Trouble with state pension

LIVING ANNUITY OR GOING IT ALONE Ronelle Kind, chief operating officer of Liberty Viewpoint, advises a reader who is retiring from the civil service.

Q: I’m retiring from government service with the option of a retirement gratuity of R1.2 million plus a monthly pension of R 27 414 for life, or a resignation benefit of R5 047 648. But what about my wife and heirs if I die? I’m also worried about how the GEPF will be managed in future. If I take the resignation benefit of R5 047 648, can I do better on my own?

A: The Government Employees Pension Fund (GEPF) is a defined benefit fund. The retirement benefits are defined with regard to the reader’s salary at retirement and the length of service.

If we consider this reader’s particular circumstances, in order to match the R27 414 per month pension from the GEPF, they would need to draw 6.52% per annum from the living annuity balance.

Assume the balance grows at 10% per annum and that the reader would require the annual pension to increase with inflation at 6%. Then the investment growth on the account will exceed the pension being drawn for around nine years. After that the capital will start shrinking and will be fully eroded after about 22 years.

If the reader is 60, the capital will be fully eroded by age 82. If, on average, the account grows by less than 10% per annum, this amount will be eroded sooner. This demonstrates the investment risks the reader faces.

Most pensioners face a similar decision at retirement.

Here are some considerations that need to be taken into account: Attitude towards risk. The level and nature of base expenses in retirement. Tax considerations. Level of investment expertise and ability to obtain advice on choosing portfolios.

Views about health and longevity.

Bequest motives. The living annuity framework lends itself more easily to providing an inheritance to children. However, in this particular case, the reader will receive a gratuity of R1.2 million. This could be invested and left to dependents.

The number of children dependent on the reader at retirement could inform the decision.

It is recommended the reader obtain advice from a financial advisor prior to making a decision.