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

I often find that retired people encounter cashflow problems in their mid-70s.  This is probably due to pensioner inflation being higher than pension increases.  The items that most retired people spend large part of their budget on are medical expenses and electricity which have increased significantly.

There are two options open to you:

1. Improve the returns that you receive on your living annuity portfolio

If you are looking for an after-tax income of R30 000, then the drawdown rate of your living annuity would need to be around 7.5%.  A typical living annuity costs around 2.5% a year so you would need to invest in a portfolio that returns around 10% a year.

Getting a sustainable return of 10% a year on an investment can be a challenge, especially when you cannot afford to expose your portfolio to too much risk.  Remember, this is your retirement capital and you cannot afford to lose it.

There are a couple of portfolios that are designed to offer this type of return for living annuities without exposing the portfolio to too much risk.  Your financial adviser should be able to help you here.

2. Move some of your retirement funds into a guaranteed life annuity

Guaranteed life annuities will generally give you a higher income than a living annuity.  There are a number of reasons for this:

• The company that underwrites the guaranteed life annuity uses life expectancy tables. Those that live beyond their life expectancy are subsidised by those who pass away before they reach their life expectancy. If you have a living annuity, you must make sure that you have sufficient funds to last you till 100 as you do not know when you will pass away.

• The company that underwrites the guaranteed life annuity can be more aggressive with its investments as it has reserves. You, as an individual, will need to err on the side of caution at all times as you cannot afford to lose your retirement savings.

The table below will show you the impact of moving some of your funds into a guaranteed life annuity.  I will work on you having a total of R6m in retirement funds:

As you can see, you can improve your pension by making changes to the type of annuity you use as well as the choice of portfolios you are invested in.  I would recommend that you chat to an experienced financial adviser who can help you make the right choice.