Investing retirement annuity to get a monthly return
Q: I am 63, and my retirement annuity from Alexander Forbes will pay out soon. Please give me an indication of where I can invest my R400 000 and get a monthly return but also still keep the capital amount. Not sure if I can take the whole amount and invest as I wish, or do I have to buy a living or a life annuity?
A: Generally, when retiring from a retirement fund, you are only able to cash in (otherwise known as a commutation) up to one-third of the fund value in cash, of which the first R550 000 is tax-free, and any amount above this is taxed in accordance with the retirement tax tables.
The remaining value in your retirement fund must be used to purchase an annuity.
It is important to remember that all previous withdrawals and commutations taken from other retirement funds during your lifetime will be included in the calculation when determining how much tax you need to pay on your cash commutation.
When leaving your employment through resignation or retrenchment, you can withdraw the full amount in your pension or provident fund, although you will be taxed at a higher rate than a retirement withdrawal.
Regarding the portion you need to use to purchase an annuity, you are correct in saying that you must purchase either a living or life annuity.
It is important to carefully consider your overall financial plan before making such a decision, as each annuity has varying functionality that could have a long-lasting impact on your retirement plan.
If you decide to take a portion of your retirement annuity in cash, these funds will be paid into your bank account after all taxes have been deducted, and you are free to invest the full proceeds as you wish.
Investment options
The barriers to entry into investing have drastically reduced over the years, with a wide range of options available to investors.
One of the more commonly used methods of investing is using a LISP platform to invest in unit trusts.
When investing in a unit trust, you can invest in four main asset classes: equity, property, cash and bonds. When looking at the historical average return of these different asset classes, investors would need to invest in property and equity to grow the purchasing power of their funds (in other words, achieve a return above inflation).
It is important to remember, though, that with the higher expected return of these assets comes an increased expected risk and volatility of the investment, and capital is not guaranteed.
Investing in cash and bonds will drastically reduce the risk and volatility of your investment, but with this reduced risk, investors should only expect to earn inflation-like returns over the long term.
To guarantee your capital and receive a monthly return, you would generally need to use a banking product such as a fixed deposit. These products usually come with specific terms and conditions around accessibility and duration of the investment, where the longer you are willing to lock away your capital and the more you are willing to invest in the product, the higher the interest rate the bank will be willing to offer to the investor.
Remember that, just like any cash and bond investment, earning interest in these fixed deposits will result in you being liable for additional income tax should you earn above R23 800 interest in a tax year.
If you are older than 65, this threshold increases to R34 500.
When making any investment decision, ensure you are not making it in isolation – and it is always advisable to consult your financial advisor and review your holistic financial plan.