Question:
I am converting from a permanent to a five year fixed term contract. The actuarial value of my pension as of June 2008 was estimated at R2.2-million before tax. The balance of my bond is R350 000 and the value of my house is estimated to be R1.7-million. I am 51 years old and have a retirement annuity.

How do I invest the balance of my payout?

Answer:
You are obviously very serious about making sure that you cover all your bases and with good reason. How you choose to deal with this issue may well have a very significant impact on the quality of life you will be able to afford in retirement.

When you leave the permanent employ of a business with retirement benefits, you are left with the following basic options. You can:

1. take the cash

2. transfer to the retirement fund of your new employer (which is not an option for you)

3. transfer the funds to a retirement annuity (RA)

4. invest the funds in a preservation fund.

Your first option will be to take the benefit in cash. From a taxation perspective, this could well be the most expensive decision available to you. Should you choose this option, you will receive the first R1800 tax free. Anything else will be taxed at the higher of your average tax rates over the last two years. As an indication, someone earning R30 000 per month will have an average tax rate of about 26 percent. So, depending on how much money you earn, you will have to be prepared to forfeit more than a quarter of your benefit to SARS.

It is important to note that the tax-free benefit is set to become much more significant in March 2009. Once you have done this, all income earned on the investment (interest, property dividends, etc.) will be taxed as an income in your hands (based on normal tax tables). The capital growth of the investment will attract capital gains tax of around 10 percent of your growth.

Your second option will be to transfer your investment to a RA or a preservation fund. If you choose this option, you will only be able to 'retire' from your investment from age 55. In the case of a RA, you will not be able to access your funds at all until you retire from the fund. If you choose a preservation fund, you will be able to make one withdrawal at any time prior to retirement. This withdrawal can be anything up to the full investment amount and will be taxed in the same manner as the 'cash now' option above.

When you retire from these investments, you will be able to take up to one third of their value in cash in the case of an RA or if the source of your preservation fund was a pension fund. If the source of your preservation fund was a provident fund, you can take the full value in cash. It is also important to note that, as long as your investment is in a RA or a preservation fund, you will not pay tax on the income or capital gains earned on your investment. For all of these options, whatever you do not take in cash has to be invested into an annuity that will provide you with an income during retirement. This is called a compulsory annuity.

So, what are the benefits of transferring your funds to a RA or preservation fund? Firstly, your tax-free benefits are much more attractive. Of the lump sum you take out, the first R300 000 is tax free. The next R300 000 is taxed at 18 percent, the following R300 000 at 27 percent and the balance at 36 percent. This alone should already leave you in a better position than taking the cash today. Whatever you do not take in cash will go to a compulsory annuity, where the income will be taxed as normal income in your hands.

So where does this leave you? If I were in your shoes, I would think very carefully about taking the cash as this will probably be the most expensive route if tax is taken into account. Because of the benefits highlighted above, it might make sense to consider opting for a preservation fund and to make your once-off withdrawal to settle your bond. Our homes are not really seen as retirement investments in the true sense of the word, because lifestyle assets like these will always be necessary for us to live with.

I hope that this has given you a clearer idea about the options you should be considering at the moment. Whatever choice you make, keep your long term objectives in mind. Often the temptation of taking the cash up front leads to the money disappearing by the time you really need it. This is a situation most of us should avoid if we can.

• Have you got a Personal Finance question? Click here to ask our experts.

• If you would like acsis to put you in touch with an independent financial planner, click here!