Guardian proactively chooses a beneficiary fund for his children

Momentum Umbrella Beneficiary Fund

Fairheads can report on a recent case study, which is particularly interesting because it shows growing awareness among higher-income earners of the tax and savings advantages of beneficiary funds.

A couple, both in their forties and the parents of two minor children, had worked for a large financial institution. Tragically, the mother passed away in an accident, leaving the family bereft. The father, who holds a senior position in the same institution, was informed by the retirement fund trustees as to the choices open to him regarding the death benefits due to the two children.

A couple, both in their forties and the parents of two minor children, had worked for a large financial institution. Tragically, the mother passed away in an accident, leaving the family bereft. The father, who holds a senior position in the same institution, was informed by the retirement fund trustees as to the choices open to him regarding the death benefits due to the two children.

The death benefit amounts were in the region of R600,000 per child. As the surviving spouse and guardian of the children, he could choose either to accept the funds on their behalf as a lump sum, or invest them in a beneficiary fund run by Fairheads.

Being financially astute, he asked about the tax and investment advantages of the beneficiary fund. He also took into account the potential situation should he too pass away while they were still minors. It was explained to him that the funds in the beneficiary fund would belong to the children who would become members and each have their own account. The funds would be available only to them upon termination at which stage they might choose to continue to leave the assets in the beneficiary fund. To the guardian, the choice of a beneficiary fund was preferable to:

  1. Needing to oversee the investment of a lump sum and decide how to use it for the benefit of his children
  2. Needing to state in his will that a testamentary trust be set up for his children in the event of his death – knowing that such a trust can be expensive to run on account of the administrative burden and the need to manage investments.
  3. In the event of not making any testamentary provision, knowing that the funds would be received by the National Guardian’s Fund.

The father guardian made an appointment to meet me and find out more once the documentation and funds were received from the employer’s retirement fund by Fairheads. We gave him our introductory pack and discussed matters such as the asset allocation model we use for each individual member, the use of arms-length, best-of-breed investment managers, investment performance, and the option to choose a discretionary amount of the member’s funds on an annual basis.

We were able to reassure him that our beneficiary fund vehicle adheres to best practice in all areas, including governance. Our track record in trusteeship goes back decades. Just as important, we were able to offer him some form of comfort in a time of great distress.

It is our conviction that more and more people with higher income levels, on being offered a choice by retirement fund trustees regarding s37C death benefits, will choose beneficiary funds, in particular on account of the significant tax advantages: beneficiary funds are wholly tax exempt, both in terms of income and capital distributed from the fund.
In conclusion, there are few better investment vehicles available in South Africa today from a tax perspective.

We call on all retirement fund trustees, to help educate members on beneficiary funds and to add them as an option on the nomination form which members should be reminded to update on an annual basis or as and when their personal circumstances change.

Fairheads