Question

I am 72 and will shortly be retiring.  I will receive an income of R10k a month which is sufficient for my living costs.  My wife is 9 years younger than me and will work for 3 more years to 65.  She will then receive a modest pension, so a bit of help for her from me may help. I will be downsizing my house now and expect to have a capital sum of R2m available to help my wife. Can you please advise how best to invest this.

Answer

When you’re looking for an investment that will be used to provide someone with an income when they retire, there are two key factors that you should consider. 

• The investment and income must be tax efficient
• The income needs to be sustainable

Tax efficiency

If you invest the money cleverly, it will trigger very little tax and maximize the amount of income that you can get from the capital

Your pension and your wife’s pension will trigger income tax at the normal tax table rates.  The proceeds of this R2 million investment will trigger capital gains tax, so if you invest it cleverly, you can minimize capital gains tax.    

Each person gets a R40,000 annual exclusion when it comes to capital gains tax.  So, if you split the investments and invest some of it in your name and some of it in your wife’s name, you will be in a position where the first R80 000 in capital gain from this investment will not trigger any tax.  I would therefore recommend that you consider splitting the investment.  Remember, donations between spouses do not trigger donations tax so there is no problem on that front.

As a big chunk of any income you receive from this investment will be classed as a capital drawdown, you could be in a position where most of the income generated by this investment will be tax free.

Sustainability

It is important that the money be correctly invested and that the drawdowns that you make from it may be sustained by the investment growth.

Once your wife retires, you should be able to sustainably draw an income of 5% a year from it.  A R2million investment should be able to provide an income around R8 500 a month.  As you will not be making any drawdowns from the capital for three years, this amount should be higher, so the initial income should be in the region of R9 500 in today’s money.

If you find that the income is not sufficient, you could use the proceeds to purchase a voluntary life annuity.  If you chose a joint life annuity which pas an income till both you and your wife pass away, your starting income would be around R11 000 a month, increasing by 5% a year.  With a life annuity, as the R2m will be used to buy this ongoing income stream, the capital will not be available for your children to inherit.

As you can see, with a bit of planning, you can create a sustainable and tax efficient income stream for you and your wife with the profit from the sale of your home.  As always, I would recommend that to chat to a financial planner who can help you evaluate these options and get the right solution in place.