It’s a question that we get asked often by future South African expats who have recently retired: how should I invest my pension payout? If you’re looking to invest in a pension payout to cover daily living costs while spending time abroad, answering this important question involves addressing another two equally important questions, first. Let’s take a look at these questions one by one.
The main question: what would be the best product to invest in if you want to ensure a reasonable monthly interest to add to your monthly pension?
Many retirees choose to spend most of their time abroad because their children grew up and left many years ago to relocate overseas for work. In such a situation retirees still spend a portion of the year at home, so they’ll need cross-border funds flexibility. As a result, answering the main question involves unpacking two further questions:
- Will you take the allowable cash portion?
- What annuity type is most suitable for your needs?
How should I invest my pension payout?
What happens when you retire?
It’s the day you’ve been working (pun certainly intended) toward your whole life. The day that you no longer have to get up in the morning to go to your job because work is for the non-retired, and you’re no longer a member of the workforce.
Before you get ready to kick back and enjoy your retirement, you still have a few important decisions to make to set yourself up properly for your golden years. There are many options to consider when you retire but you will need to consider your specific personal needs and circumstances before making any final decisions.
Here are the options available to you on retirement:
Take the allowable cash portion upfront.
According to the Pension Fund Act, you are allowed to withdraw one third of your retirement funds in cash, which will be taxed as follows:
|LUMP SUM AMOUNT
|First R500 000
|R500 001 to R700 000
|18% of amount over R500 000
|R700 001 to R1 050 000
|R36 000 + 27% of amount over R700 000
|R1 050 001 and above
|R130 500 + 36% of amount over R1 050 000
When it comes to the tax-free portion at retirement, it must be noted:
- The R500 000 tax-free portion can only be used once per individual per lifetime.
- If you have withdrawn from any pension fund savings previously, this will eat into your R500 000 tax-free allocation.
- If you took a retrenchment package this will also impact your tax-free portion.
- Any non-deductible contributions can increase your tax-free portion at retirement.
- A full transfer of your retirement savings to a living annuity is advisable as there are no tax implications.
The remaining two-thirds (or the full value if you do not take the allowable cash portion) must be used to purchase an income-generating annuity.
What type of annuity will suit your needs? There are two types:
- Fixed annuity: with a fixed annuity, you entrust your pension fund money to the investment life company you have chosen, which in turn guarantees to pay you a fixed, taxable income at regular intervals until death.
A life annuity pays for the whole of your life but income payments cease upon your death and the capital is retained by the investment life company.
Once a life annuity is taken this cannot be changed at a later stage.
- Living annuity: A living annuity is a unit trust-based investment platform that places your pension into a diversified unit trust portfolio, from which your taxable income can be drawn.
The allowable income level is set by the Pension Fund Act at between 2.5% and 17.5% of the capital balance per annum.
Income can be paid annually, quarterly, or monthly, depending on your requirements, but you are only allowed to change your drawdown levels once a year on the anniversary date of the investment.
The trade-off risk is that you can outlive your annuity. If you draw an income of, for example, 15% per annum but the investment grows at only 10% per annum, causing the capital to erode which will result in a reduced income, or even eventual investment depletion.
If, however, you draw an income of 10% and the investment grows at 15%, then the investment will grow by 5% per annum over and above income drawn. The income will also grow accordingly, as it is a percentage of the capital balance.
The income you draw will be taxed according to the applicable tax tables and upon your passing, your remaining investment capital is payable to the beneficiaries you have selected.
Other factors that you will need to consider when making your decision:
Do you have any dependents? (If no, you do not need to choose a living annuity that allows you to bequeath the capital to dependents on your death, you are free to choose a fixed annuity that will pay you a guaranteed income for life.)
Are you dependent on anyone? How much flexibility do you require with your money?
Longevity (how much longer still do you expect to live for? Do you run the risk of outliving your savings?)
Another crucial factor that is often under-estimated is what funds you should be investing in. There really is so much choice out there and some of your options include:
- Income-generating funds: A mutual fund that seeks to generate current income through dividends or interest payments, with some providing valuable opportunities for your capital appreciation.
- Balanced funds: Mutual funds that invest across asset classes, including a mix of low- to medium-risk stocks and bonds, providing you as a retiree/investor with a low risk tolerance a better opportunity for capital appreciation and income.
- Stable value funds: A portfolio of bonds that are insured to protect the investor against a decline in income or a loss of capital. The owner continues to receive the fixed interest payments no matter the state of the economy.
- Equity funds: Mutual funds that primarily invest in stocks. Your money is invested in these funds via lump sum or systematic investment plan (SIP) which is then invested on your behalf in various equity stocks. Consequent gains or losses accrued in the portfolio affect your fund’s Net Asset Value (NAV).
- Tracker/exchange-traded funds (ETFs): Also known as index funds, these investments are designed to offer exposure to an entire index at a low cost.
- Asset-swap funds: You can purchase rand-denominated unit trust through a South African financial institution which then invests your money directly in foreign assets, which returns are payable in foreign currency without needing to be repatriated to South Africa.
- Offshore funds (in foreign currency): A legal means to put your money onto financial platforms designed to make money outside of your borders. South African law allows every resident over the age of 18 a foreign investment allowance of up to R10-million per calendar year.
Which one should you choose? All of these funds have different objectives and provide different returns based on various factors. You’ll only be able to make a proper selection after a financial needs analysis has been compiled, to give you complete insight into your money situation. Diversification and a well-balanced portfolio is the best approach to a fruitful retirement.
FinGlobal: cross-border financial services for South African retirees
Looking for someone reputable to handle your post-retirement money moves? FinGlobal can help. We can get your money where you need it to be in a manner that is time efficient, cost effective and tax compliant. We’re ready to help with:
- Pension income transfers
- Foreign exchange
- Tax clearance
Interested in learning how FinGlobal can handle the admin-intensive side of facilitating your retirement years? Leave us your contact details and we’ll be in touch!