Beneficiary fund industry seeks majority age exemption
02 April 2012 | Magazine Archives FAnews & FAnuus | Employee Benefits | Giselle Gould, Fairheads
The Children’s Act of 2007 reduced the age of majority from 21 to 18 years. This change is problematic for certain financial services stakeholders, with the result that a leading beneficiary fund service provider recently called on government for an exemption.
The age of majority is variously defined as "the threshold of adulthood” or "the age at which children can act independently of their parents”. Government’s decision to lower the age of majority (to 18 years) stemmed from conflicting stipulations in the Age of Majority Act and the Children’s Act.
Is 18 too young
Recent amendments to the legislation mean that 18 to 21 year olds can get married, sign any contract or litigate in their own names... But there are concerns that not all 18 year olds are ready for this additional responsibility.
"It is not uncommon for beneficiary fund service providers to pay out R100 000 or more on the termination of an account when the fund member reaches majority age,” says Giselle Gould, business development director of Fairheads Benefit Services.
A R15 billion "pot”
"Yet the reality of social and educational circumstances means that the average 18-year old is not financially mature enough to invest or use large sums of money responsibly.” Beneficiary funds (and their umbrella trust predecessors) are financial vehicles that house and manage approximately R15 billion of assets on behalf of orphans or single-parent children.
They receive and manage lump sum death benefit payouts from retirement funds in terms of section 37C of the Pension Funds Act. Accounts are set up in an umbrella beneficiary fund which pays out an income to beneficiaries (usually through their guardians), as well as capital amounts for expenses such as school fees. Once the beneficiary reaches majority age they are entitled to the remaining funds.
Education meltdown
"It is estimated that only half the children who start school achieve their matriculation pass,” says Gould. "And of that half, only 70% pass!” The result is that most 18 year olds are without the education to make sound financial or business decisions. There are social realities to consider too.
According to the 2012 National Budget, nearly 16 million people are now on social grants. To make matters worse, a recent report by the SA Institute of Race Relations showed that children on the child support grant account for 70% of all people on social welfare. The number of social grants for children has risen 13-fold since 2011.
Consumption expenditure
Against this backdrop the pressures on 18-year-olds who receive large payouts are massive. They are encouraged to use the funds for immediate family needs rather than investing them for tertiary education or applying the funds as seed capital for a small business, for example.
Fairheads met more than 4, 000 guardians and caregivers during an educational national road show throughout 2011. Many guardians reported that 18 year old recipients of beneficiary fund payouts tend to drop out of school or quit their jobs upon receiving a large cash lump sum. Many squander the money and destroy their chances of a better future.
Protection needed
Fairheads makes a point of counselling beneficiaries and members before their funds terminate to encourage them to use the funds wisely. Because financial literacy levels are so poor, Fairheads has started lobbying government for an exemption to the age of majority for trusts and beneficiary funds from 18 to 21 years.
"This is undoubtedly a controversial topic but we believe that those extra three years could give thousands of young people time to think carefully and be more mature about how to use lump sum payouts,” says Gould.
Benefiting from a beneficiary fund
In December 2001 a Group Pension Fund asked Fairheads to establish trusts for two minor children whose father had passed away. The death benefit amounted to R364, 432. The trustees decided to allocate 58.78% to the widow and to allocate 20.61% to each child, aged 9 and 11. The children’s share - R75, 000 each – was placed in an umbrella trust (replaced by beneficiary funds today) and used for educational expenses.
A decade later the oldest child completed her studies. The accumulated interest earned over the period was in excess of R72, 000 which enabled the Fairfund Umbrella Trust to assist her with secondary and tertiary fees as well as covering her matriculation dance expenses, driving lessons and license, a computer and related equipment (totalling R70, 428). The trust also assisted the child with camera equipment and the means to set up her own photography company.
The beneficiary has since reached majority age and elected to take the remaining funds out of trust, benefiting to the tune of R78, 720.
