Lower age of majority enables 18-year-olds to squander death benefits

The lowering of the age of majority from 21 to 18 in 2007 is having a disastrous effect on the dependent children of retirement fund members who died before retirement.

The reason is that, in most cases, when these children turn 18 they are entitled to claim any residual money from the fund member’s retirement savings that is held in trust. And when they receive the money, most children drop out of school without any idea of how to preserve their newly acquired wealth.

Richard Krepelka, chief executive of Fairheads Benefit Services, says the situation is very serious and government needs to intervene.

Fairheads is the biggest administrator in South Africa of beneficiary funds and umbrella trust funds.

Krepelka says that retirement fund trustees, who have the responsibility of placing benefits in a beneficiary fund on the death of a fund member, cannot stipulate that the capital amount must be retained until a beneficiary reaches an age older than 18. This is even where, in a signed beneficiary statement, the fund member stated the period for which the benefits should be retained.

The age of majority was lowered to 18 by the Children’s Act of 2007.

“It is not uncommon for beneficiary fund service providers to pay out R100 000 or more on the termination of an account when the fund member’s beneficiary turns 18. Yet the reality of social and educational circumstances means that the average 18-yearold in South Africa is not financially mature enough to invest or use large sums of money responsibly,” Krepelka says.

Fairheads has been lobbying the Financial Services Board and National Treasury for the Pension Funds Act to be amended to allow children’s benefits to be managed until age 21, which would encourage dependent children to complete their secondary education.

Beneficiary funds and their umbrella trust predecessors manage about R19 billion in assets on behalf of orphans or singleparent children in South Africa.

In terms of section 37C of the Pension Funds Act, when an under-age beneficiary receives a lump sum death benefit from a retirement fund, an account may be set up in an umbrella beneficiary fund, which pays an income to the beneficiary (usually via the guardian), as well as capital amounts for expenses such as school fees. Once the beneficiary turns 18, he or she is entitled to the remaining funds.

The alternative is to pay the amount to the guardian of a minor child.

Krepelka says: “Exacerbating the problem, only 50 percent of 18-year-olds are in matric; the rest are in lower grades, or have dropped out of school already. This leads to a very low literacy level and an even lower financial literacy level.”

He says that Fairheads tries to counter the problem by counselling beneficiaries before termination payments are made.

“We advise them to leave the money invested in the beneficiary fund until they complete their education, but most of them opt to have the money paid out.

“This leads to more youngsters being insufficiently educated and dropping out of school, and therefore becoming unemployable, which perpetuates an already unacceptable unemployment rate. This is contrary to a key objective of a beneficiary fund, which is to ensure that children get sufficient education to be self-sufficient in society and the economy.”

Fairheads met with over 5 000 guardians and caregivers during a national education roadshow this year, and most of those consulted regarded the new age of majority as an issue that requires attention, he says.