| Question: Can you give me direction on how to invest my pension money when I retire? |
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You have spent your life working hard and ensuring you have planned well so that one day you can retire comfortably. There are many options to consider when you retire but one would need to identify your personal circumstances and requirements before providing a final solution.
As per your question, I have answered on the basis that this is a pension fund and not a provident fund, as the rules of these funds differ.
Without knowing the value of your pension fund, it is difficult to give a straight answer, as at retirement there are two important decisions that need to be considered: |
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- Are you going to take the allowable cash portion?
- What annuity type is best suited to your requirements?
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Below is a general view of the options available to you on retirement.
According to the Pension Fund Act, individuals may withdraw one third of their retirement funds at retirement age in cash, which will be taxed as follows: |
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| Amount |
Tax Implications |
| First R500 000 |
Tax-free |
| R500 001 to R700 000 |
18% of amount over R500 000 |
| R700 001 to R1 050 000 |
R36 000 + 27% of amount over R700 000 |
| R1 050 001 and above |
R130 500 + 36% of amount over R1 050 000 |
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| Note the following with regards to the tax-free portion at retirement: |
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- The R500 000 tax-free portion is only allowable once per individual;
- If you have withdrawn from any pension fund savings prior to or after retirement it will impact the R500 000 tax-free portion;
- If you have taken a retrenchment package this will also impact the tax-free portion;
- Any non-deductible contributions to a retirement annuity/pension fund can increase your tax-free portion at retirement;
- If you do a full transfer from your retirement savings to a living annuity there are no tax implications.
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The remaining two-thirds (or the full value if you do not take the allowable cash portion) will need to be used to purchase an income-generating annuity.
There are two types of annuities:
1. Fixed Annuity: |
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- With a fixed annuity, you will hand your pension fund money over to the investment life company, which in turn guarantees to pay a monthly taxable income until death. The investment company will take into consideration a few factors, such as age, and will determine an income to pay out for the rest of your life.
- A life annuity pays either for the whole of your life or will be on a joint-life basis, depending on the selection made at inception.
- The downside, however, is that income payments cease upon your death or the joint-life death and the capital is retained by the investment life company.
- Once a life annuity is taken this cannot be changed at a later stage.
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| 2. Living Annuity: |
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- A living annuity is a unit trust-based investment platform where an individual’s ‘pension’ money is invested into a diversified unit trust portfolio and a taxable income is drawn from the portfolio.
- According to the Pension Fund Act, the income level allowed is set at between 2.5% and 17.5% of the capital balance per annum. The income can be paid annually, quarterly or monthly, depending on your individual requirements.
- You would only be allowed to change your drawdown levels once a year on the anniversary date of the investment.
- The understandable risk is that if an individual draws an income of, say, 15% per annum and the investment grows at only 10% per annum then the capital will erode. The erosion of capital will lead to a reduction in income, or even the eventual depletion of the investment.
- If an individual draws an income of 10% and the investment grows at 15%, then the investment continues to grow by 5% per annum over and above the income drawn. Bear in mind that the income will also grow accordingly, as it is a percentage of the capital balance.
- The income drawn may be subject to tax according to the tax tables.
- Upon your death, the remaining capital is payable to selected beneficiaries.
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| Other factors of utmost importance: |
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- Do you have any dependants?
- Are you dependent on anyone?
- How much flexibility do you require?
- Longevity (how long you are expected to live for).
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| Another crucial factor that is sometimes overlooked, is what funds to invest in. A wide multitude of funds is open to investors. These can include but are not limited to: |
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- Income-generating funds
- Balanced funds
- Stable funds
- Equity funds
- Tracker/exchange-traded funds (ETFs)
- Asset-swap funds
- Offshore funds (in foreign currency)
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All of these funds have different objectives and provide different returns based on various factors.
So, which is the right one to choose? Well, this can only be determined after a proper financial needs analysis is compiled. One should not forget that it is possible to invest a portion of your pension money in foreign-denominated currency if you are concerned with the local market sentiment. Diversification and a well-balanced portfolio is the key to a successful retirement.
These are just some of the factors one should consider when investing pension savings. It is recommended that you get in touch with a financial advisor who will compile a proper financial planning analysis and provide you with the most appropriate solution to meet your requirements. |
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| Credit To: Haldane, Michael. (2019, March 18). How do I invest my pension when I retire? MoneyWeb. Retrieved from: https://www.moneyweb.co.za/qa/advisor-questions/how-do-i-invest-my-pension-when-i-retire/ |
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Refer to the Retirement Planning Insurance article |
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