This time, vanilla is good
Investing your pension when you retire does not need to be difficult, writes Robert Laing
I’ve just gone through a rite of passage we all have to experience at some stage: retirement. I found it very trying, so would like to share some of the harsh lessons I’ve learnt with you, dear reader, who I assume is 20-something and thinks this is something that will never happen to you.
I’m retiring at a relatively young age, 55, and would have retired at 50 if anyone had told me I could. Nobody did, which is why I’d like to share my wisdom with you.
I’m leaving my job voluntarily, a rare luxury for a middleaged corporate wage slave in the modern era. Many people my age working in the information technology media industry find themselves suddenly herded to the human resources department like lambs to the slaughter and ordered to fill in a form asking confusing questions such as whether they want a “life annuity” or a “living annuity”.
Under SA’S pension laws, you can take only a third of your pension as cash immediately, provided this does not come to more than R500,000. Furthermore, this limit applies to your entire working life. SA’S convoluted pension system does not encourage portable pensions, so people who job hopped early in their careers and invariably built up too small a pension to bother putting in a preservation fund need to deduct what they cashed in earlier from the R500,000 limit.
The remaining two-thirds, or more if your pension is more than R1.5m, has to be put into one of the two types of annuity, else the SA Revenue Service adds the entire lump sum payment to your income for that tax year. Considering that income over R1.5m is taxed at 45%, it is far wiser to hand the money to a pension fund manager.
There is no escaping income tax on your pension. But as most people are likely to end with an annuity paying less than R195,850 a year, which places it in the lowest tax band of 18%, it’s a far wiser choice than letting the taxman take nearly half your pension savings one fell swoop.
Hardly anyone knows the difference between a life annuity and a living annuity, so corporate overlords like to advise those they are about to cull to consult a registered financial adviser, preferably their brother-in-law.
I was forewarned of this by the history of my father, who was retrenched from IBM at
55. He was more of a cult member than an employee, so the sudden separation was like losing a limb, not just a monthly salary. Luckily, I’ve never been that emotionally attached to any employer, much as I may have loved my colleagues in the trenches.
What happened to my father was fairly typical of those who are cast out of the safety of a corporate laager: without any forewarning or prior education, he became prey to vicious sharks who circle lifelong wage slaves to seize the pensions they have painstakingly built up over long careers.
Writing about personal finance over decades, I’ve offended many financial advisers, who resent being called things like vicious sharks. To placate them, I’ll adapt an old joke often applied to journalists and lawyers: it’s the 99% who give the other 1% a bad name.
No doubt there are advisers who deserve a large whack of their clients’ pensions for filling in a form, but I’ve encountered only the horror stories of pensioners left destitute by meekly signing documents placing their life savings into dodgy investments such as Sharemax.