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Should I cash in my RAs and invest in living annuities?

And does it make sense to buy another RA after one retires as I will be paying tax on my income from part-time work?

I am 59 years old and plan to retire at 60 with a GEPF [Government Employees Pension Fund] pension and a living annuity. I will also work part-time thereafter. I have three other retirement annuities (sold to me by different advisors early in my career) all of which I can withdraw as I am over 55. Should I cash in the RAs and invest in living annuities? Also, does it make sense to buy another RA after one retires as I will be paying tax on my income from part-time work?

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Dear Reader,

Thank you for your valid question. Your question has a lot of different segments, and I will deal with them hereunder. Please do not see this as advice but as general information. My advice to you would be to see a Certified Financial Planning professional to analyse your situation and present you with a tailormade solution to your specific situation. The decisions you make now will affect the rest of your life.

Your pension fund

If you have been a member of the GEPF for less than 10 years, you will be entitled to only a gratuity. If you have been a member of the GEPF for more than 10 years you will be able to receive a gratuity and an annuity income from the GEPF.

Before 1 March 1998 government employees were not taxed on their lump sum. The tax-free lump sum is calculated in terms of the ratio of years worked before 1998 relative to the number of years you have worked for the government. The amount should be reflected on your benefit statement, to enable you to make an informed choice.

This means that your tax-free lump sum can be much more than the R500 000 allowed by the current tax tables applicable to lump sums from retirement funds.

If the above applies to you, it would be best to take the full lump sum that you are entitled to tax-free, and invest it in a discretionary investment from where you can draw a tax-friendly income.

In some cases, it might be prudent to withdraw up to R1 000 000 of the gratuity as the tax payable on the lump sum will be less than the tax on your annuity income. The balance of your gratuity, which will then be taxable can be transferred to a living annuity to avoid paying tax on it.

Your retirement annuities

If a large penalty is not payable on your retirement annuities, it would be a good idea to withdraw them.

The one-third portion can then be invested elsewhere, and it can be left to grow without attracting further retirement lump-sum tax. You will be released from the Regulation 28 requirements of where you can invest and if you should pass away, the trustees will no longer have a say on who gets your funds.

On the living annuity portion, you can choose an income of between 2.5% and 17.5%. If you have enough income, you can choose the lowest percentage of income and invest the income in your discretionary investment.

Should you need additional income later, you can increase the percentage.

Currently, we advise an income percentage of between 4 and 6% per annum as being the best choice, to enable your annuity income to grow in the future.

Working after retirement

You also plan to continue working after retirement and you asked if you should invest in a new retirement annuity again.

Continuing with a retirement annuity will definitely save you tax.

Retirees often forget that they are drawing income from various sources and all sources are taxing you as though you are only earning the income from one source.

You would have to keep track of your gross income and ask the various sources that you are drawing income from to adjust your tax rate. Either this or face a huge tax bill.

Invest in a new retirement annuity?

If you should invest in a new retirement annuity, which I assume would be short term, you can invest in it until the value is just below R247 000.

Under the current Pension Funds Act, you can then withdraw this amount as a lump sum, if it is the only retirement annuity you have with the provider.

I hope that this information will help you, and I wish you all the best in this next cycle of your life.

Do you have any questions you would like answered by registered financial planners?

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The reader’s existing RAs are subject to Regulation 28. If they are transferred to a Living Annuity they would sidestep Reg 28, which opens up a wider choice of investment options. Up to 100% of an LA could be invested in instruments like an S&P500 tracker fund that could protect against the risk of the Rand weakening against the USD during retirement.

The regulations are arguably back to front. When you are young you are forced to stick to “conservative balanced portfolios” via Reg 28. But young is when you should be taking on risk. When you cross the 55 age threshold and can move RAs to a Living Annuity, you are suddenly allowed to take on much more risk!

Well – when I was young, we were advised to stick to ”high risk” funds!

A good portion of your investments today ( with unforeseen disasters like Govind 19), and you are close to your ”sell-by”date, should be in fixed annuities, due to stock market crashes all over the world, like last year.

The benefit of RA’s and LA’s is becoming spoiled because:

1. You pay RA contributions and then wait for 18 months, go through an audit every year, then you will eventually get your refund. Maybe this year it will be more difficult.
2. Although LA investments are not subject to regulation 28, in practice your investment manager will probably limit you to between 30% and 60% foreign exposure.
3. The future of free market mechanisms are threatened by our incompetent government.

I’m a Cat 1 and 2 advisor and I found this article excellent.
Well done!

“ask the various sources that you are drawing income from to adjust your tax rate. Either this or face a huge tax bill”

Perhaps you add the words “on assessment” as the total tax payable remains the same, it’s just the timing ? Depending on the extent and nature of income from his discretionary investments he may be a provisional taxpayer in any case.

End of comments.

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