I would like to split my pre-retirement savings when I go into retirement. All my pre-retirement savings are in retirement annuities, pension preservation funds and a provident preservation fund. Half would go to a local living annuity which would be enough to pay for my day-to-day expenses. The other half, about R2 million, would be invested in an offshore multi-asset fund also within a living annuity, as the goal is to grow the investment long-term (10 to 15 years) and hedge against rand depreciation.
Is this possible to do without incurring any tax from Sars, as both investments would be housed in a living annuity? How would I go about it? How do I find a financial advisor who will accept a consulting fee rather than a fee based on the investment balance?
Structuring the retirement phase of your life is one of the most important decisions you will ever make. It is imperative to ensure the strategy, as well as the vehicles you choose, are suitable for your income needs, as well as your risk profile and the investment term. Retirement represents roughly one third of our lifetimes. Therefore, we need to ensure that our funds will last as long as possible and that we won’t deplete the capital too early into retirement.
When structuring a retirement income plan, it is important to first define what your monthly income requirement is, keeping in mind that the proceeds from the living annuity will still be taxed. The tax payable on this income cannot be avoided if it is above the tax threshold (currently R122 300 if you are older than 65 years), as income received from retirement vehicles is still taxable.
The Association for Savings and Investment South Africa (Asisa) provides guidelines on how long your income will last in real terms at different growth and drawdown rates. This is important to keep in mind as drawing a higher percentage from your portfolio will lead to a shorter investment lifespan, as you will start depleting your capital sooner. The net return of the investment strategy does of course play a significant role here, as does inflation and experienced inflation (for example, the cost of your medical aid increase every year).
I believe in diversifying your living annuity, and the investment approach you follow. It is, however, not necessary to structure two different vehicles. Diversification can also be achieved within one vehicle. The underlying funds within a living annuity can be diversified by ensuring you diversify among asset classes (by including cash, bonds, property, local and also equity), but also diversifying with a multi-manager approach.
By combining a few different investment styles and strategies, you enhance the resilience of your portfolio.
You can also include a voluntary (accessible investment) component in your retirement planning: an option may be to reinvest the tax-free component (first R500 000 which is taxed at nil percent at retirement) into this investment. This can be seen as an emergency fund (as it is accessible) or used to supplement your monthly income from your living annuity. It is important to remember the income percentage on a living annuity can only be amended annually – so structuring an accessible emergency fund is advised.
The annual income you will require in the short term (one to two years) can be structured – here you can combine cash (money market) funds, together with a multi-asset income fund. It is, however, important to be aware that interest rate changes can have an impact on the returns of these funds. So far, South African investors have seen rate cuts of 3% in 2020, and there may be more ahead.
The longer-term component of the living annuity can be structured in growth assets (equity exposure). This is imperative to ensure you will still earn a return that outperforms inflation in the longer term – especially when drawing an income. A combination of property and local and offshore equity exposure can be used here. This is very important to ensure you will not deplete the capital too soon. When you deplete assets from your income requirement, the investment can be rebalanced to ensure that you have sufficient funds in the income component again. This way you benefit in the longer term from having exposure to growth assets, but in the shorter term, you are protecting yourself from market volatility and cycles.
Fee structures usually consist of a few different components:
- The admin fee/platform fee – this will depend on the fund value, as well as the administrator you choose. It’s worth comparing the options available in the market.
- The second fee will be the advisory or management fee. As managing an investment is an ongoing process for the rest of your retirement, these are usually structured as an annual fee rather than a once-off consulting fee. Structuring it as a once-off fee is not recommended, since you require ongoing advice. Bear in mind your wealth manager is likely to leverage a team of analysts, technical advisors, legal advisors and investment specialists to bring you the best advice on an ongoing basis.
- The last component is the fund manager fee. This will differ depending on what investment strategy you follow. For example, single versus multi-manager, or the underlying asset classes of the investment. Once equity and offshore exposure is included, the fees will be higher, but so will the potential return. These go hand in hand.
It might be a good option to request Effective Annual Cost (EAC) quotes when comparing proposals. This compares all the fees included – and is a transparent way of comparing different quotes.
It is important to ensure you have an ‘all-weather’, well-diversified portfolio that aligns to your needs in place at retirement. Talk to a wealth advisor to ensure you are receiving appropriate advice and access to the necessary management skills. This will also help to protect your interests in the longer term so that your portfolio will be able to provide you with a sustainable income for as long as you are alive.