Will your retirement annuity pay out if you’re terminally ill?

Being diagnosed with a terminal illness, such as cancer, is distressing. Not to mention the financial implications of caring for yourself during this trying time. Your medical aid and various insurances can help you with these costs.

But what will happen to your retirement annuity (RA)? After paying towards it for years, will you be able to access this money and benefit from it before you pass away? We got in touch with retirement experts to find out more.

Will you be allowed early access?

According to Mica Townsend, business development manager at 10X Investments, the Income Tax Act states that a member may retire from an RA on the date on which that member becomes permanently incapable of carrying on his or her occupation due to sickness, accident, injury, or incapacity through infirmity of the mind or body.

She explains that the circumstances that enable someone to retire from an RA fund before the age of 55 must be considered in the context of this requirement, rather than the person's illness itself.

“A person who suffers from, for example, heart disease or cancer may still be able to work. Therefore, a terminal disease (which is in itself a vague term that doesn’t specify a time horizon), would not automatically qualify a person to retire early from an RA,” says Townsend.

“The RA fund trustees consider each case on its merits, and the discretion lies with them. They will require medical proof that the person is unable to work to substantiate the claim, and they may ask for further evidence,” she adds.

Townsend points out that the purpose of an RA is to provide a retirement or death benefit. It’s not a dread disease benefit. Therefore, it pays out only if the member is forced to retire from working, not merely because they’re ill.

Jan van der Merwe, head of actuarial and product at PSG Wealth, agrees that an RA will not automatically pay out due to a terminal diagnosis. However, he explains that if this diagnosis results in a disability, the fund will be paid out under the infirmity of mind or body clause.

“The treatment of funds that you access as a result of disability will be subject to the normal tax rules and requirements that apply at normal retirement,” says Van der Merwe.

What impact does your “time left” have?

According to Townsend, the “time you have left” will be an important factor the trustees of the fund will consider when they decide how your fund will be paid out. She explains that there is, however, no such thing as "degree of access".

“If access is granted then the normal retirement access rules apply. Not more than one-third of the total value of the retirement interest may be commuted for a single payment and the remainder must be taken in the form of an annuity, except where two-thirds of the total value does not exceed R165,000, or where the member is deceased,” says Townsend.

Depending on your insurer, Van der Merwe adds that the portion of the retirement fund that needs to be used to purchase an annuity may be paid out according to an “ill health enhanced annuity”.

What if you recover?

According to Johan Botha, head of business development and employee benefits at Aon South Africa, if you recover from a disability caused by a terminal illness, your insurer won’t be able to retract their decision once it has already been approved.

Townsend agrees that if the member had been granted access to their RA, then this continues. Nobody follows up on the member once the RA is paid out or is converted to an annuity. The annuity will keep paying regardless.