A Fin24 user writes:
I am 69 years old and have R450 000 saved in a money market fund.
I would like to know if I would be making a good investment if I were to transfer it to a retirement annuity (RA) now, as I will only be working for another two years.
Which option would you recommend, what pension would this pay me each month, and what would be the tax on this at age 71 when I retire?
Stella Arthur, a financial planning analyst for senior market advice at Sanlam, responds:
An RA is usually a long-term savings vehicle aimed at assisting people in providing for their retirement.
The key words here are "long-term". As markets fluctuate during different economic cycles, a long-term investment will be variable in returns earned.
You have only two years left until you retire, which is a very short time. This does not allow for the opportunity to allocate funds in a riskier investment portfolio with the potential for higher returns (any losses earned will not have sufficient time to recover).
Under normal circumstances, people with two years left until retirement will have their underlying investments allocated more into cash reserves (a more cautious/conservative profiled investment).
Therefore it may be unwise to shift your cash investment into an RA as the opportunity for riskier investments is no longer a realistic option.
An important benefit of investing in an RA is the potential for tax-deductibility of your contributions. The deduction is limited to the greater of 15% of non-retirement funding income, or R3 500 less allowable pension fund contribution, or R1 750.
Should you invest the R450 000 cash into an RA now, the immediate tax benefit for the tax year 2012/2013 may be limited.
You will be entitled to commute a maximum lump sum of one-third of the interest, of which the first R315 000 is tax free (if not utilised already plus all previously disallowed contributions).
The remaining balance is subject to tax according to the retirement tax scales.
You must consider any other retirement lump sum that you may be entitled to, as the tax-free R315 000 is not applied to all lump sums receivable on an individual commutation basis but rather to the lump sums receivable cumulatively.
The remaining two-thirds will be utilised to purchase a compulsory life annuity. The life annuity receivable is taxable according to your marginal tax rates.
In receiving an annuity, the amount that you may receive is limited to percentages as determined by the fund (a minimum of 2.5% and a maximum of 17.5%).
This type of rule may inhibit you from enjoying your desired lifestyle as the monthly income may be inadequate.
Currently your money is invested in a money market fund which is a safe option, considering you want to retire in two years.
You are entitled to the full amount whenever you choose and it is completely tax free (interest earned for the year excluded).
Should you choose to keep your cash in the money market fund, your investment will grow over the next two years with money market rates.
The only tax payable on this investment is based on the annual interest earned. You may enjoy the benefit of the annual interest exemption, which currently is R33 000 for an individual over the age of 65 for the tax year 2012/13.
Assuming money market interest rates remain at a constant of 5.17% pa (current nominal rates as per Stanlib – 7/9/2012), and that the only interest you earn is derived from the above money market fund, the interest that you will earn in the 2012/2013 tax year is R450 000 x 5.17% = R23 265.
Applying the interest exemption of R33 000 will make the full interest earned income-tax free.
If you are willing to postpone retirement for a few more years, an alternative that can be considered is an investment into a collective investment scheme (unit trust).
Unfortunately we cannot speculate on the pension that will be payable at retirement, should you choose to invest in an RA. The tax payable will be subject to the lump sum taken, annuity received and any changes to tax rates as per the South African Revenue Service.
The above response is a general one due to the omission of important information such as: your appetite for risk, what other retirement investments you have and your reasons for considering investing your cash in an RA.
This is why it would be beneficial and more appropriate to consult with your financial adviser for comprehensive advice.
Your financial adviser will take a holistic view of your current investment portfolio, retirement savings and tax position, and will then be in a better position to give you advice tailor-made around your specific needs and objectives.
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