Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

As with most financial questions, there is no categorical right or wrong answer. Your personal circumstances will determine the most appropriate course of action. I will run through some of the issues that you need to consider before doing anything.

Most teachers are on a defined benefit pension fund. Here, you typically get a pension for the rest of your life, based on the number of years’ service that you have. 

Your pension is guaranteed for the rest of your life and is not affected by what is happening on the stock market. Every year, your pension will usually increase by a percentage of the official inflation rate. I have found that unless you have additional savings somewhere, people on funds like these often struggle to keep up with the cost of living in their later years. 

Should you pass away, your spouse will get a reduced pension and, unless you have children under 22 when your spouse passes away, there will be no inheritance or legacy for them from your retirement savings. 

I come across financial advisers who encourage people who are in this type of fund to resign just before they retire, transfer the proceeds into a preservation fund and then buy a living annuity from that preservation fund. 

They argue:

• You will have more control over your finances.
• There will be no reduction in your spouse’s income on your death.
• There will be a decent legacy for your surviving children.

Now before you withdraw from the fund and transfer the proceeds, you need to understand the financial implications and risks you are taking.

With a living annuity, you carry the investment risk. 

If your investment returns are less than the running costs and what you are drawing down, you could run out of money. 

Compare the teachers’ pension with the proposed living annuity to check what drawdown rate the living annuity is based on. If it is more than 5%, you need to be careful. 

When you resign, you will probably lose your medical aid subsidy. The subsidy will need to be added to the new pension when you do your comparison. 

There will be times when your personal circumstances may justify resigning from a defined benefit fund and taking out a living annuity. 

If you are ill with a severely compromised life expectancy, a living annuity could give your family a higher income once you die. 

If you have adult children or parents who depend on you financially, they will not get any income should both you and your spouse die. 

This is not a simple decision and I recommend you get a financial planner to run a couple of scenarios for you so that you can understand the implications of your decisions.