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Weighing up retirement options as unemployment looms

Sep 28 2016 17:29
Carin Smith

Cape Town - A Fin24 user has three different retirement investments and is not sure what to do now that he might lose his job.

He writes:

I have three retirement investments. One is from a previous employer of 15 years ago and the money was transferred to a "preservation fund" after I resigned. The value is about R1.5m.

I also have a contributing pension fund at my current employer. It is also about R1.5m. Then I have a retirement annuity of about R200 000, which has been paid up and temporarily placed in a preservation fund.

I am 55 years old and am possibly going to be unemployed by the end of the year. I have a mortgage of R1m and my house is worth about R1.3m.

My question is regarding the one third in cash I am allowed to take from my pension fund when I retire. Does it apply to each of the three funds I mentioned above?

I am thinking of paying off my home loan with it.

May I withdraw all the money from the "preservation fund"?

I turned 55 in November 2015. I think there might be tax implications.

Am I allowed to take one third from my pension in cash and buy an annuity with the other two thirds, but leave my money in the "preservation fund" as it is now and then only withdraw it at a later age? Then the tax rate will be lower.

What if I decide to use my home loan (an equity bond) to lend money and buy shares - in the hope that the return on the shares will be higher than the interest on the loan? When I sell the shares capital gains tax will apply. So, could I deduct the "interest" I pay on the home loan from the capital gain? How do I indicate this to the Receiver of Revenue?

If I use money from my home loan to lend money to someone else - a family member, for instance - and that family member dies shortly afterwards and has no money in his estate, could I regard that "loss" as a loss of capital gain? In other words could I deduct it from any capital gains for the year and transfer what remains to the next year?

Do you have any other suggestions? I would look at a large amount of about R100 000.

Gustav Potgieter CFP® of Aurum Trust responds:

Information used to make a suggestion:

Age            55
Preservation Fund (not sure if it is pension or provident)        R1 500 000
Current Pension Fund                                                          R1 500 000
Retirement annuity                                                             R    220 000
Total capital                                                                        R3 220 000

Other:
Property worth R1.3m and still have a bond of R1m.
Good chance of losing job.

Question 1: Regarding retirement, tax and repayment of bond":

You are not obliged to retire at the same time from all your retirement funds. At retirement, the tax free portions are aggregated to calculate the tax.

Please note that as from 1 March 2016, all retirement annuities under R247 500 can be commuted and taxed at the retirement tables as below.

The following tax rates apply to the 1/3:
First R500 000            0%
Next R200 000            18%
Next R350 000            27%
Amount above R1.05m        36%

If we presume a withdrawal rate (6%) on your pension, after retirement the calculations are as follow, with the assumption that your whole income is taxable.

1. Keep on paying the bond

Income from R3.22m                                                               R16 100/month
Less Tax (Possible deductions and medical tax credits ignored)    R  1 810
NETT                                                                                      R14 290
Less: Bond (estimate)                                                              R10 000
Amount left after bond repayment                                             R 4 290

2. Commute RA and take 1/3 cash to pay bond

Retirement annuity                                            R   220 000
1/3 cash (Preservation and Pension Fund)            R1 000 000
                                                                        R1 220 000
Less Tax                                                            R   173 700
After tax amount                                                R1 046 300
Less Outstanding bond                                        R1 000 000
Balance                                                              R    46 300

Money available to provide retirement income:

Balance from 1/3                                                  R    46 300
2/3 from pension and preservation funds                R2 000 000
Total                                                                    R2 046 300

Retirement Income at 6% withdrawal rate                                     R10 230
Less Tax (Possible deductions and medical tax credits ignored)        R     710

After tax retirement income                                                          R 9 520

Please note that all these calculations were made with limited information and a thorough analysis of your whole situation must be made before a final recommendation.    

Question 2: If money from the bond is used to invest, can the interest on the bond be deducted from the capital gain, for tax purposes?

No.

Question 3: Can I deduct a loan to a person, dying insolvent, as a capital loss for capital gains tax purposes?

No

I recommend you contact a professional to ascertain all the relevant information and to make a recommendation.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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