Question:
I need advice on the pension options available to me seeing as though I have R2-million available for compulsory purchases and R2-million for discretionary purchases.

I'd appreciate any advice regarding compulsory/living/voluntary annuities.

Answer:
In navigating the seemingly endless permutations of choices, it would be prudent to have a structured framework upon which to base these decisions. This would probably take the flow of where one can invest from a legislative perspective closely followed by where one should look at investing and finally taking account of how one should be invested.

Firstly, there is a clear distinction when it comes to post-retirement compulsory vehicles (i.e. Conventional Life Annuity and Individual Linked Living Annuity) that only monies received from pre-retirement compulsory vehicles (i.e. Retirement Annuity (RA), Pension, Provident & Preservation Funds) may be accepted. This means that all compulsory funds, except for the commuted amount, would have to be transferred into one of the two post-retirement vehicles.

The commuted amounts for Pension, Pension Preservation an RA would be limited to a maximum of 1/3rd of the total benefit and up to a maximum of 100 percent for Provident and Preservation Provident Funds. Of course, these lump sum commutations would be taxable and levied according to the retirement tax table.

With that in mind, all post-tax commutation amounts as well as any other discretionary money will have to be invested in discretionary vehicles. These vehicles generally include endowments, unit trusts and Linked Investment Service Providers (LISP).

When deciding on which vehicle(s) best suit your needs, the two most prevalent questions to explore are that of tax and liquidity.

Capital and income needs both now and into the future should drive the overall decision making, however, tax seems to be a common thread that weaves across all the vehicles and one should be mindful of this and ensure that the final structure optimises tax liability.

A classic example of this would be that although transfers (without any commutation) are free of tax, all income is deemed as gross income and taxed according to your marginal rate.

This is in contrast to discretionary money (and more specifically commuted amounts post-tax) that can be invested in a Unit Trust/LISP where capital withdrawals can be taken free of tax. These specifics will differ from individual to individual and therefore best dealt with by a professional.

Lastly, and very importantly, how you need to invest this money. One should start with what one?s desired lifestyle objectives and goals first and foremost, both now and into the future. Once this has been fully explored and understood, there will be a required return needed from the portfolio in order to fund this lifestyle.

The best way to achieve this return is through strategic asset allocation. Understanding how the different asset classes are likely to behave and perform over various time periods gives a sound indication of how one should allocate assets in accordance with the required return. The higher the exposure to growth assets such as equities and property, the higher the potential returns. This will ultimately determine the level of risk (volatility) associated with such a strategy.

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