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

Your approach with regard to planning your estate for tax efficiency has to be a clever one and with a couple of tweaks, you can get the result you desire.

As retirement assets fall out of your estate, no estate duty will be payable on them.  This could save your heirs between 20% and 25% in estate duty.  To make things better, you may attach a beneficiary to the investment and save a further 4% in executor fees. 

Now your retirement assets come in two main forms:

• Pre-retirement assets
• Post-retirement assets

The pre-retirement assets would be the investments in your pension, provident and preservation funds as well as in your retirement annuities. These retirement funds have boards of trustees who have to comply with Section 37C of the pension fund act.  This means that they must ensure that all dependants have been identified and looked after before any non-dependants receive any benefit.  There can, therefore, be situations where your beneficiary nomination may be overridden by the board of trustees.  There can also be delays while the board of trustees investigate whether there are any dependants who may need to be catered for.

A way around this is to convert your pre-retirement asset into a post-retirement asset by maturing your RA and taking out a living annuity.  The living annuity does not have the complexity of having a board of trustees overseeing your beneficiary nominations.  This will provide you with a lot more certainty and allow the benefits to be passed on to your nominated beneficiaries, even if they are not dependent on you.

Having the funds in a living annuity will also give your investment access to a much wider range of investment options.  Pre-retirement assets have to comply with regulations that restrict how much you can invest offshore.   With a living annuity, you can invest all the funds in an offshore portfolio.  A portfolio that I like to use targets high returns and utilises hedges to limit downside risk.

The downside with living annuities is that you are obliged to take an income of between 2.5% and 17.5%.  This may be inconvenient as this income will be taxable.  A solution that I use is to take the lowest drawdown of 2.5% annually and have this immediately paid into a retirement annuity.  This premium will come off your taxable income, so there will be no additional tax payable.

You can bequeath the living annuity to anyone you please without any outside interference.  What is great about using a living annuity as an inheritance vehicle is that if it is properly set up and managed, it will provide an ongoing income that keeps up with inflation that will last forever.