A lot of consideration needs to go into the process of choosing a beneficiary fund when retirement funds invest monies left to minor children.
Although beneficiary funds have been operation since January 2009, a lot still needs to be done to articulate their advantages as well as to clarify the criteria for choosing one that will suit clients’ circumstances.
More than meets the eye
Managing a beneficiary fund is much more than investing someone’s benefits. It is about providing support to the family, familiarising yourself with their circumstances and actually growing with the family. Advisers and trustees need to look for a beneficiary fund that not only establishes a relationship with pension funds, but one that has a track record of even stronger bonds with the families.
Beneficiary funds were established after the amendment of section 37C in the Pension Funds Act 2008. In 2014, further amendment occurred to accommodate unapproved benefits. Unapproved group benefits comprise of risk policies provided by an insurer under the employer’s name. Approved risk benefits are provided by the retirement fund.
Beneficiary funds only accept money coming from employee benefits such as proceeds of retirement, pension and provident funds as well as approved and unapproved group life benefits.
Avoid confusion
While death benefits for minors are also managed under testamentary trusts, and the state’s guardian fund, these should not be confused with beneficiary funds. In the testamentary trust, you invest personal assets of the deceased as stipulated in his or her will, while only employer benefits are invested in a beneficiary fund.
Beneficiary funds also differ from the guardian fund which receives money for minor beneficiaries who inherit intestate of the deceased. The guardian fund can receive employee benefits only if there are no known dependants or nominated beneficiaries and the deceased did not have an estate. But retirement benefits generally do not form part of a deceased estate. Only in very rare situations could they possibly form part of the estate.
Furthermore, beneficiary funds have a tax advantage which arises from the fact that monies paid to them are after-tax benefits. As a result, no tax is levied in the fund or on any maintenance payments made.
A sense of normality
Beneficiary funds aim to provide a regular income and attend to the educational needs of the beneficiaries while still endeavouring to grow the capital.
The allocation of assets reserved for living expenses and assets to be reserved for growth differs from one beneficiary fund to another.
To me, investment returns are very important but secondary compared to the safety and liquidity of the portfolio. This implies that the fund should follow a conservative strategy in investing the assets.
A combination of low risk portfolios such as cash and income fund mixed with a market linked portfolio is best suitable to hold the investments. Cash provides for static liquidity.
An income portfolio provides for unexpected cash demands while the growth portfolio ensures that the portion of benefits that is not needed for immediate income provision continues to earn investment returns so that there will be a nest egg available for the child at the end of the fund’s term.
Service essential
Of critical importance when choosing a beneficiary fund is the service that the family will receive throughout the years.
The pension fund’s implicit responsibility ceases when the benefits are paid to a beneficiary fund. It stands to reason that beneficiary fund’s responsibilities should therefore be documented from the beginning in the form of a service level agreement with the retirement fund. This will ensure that all parties account for their part in ensuring optimal care for minor beneficiaries.
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