Why not reform for kids too?

Published on EBnet, February 2016

By Olefile Moea, Director, Fairheads Benefit Services

In line with industry trend and also #FeesMustFall

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.

Children are powerless in the face of how the guardian may choose to spend a lump sum but if the death benefit is paid to a beneficiary fund instead, a monthly “stipend” is paid 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.

At Fairheads we believe the time has come for government, trustees and retirement fund member alike to start thinking about beneficiary funds as a critical vehicle in funding the educational needs of children. The argument is compelling:

  • 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 and the like are controlled carefully by the beneficiary fund trustees, to ensure the correct payee receives the funds.
  • The lump sum is invested for longer-term growth by professionals. A beneficiary fund can access the expertise required to achieve the best returns at an appropriate risk, and at a reasonable cost.
  • Trustees should compare service providers – you ideally want an independent administrator which selects best-of-breed investment managers and works according to an asset allocation model for each individual beneficiary fund child member. Such a model would take their age and particular circumstances into account and slot them into a ‘lifestage’ model best suited to their income and capital growth needs.
  • The beneficiary fund account is in the child’s name.  Rightfully then when they turn 18 they may receive the residue of the funds (there is a powerful argument to be made for the age of majority for beneficiary funds to be extended to 21, something for which the industry is currently lobbying. In our experience and based on feedback from guardians, many 18-year-olds do not yet have the life experience or financial wisdom to manage a residual lump sum responsibly).
  • 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.

Beneficiary funds were launched in January 2009. Seven years later, they are a tried and trusted solution for 37C death benefits, but awareness remains relatively low. Let us all use 2016 to help promote the advantages of this powerful financial tool. The case study below illustrates the point.

Case study

(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 wisely 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, 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.

This is just an example of how far even relatively small amounts can be stretched to ensure that we provide the best possible future for our children.