Beneficiary: funds what you need to know
Legislation has been passed to create a new, better-protected vehicle for benefits paid out upon the death of a retirement fund member. The new vehicle is called a beneficiary fund and it comes into operation from January 2009.
The new legislation has come about in the wake of the Fidentia "widows and orphans" scandal, which prompted government to take action to avoid reoccurrence of such mismanagement of minors' assets.
Beneficiary funds will be governed by the amended section 37C (2) of the Pension Funds Act, which brings about numerous structural and compliance advantages, such as adherence to Regulation 28 for investments. All stakeholders will have recourse to the Pension Funds Adjudicator and International Financial Reporting Standards (IFRS) will probably apply to beneficiary funds too.
Beneficiary funds will replace umbrella trusts as the vehicle for any new death benefit monies and approved life cover from 1 January 2009. Note that existing umbrella trusts will continue to run their course and that unapproved benefits will continue to be paid into umbrella trusts.
What you should do
Planners should acquaint themselves urgently with the new legislation as they may be called upon to advise retirement fund members, guardians and beneficiaries.
Two aspects of beneficiary funds, namely taxation and the choice of payment into an existing trust, are discussed in more detail below.
When deciding how to allocate approved life cover or a retirement fund death benefit, planners and trustees need to decide each case on its merits, taking the usual considerations of costs, quality of administration, guardian competency and tax efficiency into account.
Tax benefits
Bear in mind that beneficiary funds offer a new tax advantage – no tax is levied on capital transferred to a beneficiary fund for dependants. This tax relief means that some beneficiaries will have a larger benefit. The beneficiary fund is also exempt from tax.
Note however that amounts paid out of the beneficiary fund will be taxable in the hands of the beneficiary, as well as the final amount when the beneficiary attains majority. Given the size of most benefits however, fewer than 1% of beneficiaries are above the tax threshold. The annual tax threshold is R46 000 and thereafter the PAYE tables apply. The threshold is expected to be increased significantly in the 2009 Budget.
Other trusts
The new legislation also makes provision for death-benefit monies to be paid into an existing family trust or a testamentary trust that the deceased may have provided for. Retirement-fund members (in their nomination form), majors and guardians are also entitled to choose whether they would like funds to be paid into an existing trust. Current interpretation of the legislation does not preclude the use of an umbrella trust.
There are obvious risks in this selection, particularly the use of service provider and the reduced regulatory environment under the Trust Property Control Act. Furthermore, depending on the vesting structure of the trust used, it may not be as tax-effective as a beneficiary fund.
