Question:
I am going on pension next year and want to know how I should invest my money.

I have 42 years service and have been a member of the same provident fund for that whole time.

Answer:
Congratulations on reaching retirement after 42 years with the same employer. You will certainly be reaping the benefits with a substantial provident fund value at retirement!

Firstly, let us look at the nature of your fund — a provident fund. As a first port of call when discussing retirement funds, one should always refer to the rules of a particular fund to establish exactly what a specific fund does or does not allow. Some general rules do, however, apply and we can look at these. With a provident fund, a retiring member usually has the option to access the full retirement benefit or any chosen portion as a lump sum and then use the balance to provide an annuity, pension or income after retirement.

Whatever portion of the benefit you elect to receive as a lump sum or cash will be subject to taxation, with a portion of the lump sum being tax-free. A provident fund member cannot at any stage claim the contributions made on an annual basis as a deduction for tax purposes. However, if proper record of these non-deductible contributions has been kept, you may add these amounts at retirement to the calculated tax-free portion and increase the tax-free portion of your lump sum. I would suggest you liaise with someone at your fund to ascertain whether they have recorded your contributions over the years. The fund itself will apply to SARS for a tax-directive before paying your chosen lump sum benefit to you.

The balance of the lump sum that is not tax-free will be taxed on a sliding scale with the first R300 000 of the taxable portion taxed at 18 percent, the next R300 000 at 27 percent and anything above that at 36 percent.

When it comes to deciding what portion of the benefit to take as a lump sum, you should consider the following:

• Do you have any large outstanding debts that should ideally be paid off at retirement?

• Do you have any other major capital requirements at retirement? (e.g. purchasing a new vehicle, etc.)

1. A conventional/traditional/life annuity. This type of annuity is generally purchased from an insurer or life office and essentially involves you buying an income for the rest of your life. The level of income you receive is based on an annuity rate, which is the rate applicable during the week you purchase the annuity. You do not have any access to the capital and the product provider guarantees to pay you the income for the rest of your life. In this way, the investment risk resides with the product provider. A disadvantage for you, however, may be that you can never change the income option initially chosen. Once you make your decision (e.g. you may elect to receive a level income for life, an income escalating with inflation, etc.) it cannot be changed.

2. A living annuity. Again this is an annuity purchased with a life office, but it differs substantially in that the balance of your benefit is invested in a portfolio of your choice. It is then your responsibility as the investor to manage the portfolio on an ongoing basis, ideally with the assistance of a Certified Financial Planner. You may then draw an income annually, which must be between 2.5 percent and 17.5 percent of the fund value. As you can see, this type of annuity is much more flexible in terms of varying your income levels if necessary from year to year. Furthermore, the capital remains within your control and upon your death your beneficiaries will receive the capital (either in the form of an income or potentially as a lump sum). The investment risk is, however, squarely on your shoulders and your underlying portfolio is potentially subject to the volatility of the stock market.

I strongly urge you to discuss your total situation with a Certified Financial Planner before making any decisions regarding your retirement planning. The decisions that you make at this stage may very well affect your lifestyle throughout retirement. You therefore need to ensure that your decisions are appropriate as part of a holistic financial plan suited to your needs and goals.

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