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Minor children are often the beneficiaries of the death benefits paid out by retirement funds. The challenge is to make sure the money is used for their benefit, writes Maya Fisher-French
If a member of a retirement fund dies while his or her children are still minors, 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.
Olefile Moea, executive director at Fairheads Benefit Services, says: “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.”
Moea believes that, in this case, children are powerless in the face of how the guardian may choose to spend the 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, the child comes of age at 18 and he or she is able to withdraw any funds available. Giselle Gould, business development director at Fairheads Benefit Services, says that, 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,” says Gould, who believes that the age of maturity should be extended to 21 so that the child has the opportunity to finish their matric and possibly tertiary education.
If this was the case, they would have benefited from having funds to help with their education and would, 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.
. 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 child’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 and the like are controlled by the beneficiary fund’s trustees to ensure 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 remainder of the funds, though they are encouraged to leave the funds as they are until 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 that should be principally reserved for the child’s education.
