Lump-sum payouts to beneficiary fund members ‘illogical’

Published Jul 18, 2015

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If you can’t get your hands on your entire pension benefit when you reach retirement age and are made to buy an annuity, where is the logic in paying a lump-sum benefit to a member of a beneficiary fund when he or she turns 18?

This is one of the questions that trustees of retirement funds grappled with at the recent Institute of Retirement Funds’ Africa conference in Cape Town.

In light of imminent “compulsory annuitisation” for provident fund members, trustees were canvassed to support proposals that the trustees of beneficiary funds should be given some discretion to retain benefits beyond the age of majority, until either the child completes his or her education (to grade 12/matric level) or turns 21.

An annuity that you buy to provide an income in retirement is a regular sum of money that is paid to you, usually monthly, until you die. You use your retirement savings to buy the annuity from a life assurer.

Currently, members of pension funds and retirement annuity funds are compelled to buy an annuity with at least two-thirds of their lump sum at retirement age.

Members of provident funds are allowed to take the full proceeds of their savings as a cash lump sum, because of the way provident funds are taxed.

The government wants to harmonise the way all retirement funds are taxed. This will mean that members of provident funds will also have to buy a compulsory annuity with two-thirds of their retirement capital. This raises the question of how beneficiary funds should handle lump-sum payments to the minor dependants of deceased fund members.

“Are we to continue paying out lump sums?” Giselle Gould, the business development director at beneficiary fund provider Fairheads, asked trustees at the conference.

Thomas Mketelwa, a trustee from the KwaZulu-Natal Municipal Pension Fund, says trustees are faced with a dilemma in that the benefit could be squandered, particularly because the age of majority is now 18.

Some of these payouts are substantial, he says. “When we give money to a spouse [to look after on behalf of a minor dependant], we check that he or she is financially able to manage the money. We believe the same should apply to minor and major children.”

Mketelwa says that, although beneficiary funds have “created some comfort and security for minors’ money”, trustees have concerns about the costs of placing money in these funds. “Costs start at 1.1 percent. Is it not too much?”

David Hurford, the head of sponsored products at Fairheads Benefit Services, says beneficiary funds do not continuously collect contributions, as retirement funds do; instead, they collect a once-off benefit and distribute it.

Trustees are also concerned about where their responsibility to a minor ends. “After we’ve paid the money over to the beneficiary fund, is that where our role ends, because the beneficiary fund has its own trustees? We believe there must be more accountability from the beneficiary fund to our boards,” Hurford says.

Mketelwa says beneficiary funds should report to retirement funds every quarter on costs and how they are looking after the minor’s money.

Hurford says there is broad support for retirement reforms, such as preservation and annuitisation, although this is still to go through a formal approval process at the National Economic Development and Labour Council.

“If it is not acceptable to pay a lump sum to a 60-year-old [member on retirement], why is it acceptable to pay a lump sum to a guardian on behalf of a minor?” he asked.

Trustees can decide to make lump-sum payments to the minor dependant’s guardian if they believe that the guardian is competent to manage money, but Hurford says Fairheads considers this illogical, because the major thrust of retirement reform is preservation and annuitisation.

“We earn administration fees, so the longer we have the money, the better for us, and I can understand why some in the industry question our motives. However, there has been a passionate plea on the part of guardians to stop paying lump sums upon attainment of age of majority,” Hurford says. There are many cases of children dropping out of school and the money being squandered, he says.

Fairheads, with the support of a number of retirement funds, has made a submission to the Financial Services Board about the payment of lump sums to 18-year-olds – in effect, to pay out at age 21, or when the person has, at least, passed matric.

Marilyn Kamp, a pension consultant at Robson Savage, also raised the question of whether it would be more appropriate to pay income in the form of an annuity, particularly to 18-year-olds.

“Is it not time for trustees of the beneficiary fund to have some enduring power to assess the beneficiary at the time of majority age to make sure they can cope with the money before it gets paid out as a large lump sum?”

WHAT ARE BENEFICIARY FUNDS?

When you, as a contributing member of a retirement fund, die leaving dependants, the trustees of the fund have a legal responsibility (in terms of the Pension Funds Act) to distribute your death benefit according to what is fair and equitable, irrespective of the wishes expressed in your will or on your beneficiary nomination form.

A fund cannot pay benefits directly to a minor and may not want to pay a guardian if it is not certain that the guardian will use the money for the benefit of the minor, or is not capable of managing the money responsibly.

One of the options open to trustees is to transfer your death benefit (your retirement savings plus any group life payout) to a beneficiary fund. The government introduced beneficiary funds after the Fidentia Group helped itself to funds owed to widows and orphans in the Living Hands Umbrella Trust.

Beneficiary funds are cost-effective alternatives to testamentary trusts and are widely used to manage the death benefits of blue-collar workers. A testamentary trust, which you set up in your will, is more appropriate for individuals with assets such as property that they want to leave for the benefit of minor children.

A beneficiary fund is a type of retirement fund that manages a deceased member’s lump sum for the benefit of minors. The fund provides guardians and caregivers with a monthly income and ad hoc payments for other expenses, such as education and health care. Over time, the capital is used as benefits are paid out. But when the dependant turns 18, which is the age of majority, he or she is entitled to whatever capital is left. This lump-sum payment can be substantial.

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