The Financial Wellness Coach: People live longer nowada…
Question: I am 52 years old and change the company. I recently bought a home and am considering putting the R 170,000 in my old company’s retirement fund into my bond. Is this a good idea? I currently have no other pension plans.
First published in Daily Maverick 168 weekly newspaper.
Reply: It is usually a good idea to pay off any debts before you start investing. Any new investment must provide you with an after-tax return that is better than the interest rate you are paying on your debt.
However, as with most financial decisions, nothing is obvious and you need to do some calculations first.
In your situation where you want to withdraw money from a pension fund, you need to be aware of the penalty taxes that are levied when withdrawing your money.
If you deduct the R 170,000 from the pension, the first R 25,000 would be tax-free and the rest would be taxed on a sliding scale starting at 18% and ending at 36%. In your case the tax payable would be R26,100, so you would get R143,900. So you could put R143,900 into your bond.
A better solution would be to take the initial tax-free portion of the termination benefit (R25,000) and pay it into your bond right away. You then transfer the remaining amount of R145,000 to a maintenance fund or a retirement pension. There would be no tax to be paid.
That investment would grow in a tax-free environment and in three years, when you turn 55, you can mature the investment. Since the investment is less than R 257,000, you can deduct everything as a lump sum. No tax would be charged if you did not use your R500,000 tax-free retirement allowance. You can then pay the full amount into your bond.
If you wait three years for your retirement savings to be due, you will have saved RN 26,100 in taxes and can use that savings to add even more burdens to your borrowing.
However, I fear that you do not have sufficient retirement provisions. I recently saw statistics showing that life expectancy has increased by 26 years since 1953. This has a significant impact on your financial planning.
You need to make sure that the money you saved up in retirement lasts for at least 30 years, rather than the 10 years the parents of baby boomers like me usually lived after retirement.
Several pension funds turn to me to offer their members pension advice. One of the more difficult parts of my job is helping members understand the monthly income their retirement savings can provide. The money they have in their retirement fund is often the greatest money they have ever had, and they are often disappointed when it is converted into monthly income.
The challenge for us is that the investment income from your retirement savings has to last for the rest of your life.
Now we don’t know how long this will take. We also don’t know how well the markets will do.
We are now through a period in which the markets have been moving sideways for five years. If you withdraw more money than the investment brings in after cost, you are using up your capital and you are at risk of running out of money.
The Financial Sector Conduct Authority recently proposed a number of recommended retirement benefit utilization rates: This means, for example, if you have a living pension, your ideal drawdown should be 5% by the time you are 65 years old.
Let’s translate this into a monthly pension income:
R5 million annuity funds only give you R20,000 per month. Remember, your medical aid and tax rewards will devour some of it, so you need to make sure you have adequate savings.
My recommendation is that you invest as much as you can in your retirement savings for the next 13 years before you retire.
Remember to take full advantage of the 27.5% tax break you receive on pension contributions.
It’s not too late to get back on track, but it takes a lot of financial discipline. DM168
This story first appeared in our daily newspaper, Daily Maverick 168, which is available free of charge to Pick n Pay smart shoppers at these Pick n Pay Shops.
Kenny Meiring MBA CFP is an independent financial advisor. You can contact him at Financialwellnesscoach.co.za. Please send your questions to [email protected]