Dear reader,
While having enough money to live comfortably in retirement and for the rest of your life is important, you need also keep investing and expanding your portfolio because our current economic climate is quite unstable. The circumstances we live in today call for an active approach to obtaining, securing, and keeping financial resources.
War, high inflation, a high unemployment rate, power outages, and steadily rising interest rates should be sufficient justification for you to make wise financial decisions. When deciding whether to invest, there are a few things to think about; age, time horizon, risk tolerance, financial situation, risk capability, and capital availability are some examples of such factors.
Public sector pension funds have slightly different rules at retirement. A lump sum benefit received by, or accruing to, a taxpayer from a public (government) sector fund was tax-free prior to 1 March 1998. Prior to that date, there was also no limit on the amount that could be deducted for income tax purposes by the member for contributions made to the public sector fund. A lump sum received by, or accrued to, a member from a public sector fund is taxable as of 1 March 1998.
To preserve a member’s right to a tax-free benefit prior to 1 March 1998, taxation of public sector pension fund lump sums is phased in.
Seeing that you mentioned that section C applies to you, according to legislation the portion on your retirement benefits received prior to 1 March 1998 will be tax-free and the benefits accrued after 1 March 1998 will be taxed as per the retirement tax table.
We can consider two options, deciding to invest in South Africa for the long term as a retiree or investing offshore.
Although there aren’t any responsibilities to take care of and funds are available, considering your age there really wouldn’t be much time to take huge risks unless of course there is high-risk tolerance. A person who is close to retirement can continue making contributions to their retirement annuity to take advantage of the R350 000 income tax benefit on contributions but should exercise caution because higher contributions may increase the likelihood that the retiree will have to pay taxes on the cash lump sum withdrawal if they opt to take the one-third cash lump sum.
So, if you are choosing to stay in South Africa and you already have investments in place, you may consider using your funds to invest in a diverse portfolio of medium-risk unit trust investments via a debit order or a lumpsum investment.
If emigration is an option, then saving up to invest directly in offshore unit trusts would be your best bet.
A unit trust is an investment in which investors’ money is pooled together by investment managers and used to purchase assets. The number of units you own within the unit trust is determined by the amount used to invest in the unit trust and the price per unit. There are people who will be designated to manage your funds, and they are called fund managers.
There are various types of unit trust investments:
- Local and offshore investments – you can choose to invest locally and/or offshore with the option of choosing to invest in different types of asset classes namely bond funds, equity funds, money market funds, property funds, and derivatives. The downside is that you can trigger capital gains tax upon withdrawals and switches, and it is included in your estate when you pass away. Furthermore, when investing directly offshore it is important to know that you can invest up to R1 million without having to apply for a tax clearance certificate, any amount above R1 million will need a tax clearance from Sars. The maximum you can invest offshore per year is R11 million. Furthermore, all interest, dividends and real estate investment trust income earned will be taxable.
- Linked endowment policy – this investment is perfect if you want to invest long-term and if you have a high marginal income tax rate (above 30%) and would like tax benefits such as the returns and interest income to be included in your taxable income and is taxed as per marginal tax rate but capped at 30%. You can also choose to get an endowment with a life cover benefit that is paid to the nominated beneficiaries upon the death of the life assured that provides estate benefits. The downside is that there is a five-year restriction period whereby your investment will be locked in and there is a yearly contribution limit which is 120% of your previous contribution, otherwise, your restriction period could start over.
- Living annuity – at retirement, one can consider investing their compulsory two-thirds into a living annuity, or better yet a hybrid option that has the benefits of both a life and living annuity and maintains a low-income drawdown of between 4% to 5% per annum to avoid eroding into your capital. However, if you already have a living annuity and would like to emigrate, it would be better to draw down at a higher rate and re-invest the funds to earn returns. The benefits are that you can nominate beneficiaries and the downside is that the income you receive will be taxed as per the income tax table.
- Tax-free savings account – this investment is a great option for someone who needs to earn returns and transact in the short term as there is no tax on any transactions. The only limitations are that you are only allowed to contribute R36 000 per tax year and R500 000 in your lifetime, if these limits are exceeded there will be a 40% penalty on any excess contribution.
- Money market – this is an account you can use as a parking solution for your money to earn money market-related interest in the short term before you emigrate. This would be a more suitable option if you think you may exceed your limit on a tax-free savings account. The interest income earned will be taxable.
Given such great choices for investing, planning for retirement and emigrating should be a bit easier. For further guidance on choosing what investment would be most suitable for you, please do not hesitate to contact us or your financial advisor.