A Fin24 user wants to farm, but is worried about his pension. He writes:
My pension will not be enough and that's a fact. I will be 55 in August next year and need to know how to get by with my pension.
I want to take up farming. We (my wife and I) have no debt and have enough to buy some sheep so that we can carry on with the farm. She leases the farm, and the lease expires in October 2014.
I would like to know whether a lump sum is payable and if not, what the tax implication would be if I were to use some of the fund and invest the rest.
Danelle Esterhuizen, legal specialist for Sanlam Senior Market Advice, responds:
In most instances, pension fund rules allow for a person to retire from the fund from the age of 55. If that is the case with your particular fund, you will be in a position to retire from the fund subject to certain rules and guidelines.
There are various investment options available at retirement. You could, for example, buy a fixed or escalating income for the rest of your life, or you can buy a living annuity which is an investment linked to the market. You could then withdraw a percentage of the investment amount as an income (within certain prescribed limits).
You will most probably be allowed to withdraw a certain portion of the fund at retirement in cash, probably a third if it is indeed a pension fund.
The withdrawal amount (lump sum) will be subject to income tax at a prescribed table. You will be compelled to use at least the other two-thirds to buy an income.
You will therefore only be allowed to use a third (less tax) to invest in your farming venture.
That said, you should never underestimate the value of money over a period of time. A small amount withdrawn now will have an increased effect over time on your investment. It is safer to rather preserve your capital as far as possible.
You should only use your pension income to cover basic needs, not to enter into new business ventures. You should therefore carefully consider – with the support of a qualified financial adviser – whether you should go ahead and withdraw a portion of your money now.
An important investment principle to understand is the relation between risk and return. It is safe to say that the higher the level of risk of the investment, the higher the potential earnings on that investment.
The flip side is also true: the lower the risk level, the smaller the expected return.
When you are in a situation where you do not have sufficient capital available at retirement, this investment principle should be your guide. Because you have too little money, you cannot afford to invest in a low risk investment as you need the growth. But on the other hand, you cannot take too big a risk as it is the only money you have available.
Most investors would agree that farming is an investment with a higher risk. Ronald Reagan once said that gambling would look like a guaranteed investment if you were to compare it with farming.
I therefore think that most advisers would agree that it is not an ideal situation to invest all your pension money into farming. An alternative would be to rather continue working in your current position where you have a good understanding and knowledge of the industry.
In that way, you can also continue building your pension.
Do please be sure to get guidance from a qualified investment adviser.
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