Retirement fund trustees, in discerning how best to allocate section 37C death benefits to the financial dependants of deceased retirement fund members, rightly look principally at the needs of minors. If the trustees are of the opinion that the guardian or caregiver may not be ideally placed to accept, invest and manage a lump sum payment on behalf of the minor in their care, they may elect to place the benefit in a beneficiary fund. The advantages of this cost-effective and safe vehicle are well known in the industry by now.
However, we perceive that there may be a gap in that retirement fund trustees could be overlooking the potential benefits of using a beneficiary fund for majors, the disabled and the elderly.
Here’s why this can happen and why it matters:
Historical reasons
Historically, beneficiary funds in South Africa were introduced under section 37C mainly to protect minor children who could not manage lump sum death benefits. As a result, trustees are used to seeing beneficiary funds as a “child-focused” solution, so they default to lump sum payments or trusts for adults.
Lack of awareness
Majors may be overlooked because trustees may not know that beneficiary funds are legally available for dependants of any age. A determination by the Pension Fund Adjudicator’s determination in the case of Vellem (obo Vellem) v Auto Workers Provident Fund and Another [2014] 1 BPLR 134 (PFA) proves the point (Paragraph 5.6, my emphasis).
“In distributing death benefits the trustees may pay benefits allocated to a minor dependant to such a dependant’s legal guardian, trust fund or a beneficiary fund. Their preference to pay such a benefit in any one of the methods set out above must be informed by the dependant’s best interests. In the same manner, a major dependant’s benefits may be paid to him in cash or into a beneficiary or trust fund. The preferred method of payment must be duly cognisant of the beneficiary’s best interests. There must also be a link between the preferred method of payment and the rationale behind it, especially in instances where payment into a beneficiary or trust fund is elected by the trustees over cash payment to the dependant’s legal guardian (in a minor dependant’s case) or the dependant himself (in a major dependant’s case)”.
A key principle in this is engagement with the dependant (or their guardian or caregiver). Our experience is that when the family is consulted during the process, there is a far greater understanding of the benefits of beneficiary funds, and as a consequence better use of the benefits and a better outcome for the dependants.
“Age 18”
Trustees may mistakenly assume that once a beneficiary is legally an adult, they can responsibly manage a large lump sum. This is not always the case. Fairheads has over many years advocated that the age at which lump sum death benefits are paid to beneficiaries be increased from age 18 to 21. This is because we have witnessed first-hand the impact of paying out a large lump sum to someone who has yet to finish school. There are very few 18-year-olds with the financial wisdom to handle a lump sum wisely – and there is often also pressure from extended family members to access the money for their own purposes.
There are other reasons for not paying a lump sum to a major. For example what about the case of a major dependant who displays clear signs of substance abuse. Would it be in the best interest of that person to receive a lump sum?
Overlooking the advantages
While trustees may have the perception that trusts or direct payments are more flexible solutions for adults, they should keep in mind that beneficiary funds are regulated and more cost effective than private trusts. Professionally managed, they ensure that funds are used for their intended purpose, like a monthly income for living expenses and ad hoc payments for capital expenses such as education and medical costs.
Beneficiary funds are registered under the Pension Funds Act and comply with FSCA oversight – and they offer significant tax advantages.
Elderly parents
In our experience, beneficiary funds can be particularly useful for elderly parents or dependants with limited financial skills or declining capacity. The beneficiary fund administrator can, for example, engage directly with a caregiver or the nursing home to ensure that elderly parents’ financial needs are met.
Conclusion
Beneficiary funds are not just for minors. We encourage trustees to extend their investigations into s37C allocations and consider all dependants, including majors and elderly family members, and to use beneficiary funds where they can best protect and sustain long term financial security.
