Couples who live together often find themselves in a difficult financial situation because their relationship is not always automatically recognized by law when receiving an inheritance, pension benefits, or insurance payouts.
Couples who live together often find themselves in a difficult financial situation because their relationship is not always automatically recognized by law when receiving an inheritance, pension benefits, or insurance payouts.
In the sphere of financial recognition, partners living together occupy an undefined position. However, tax legislation, specifically the South African Revenue Service (SARS), recognizes a permanent life union for income tax, gift tax, inheritance tax, capital gains tax, and transfer duty purposes. In the absence of contrary evidence, such partners are considered to be married outside of community of property.
Nevertheless, family law does not provide such automatic recognition, and pension funds operate according to their own rules.
Life insurance policies offer the most direct form of protection: either partner can name the other as a beneficiary, and the insurance company is obligated to pay the funds to that person. Although individuals have complete freedom in naming beneficiaries, it is crucial to specify them clearly by name and relationship. As noted by Crue Invest, vague phrases like 'my partner' or 'my family' can cause uncertainty and delays when submitting a claim.
Furthermore, Divorcelaws.co.za warns that a clause in the policy providing benefits to the insured person's 'family' may also cause problems, as a cohabiting partner might not be considered part of the family in that context.
Harry Joffe, Head of Legal Services at Discovery Life, emphasizes that insurance policies should be excluded from wills, as this only complicates the process. He explains that policies have a designated separate beneficiary, and including them in a will can lead to additional issues since the will does not take precedence over the nomination in the policy itself.
Discovery Life has encountered cases where the deceased named ten people as beneficiaries, but the payment went to the daughter because that is how it was specified in the policy. Joffe also insists on the need for regular updating of nominations, especially after the relationship ends.
The situation with pension funds is much more complex. Partners living together can name each other as beneficiaries in pension funds, but the designation is merely a guideline, not a guarantee, according to Crue Invest.
According to the Pension Funds Act, death benefits from a pension fund must be distributed among those who were financially dependent on the deceased at the time of death. These individuals may include a life partner, former spouse, minor children, siblings, or even elderly parents. The trustees must determine all dependents, and the final distribution remains at the discretion of the trustees based on the facts and evidence presented.
Joffe states: 'It is up to the fund trustees to decide who your dependent is. Within the pension fund, you only have a choice—it depends on who the trustees decide to pay.' A partner living together may claim the status of a de facto dependent if financial interdependence can be proven, for example, if the surviving partner is in a worse financial position as a result of the death. However, this does not happen automatically, and the trustees have discretion.
There is a significant exception: once a member converts a pension annuity into a life annuity, they are completely outside the scope of the Pension Funds Act. Joffe explains: 'A life annuity is different because it is no longer a pension fund. You can name anyone.'
For partners living together who have substantial pension savings, the decision of when and whether to switch to a life annuity has serious consequences for who ultimately receives those funds. Annuities (RAs), savings accounts, pension, and charitable funds remain under the control of the trustees, whereas a life annuity does not. Joffe notes that many people convert their RAs to a life annuity as soon as possible because it ceases to be regulated by the Pension Funds Act.
Unlike the situation upon death, where a cohabiting partner has a chance of being recognized, upon the termination of the relationship, such a partner does not have an automatic right to the other's pension interests. This is because these relationships are not governed by divorce law, explains Crue Invest. The right to a share in pension interests upon divorce is limited only to legally married couples.
Crue Invest warns that if pension savings are held in one name, it can lead to serious financial detriment for the other partner, especially if the non-working partner manages the household while the working partner accumulated pension savings throughout the relationship.
In the opinion of Crue Invest, SARS is perhaps the most generous body for cohabiting partners. Transfers between permanent partners are exempt from gift tax, inheritance tax exemptions apply to assets bequeathed to the surviving partner, and capital gains tax deferral is available. However, Crue Invest reminds us: 'Tax recognition should not be confused with family law protection.'
René Munsa, Chairman of the National Debt Counselling Association, concludes: 'Cohabiting partners cannot automatically inherit, receive pension benefits, or benefit from insurance unless the appropriate documentation and nominations are in place.' He adds that without this, the surviving partner may face delays, disputes, or financial pressure during a difficult time.
Charise Bucks, a certified financial planner at Brenthurst Wealth Management, advises: 'If your ultimate goal is to build wealth together, ensure that the legal and financial foundations match the emotional ones. Otherwise, you might end up with a beautiful love story and a terrible balance sheet.'