BUSINESS NEWS - The financial decisions that really matter.
For most people, reaching retirement will be the biggest financial event of their lives. It is a big jump from receiving a regular salary and the benefits that come along with that, to living off what you have saved.
The risks of getting this wrong are severe. Making a mistake at this point could jeopardise all the years of hard work that have led up to it.
Speaking at the Alexander Forbes Planning for Retirement seminar in Stellenbosch, financial planner Estian Visagie said that there are essentially six important decisions that need to be made at retirement, and they are all inter-related.
How much of my capital do I withdraw as a lump sum?
Current pension fund law in South Africa allows you to withdraw up to one third of your pension fund at retirement as a lump sum. The first R500 000 of this is tax free, with rates increasing as the amount goes up.
Even though they may be able to take more, many people only take R500 000 as they don’t want to pay tax on anything above that. However, as Visagie pointed out, this may not be the most efficient option in the long term.
“There may be a good reason for withdrawing more,” he said. “If the income tax you are going to pay over the long term is more than you would pay once off, this might make sense.”
It’s important to bear in mind that whatever you don’t take as a lump sum has to be used to buy an annuity, and any money paid out of that annuity will be taxed as income. Money taken as a lump sum can however be invested in a unit trust portfolio, where future withdrawals should be seen as capital gains and therefore taxed at a lower rate.
Which products do I need?
At least two thirds of your retirement capital has to be used to buy an annuity (discussed below), but you also need to consider the rest of your money. Where will you invest emergency funds, for example, or can you afford to give up some liquidity in order to use products that offer some sort of capital guarantee?
You also need to consider how to structure your portfolio so that it is efficient in terms of taxes and estate duties over the long term.
What should my asset allocation be?
Retirement is not a single event. You will go through different stages, and your needs will be very different as an active 65-year old to what they will be as a frail 95-year old. You need to consider how you will cater for these different times.
It is therefore important to look across your entire portfolio to understand your asset allocation, whether it’s suitable, and how it needs to change over time. This would also include considering physical assets like property.
“You can’t just look at the investments,” Visagie said. “You have to look at your total wealth position.”
What kind of annuity should I choose?
There are essentially two types of annuities one can choose at retirement: a living annuity, which is linked to an investment portfolio; or a guaranteed annuity, which is underwritten by an insurance company.
Living annuities have become very popular as you keep control of your capital and when you die it forms part of your estate. However, your income could be at risk if the investments perform poorly, and you take the risk of outliving your money.
The risks of getting this wrong are severe. Making a mistake at this point could jeopardise all the years of hard work that have led up to it.
Speaking at the Alexander Forbes Planning for Retirement seminar in Stellenbosch, financial planner Estian Visagie said that there are essentially six important decisions that need to be made at retirement, and they are all inter-related.
How much of my capital do I withdraw as a lump sum?
Current pension fund law in South Africa allows you to withdraw up to one third of your pension fund at retirement as a lump sum. The first R500 000 of this is tax free, with rates increasing as the amount goes up.
Even though they may be able to take more, many people only take R500 000 as they don’t want to pay tax on anything above that. However, as Visagie pointed out, this may not be the most efficient option in the long term.
“There may be a good reason for withdrawing more,” he said. “If the income tax you are going to pay over the long term is more than you would pay once off, this might make sense.”
It’s important to bear in mind that whatever you don’t take as a lump sum has to be used to buy an annuity, and any money paid out of that annuity will be taxed as income. Money taken as a lump sum can however be invested in a unit trust portfolio, where future withdrawals should be seen as capital gains and therefore taxed at a lower rate.
Which products do I need?
At least two thirds of your retirement capital has to be used to buy an annuity (discussed below), but you also need to consider the rest of your money. Where will you invest emergency funds, for example, or can you afford to give up some liquidity in order to use products that offer some sort of capital guarantee?
You also need to consider how to structure your portfolio so that it is efficient in terms of taxes and estate duties over the long term.
What should my asset allocation be?
Retirement is not a single event. You will go through different stages, and your needs will be very different as an active 65-year old to what they will be as a frail 95-year old. You need to consider how you will cater for these different times.
It is therefore important to look across your entire portfolio to understand your asset allocation, whether it’s suitable, and how it needs to change over time. This would also include considering physical assets like property.
“You can’t just look at the investments,” Visagie said. “You have to look at your total wealth position.”
What kind of annuity should I choose?
There are essentially two types of annuities one can choose at retirement: a living annuity, which is linked to an investment portfolio; or a guaranteed annuity, which is underwritten by an insurance company.
Living annuities have become very popular as you keep control of your capital and when you die it forms part of your estate. However, your income could be at risk if the investments perform poorly, and you take the risk of outliving your money.
