Published in City Press, 13 March 2016. By Maya Fisher-French.
Read the article Would you trust your child with a lump sum or below.
Minor children are often the main beneficiaries of the death benefits paid out by retirement funds. The challenge is to make sure the money is used for their benefit.
If a member of a retirement fund passes away leaving minor children, the trustees of the fund are required to determine whether or not to pay out the child’s portion of the fund directly to the surviving parent or guardian, or whether to transfer the funds to a beneficiary fund which will manage the money on behalf of the child until they reach the age of 18.
Fairheads Benefit Services, which administers beneficiary funds, is campaigning for trustees to protect minors’ benefits by considering beneficiary funds in more cases and for the regulator to increase the age of maturity from 18 to 21.
“At a time when retirement reform is moving in the direction of annuitisation for adult retirement fund members, we find it strange that no-one is giving thought to those at the other end of the age spectrum – minor children on whose behalf trustees frequently elect to pay a section 37C lump sum to the guardian or caregiver,” says Olefile Moea, executive director at Fairheads Benefit Services who believes that in this case children are powerless in the face of how the guardian may choose to spend a lump sum.
Beneficiary funds, however, have a fiduciary responsibility to manage the money for the child’s benefit and pay out a monthly “stipend” to maintain and educate the child.
“What is more, if the benefit is professionally invested, it can often be stretched to fund tertiary education too – helping to find a solution to one of the country’s most pressing problems represented by the #FeesMustFall campaign.” adds Moea.
Even if the funds are transferred to a beneficiary fund, at the age of 18 the child comes of age and they are able to withdraw any funds available. Giselle Gould, Business Development Director at Fairheads Benefit Services says unfortunately this occurs in about 95% of cases.
“In some cases the child receives the money before finishing matric. At that age R150 000 may seem like a lot of money and they drop out of school. In other cases pressure is put on the child by their extended family to take the money to support them.”
Gould believes that the age of maturity should be extended to 21 so that the child has had the opportunity of finishing their matric and possibly tertiary education. They would have benefited from having funds to assist with their education and also by that age be more financially astute.
What is a beneficiary fund?
Beneficiary funds were launched in January 2009 but are only for private-sector retirement funds. The Guardian Fund is used by the Government Employees Pension Fund (GEPF).
- A retirement fund member of a private-sector pension/provident fund or retirement annuity can elect on their Nomination of Beneficiary form to have their children’s portion paid to a beneficiary fund. Trustees of funds can also elect to transfer a child’s funds to a beneficiary fund if they are concerned about the ability of the guardian to manage the money.
- The guardian receives a monthly income towards the upkeep and education of the child, calculated together with the beneficiary fund’s trustees.
- Capital payments for school fees, medical bills, etc, are controlled by the beneficiary fund trustees, to ensure that the correct payee receives the funds.
- The lump sum is invested for longer-term growth by professionals.
- The beneficiary fund account is in the child’s name and when they turn 18 they may receive the residue of the funds, although they are encouraged to leave the funds until age 21.
- The tax advantages are significant. No tax is paid in the beneficiary fund and furthermore any payment out of a beneficiary fund, whether capital or income, is tax free.
- The child’s account is practically ring-fenced should the guardian die. This means that other family members will be unable to access the funds which should be principally reserved for the child’s education.
(names have been changed or withheld for reasons of confidentiality)
In 2008, Lindani’s father passed away and left him and his younger brother in the care of his grandmother. Lindani was 11 at the time and his brother was 4. The trustees of the retirement fund distributed around R325 000 to each of the brothers and paid the money to a beneficiary fund.
Today, Lindani is 19 and has just completed his first year at the University of Pretoria, studying engineering. He has opted to leave the remaining benefit in the fund, and has nominated to receive a small income each month.
During the seven years that the funds have been invested in the beneficiary fund, Lindani has received income of R350 per month, plus over R339 000 in capital assistance for his education and still has over R150 000 remaining which he intends to use to pay for the rest of his tertiary education.