Retrenched at 57 and needing funds

LUMP SUM IS TAXED SEPARATELY AT RETIREMENT FUND LUMP SUM RATES John Harman, financial advis0r at Rosebank Wealth Group, advises reader who has been retrenched about starting small business.

Q: I’m retrenched, 57, and need my retirement funds. I have no debt. My fund benefit is R6 136 million, giving a monthly pension of R35 648 (pre tax). If I take onethird cash, R2 045 437, my monthly payment would be R23 762 (pre tax). Leaving R3 million with fund for a monthly pension and possible, periodic bonus payments. Here, the risk lies with the fund to provide regular minimum monthly payments.

Taking a cash portion of R660 000 to set up a small business.

Buying further pensions from FSPs with the balance (about R2 440 000). A: I presume your current pension fund is a defined benefits fund. As you point out, the risk lies with the fund to ensure payments. I urge you to thoroughly investigate the financial soundness of the fund.

Defined benefit funds around the world are experiencing problems meeting their financial obligations. Longevity and ultralow interest rates in most developed economies lie at the crux of this funding issue.

Also, get clarity on their policy on annual increases. It is not unreasonable to assume you can expect to live for another 20-30 years. Medical costs are likely to increase above general inflation and ensuring your fixed income keeps pace with these increases is vital.

Upon retirement from a retirement fund, you are limited to taking a maximum of one-third of the funds value in cash, with the balance having to be used to purchase a pension or annuity which will then pay you a monthly income. This monthly income is taxed entirely as income in your hands, all at your marginal tax rate.

The lump sum is taxed separately at retirement fund lump sum rates, assuming no previous withdrawals.

The first R1 050 000 can be taken at an effective tax rate of 12.43%, leaving you R919 500. It makes sense to take at least R1 050 000 as this effective tax rate is lower than what you will pay on the monthly income received from the pension.

You mention a figure of R660 000. As you are over the age of 55 (the notional retirement age for retirement funds) and need monthly income, do not even consider the withdrawal route. This lump sum should provide you with enough cash to explore setting up your small business option.

I recommend keeping the balance of your cash as discretionary funds. This gives you freedom and flexibility should you need to supplement your income at any stage.

Send your queries to