When my salary stops, how do I draw an income in retirement?
Retirementor and CFP® Pat Blamire is asked this question so often by her clients. From years of planning for their future security, she understands that clients need to know exactly how drawing an income from their retirement savings works … for their peace of mind. Her article which follows here explains exactly how this happens.
In the build-up of your retirement savings, the tax treatment of these monies is predominantly split into two major categories:
- Monies that you can claim tax relief on the contributions (such as contributions towards your company pension or provident fund, or contributions towards a retirement annuity). We refer to such monies as your “non-liquid investments”; and
- Monies that you earn after tax, and save in different investments such as fixed deposits, unit trusts, endowments or tax-free savings accounts. We refer to such monies as your “liquid investments”.
The balance between liquid investments and non-liquid investments in retirement is within your power, and is a very important decision that needs to be made. Your Retirement Specialist will help you make this decision. This graphic may help you understand the difference between the two types of assets.
Your “non-liquid investments” have certain rules and regulations, and are not flexible. Your “liquid investments” are usually flexible, and, in retirement, are used to provide you with lump sums, say, to purchase replacement motor vehicles, pay for holidays, and can be used to top up your monthly income.
At retirement (any time after age 55), you can retire from your “non-liquid investments” and start drawing an income from these retirement savings. To encourage people to save for their own retirement, tax legislation allows certain tax relief on lump sums that you draw from these investments: the first R500,000 of a lump sum is tax free; amounts between R500,001 and R700,000 are taxed at 18%; amounts between R700,001 and R1,050,000 are taxed at 27%; and amounts in excess of R1,050,001 are taxed at a flat rate of 36%.
You can then use the untaxed portion of your “non-liquid investments” to buy yourself either a Compulsory Annuity or a Living Annuity. A Compulsory Annuity is provided by an insurance company or your company retirement fund, and they undertake to provide you with an annuity (pension) for the rest of your life, and usually for your spouse also (in most instances, the spouse’s pension is reduced to 75% of your pension). When the surviving spouse dies, this pension then dies with them.
A Living Annuity is an annuity (pension) where you decide how much income you want to draw from your “non-liquid investments”. Legislation requires you to draw an income of between 2.5% and 17.5% per annum of your Living Annuity, and this is paid to you monthly. On your death, your surviving spouse (or beneficiary) will have the choice of either continuing to draw an income from your Living Annuity, or cashing it in, and receiving a lump sum, after-tax amount. As your Living Annuity is untaxed money, if a beneficiary decides to cash it in, these monies will be taxed before being paid out to them. No monies are ever left behind in a Living Annuity after your death, and will always be paid out to your beneficiaries.
Income drawn from either a Compulsory Annuity or a Living Annuity is taxable in your hands, and taxed according to the tax tables. Investment growth within a Living Annuity is taxed at 0%, and it is therefore a very tax efficient investment vehicle. On your death, it does not form part of your estate for estate duty purposes.
These are very important decisions to be taken when you get to retirement, and your retirement specialist will guide you through this process.