If your retirement fund and group life cover make up the largest portion of your assets, a beneficiary fund may be a simple and cost-effective way to ensure that your minor child receives a regular income if something should happen to you.
Your retirement funds do not form part of your estate, or your will, and are allocated at the discretion of the retirement fund’s trustees.
The trustees must consider all legal and financial dependants. If you have minor children, they will most certainly receive a substantial portion of your retirement fund.
Many employees may also have group life cover, however, unlike the retirement fund, life cover must pay out to the nominated beneficiary. A parent could, for example, select their children to be the 100% beneficiaries of the life cover. You could also have life cover as part of a retirement annuity.
The question is then, who receives the money? As the child is under the age of 18, the funds must be given to a guardian to manage. If the trustees are concerned about the financial literacy of the guardian or whether the funds will be used appropriately, they can opt to transfer the funds to a beneficiary fund.
Beneficiary funds were created in 2009 to protect the assets of minor children. This applies to both employer funds and retirement annuities in the private sector, but not the Government Employees Pension Fund (GEPF) which uses the government-run Guardian’s Fund.
According to Jeanetta Hendricks, General Manager of the Care Division at Fedgroup, as a parent you can give instructions in your beneficiary nomination form for the children’s portion of your retirement fund and group life cover to be paid to the beneficiary fund.
This is a useful tool for a parent who may not be comfortable with the child’s guardian managing the funds. This could even protect the funds from the surviving parent.
Advantages of a beneficiary fund
A major advantage of a beneficiary fund is that the retirement funds are professionally managed.
The guardian receives a monthly income towards the upkeep and education of the child. The amount of this monthly income is calculated together with the fund’s trustees.
Capital payments for school fees, medical bills, etc, are controlled by the fund trustees, to ensure that the correct payee receives the money. The lump sum is invested for longer-term growth by professionals.
The child’s account is also 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.
Another advantage is that a beneficiary fund is protected from creditors, which adds an additional layer of protection for the child’s capital.
There is also a tax advantage. No tax is paid in the beneficiary fund and as the children are minors and not taxpayers, any payment out of a beneficiary fund, whether capital or income, is tax free.
The beneficiary fund account is in the child’s name and when they turn 18 they may receive the residue of the funds, although they are encouraged to leave the funds until they are older and better equipped to manage the money themselves.
If you have young children, it is worth speaking to your HR department to find out about nominating a beneficiary fund to receive your child’s benefits.
This article first appeared in City Press.
When making claims from Beneficiary Trust must the legal guardian submit his payslips and income and expenditure to see if there is a need for Fund to pay guardian if the Guardian is reckless and lavish in financial matters.
David Hurford, Chief Executive Officer at Fairheads replies:
Typically, the beneficiary fund trustees do not perform an assessment on the guardian or caregiver’s competence to manage money appropriately. This is the job of the retirement fund trustees as part of their Section 37C deliberations when deciding on an appropriate mode of payment to a minor dependent of a deceased retirement fund member.
Once the benefit is placed in the beneficiary fund, the primary objective of the fund is to ensure that the benefit is used in the interests of the child. The beneficiary fund should work closely with the guardian to make sure that the money is used to help the child through their formative years.
Benefits can be distributed from the beneficiary fund in three ways, namely:
• A regular income which can be paid to the guardian or caregiver on a monthly basis (or the frequency decided upon by the guardian);
• Ad hoc capital requests; and
• The final termination benefit which is paid to the member (child) when they reach the age of majority, or some other date as determined by the board of trustees.
The regular income payments are typically structured to cover the daily living expenses of the child. How the money is used by the guardian is not controlled, and therefore these payments are relatively small with larger amounts being paid upon request. Ad hoc capital requests are assessed and verified, and in most cases paid directly to the service provider (such as the school for school fees).
In some cases, a guardian may request that the regular income be increased due to a change in their circumstances. The beneficiary fund trustees may request information about the household income and expenses to assess whether it would be in the interest of the minor to increase the regular income, or whether the increase would be used to fund items from which the member would not benefit.
In conclusion, there are occasions where the beneficiary fund may request information from the guardian in order to have a more wholistic view of the financial circumstances of the household in which the child lives.
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