Question:
My wife retired on 30 September 2008. Her provident fund value on 30 October 2008 was R791 895. She also matured a retirement annuity policy yielding R216 000.

We're thinking of buying a living annuity from Allan Gray with the two-thirds portion of these two amounts. She is 60 years of age and I am 66. I'm retired and receive a pension from BPSA Pension Fund. This fund will continue making payments to my wife after my death.

Here are my questions:

1. What drawdown percentage should we start off with?

2. What is the tax liability on the one-third lump sum (keep in mind an amount of R46 767 that was transferred tax-free from the Associated Institutions Pension Fund)?

3. Which Unit Trust funds should the living annuity fund be comprised of?

Answer:
You ask a number of very important questions that will impact on your lifestyle going forward.

Firstly, you mention that you want to purchase a living annuity with the 2/3 portions of the two funds. At retirement from a RA fund, only 1/3 may be taken as a lump sum and the balance has to purchase an annuity. A provident fund does not generally have such a restriction though. Subject to the rules of a specific fund, of course, provident funds generally allow retiring members to take any portion of the benefit as a lump sum. I would suggest you double-check with your fund administrator regarding your options with the provident fund benefit. Also note that while a portion of retirement benefits may be accessed as a lump sum, such commutation is not compulsory. You may in fact apply the full value to the purchase of an annuity if you wish. Therefore, the decision as to which portion of the benefit from the two funds should be taken as a lump sum is very important. Obviously, the larger the amount allocated to the living annuity, the higher the potential income that you may be able to draw in the future.

Factors to consider would be whether there are any major outstanding debts that you would want to settle from a capital amount (e.g. a mortgage bond or other loans) or whether you may have other capital requirements to meet (e.g. the purchase of a new car).

Since a portion of the lump sum may be tax-free, it is usually advisable to take at least the tax-free portion as a lump sum.

If we take your full available benefit totalling about R1.008-million, we can calculate what the tax-free amount is likely to be. The prescribed formula must be applied, which allows R300 000 tax-free over the lifetime of a taxpayer with the balance taxed on a sliding scale. You mention an amount transferred tax-free from the Associated Institutions Pension Fund ? all benefits accrued to members of state/semi-state type funds before March 1998 were tax-free in principle. I assume therefore that your wife was a member of the AIPF for a period prior to March 1998 and that the amount referred to is that portion of her benefit which she accumulated during that time. Based on all this it is likely that her allowable tax-free amount now will be R346 767.

Assuming your wife does elect to take only 1/3 of the value of both funds (which will total R336 000) as a lump sum, the full lump sum is therefore likely to be tax-free. I once again urge you to check the exact options regarding the provident fund benefit. If you may elect any portion as a lump sum, you may well consider taking the full R346 767 as a lump sum.

When considering an appropriate draw-down rate, it is difficult to make a decision without looking at your holistic situation. The draw-down must be between 2.5 percent and 17.5 percent per annum of the total investment value and the percentage may be changed annually on the living annuity policy?s anniversary date. I would strongly urge you to consult with a Certified Financial Planner to put together a holistic financial plan for both you and your wife. Such a plan would take the following, amongst others, into account:

• your monthly income requirements

• other periodic capital requirements you may have

• available income and capital from all sources (you mention that you also receive a pension)

• longevity requirements (i.e. how long your capital needs to last to provide for you and your wife)

• the impact of different draw-down options on the longevity of your capital (if in any year you draw income exceeding the growth achieved in the underlying investment, an erosion of capital will occur and thus the importance of a plan that balances your lifestyle requirements with your availability of capital and longevity)

• the effect of income tax (any income received in the form of an annuity/pension is taxed as income annually at your marginal rate of tax)

• the most appropriate funds in which to invest the capital taking all the above considerations into account

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