*This content is brought to you by Brenthurst Wealth
By Charize Beukes *
Retiring after a lifetime of work should be a time to celebrate, but it’s also a time for big decisions that can lead to unneeded stress. What to do and how to handle your retirement savings is a major life decision because it plays such a big role in how your retirement years pan out.
The possibility of living for another 30 years after your retirement means that financial decisions now deserve your full attention, especially because one of the first decisions is whether to withdraw the one-third of your savings that you’re permitted, which includes R550,000 tax-free.
Under South African pension laws, anyone in a pension fund, pension preservation fund, provident fund, provident preservation fund, or retirement annuity may draw a one-third lump sum but must invest the remaining two-thirds in an annuity. This annuity is the investment instrument that will pay you an income through retirement or until the funds are depleted.
What you decide to do with your retirement funds will ultimately depend on your personal circumstances. The bigger your nest egg, the less you probably need to worry about your savings lasting through retirement.
However, not everyone feels they have enough to retire on, with National Treasure putting the figure of those who can retire comfortably at a mere 6% of the population.
This means you probably need all the help you can get to maximise the retirement savings that you have.
If that’s you, the following three tactics could help you get the most out of your savings by using the one-third withdrawal available.
Prepare for an uncertain future
If you do choose to draw your one-third savings, my first piece of advice is to use the funds to create an emergency fund.
This might sound like an extravagance in case something happens at some point in the future. But just like an insurance policy, this emergency fund can save you from financial disaster if you face unplanned expenses.
The big idea is that you want to shield your retirement savings in your annuity from unexpected disasters. That pool of funds needs to sustain your retirement, and the best way to keep them out of harm’s way is to have a standalone emergency fund.
Settle outstanding debts
Another smart way to use your one-third withdrawal could be to settle any debt you have. Not having to pay a mortgage, car, or personal loan will go a long way to reducing your monthly expenses in retirement.
And as we’ve seen over the past few years, inflation and higher interest rates can quickly eat into your budget.
So, by settling debt when you retire, you’re improving your liquidity – meaning you have more cash on hand every month. And if you’re really smart, you can use those extra funds to save up for future expenses or luxuries like an overseas holiday.
Optimise your tax in retirement
Another way you can tactically use your lump sum withdrawal is to reinvest that sum into a discretionary investment. A discretionary investment can be any fund or instrument not bound by retirement savings laws. In effect, you’re investing in assets at your discretion, not by National Treasury’s rules.
This means you could invest 100% of your lump sum into offshore equities, which is prohibited by the pension fund laws. Many argue against doing this because you’re concentrating your risk on one specific asset class.
Whichever discretionary investment instrument you choose – ideally in consultation with your financial advisor – the other benefit is that your withdrawals are not subject to income tax, which your annuity funds are. Yes, you could be subject to capital gains tax, but this rate is lower than your income tax rate.
The argument in favour of this approach is that your monthly income from your annuity may be lower because you withdrew one-third, but you’re also paying less tax every month.
Let’s examine the impact that decision will have on your future income.
Full value used: Compulsory Annuity 2/3RD Of the value used: Compulsory Annuity1/3RD Discretionary InvestmentTotal tax saving Yearly Income drawdown240 000160 00065 364Monthly income drawdown20 00013 3335 447Rate of income tax10.92%7.23%*-Total income tax payable to SARS26 19711 565–14 632Income after tax (yearly)213 803148 43565 364Income after tax (monthly)17 81712 3705 447Shortfall to be covered by discretionary investment5 447 p.m.
*Subject to CGT after taking into account the annual exclusion
Hopefully, this illustrates that there’s more than one way to consider your retirement funds. The key is to start planning for this before you reach 65 and suddenly need to make a decision that could be life-altering.
Your decision will depend on your personal circumstances, although we at Brenthurst are strong believers in not having all your eggs in one basket. This means using a tactic like having some discretionary and non-discretionary investments to supplement your income, take care of unforeseen expenses and even lighten the tax burden.
I urge you to start thinking about these issues long before retirement. It’s essential to get a clear picture of where you are now, where you need to be and how you will get there. Both before and in retirement.
* Charize Beukes, CFP® is a Financial Planner at Brenthurst Wealth. [email protected]
Brenthurst Wealth Management
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