Tips: stretching pensions

65 AND RETIRED: CAPITAL SHOULD OUTPACE INFLATION, WITHOUT RISK

Understanding performance in different investing environments and asset-classes, and tax rules can make a big difference.

Retirement assets can be classified in these categories: Type 1: Those from an inheritance, selling a business, or saving without using tax rebates; Type 2: Assets accumulated in a pension fund or retirement annuity (RA); Type 3: Assets invested in a provident fund.

There are a few points to consider in retirement planning; they shouldn’t be considered investment advice.

Housing assets in the right vehicle.

If you’re obliged to choose an annuity from an insurer, understand the differences between a living annuity (LA), guaranteed annuity (GA) and a guaranteed-with-profits annuity. Consider splitting your retirement fund into one housed within a LA and the other in a GA.

Endowment policies: Equity remains the asset class of choice for long-term growth, but the capital gains tax (CGT) levied on the sale of shares can seriously dent after-tax returns. A further benefit of endowments is investors are free to invest across asset types and geographies.

Type 1 pensioners should ask a financial advisor about the benefits of housing a direct equity portfolio within an endowment. Tax on income is levied at a 30% flat rate within the endowment – an opportunity for pensioners who pay more than this rate.

Section 12J venture capital investments: Investors can invest in projects creating employment, in return for tax rebates. This vehicle isn’t for everybody, as your capital is tied up for five years, and should only be looked at in conjunction with the tax rebates offered.

Investing in “alternative assets” including hedging strategies: Traditional hedge funds were initially designed to hedge against negative performance – what you want when you’re retired and don’t want to lose capital.

Tax considerations

Sars is looking at more ways to tax the wealthy, whatever their age.

CGT and estate duties may increase, rules about which assets do/don’t qualify for estate duty exemption may change. Use all the tax breaks you can to sweat your retirement assets.

Type 2 and 3 pensioners usually know retirement assets aren’t liable for CGT, dividends withholding tax or income tax on investment growth earned. Your annuity income will be taxed according to the current income tax tables.

All over-65s and over-75s are eligible for rebates on interest earned. Retirees could make full use

tax-free investments. You of can invest a maximum of R33 000 a year, up to a maximum of R500 000 in your lifetime.

Sars has made it harder to abuse trust structures to pay less tax. However, there are cases where using a trust structure is a legitimate conduit of family wealth between generations.

Find out which assets are exempt from estate duty, executor’s fees and/or CGT on death.

We recommend couples near retirement consult an advisor to discuss short-, medium- and long-term investment needs, then develop a plan. Insist investment risk be defined as the risk of the asset not outperforming inflation, not investment volatility, the maximum drawdown of an investment or an investment’s “value at risk”.

Peter is director of Rosebank Wealth Group