Death benefit lump sums to minors not aligned with pension reform

David Hurford, Head of Sponsored Products at Fairheads Benefit Services.

Why should children bear the risk of lump sum payments to guardians?

The general move away from lump sum payments to individuals in favour of annuitising retirement savings is an important element of retirement reform in South Africa.

Yet, while adults’ savings are being protected through annuitisation, many retirement fund trustees continue to pay lump sum death benefits to guardians on behalf of minor dependents, exposing children to the risk of guardians not spending the benefits in the child’s best interest.

If government and the regulator are of the view that retirees should not receive lump sums at retirement, then the payment of children’s benefits as lump sums does not sit easily with current retirement reform, said David Hurford, Head of Sponsored Products at Fairheads Benefit Services, during a panel discussion on beneficiary funds at the Institute of Retirement Funds conference in Cape Town today.

Beneficiary funds were introduced in 2009 by government specifically to provide protection for minors’ assets and allow for an “annuitised” approach to distributing a lump sum benefit. The guardian receives a monthly amount to use for supporting the child and is encouraged to request capital amounts to be paid for school fees and similar maintenance related expenses. In this way the funds are spent in the best interests of the child and also ring-fenced in the event of the guardian’s death, as the beneficiary account is in the child member’s name.

Also taking part in the beneficiary fund panel discussion, Thomas Mketelwa, Chairman of the KZN Municipal Pension Fund, said that lump sums paid to 18-year olds upon “termination” of a beneficiary account were also problematic as the 18-year old could squander the funds and drop out of the education system. He welcomed the recent submission made by the beneficiary fund industry to National Treasury to address this issue.

Mr Hurford said that trustees are not yet sufficiently aware of the advantages of beneficiary funds. They are cost effective and tax effective, and offer institutional investment returns. They are taxed in the same manner as pension funds in South Africa, that is no tax is paid in the fund. Furthermore any payment out of a beneficiary fund, whether capital or income, is tax free.

“Trustees have a fiduciary duty to act in the best interests of the minor dependent. I believe that this duty compels them to look carefully at beneficiary funds to understand their advantages when it comes to the payment of minors’ lump sum death benefits,” he said.