With R800K, what monthly income can I expect if I want an income until I pass on?

And will the balance fall away when I pass on?

I am retiring in about 18 months. My current fund values are around R800 000. What monthly income can I expect if I want an income until I pass on? Does this whole investment fall away when I pass on or is there money available should I pass on?

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Dear reader,

Thank you for making contact with us.

You did not mention which type(s) of retirement savings products you currently have. According to the Pension Fund Act, the following applies at retirement:

  • Provident fund/preservation provident fund – You may take the full vested benefit (all the contributions that you made to your fund before March 1, 2021) as a lump sum, subject to tax. If the non-vested balance (all contributions after March 1, 2021, including the growth thereon) is below R247 500, you may also withdraw that as a lump sum, subject to tax. If the non-vested amount is above R247 500, it will be treated as a retirement annuity or pension fund (see below).
  • Retirement annuity or preservation pension fund – You may withdraw 1/3 as a lump sum subject to tax. The balance must be applied to purchase an annuity. This is a product that will provide you with an income every month.

The following tax table will apply to the cash lump sum you choose to take at retirement:

First R500 000 tax-free
R500 001 to R700 000 18% of amount over R500 000
R700 001 to R1 050 000 R36 000 +27% of amount over R700 000
R1 050 001 and above R130 500 +36% of amount over R1 50 000

Please note the following with regard to the tax-free portion at retirement:

  • The R500 000 tax-free portion is a cumulative total in your lifetime.
  • If you have withdrawn from any pension fund savings prior to or after retirement it will reduce the tax-free portion available to you.
  • If you have taken a retrenchment package this will also reduce the tax-free portion.

There are two types of annuities that you can consider for the remaining 2/3 of your fund value (if applicable):

Fixed/life annuity 

  • With a fixed annuity you transfer your retirement savings to an insurance company that in turn guarantees to pay a fixed monthly income until death.
  • Depending on the product you choose, your surviving spouse may receive an income after your death but on the death of the last surviving spouse, all benefits and capital are forfeited.
  • You will not be able to nominate a family member as a beneficiary.
  • Depending on the specific terms of your annuity, you may receive an annual increase in your income.
  • The income from the annuity is taxable.

Living annuity 

  • A living annuity is an investment-linked annuity that provides you with an income based on the capital value and returns of your portfolio.
  • According to the Pension Fund Act, you may set your income between 2.50% and 17.50% of the capital balance per annum.
  • The income is taxable and is paid to you annually, quarterly or monthly depending on your personal requirements.
  • The income level (percentage and frequency) may be changed annually on the anniversary date of the investment.
  • You may nominate beneficiaries. At death, your nominated beneficiaries will receive the market value of the investment. If no beneficiaries are nominated the funds are paid into your estate.

At Global & Local, we generally prefer a living annuity as it is more flexible – your capital can enjoy market growth and be left for your family after death. Having said that, in certain situations (older investors, smaller investment values), a life annuity may be a safer alternative.

Income from your annuity

The below reflects income quotes on a life annuity that we obtained from two life companies. We assumed a retirement age of 60.

Life annuity:

Single life annuity – Option 1
Amount R533 000
Guarantee term 5 years
Income payment R4 889.42 per month
Yearly income increase 0%
Single life annuity – Option 2
Amount R533 000
Guarantee term 5 years
Income payment R3 417.57 per month
Yearly income increase 5%

Living annuity:

Living annuity: Drawdown 2.50% per annum (min allowed)
Amount R533 000
Term Life (until capital reduces to below R125 000)
Income payment R1 091.26 per month
Living annuity: drawdown 17.50% per annum (max allowed)
Amount R533 000
Term Life (until capital reduces to below R125 000)
Income payment R7 638.83

You will note above that you are able to withdraw significantly more from the living annuity if you select the maximum income allowed, but this will erode your capital very quickly. The main risk in a living annuity is withdrawing more income than the growth rate of your investment. In general, we would usually not recommend a withdrawal rate of more than 5%, in order to ensure that you preserve and grow your capital.

As you can see, there are a lot of variables to consider. The above quotes are not specific to you (we do not have enough information), so we are not able to conclusively recommend one product above the other at this stage. As you approach retirement, we strongly recommend that you see a financial advisor for a personal evaluation and recommendation.

Please feel free to contact us with further questions.

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

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COMMENTS   9

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Firstly – a very good and detailed answer to this reader question – well done Michael.
What is very scary though is that : a living annuity with 2,5% drawdown will give you income of R1,000 per month.
If you take R533,000 and buy SA retail bonds you will yield 8% (ie R3,500 per month) with 0 drawdown.
How can that be?

You can draw down 8 pct on your living annuity as well if u want to !!!Theoretically oh u only draw 2,5 pct on yr living annuity ,your capital should grow !( But of course it may also decrease !!).

The “insurers” need to profit don’t they?

Dear Crimson_Red & edalsg

Well noted in both cases.

It is always tough to give all the relevant information in a short article.

The 2,5% example is very conservative and most investors could probably afford to draw more than this, without eroding capital and also enjoy a small increase in their annual income. Your outcome in a Living Annuity is very dependent on the underlying investments you select. Go too risky and you will lose capital when equity markets are under pressure, too conservative and your capital may be preserved in absolute terms, but as time passes your buying power will reduce by inflation.

Each client needs to carefully consider their personal scenario before making the choice of product as well as the investment strategy within the Living Annuity should they decide to go this route.

SA retail bonds looks very good.

With R800K you cannot retire, keep your job or look for another job.

With 800k, you can buy an apartment and rent it out for R5000 a month.

An pay R4000 in rate, taxes and levies increasing 15% pa

Really silly to even contemplate cashing in part of the initial pension payout as an “option”.

Too many people are bedazzled by the huge sum available on payout (for many the largest amount of money they have EVER had in their hands).

Unfortunately for many, they have little financial discipline or savvy, and cash out the maximum to buy a new car, travel the world one last (or only) time, or pay their debts off. Always easy to justify some “good” excuse!

Taking some cash from the pension is usually the WORST POSSIBLE decision one can make!

This consequence only becomes real 5-10 years later when inflation has degraded the value of the monthly pension. By then the pensioner is too old / infirm to fix the problem.

Seeing a Financial Advisor SHOULD be a good advice.

But it can also mean really BAD NEWS for the naive if they cross the path of a predatory commission-driven sales force!

Here again, there are many dangerous potholes for the unwary or inexperienced investor relying on a stranger for financial advice.

Is the advisor’s advice commission driven? Better watch out!!

What’s the cost of the advisor’s fee? A deadly expensive fee calculated off the gross value of the funds discussed?? Such a hidden cost can cut an already insufficient income by 50%.

I really do think company HR departments can do a LOT MORE to educate and protect their staff from making these bad decisions. And they need to handle this advice aggressively when the staff are young – not wait until the staff are a year or two way from retirement. Not much you can do then.

End of comments.

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