Question

Our company is closing down, and I’ve been put on early retirement.

I am 60 years old and have R5m in my provident fund and R3m in savings which includes the severance package.  I am concerned that this will not be enough as I was planning on saving for five more years. I need an amount of R30 000 a month to live on.   

Answer

The good news is that you should be fine with a bit of planning.  There are a couple of factors that you should consider when structuring your retirement income after a retrenchment.

Retrenchment package

As you are over 55, you have the option of having your retrenchment package taxed by using the retirement lump sum tables instead of the normal income tax tables.  If you do use the retirement lump sum tables, you will have used up a portion of your overall lump sum tax allowance.  I would recommend that you compare both scenarios and see which will give you the best after tax result for both your package and your pension.  Speak to a suitably qualified financial advisor if you are unsure.

Sources of income

As you need R30 000 a month after tax your pre-tax income should be in the region of R37 000. 

Now if you took all this money from your retirement fund, your drawdown rate would be 8.9% which is too high to be sustainable.

This is not that efficient from an income tax perspective as we will be paying R6 909 in tax each month.  This amounts to R82 000 a year, which is more than two months’ of your income.

An alternative approach (which I prefer) is to supplement your income with your savings.  The advantage here is that the drawdowns from your savings will trigger capital gains tax instead of income tax.  In your instance, no CGT will be payable. 

As you can see, the drawdown from the savings did not trigger any tax.  I will explain why:

If we assume that 10% of the income you receive here is a capital gain

The solution is a lot more tax efficient and will save you an annual amount of R54 000 when compared with the first option.

Life annuity or living annuity

A life annuity typically gives you a larger monthly income than a living annuity.  This can be a solution if you are struggling to reach your monthly income target.  To give you a sense of the numbers.

You can invest a part of your retirement savings into a life annuity and part into a living annuity.  This will give you a nice boost to your income and also preserve a lot of the flexibility of having a living annuity.

Other work

You do have a skill set and a lot of experience.  Do not discount the possibility of getting further employment or being able to supplement your income from consulting work.  If this does happen, then you can reduce the drawdowns from your annuity and savings by the income that you have earned.

Retrenchments have a massive impact on your finances.  However, with some planning, you can find the most appropriate solution.