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Advice on RA options

A Fin24 user asks:

I would like some guidance on my RA, which I have had now for 17 years with Sanlam.

As I understand it, when the policy matures you can either take a lump sum and get a monthly reduced pension, or no lump sum and a monthly full pension.

Is this correct, and which option is best? I am 55 years old.

Francois Retief, senior manager - legal services at Sanlam, responds:

After reaching the age of 55, a member of a retirement annuity fund may commute up to one-third of the retirement interest. (Under certain circumstances, where the value does not exceed R 75 000, the full value may be commuted.)

The amount not commuted must be used to purchase a compulsory annuity.

Income tax considerations play an important part in your decision as to the amount you wish to take as a lump sum.

You need to take into consideration your marginal rate of tax after retirement as well as other retirement fund lump sum benefits, retirement fund withdrawal benefits and severance benefits which you have received before.

The first R315 000 of retirement lump sums is tax-free, and any amount over that will be taxed at a progressively higher rate.

As a rule, a financial adviser will recommend that a client takes the maximum tax-free amount, as this can be used to purchase a voluntary annuity which is more tax efficient than a compulsory annuity.

To decide whether a lump sum subject to tax should be taken, your consultant will need to make some calculations to give you a recommendation.

Your decision on which option to choose should, however, not be taken in isolation. You need to look at it as part of a detailed retirement plan in consultation with a financial adviser specialising in this field as well as investments.

 - Fin24


*Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

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