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Retirement Planning
Wednesday, October 1, 2008
Tax benefit

From 1st January 2009 it is likely that no tax will be payable by beneficiaries on the capital they withdraw from “death benefit” monies invested in ‘beneficiary funds’.

Such funds are being set up to supersede umbrella trusts that reached prominence at the time of the Fidentia scandal. In his 2007 budget speech, Minister Trevor Manuel promised that the government would look into the plight of “widows and orphans” to ensure that future scams were avoided.
The result is that legislation will be passed in the near future to create beneficiary funds that will be governed by the Pension Funds Act, allowing recourse by any stakeholder to the Pension Funds Adjudicator. These funds will replace umbrella trusts as the vehicle for any new death benefit monies, while existing umbrella trusts will continue to run their course.
Speaking at the Institute of Retirement Funds conference in Durban in August, Giselle Gould of Fairheads Umbrella Trust Company highlighted a few advantages of the new funds. “This is a significant development. The average death-benefit payout from a retirement fund is R50 000 and can serve a vital role in educating and sustaining minors. Why tax these amounts?”
The new vehicle is tax-effective at the fund level too as, unlike umbrella trusts, all monies transferred from a retirement fund to a beneficiary fund will be tax-free.
A further welcome feature of the new legislation is compliance with Regulation 28 of the Pension Funds Act, which provides prudential investment guidelines depending on the nature of the investment product.
Beneficiary funds are unequivocal about the status of the legal guardian versus a caregiver, an issue that has proved problematic for trustees in the past. Gould says that trustees should consider very carefully the risks of paying lump sums to caregivers on behalf of minors as they are not legal guardians and are more likely to change.
Administrators will need to apply to the FSB for a so-called 13b licence to administer beneficiary funds. Licences will be granted on the basis of a raft of requirements including annual reporting and system auditing, liquidity, a FAIS licence, a trustee code, fidelity cover, and an investment policy statement.
Companies wishing to offer beneficiary fund services need to draft rules and submit them to the Financial Services Board in order for a fund to be registered.
There are similarities with retirement funds. Each beneficiary fund will have a principal officer and funds may be structured as stand-alone or umbrella products. The board structure will comprise of a minimum of four individual trustees (unlike umbrella trusts, which allow for corporate trustees) who will play an even more intense and active role than their counterparts in retirement funds, given the interactive nature of beneficiary funds. Trustee powers and competence will be spelt out in the regulations and/or beneficiary fund rules.
International Financial Reporting Standards (IFRS) would probably apply to beneficiary funds. It is probable that audited annual financial statements for all licensed administrators will need to be submitted to the FSB, as well as audited statements for each beneficiary fund. Reputable service providers are already providing audited financial statements for their umbrella trusts but those who are not should gear up for the auditing that will become obligatory for the new beneficiary funds.
Boards of trustees of beneficiary funds will have to submit an investment strategy or an Investment Policy Statement (IPS) to the FSB, in terms of which they will have have to retain full discretion but need to demonstrate the appropriateness of the IPS. Investment consulting could therefore become a necessary function in these beneficiary funds. Service providers should therefore begin to review their investment strategies with a view to being able to justify the same to the regulator.
Administrators and companies wishing to offer beneficiary fund services are gearing themselves up for the target date of January 2009. There is much to be done. Gould recommends that trustees and retirement fund members familiarise themselves with the essentials of the new legislation. In particular, they should ensure that no funds are paid over to umbrella trusts from the cut-off date.

Copyright © Insurance Times and Investments® Vol:21.9 1st October, 2008
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