Positive changes for widows and orphans

The changes include an amendment to the Pension Funds Act which will make it easier for additional death benefits to be administered in beneficiary funds, as well an announcement in the Budget which has raised the tax-free limit for pre-retirement lump-sum benefits.

Giselle Gould, Business Development Director of Fairheads Benefit Services, says that beneficiary funds should become even more attractive as a result of these changes.

"Beneficiary funds have proven to be a sound and cost-effective vehicle for preserving and growing minors’ funds since 2009. I believe the authorities acknowledge the important social role beneficiary funds play in sustaining and educating children and are therefore supporting the industry through positive change.”

Beneficiary funds can now receive so-called unapproved benefits in addition to approved benefits, meaning that death benefits paid out of group life policies may now also be paid into beneficiary funds instead of into an umbrella trust.

Many companies have a group life policy, accident cover or other risk benefit cover with a service provider that is separate from the company’s retirement fund. These are called unapproved benefits whereas the fund credit from the retirement fund is called an approved benefit.

Ms Gould says this provides better protection for vulnerable minors and eases the burden on guardians who sometimes have to oversee two accounts on behalf of the children in their care.

The tax-free threshold for pre-retirement lump-sum benefits (including death benefits) has been increased from R315 000 to R500 000. Ms Gould says this is good news in particular for the families of blue-collar workers as raising the tax-free limit will ensure a relatively larger payout to dependants on their death.

"Retirement fund members are taxed on a combination of their retirement fund credit and group life benefits. This brings the total payout often to more than R500 000, with the effect that lower-income retirement fund members whose salary was below the PAYE threshold are then taxed on their lump-sum death benefit. By raising the lump-sum tax threshold from R315 000 to R500 000, the family of those members will obtain fairer tax treatment,” she says.

Beneficiary funds have other tax advantages as no tax is paid in the fund and any income or capital paid out to minors is also tax-free.