• Giselle Gould, Business Development Director

18 or 21? The debate continues


  • Since the Children’s Act of 2005, the age of majority in South Africa has been 18, not 21 (with effect from 1 July 2007). This has led to a vigorous debate on the issue of whether 18-year-olds are capable of handling lump-sum payouts from beneficiary funds.

  • Acting within the existing legislative framework, Fairheads informs members turning 18 that they have a choice whether to take a lump sum or leave it in the beneficiary fund to pay for further education. The tax and pricing benefits of beneficiary funds are compelling.

  • A new legal view may allow trustees of beneficiary funds to exercise their discretion over the age at which minors’ funds can be paid out.

Beneficiary funds principally house benefits on behalf of minor members whose parent has passed away. They may also accept monies due to majors above the age of 18. The trustees of retirement funds may choose to pay benefits due to dependents into such vehicles, following which responsibility for the funds rests with the trustees of the beneficiary fund. These trustees appoint an administrator, investment managers and a range of other service providers to the fund.

Much of the effort in administering beneficiary funds has traditionally been on paying out members’ benefits and terminating their membership of the fund when they reach the age of majority. (Indeed, until recently, the rate of prompt terminations was one of the key success measures employed by trustees to evaluate the performance of the administrator).

Yet the trustees of transferor retirement funds, guardians and many others have voiced strong concerns about paying out lump sums to members when they reach the age of 18. In Fairheads’ experience, the average payout is valued at over R100,000. Many 18-year-olds are still in school and the consequences of receiving a relatively large sum can be devastating if not managed properly. Guardians and caregivers at Fairheads’ annual roadshows have complained about children dropping out of school and the money being squandered within a matter of months. There have even been cases where guardians have actively hidden the fact from the minor member that money is held in a beneficiary fund, to prevent such a situation.

Member choice

The trustees of the Fairheads Umbrella Beneficiary Fund have therefore adjusted their strategy from simply paying out benefits at age 18 to one which emphasises the freedom of choice for members. There is no restriction on funds being held in a beneficiary fund with a major member’s consent, and it is arguable that for many this is a good investment vehicle because of low fees, institutional investment management and tax exemptions. In some cases a beneficiary fund account can be cheaper than a bank account, plus it comes with major tax advantages. See below in coloured text.

Communication with members is key. The message is simply that members can retain their membership in the fund and request monies when they need it, either in part or in full. There are no termination fees, lock-in periods or any other restrictions on retaining membership of the fund. And members are responding, with large numbers of major members now leaving their benefit in the beneficiary fund.

A new legal view sets the trend

A new view, obtained by Fairheads, has now emerged which considers two issues in relation to Section 37(C) death benefit distributions. Firstly, are members entitled to automatically receive their benefits upon reaching the age of majority, and secondly are the trustees of transferring retirement funds obliged to obtain a major dependent’s consent to place funds into a beneficiary fund?

On the first matter, the legal view concludes that discretion may be given to the trustees of the beneficiary fund to consider whether it would be in the best interests of the major member to be paid a lump sum at age 18 or whether it would be more appropriate to continue paying the benefit in more than one payment.

On the second matter, the view is that it is not a requirement to obtain a major dependent’s consent. Trustees, the view holds, have the duty to act in the best interests of the major dependent, and should use their discretion to determine whether death benefits should be placed in a beneficiary fund.

The view emphasises that trustee discretion needs to be exercised with care, taking the specific circumstances of the individual into account. For example, would it be in the best interest of the member to pay out a large lump sum when they have serious substance abuse issues?

Legislative change

Pressure to reconsider the age of 18 for lump-sum payouts has been growing ever since 2007 when the Children’s Act introduced 18 as the new age of majority, down from the previous age of 21.

In 2015, an industry submission led by Fairheads was made to the Financial Service Conduct Authority (formerly the Financial Services Board) to amend pension fund legislation so that lump sums are not automatically paid out to minors when they turn 18.

If such a change were made, there is a greater likelihood of the member being more mature, more educated and therefore, hopefully more financially literate to manage their own financial affairs. The chances of them being able to sustain themselves would be higher. Furthermore, the proposal could possibly also incentivise beneficiaries to stay in school or go back to school to obtain a matric or the equivalent of a NQF Level 4.

The trend is clear, as is shown by the above and we hope that in due course it will be reflected appropriately in legislation.

Pricing and tax benefits of beneficiary funds

Pricing equivalent to that of a current account

Beneficiary fund costs, like those of retirement funds, have reduced over time. The Fairheads Umbrella Beneficiary Fund is in some cases cheaper than a bank account, with the added benefits that come with the product.

Expert investments and institutional pricing

The investment manager and asset allocation of beneficiary funds allow members to benefit from expert investment knowledge which has been gained over many years of managing minors’ money, which is quite different from the investment management of contributory retirement funds.

Investments are pooled, creating an opportunity for significant savings when it comes to fees.

Significant tax advantages

Beneficiary funds are wholly tax exempt, both in terms of income and capital distributed from the fund. There are few better investment vehicles available in South Africa today from a tax perspective. In a sense a beneficiary fund can be viewed as a tax-free preservation vehicle.

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