Divvying up your pension

ESSENTIALS: LONG-TERM GROWTH AND EXPENSES COVERED

John Harman, advisor at Rosebank Wealth Group, advises a reader on dicing up a pension for reinvestment and expenses.

Question: I was retrenched last year and am living on spare funds. I’m 57, unemployed, with a small mortgage I can settle with spare cash and just need to cover monthly expenses. The current benefit in my pension fund is R6 136 million, or a monthly pension of R35 648 (pre-tax). If I take one third cash, my monthly payment would be R23 762 (pre-tax). I am considering:

Leaving R3 million with the current fund and receiving a monthly pension from that. In addition to the monthly payment, I’d possibly also receive periodic bonus payments;

I would like to withdraw a cash portion of under R660 000 to set up a small business. R660 000 is where the next tax bracket starts.

Then I would like to purchase one or two further pensions from FSPs for the remaining balance, perhaps with more risk elements attached. Is this viable?

Answer: No debt to your name is commendable and gives you some flexibility.

I presume your current pension fund is a Defined Benefits Fund. I would urge you to thoroughly investigate the viability and financial soundness of the fund. Defined benefit funds are experiencing problems adequately meeting their financial obligations.

Make sure you get clarity on their policy on annual increases. At an age of 57, you can expect to live for another 20–30 years. Medical costs are likely to increase at a pace faster than general inflation and keeping up with these increases is vital.

The fund’s obligation finishes on death. Many provide a 50% or 75% benefit to the surviving spouse, however, there will be no leftover capital.

Upon retirement, you are limited to taking a third of the fund’s value in cash, with the balance used to purchase a pension or annuity for monthly income, taxed at your marginal tax rate.

The lump sum is taxed separately at retirement fund lump sum rates, assuming that you have never withdrawn or retired from a retirement fund before in your lifetime. The first R1 050 000 can be taken at an effective tax rate of 12.43%, which means that you will receive a net R919 500.

I would suggest that it makes sense to take at least a gross figure of R1 050 000 lump sum as this “effective” tax rate is lower than what you will pay on the monthly income received from the pension.

As you are over 55 and need monthly income, I suggest cancelling the withdrawal route. This lump sum should provide you with enough cash to explore setting up your small business option.

Lastly, depending on the cash lump sum you take, I would recommend keeping the balance of your cash as discretionary funds, in ordinary unit trusts, ETFs directly. This gives you complete freedom and flexibility over those funds and no undue restraints if/ when you need to access those funds.

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