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A Fin24 user has asked various tax planners for advice after retirement and wants to know about the basics. He writes:
I have retired at the end of December 2014. My company kept me on a monthly basis. My pension fund stands at about R2.7m.
I want to take out my tax free portion of R500 000 and invest the balance in a low cost unit trust to receive a monthly income of R12 000. My age is 66 years.
I have asked many tax planners to discuss my retirement. I want to know what you can offer me.
Andrew Duvenage of NFB financial services group, responds:
Congratulations on reaching retirement.
You are entitled to draw up to a third of the pension fund as cash, with amounts over R500 000 subject to tax tables.
We would agree that you take the full tax free portion, but it is worth considering whether you have sufficient liquidity in your portfolio. In some instances it may make sense to access more of the one third portion in order to ensure liquidity in the portfolio in retirement.
The next issue that needs to be considered is the proposed drawing rate. An amount of R12 000 (gross) per month equates to a drawing rate of 6.55% per annum. It must be noted that this is a relatively high drawing rate.
In the current market environment (low levels of growth and a tightening interest rate cycle), investors would be well advised to expect lower levels of returns in investments than what they have become used to in recent years. We would suggest that investors in moderate risk assets should base projections on net returns of around 8% to 10% per annum. If one assumes a return of 10% and drawings of 6.55%, the net growth is around 3.5% per annum.
The challenge here is that the net growth rate is well below inflation, meaning that in real terms, the capital value of the investment will erode over time. This will be exacerbated if the drawing amount is increased each year to account for an increase in the cost of living.
Assuming an inflation rate of 6% (which is potentially low in retirement given the historical increases in medical aid premiums), the funds will last around 20 years. That would take you to around 86 years of age.
Therefore, we would strongly suggest that the drawing rate is considered and understood.
In terms of investment alternatives, the appropriate fund allocation will be dependent on a number of factors, including your attitude towards risk. That said, in order to generate reasonable levels of capital growth, which are required to prolong the life of the assets, you will need to have some level of risk in the portfolio.
Consequently, you would probably need to look at either cautious or moderate risk asset allocation funds. These funds invest across the asset classes (cash, bonds, property, equity, alternatives) to create an allocation that would provide for investment growth while limiting volatility insofar as is possible as per the mandate.
Cautious funds will tend to allocate more of the portfolio towards stable assets (cash, fixed income) while moderate funds will usually have a higher relative exposure to growth assets (equities, property).
As this cannot be construed as formal financial advice, it would be in your interests to contact a certified independent financial adviser, who will be able to conduct a full analysis on your financial position and goals provide professional guidance with regards to your entire financial plan and risk profile.
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