I would appreciate some ideas on how to manage a maturing Old Mutual retirement annuity (RA). The total value is around R400 000. I don’t need to use the funds from the RA, but would like to withdraw and reinvest the one-third tax-free portion. Please could you give me some ideas of where I should consider investing?
I also have around R600 000 invested with Allan Gray which has not performed as expected, so I’m unlikely to add it to this portfolio. Then, the remaining two-thirds RA investment I’ll put into an annuity. So, some recommendations here would also be appreciated. As additional info, I do have another RA maturing in 2025. I have not taken early retirement drawings from this one.
Your questions mostly address product structuring – and I would therefore like to start my answer by reminding all readers that an admin platform or an investment vehicle just remains the platform on which you build your investment ‘house’. The real fundamental success, or failure, will lie in understanding your goals and objectives and mapping them to an investment strategy within these different product vehicles, taking cost and tax structures into consideration.
I am assuming you have reached the age of 55, as your Old Mutual retirement annuity is maturing. You make mention that you would like to withdraw the one-third tax-free cash lump sum. We assume you haven’t made any previous withdrawals and that the first R500 000 of your lump sum will be taxed at 0%.
The one-third cash lump sum that you wish to take (R133 333) can be reinvested in a flexible voluntary investment, which means you can withdraw at any point, and also reinvest at any point into this investment. It can play also an invaluable role in your portfolio as an emergency fund. Within this vehicle, I would advise diversifying in terms of asset classes, as well as fund managers, by following a multi-manager approach.
The remaining two thirds (R266 667) must be used to purchase a compulsory annuity – for example, a living annuity, where it will be compulsory to draw in income between 2.5% and 17.5% of the fund value. The income withdrawn will be taxed at your marginal income tax rate. My advice would be to withdraw the minimum and reinvest the amount into the voluntary investment you created with the one-third cash lump sum – as you don’t require the income until you have reached your actual retirement date. It is imperative not to start depleting your retirement capital earlier than needed.
A benefit of this restructure is that it will allow you to move outside of Regulation 28 of the Pension Funds Act, which governs how retirement products may be invested within South Africa. Regulation 28 comes with some limitations, and the one which is most often debated is that you are not allowed to invest more than 30% offshore. In many portfolios, South Africans do require more than that to diversify optimally, which can also help manage risk.
Depending on your situation – and whether you are still working, a retirement annuity can still play a valuable role in your portfolio by giving you an annual tax benefit. If your annuity is structured properly – and earning optimal returns – you really can have the best of both worlds, by earning a proper return, and also being able to claim your contributions back from Sars. For tax purposes, you can deduct up to 27.5% of the greater of your taxable income or remuneration (with an annual limit of R350 000). A higher contribution than this will not be deductible and will be carried forward. Any non-deductible contributions carried forward can at the retirement stage still be accessed or used. So there is definitely a major tax benefit to your portfolio, but the investment cost and strategy are always fundamental.
The living annuity, as well as the voluntary investment, are not subject to the provisions of Regulation 28, and you will therefore have the benefit of diversifying your portfolio further.
Regarding the Allan Gray investment – I am not sure in what investment vehicle you are invested in, but it is worth remembering that with any investment platform or vehicle, the real value of the investment depends on how are you invested, what the underlying building blocks are, whether you are well diversified enough, in which asset classes are you invested, and who the fund managers are. Ultimately, the investment strategy is incredibly important. Your investment can most probably remain on the platform, but the underlying strategy just needs to be amended to bring it in line with your specific goals and objectives and as often as required.
That is why I would advise working with a wealth advisor who will not only provide advice but also manage and review these changes for you. We are living in extreme times and an ever-changing world. Your investment portfolio definitely needs to adapt to it.