Investments on retiring

OPTIONS: CHECK IMPACT ON MONTHLY DRAWDOWNS IF TAKING LUMP SUM

There can be exemptions on discretionary money if you nominate the beneficiary correctly.

You may have numerous investment vehicles that you’ll need to decide what to do with when you retire. These may include discretionary investments like unit trust investments, endowments, tax-free investments and pension money like retirement annuities or a provident/ pension/preservation fund.

Lump sums at retirement:

I believe you should take a lump sum where the tax paid on it will be less than the marginal income tax rate you’d pay if you took a monthly drawdown.

To make an informed decision, know what the impact of taking the lump sum will be on your monthly drawdown. If you’ve taken a lump sum from your retirement fund, as recommended by your financial planner, decide how best to take a drawdown from the capital you’ve saved in your various investment vehicles.

Don’t consolidate your discretionary money with your pension money. Assuming you decide on a living annuity, there’ll be certain estate duty exemptions on your pension money, but there can also be exemptions on your discretionary money if you nominate the beneficiary correctly.

Monthly tax consequences:

Assume you have R5 000 000 saved in pension money and R3 000 000 in discretionary capital, you’re 55 and will take a 5% annual drawdown on your total investment value.

Consolidating everything into pension money, where you can draw 2.5% to 17.5% a year, the total value would be R8 000 000.

This equates to R33 333 drawn before tax each month (5% of R8 000 000, divided by 12). The after-tax amount paid out will be R26 752 based on marginal income tax tables.

If you don’t consolidate your R5 000 000 pension and R3 000 000 discretionary funds, does the picture change?

Since the R5 000 000 makes up 63% of your total savings we’ll assume this same proportion will be taken from the monthly drawdown (63% of R33 333) – that is, R20 999 before tax.

A further R12 333 must then be taken from the discretionary money to arrive at R33 333 per month. Your R20 999 before tax from your pension money would equate to R18 017 after tax.

Meanwhile, capital in your discretionary investments is only liable for capital gains tax at 10.40%, dividend tax at 20% (already paid by the investment firm) and interest tax at 26%.

You’re entitled to a R40 000 yearly rebate on any capital gains made and R23 800 on interest earned before age 65. Thus, depending on the markets and your funds’ asset allocation, you should be able to withdraw your money at a much lower rate than your marginal income tax rate.

Your net income would then be: R18 017 + R12 333 = R30 350, versus R26 752 net if you consolidate everything into your pension money.

Note, although there are numerous ways to structure and optimise your tax position, over time the net effect will probably be the same.

Herman Klopper is CEO of Futurum Financial Group