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Cape Town - Contributions into pension funds serve to provide financial independence into old age, but what happens to those funds should you pass away before retirement age?
The Pension Funds Act provides a means to manage and administer these funds on behalf of minor beneficiaries and dependants, Jeanetta Hendriks, business development manager at FedGroup, explains.
In the event of a pension fund member’s death, a beneficiary fund ensures that they're able to derive meaningful benefit from this money until they reach the age of majority.
Should a member of a pension fund pass away before their retirement age the fund's board of trustees are tasked with determining how the lump sum death benefit, other approved benefits such as retirement funds, and employment-related unapproved benefits such as funeral and disability cover should be allocated among the member's beneficiaries, dependants and nominees.
READ: What you need to know about retirement
"Death benefits fulfil an important function in a society where those who are formally employed can often support up to 10 dependants. As such, these benefits act as a type of social fund that aims to ensure families and dependants do not become reliant on the state or, worse, destitute following the death of a sole or primary breadwinner," warns Hendriks.
In her view, beneficiary funds are one of the most cost effective funds available and also offer institutional investment returns. Once lump-sum benefits have been placed in a beneficiary fund they're also tax exempt as they're taxed in the same manner as pension funds. This means that no tax is paid in the fund and any payment made out of these funds to beneficiaries is also tax free, as are investment returns.
"Thanks to recent tax reforms the pre-retirement tax-free threshold for lump-sum benefits also increased to R500 000, which ensures that those who need this money most – the dependants – receive a larger portion of the death benefit," said Hendriks.
READ: How much is your retirement lump sum really worth?
However, these benefits are mitigated if a surviving spouse or legal guardian attempts to invest and manage these lump sum payouts in their personal capacity or through a trust.
"Beneficiary funds are safer than trusts and are less onerous in terms of taxation. They are, therefore, a better tool to ensure fund preservation and protection," says Hendriks.
If pension fund members understand the role of beneficiary funds and the benefits and advantages they offer to surviving family members and dependants, they will be able to stipulate in their nomination form that this is their preferred financial instrument to administer and manage their approved benefits – their pension fund and group life cover – as well as their unapproved benefits on behalf of their dependants.
"To make 100% certain that these funds are invested in this manner the nomination form can be supported with the stipulation in a last will and testament. Supported and guided by the member's stipulations trustees are better able to decide on the disbursement used, ensuring peace of mind for fund members as they know the money will be used for what it was intended, and that it is ring fenced to deliver lasting, meaningful benefit to their children," says Hendriks.
ALSO READ: What you should know about your retirement fund
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