Wise up to retirement taxes

Sixty-year-old Patrick is finally ready to enjoy his retirement. He was widowed in his 50s and since then he has focused on his job as a superintendent in the South African Police Service.

He has worked in the SAPS for 30 years. He stays in Pretoria with his three children and two grandchildren.

“It’s a big moment for me. I’ve been focused on community safety for so long, it’s hard to let go,” Patrick says. He plans to travel with his family across SA. Most importantly, he wants to leave some of his money to his family after he is gone.

Option 1:

As a member of the Government Employees Pension Fund (GEPF), when he retires he will receive a once-off lump sum called a gratuity as well as an annuity. An annuity is a regular monthly income that is paid out to a GEPF member until he dies.

This is called a life or guaranteed annuity. Once he has bought his annuity, he does not need to make any further decisions about the product as his terms are set for the rest of his life. This is an ideal option for retirees who prefer the relative security of the guaranteed income.

Advantages

He will receive a lump-sum benefit (gratuity) that he can use to travel and pay for any of his personal expenses or debts.

He is guaranteed an income for life. His income will be increased by inflation as measured by the consumer price index.

There is a guarantee period for five years, which means that should he die within five years of his retirement, the income will be paid to his beneficiaries for the balance of those five years.

There is no risk of reduced income due to the performance of the stock market. He will receive a medical aid subsidy and funeral benefits.

Capped leave will be paid in the form of a cash amount.

He does not have to make any investment decisions.

Disadvantages

His beneficiaries will not receive any money if he dies five years after retirement. Remember, he wants part of his money to go to his family after he is gone. However, should he die within the five-year period, his beneficiaries will receive the balance of the annuity payments up to the end of the fiveyear period as a cash lump sum.

If, however, he wants flexibility, choice and potentially higher investment returns, along with the option of leaving his retirement capital to his loved ones, he should consider a living annuity.

Option 2:

Patrick can transfer his pension benefit into a preservation fund

The GEPF will transfer the value of his pension benefit plus any difference between this benefit and what is known as the actuarial interest into a preservation fund.

One benefit of this option is that no tax is payable when the amount is transferred into an approved pension preservation fund.

Thereafter, he can withdraw up to one-third of his pension benefit. His pension benefit will be taxed as below. His contributions made to the GEPF before March 1 1998 are regarded as tax-free and will increase his tax-free lump sum benefit.

Option 3:

Patrick can use the balance of his pension fund (after the one-third withdrawal) to buy an incomeproviding product, such as a living annuity.

A living annuity is an investment product from which you can draw an income from your retirement savings during retirement. It is intended to provide a regular income to investors who have retired, using retirement savings received on retirement from a pension, provident or retirement annuity fund.

You can select the income you wish to receive from the investment within certain limits. You can choose to receive your income monthly, quarterly, twice a year or once a year. Your income may be reviewed and changed every year.

However, the big drawback is that your income is not guaranteed for the rest of your life and you bear the risk of running out of savings to pay the level of income you need because you do not have enough capital and/or your investments do not perform well.

It is advisable you withdraw a sustainable level of income. Any money left in Patrick’s living annuity when he dies will be left to his beneficiaries.