What is a beneficiary fund?

A beneficiary fund is a special kind of retirement fund set up to receive, administer, invest and pay benefits due to the beneficiaries of members who die before retirement.

The Pension Funds Act provides for these funds to be set up and used for benefits due to minor dependants or dependants who are not capable of managing a large sum of money for their future income needs.

The funds are subject to pension fund legislation ensuring proper governance and management and investment of the money in these funds. The funds are regulated by both the Financial Sector Conduct Authority (FSCA) and the Prudential Authority.

Funds are typically set up either by an existing retirement fund or by an administrator. Some beneficiary funds, like umbrella retirement funds, manage money for beneficiaries of members of a number of different retirement funds.

When are beneficiary funds used?

If you die before retirement, the Pension Funds Act in section 37C requires the trustees of your retirement fund to identify your dependants and anyone you have nominated as beneficiaries and to distribute any savings and death benefits to those dependants and nominees equitably in line with their needs.

The trustees are also required to consider how to distribute your retirement savings and death benefits in the best interests of your dependants. In the case of minor children or adults who are not capable of managing the money, the trustees must consider who is best placed to manage the money. They can allocate the money to a guardian, place it in a trust or in a beneficiary fund. Before giving the money to a guardian, the trustees must consider whether that person is likely to manage the money well for the children given their education and personal circumstances and previous experience in managing money.

Beneficiary funds may also receive death benefits from an unapproved group life policy set up by an employer – policy benefits that are not paid into a retirement fund.

What do beneficiary funds do?

Beneficiary funds are required to invest the beneficiary’s money and typically make monthly payments to the beneficiary or, in the case of minor children, the legal guardians and caregivers, to meet their regular living costs. Larger amounts may also be paid out for irregular expenses, such as once-off school-related expenses and medical costs. 

The trustees’ aim is to ensure the benefits are used for the minor’s living and education expenses at least until the child reaches majority (18 years), and they approve any requests for payments to meet ad hoc expenses.

When the child turns 18 any remaining money of the benefit paid into the fund can then be paid to them as a lump sum or the fund can continue to administer the benefits on behalf of the beneficiary.

How does a beneficiary fund work?

Each beneficiary has a sub-account in their own name which is managed for them and accounted for separately.

The fund trustees decide how best to invest the beneficiary’s money in the fund and how much can be drawn out in an attempt to balance the available capital and the beneficiary’s expenses for the full period the beneficiary will need their expenses met. Depending on how much the member had in benefits, it may not always be possible to avoid the capital being depleted before the child reaches majority, but the trustees will decide how to best use the money to maintain the child for as long as possible.

A suitable asset allocation and investment strategy is designed for each beneficiary ensuring that the money grows but enough is still accessible or liquid enough to meet the regular payments. The strategy and amount that can be withdrawn is calculated to ensure the funds are sustainable until a child is educated and able to work, or an adult dependent reaches retirement age and can draw a pension or dies.

The trustees consider the actual expenses and guide caregivers and guardians to ensure that the funds are used in the best interests of the beneficiary.

Trustees may have a policy or guidelines on how to deal with payment requests and provide a certain amount annually for ad hoc payments. If the amount is not requested it is held for child until he or she reaches majority. Priority is given to educational expenses, but other expenses such as those for driving lessons, clothing, cell phones, transport or rituals and ceremonies are also entertained. 

If requests exceed the budget, trustees explain the implications to caregivers and beneficiaries. If they still wish to draw the amount, the trustees must assess the request and make a decision in the child’s best interests.

What are the tax advantages of a beneficiary fund?

After the death of a member before retirement, any benefits paid out of a retirement fund as a lump sum are taxed as if you retired the day before your death. Read more: What happens to my retirement savings if I die before retirement?

The after-tax benefit that is paid into a beneficiary fund, however, can then earn interest, dividends and capital gains without any tax being due.

Regular or lump sum payments can also be made to beneficiaries without attracting tax.

If retirement savings and death benefits are paid out as a lump sum and invested by the beneficiary or their guardian instead of being placed in a beneficiary fund, they could be subject to these taxes.

When a beneficiary who was a child when the retirement fund or group life benefit was paid into a beneficiary fund reaches majority, they can leave their money in the beneficiary fund and continue benefitting from the tax advantages of these funds.  

How are a beneficiary's rights protected?

The Pension Funds Act sets up the following protection for beneficiaries whose money is managed by a beneficiary fund:

Administrators of beneficiary funds require a 13B licence from the Financial Sector Conduct Authority to manage a beneficiary fund.

Beneficiary funds must be overseen by a board of professional trustees.

Beneficiary funds must be audited annually and must submit regular reports to the FSCA.

Beneficiaries who have accounts in a beneficiary fund, or their legal guardian, can take a complaint to the Pension Funds Adjudicator.

Investments must be made in line with Regulation 28 of the Pension Funds Act which ensures they are well diversified.

What are the costs of a beneficiary fund?

Beneficiary funds, like other retirement funds, can charge fees for administration.

Any investments made will also incur asset management fees.

However, these fees will typically be cheaper than the fees that would be paid to set up a standalone trust. The funds enjoy institutional investment rates due to their size (the benefits of scale).

In addition, costs are shared across all beneficiaries. An example is the fees paid to independent trustees. A standalone trust needs to have an independent trustee appointed, typically at a cost. That cost is borne exclusively by those beneficiaries, whereas in a beneficiary fund it is shared among many.  

Should I consider using a beneficiary fund?

If you are a retirement fund member it is worth considering the advantages of a beneficiary fund and whether it could be a good option to ensure your dependents are cared for in the event of your death.

Consider your family circumstances. If you have minor children, who is your children’s guardian and could they manage the money on your children’s behalf? If you have adult dependants, consider who would manage your retirement fund benefits for them if you passed away.

If you pass away many years from today, will guardians you have appointed, such as your parents, still be capable? And will your choice of guardian always be suitable, given that the financial priorities of a guardian you choose now may change, for example, if that person marries or remarries or becomes unable to work?

If you have property, you may have set up a testamentary trust in your will to manage assets your minor children will inherit and you could ask the trustees of your retirement fund to consider using that trust. However, depending on how much your children will inherit, a beneficiary fund may be more cost-effective for retirement fund benefits.

You can stipulate on your retirement fund beneficiary nomination form that you would like the trustees to consider placing your benefits in a beneficiary fund and your fund may have a preferred beneficiary fund. 

This article was written by Laura du Preez, with the help of information supplied by David Hurford, the chief executive officer of Fairheads Benefit Services. Hurford also reviewed the article.