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 frequently come across this problem when I provide retirement counselling to pension fund members. There are a couple of things you can do.

Use a life annuity instead of a living annuity

One of the reasons you get a higher income from a life annuity than from a living annuity is that the two key risks that you carry when you have a living annuity are not there when you have a life annuity:

Investment risk

Pensioners are expected to live a lot longer than they did previously, so they need to manage their retirement capital cleverly.

Because you have stopped working and there is no new money coming into your retirement savings pot, you need to protect your capital and generate growth without taking too much unnecessary risk.

If you keep everything in a conservative, money-market investment you stand a very good chance of running into financial problems in later years (unless you restrict your drawdowns to the minimum 2.5%). You need to introduce a growth element into your investment.

With growth comes risk. Managing investment risk and getting the right level of growth is a key element in the success of a living annuity.

You need to get a knowledgeable adviser to assist you to manage this risk. It is tempting to do it yourself and save on the annual adviser fee but, to my mind, the 0.5% or 1% fee can save you a lot of heartache in years to come if you choose the wrong portfolio for your needs.

Longevity risk

You need to make sure that your money lasts for the rest of your life. The trouble is that you do not know how long you will live. Will you live longer than the average person or will you bring down the average?

You need to plan on living to 100 if you have a living annuity, because running out of money is not the outcome you want.

With a life annuity, the longevity risk is borne by the company you buy the annuity from. This company does not have to budget on you living to 100 – they work on your life expectancy. In simple terms, those who live beyond their life expectancy will be subsidised by those who die before they should. This makes it a lot easier for the company to plan and, as a result, they can offer a higher monthly pension.

Last week, I shared the Financial Sector Conduct Authority’s proposed guidelines for how much you could safely draw down from your retirement investment. A 65-year-old, for example, could draw down 5% of their retirement income and should not run out of money during their lifetime.

If they had R5-million in retirement savings, they could draw a monthly income of R20,833. If they had a life annuity, they would be able to get a monthly pension of R34,900, increasing by 5% a year. If they were married and their spouse was also 65, the couple could get an annuity that pays out R27,800 a month, increasing by 5% a year till the last spouse dies.

As you can see, the life annuity will provide you with a much higher pension.

Delay retirement

If you are able to, you can delay your retirement. If you can continue working for your company, even on a part-time basis, it would certainly help.

If you can work for a few extra years, you will get the double benefit of increasing your retirement savings and delaying the period for which you will be drawing from this savings pot.

Side gig

If you had a side gig while you were working, now would be the time to check whether a larger time investment in it could produce better results.

Look at how you can use your assets to generate an income. For example, if you have a property, look at using it as an Airbnb.

Downscale

If you cannot increase the inflow of cash, you will have to find ways to restrict the outflow. You must downscale your life to reduce your living expenses.

There are creative ways of doing this.

I have seen people move from the city to the country, where the property prices are considerably lower.

I’ve seen people go on two-year tours of South Africa in caravans while they live off the rental from their home – effectively delaying accessing their retirement savings for two years.

Not having enough capital when you retire affects many people. Using the right tools – and thinking creatively – can certainly improve your quality of life.