk benefits typically include life insurance, disability or severe illness cover and funeral benefits. These policies only pay out in the event you pass away, or you are unable to work anymore, have a health shock, or you or someone in your family passes away. These benefits are divided into approved and unapproved risk benefits.
But what exactly is the difference?
At Cornerstone Employee Benefits we believe that our clients and fund members should always stay informed and educated about their financial wellness and to answer that very question, we have put together a short summary of the most important differences between approved and unapproved group risk benefits.
Owners of the fund
If the cover you have taken out is provided within a pension or provident fund (except for income protection benefits which are always unapproved), it will be referred to as “approved” cover. In this case, the policy holder will be the retirement fund.
If the cover is provided under a separate or free-standing group risk policy, it will be known as “unapproved” cover. The policyholder will be the employer or company on behalf of the members or employees. Please note that “unapproved” cover simply means that it is not offered under a tax approved retirement fund and doesn’t affect its legitimacy in any way.
Tax implications and estate duty
To determine if your lump sum pay-out will be subject to tax and estate duty and what the extent of this liability will be, it’s vital to know the different tax implications of approved and unapproved funds. Tax implications are also a key factor when deciding how much death cover you ultimately require.
All contributions to approved funds are tax deductible up to 27,5% of taxable income, capped at R350,000 per annum, but the benefit pay-out is subject to tax according to current tax legislation. Lump sum pay-outs from approved group risk funds are not subject to estate duty.
With unapproved group risk funds, contributions are not tax deductible, and the benefit pay-out is tax free, so in a way you will still save on tax in the end. Unapproved death benefits are however
included as deemed property in determining the estate duty liability. Any benefit bequeathed to a surviving spouse will qualify for a section 4(q) deduction which means that the benefit amount will be deducted before the final estate duty liability is determined. Disability, funeral and severe illness cover from unapproved group risk funds is paid tax free to the member directly.
Nomination forms – For death benefits
The importance of nomination forms cannot be stressed enough! Without a nomination form, you have little control over who receives your death benefit and your funds could end up in a government guardian fund or deceased estate. Approved and unapproved risk benefits have a slightly different way of using nomination forms, however they remain equally important.
With approved risk benefits there will be a board of trustees that will facilitate all claims and pay-outs. You will still be required to complete a nomination form when joining the Fund, or as and when your beneficiary details change; however, the trustees will ultimately decide on the distribution of your death benefits, by exercising their fiduciary duties under Section 37C of the Pension Funds Act, and after investigating your circumstances at death.
Do not be alarmed, your nomination form will still be highly regarded, the trustees are just another safety net to save you from possible mishaps, and to ensure all legal and financial beneficiaries are considered.
For example, if you were amidst a divorce at the time of your death and you haven’t updated your nomination yet, your ex-spouse may receive your full death benefit even though they might not be your wishes. Here the trustees will take the divorce into account and investigate other possibilities.
With an unapproved fund, your nomination form is seen as your last and final wishes. Here, there are no trustees and the full death benefit will be paid out as instructed on the nomination form. Therefore, it is imperative that your nomination of beneficiary form is always kept up to date and is submitted to your HR officer to ensure safe-keeping in your personnel file.
The best way to ensure that you have all the proper documentation in place, is to appoint a qualified employee benefits specialist to assist you. Click here to contact Cornerstone Employee Benefits and see how we can assist. For more interesting and useful content, follow us on Facebook and LinkedIn and remember to subscribe to our monthly newsletter.