What is a beneficiary fund?
When a member of a pension or provident fund dies, the trustees of that fund can decide to pay money due to a minor (a child under 18 years old in South Africa) into a beneficiary fund instead of paying the lump sum to the child’s guardian. The trustees can also decide to pay into a beneficiary fund benefits due to majors, either with their consent or if they reach the conclusion that the major is not equipped to manage a large lump sum appropriately.
The money in the beneficiary fund can help to pay for the child’s schooling until the child completes his/her education. Monthly payments are made to the guardian or caregiver to assist towards the general living costs of the minor child.
Note that in addition to section 37C of the Pension Funds Act on death benefits, a beneficiary fund can also accept any employment-related benefits, such as unapproved benefits, annual leave accruals or other entitlements that arise as a result of a member’s death.
A beneficiary fund is registered with and regulated by the Financial Sector Conduct Authority. Members or guardians have recourse to the Pension Funds Adjudicator if they have any complaints.
How a beneficiary fund works
* A death benefit payment is transferred into a beneficiary fund and a member account is set up when a completed application form and required supporting documents are submitted.
* The money in the member account is invested and any investment returns are added to the account.
* The member account is carefully monitored and managed so that it can last as long as necessary. For this reason, not all payment requests by the guardian may be approved.
Various payments can be made from the member account. These may consist of:
* Regular monthly payments towards general living costs. The amount is determined by the needs of the minor and the value of the member account.
* Ad hoc payments can be requested by guardians or caregivers for specific costs such as school fees, uniforms, books and transport.
Fees are charged to administer the member account.
* Protection of minors’ assets. Minors’ funds are taken care of, invested in prudential investment vehicles and stretched as far as possible to cater for educational and other well-being needs.
Lump sums that are paid out to a minor’s guardian or caregiver are not guaranteed to be used in the best interest of the child, and in many cases this leads to money being squandered, leaving little for the child’s care.
The guardian or caregiver will be paid a regular stipend, with additional amounts requested being subject to the scrutiny of the trustees. These capital payments are usually paid directly to the provider of the goods or service (for example, the school) to ensure the money is used appropriately.
* Expert investments and institutional pricing. The investment management and asset allocation of beneficiary funds allows members to benefit from expert investment knowledge which has been gained over many years of managing minors’ money, which is quite different from the investment management of contributory retirement funds.
Investments are pooled, creating an opportunity for significant savings when it comes to fees.
* Significant tax advantages. Beneficiary funds are wholly tax exempt, both in terms of income and capital distributed from the fund. There are few better investment vehicles available in South Africa today from a tax perspective.
* Value-for-money pricing. Beneficiary fund costs, like those of retirement funds, have reduced over time despite the extensive benefits of a very well-tailored service.
How can my beneficiaries join a beneficiary fund?
A beneficiary fund account can only be set up for an individual by the trustees of a pension or provident fund. However, you can guide the trustees in their decision by stating on your nomination form that you would like them to consider the use of a beneficiary fund. In particular where you have minor children, the option of a beneficiary fund is far more cost-effective and tax-efficient than a stand-alone testamentary trust.
EXAMPLE: BENEFICIARY FUND MODEL
Fairheads Benefit Services has developed a lifestage and asset allocation model, which provides guidelines on how to handle a sum of money due to a minor.
As an example, a benefit of R150000 is paid to a child aged 10. The beneficiary fund account is set to run until the child’s 18th birthday.
Monthly payments are set at R625 and increase each year by inflation (at 6% a year), totalling about R70000 over the eight years.
Capital requests (for the payment of school fees, for example) are set at R7500 a year, paid in February each year, totalling R60000.
Administration costs will be about R20000 over the eight years.
Investment growth is assumed to be the benchmark for each fund: money market fund, Consumer Price Index (CPI) inflation; income fund, CPI + 3%; stable fund, CPI + 5%; and balanced fund, CPI + 7%.
A termination benefit of almost R80000 is expected.
The assets are allocated to various portfolios initially and then rebalanced annually to re-risk the child as he or she approaches termination age. The principle is that the younger the member, the more they will be exposed to growth assets because of their longer investment time horizon.
Giselle Gould is the director of business development of Fairheads Benefit Services.