Don’t make assumptions when it comes to providing for your minor children

Retirement fund members often make assumptions about how the financial needs of their minor children will be cared for in the event of their death.

It isn’t a good idea to be guessing about what will happen should you die. Your retirement fund and group life cover are, after your home, your biggest assets. Your group life cover is typically multiples of your annual salary.
This money can therefore provide for your family, but you should be sure exactly how this will happen for your unique family.  

Not part your my estate

Members often do not realise that retirement fund credits do not form part of their estates.

This means you are not free to dictate in your will who will receive these benefits.

Instead, the trustees of your retirement fund are obliged, in terms of Section 37C of the Pension Funds Act, to determine who your financial dependants are and the extent of their dependency.

With this knowledge they must distribute your retirement fund savings equitably among your dependants and anyone else you may have nominated as a beneficiary.

Then they must determine the appropriate way to pay the benefits to your dependants and nominees, which is particularly relevant when your dependants are minors.

Group life cover

When it comes to your group life cover, many people do not realise that there are two kinds of cover:

• Approved group risk insurance

What is known as approved group risk insurance cover is provided by your retirement fund.  The fund owns the policy and the benefits pay into the fund. This means the trustees decide how to distribute them and pay them in the same way they deal with your retirement fund credit.

These benefits are typically paid out to your dependant as a lump sum if they are an adult (a major or over the age of 18). Your dependant/s can then elect to invest the money, purchase an annuity to provide an ongoing income, or place the money in a beneficiary fund.

If your dependant/s are still minors, the money can be paid into a beneficiary fund, a trust, the Guardian’s Fund or paid to the minor’s guardian or caregiver.

If the trustees decide to pay the guardian or caregiver, they must be sure that the money will be safe and used for the benefit of the minor dependant. The fund can be exposed to claims that the trustees failed to do their fiduciary duty if the money is not paid to a legal guardian.

A beneficiary fund is a fund that can be set up to manage money for minor children or adults who are not capable of managing large sums.

These funds are regulated by the Pension Funds Act and if your retirement fund benefits are paid into it for the benefit of your minor children, the money will be ring-fenced for them.

The money is then invested by professionals and an income can be paid from it to your children’s guardian or caregiver. Ad hoc capital payments can also be made for your children’s education and medical costs.

Beneficiary funds are cost-effective because the investments are pooled and there are savings from the scale.

They are also tax-efficient because neither money in the fund, the income paid from it nor the residual amount paid to the beneficiary when they reach majority is taxed.

Paying a benefit into the Guardian’s Fund – operated by the Master’s Offices - is not optimal because despite this fund having laudable objectives, it has been plagued by theft and fraud.

In addition, guardians must jump through all sorts of administrative hoops when they need to draw money for maintenance, education, clothing or medical costs for a minor. Master’s Offices around the country are often dysfunctional, creating delays in processing applications for funds.

Money paid into the Guardian’s Fund earns a government-fixed rate of interest. This is currently 4.25 percent a year, which is both below inflation and unattractive relative to what you could earn in investment markets.

• Unapproved group risk cover

What is known as unapproved benefits or unapproved group risk insurance is an insurance policy owned by your employer. The Insurance Act stipulates that benefits from these policies must be paid to anyone you have nominated on a beneficiary nomination form or, if you have not nominated anyone, it must be paid into your estate. Read more: What does it mean if my group scheme is approved or unapproved?

This means it is really important to complete a beneficiary nomination form, and to review it regularly to make sure the right family members will receive the money.

You also need to be sure the money paid out from an unapproved policy will provide for your minor children.

Minor children cannot be paid a sum of money. You therefore need to nominate someone you trust to receive the benefit on behalf of your minor children and to use it for their benefit until they reach majority and can take over managing the money. You may know who you want to look after your children in the event of your death, but you may not be sure of their ability to handle a large sum of money.

If you nominate your minor children, the life insurance company can pay their legal guardian. If this is a former spouse, you may not want them to be paid. When minor children are nominated as beneficiaries, life insurers can pay other caregivers but increasingly they are realizing the risk of claims against them for paying the benefit to a third party.

The alternative is to nominate a beneficiary fund or to leave the money in an intervivos or testamentary trust to safeguard it until your children are old enough to receive it themselves.

The last word

We all hope we will see our children to adulthood, so hopefully your children never need any of these measures. But worse than not seeing them to adulthood is leaving them to struggle through childhood without you and without good plans that ensure they are looked after well financially.