Chris is about to retire and wrote to us asking what he should do with his provident fund.
A PROVIDENT fund (unlike a pension fund) allows you to take the full lump sum at retirement and you do not have to purchase an annuity. Chris asked whether rather than buying a living annuity, it would make sense to cash in the provident fund at retirement and invest it himself in a unit trust portfolio, drawing down 4% of his capital as income each year.

The tax consequences of this decision would be significant. If he never previously made any withdrawals prior to retirement, he would be able to draw R500 000 tax free. However, the rest is taxable as per the retirement tax tables. (see graphic). On any amount above R1 million he would pay 36% to the taxman – more than a third of his retirement benefit.

For example, if Chris’s retirement fund was worth R2 million, he would pay R490 000 tax reducing his retirement benefit to R1 510 000.
If he rather invested into a living annuity, there would be no tax payable and he could still draw down his monthly income from the full R2 million.

If he made the full withdrawal and invested in the unit trust, he would also pay capital gains tax, dividend tax and tax on any interest.
Within an annuity structure these investment taxes do not apply, however, Chris would pay income tax on income from the annuity. He should keep in mind that from the age of 65 one can receive an income of just over R10 000 a month before you start to pay income tax.

It is important that Chris does a proper assessment and gets some good advice before making such an important decision. This could make or break his retirement

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LEARN MORE ABOUT: Retirement Annuities

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Living Annuity is a retirement plan that allows individuals to receive an income from their retirement savings. It is a flexible investment product that allows you to choose the amount of income you receive and the investments you want to make.

With a living annuity, you can choose to receive a monthly income or a lump sum payment. The amount you receive will depend on the performance of your investments, the prevailing interest rates, and your chosen income level.

One advantage of living annuities is that they offer flexibility. You can choose the level of income you want to receive and adjust it as needed. You also have the freedom to choose the investment portfolio that suits your financial goals and risk appetite.

Another advantage of living annuities is that you can choose to leave some of the money invested for your beneficiaries. When you pass away, the remaining funds are paid out to your beneficiaries, either as a lump sum or as income.

However, there are also some risks associated with living annuities. Since the income received is dependent on the performance of your investments, and there are no guarantees on investment returns or inflation, there is a risk that your income may become too low to meet your financial needs or too high to sustain the underlying capital.

Therefore, it is essential to have a good understanding of the risks involved and seek professional advice before making any financial decisions. This will help you to find the right investment strategy and level of income that will suit your needs and goals.

In conclusion, living annuities are an excellent option for those who want more control over their retirement income and investments. With the right investment strategy and financial planning, it is possible to maximize returns and sustain income levels in the long term.