Pension Plain: what happens to a spouse's pension after the death of a pensioner?

When a fund member reaches retirement age, he or she has a choice to purchase one or more life annuities and living annuities. A single life annuity is a guaranteed annuity that the pensioner will receive as pensioner for the rest of his or her life.

The monthly pension can be a set amount, for example R10 000 per month or an amount that increases every year by a set percentage (for example, 5%) or an annual increase that is linked to the inflation rate (for example, 100% of the inflation rate of the previous year).  The monthly pension payments stop at the death of the pensioner, irrespective of the fact that the member might have a spouse who will need financial support after the death of the pensioner. 

The pensioner can also decide to purchase a double life annuity. In terms of this annuity agreement, not only will the pensioner receive a monthly pension for the rest of his or her life, but at his or her death, his or her spouse will receive a monthly pension for the rest of his or her life. This ensures that the spouse of the pensioner does not suffer financially due to the death of the pensioner and the termination of the annuity payments that were made to the pensioner. 

Is the spouse of the pensioner automatically entitled to a guaranteed spouse’s pension for life at the death of the pensioner? This question was answered by the Financial Services Tribunal in the recent case of Du Plessis v Pension Funds Adjudicator. 

Du Plessis was the spouse of a fund pensioner. After the death of the pensioner, Du Plessis claimed that he falls within the definition of a qualifying spouse in the rules of the fund that entitles him to a spouse’s pension for the rest of his life. The deceased, Du Plessis’ life partner, retired from the fund in 2019 and upon his retirement, he chose to buy a single life annuity with about R5.7 million of his retirement benefit and no spouse’s pension after indicating to the fund that he was not married and that a spouse’s consent form was not applicable to him.  Due to his election, the deceased pensioner received a higher monthly pension than he would have received if he chose a double life annuity and the monthly pension payments ended upon his death. The Pension Funds Adjudicator found that the fund applied the fund rules correctly and that, due to the election of a single life annuity by the member upon his retirement, no spouse’s pension was payable to Du Plessis. Du Plessis then lodged an application at the Financial Services Tribunal to overturn the decision made by the Pension Funds Adjudicator. 

Du Plessis based his application on the following grounds:

1. The fund did not apply the rules correctly;
2. There was an error in the contract of the Life Annuity;
3. The Life Annuity application forms are flawed; and
4. The Retirement Benefit Counselling that was provided by the fund was flawed.

The crux of his claim was that the decision by the deceased pensioner of a 0% spouse’s pension is invalid because he, as the spouse of the deceased, did not consent to it. As such, he argued, the fund should not have taken the deceased at his word and allowed him to buy a single life annuity before confirming that the member was indeed single. The Financial Services Tribunal agreed with the decision that was taken by the Pension Funds Adjudicator that the fund was correct in accepting the election of the deceased and his statement that he was not married. The Financial Services Tribunal agreed that the fund only has an obligation to follow the rules of the fund; it does not have an obligation to establish the truth of the statements made by the deceased member in relation to his marital status. Du Plessis’ claim for a spouse’s pension was therefore dismissed on the basis that the deceased pensioner enjoyed the benefit of his decisions, and that the Financial Services Tribunal can therefore not assist Du Plessis in reversing the consequences of the deceased’s decisions that benefitted him while he was still alive.

This matter firstly illustrates the importance of communication between spouses when the time to retire comes around. The spouses must have a clear understanding of the consequences of the annuity options that the retiring spouse has at retirement on both of them and agree on the best option given their current and future financial circumstances. If the spouse of the member does not have an income stream that can sustain him or her after the death of the member, a double life annuity might be a better option than a single life annuity. 

Secondly, the member and the benefits of an experienced retirement financial advisor when retirement decisions are made. This, unfortunately, often leads to ill-informed financial decisions being taken due to a lack of knowledge or information. A good financial advisor is there to assist fund members in making decisions that can lead to the best possible retirement outcomes. Without having a financial advisor to navigate your path to the best retirement outcomes, your responsibility as the driver of your retirement outcomes becomes more difficult. 

Often, members overestimate the negative effect a double life annuity will have on their monthly pension and underestimate the value of making provision for the income of a spouse. I recently came across a life annuity quote of one of the large insurers that indicated that, at the current interest rates, it is possible for a male fund member, aged 60, to buy an annuity with R2 000 000 that will pay him about R20 000 per month for the rest of his life.  If he, however, buys a double life annuity, he will “only” receive R19,000 per month, but his spouse will receive about R14,000 per month after his death. 

Giving up R1,000 per month to ensure that your spouse receives R14,000 per month after your death does not seem to be a big sacrifice to make to ensure the financial well-being of your spouse when you are no longer there to do so. At the end of the day, the choice of the financial state you leave your spouse in after your death remains yours.

* Ladouce is a pension funds lawyer and the author of the book, Pensions for Palookas.

PERSONAL FINANCE