UPDATE: As of 1 October 2018, savings bonds no longer bypass deceased estates. Find more information here. 

At our most recent Power Hour, One Lapper Chris pointed out that government retail savings bonds pay out to your dependants when you die. He suggested using these as an alternative to funeral policies. If you go this route, you can invest in bonds, build your asset base and know that your dependants will be able to afford your funeral when you pass on.

Unlike funeral policies, however, you can only invest between R1,000 and R5,000 in one bond. This would make it harder for people who contribute monthly amounts of under R100 to a funeral policy.

How it works:

“In the event of the death of a registered holder prior to the maturity date, the maturity date shall fall on the date on which the National Treasury receives all required documentation, as set out below:

• In the event a beneficiary having been nominated: a payment in full shall be made to the nominated beneficiary or beneficiaries, after receipt of certified copies of the beneficiary’s or beneficiaries’ identity document(s) and personal bank statement(s).
• In the event of a beneficiary not having been nominated: the investment shall be redeemed in full at the request of the Executor and paid into an account determined by the Executor. However, a letter of Executorship issued by the Master of the High Court of the Republic is required before the National Treasury can register and pay RSA Retail Savings Bonds in the name of the deceased estate.”

For more information on government retail savings bonds, visit the RSA Retail Savings Bonds website.

Why we love it

• It’s an excellent, low-risk way to learn how bonds work.
• Your money goes towards your net worth, not towards an insurance product.
• When your bonds mature, you can decide whether you want to re-invest in bonds, or use the money and start saving for your funeral again.
• You can buy bonds easily online or at the South African Post Office.
• It forces you to think about and discuss your funeral arrangements with your family.
• Anything over the cost of your funeral becomes part of your dependent’s inheritance. Since the bonds are paid out to your beneficiaries once the documentation is submitted, it doesn’t get tied up in the estate. This could especially be helpful if your dependants relied on your income.
• Saving towards a goal means you have to know how much you’ll need before you start. This is a great exercise to learn how to do financial planning.

The risks

• You could die before you’ve saved enough, leaving your family to pay the shortfall. If this worries you, you can take out a funeral policy until you have enough saved in bonds.
• You could spend the money. If you know you’ll be too tempted to spend the money instead of reinvesting it once the bonds mature, rather opt for a funeral policy.
• Since bonds pay interest (sometimes called coupons), any annual interest over R23,800 you receive will be added to you income and taxed accordingly. You’ll need about R307,000* invested at a five-year fixed rate of 7.75% to reach that threshold.
• Your dependants might not have the right paperwork available to receive the money. Make sure you leave your bonds to family members who have the right documentation. If possible, ensure they have the documentation ready the day you take out the bond.

*Thanks to Dominic and Shane for picking up a calculation error in the original article.

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