Picture: ISTOCK
Picture: ISTOCK

2018 is my last working year. I intend transferring the two-thirds of my pension to either a preservation fund or living annuity. What options do I have regarding the withdrawal? My one-third cash payment could last me for two years. Can I waive withdrawal for two years then opt for quarterly withdrawal from the third year after retirement?

Bonisiwe Nokwindla

Nerine Brink, principal at PSG Wealth Employee Benefits Route 21, replies:

Your conservative approach to withdrawal is well advised. A failure to exercise drawdown control - spending more than you earn - is the reason many retirees run out of money.

Preserving the two-thirds while living off the lump sum is unfortunately not possible, as preservation on retirement is not possible under the Pension Funds Act.

I recommend you make use of an independent financial adviser. The investment environment is a daunting place when faced alone.

Make use of the one-third withdrawal, but be careful not to exceed the allowed R500000 tax-free amount. Capital loss due to taxation could have a dire effect in the long term. Invest this amount in a flexible vehicle that gives three to five working days' access and targets a return of inflation plus 6%. Earmark these funds as "emergency" funds.

Purchase a living annuity or a guaranteed life annuity with the remaining two-thirds.

The transfer from your retirement fund to an annuity will be tax free. A life annuity allows you to purchase a guaranteed income for the rest of your life and potentially a reduced income for a surviving spouse. You sacrifice the capital you use to purchase the income from a life annuity.

If you choose a living annuity, you:

  • Have to draw an income of between 2.5% and 17.5% of your capital a year;
  • You can only change the drawdown once a year on your contract anniversary; and
  • No lump-sum withdrawals apart from the income are allowed.

You must manage the income drawdown preferably at less than 5% a year, and your average return should be inflation plus 5%. This should:

  • Keep the impact of inflation at bay;
  • Protect your capital;
  • Maintain your buying power; and
  • Ensure an income for as long as you live.

Should you pass away, your living annuity will transfer directly to your beneficiaries, who will have the option to keep the annuity, or withdraw the lump sum, taxable in your hands. This transfer bypasses your estate, so no estate duties are payable on the annuity.

What short- or long-term investment opportunities can I venture into that are profitable? I am looking to invest a minimum of R1000 a month for the next 12 months - what should I look at?

Name withheld

Alexi Coutsoudis, financial adviser at PSG Wealth Umhlanga Ridge, replies:

Investment guru Warren Buffett advises: "Rule No 1: Never lose money. Rule No 2: Never forget rule No 1."

Two of the greatest enemies of wealth creation are the emotions of fear and greed. Both can cloud the judgment of even the most astute investors, so make sure you first answer the question of what are you investing for.

Look for investments with stated goals and time horizons that match yours. Make sure any investments you consider can prove that they consistently achieve their stated performance goals.

When you have a short time horizon for investment (usually one to three years), your return goal needs to be tempered by the risk that is prudent to take on. This should be very low risk as this kind of time horizon does not lend itself to predictable outcomes from shares or property. The goal should be outperforming inflation without taking on undue risk, which could compromise this outcome.

When you have a long-term horizon (five to seven years and longer) your biggest risk is inflation eating away the value of your money. For this reason, and because long periods lower risk or the volatility of shares and listed property, you should consider investing in both local and offshore equities.

Your return goal should generally be to outperform inflation by 5% to 7% a year (although this is seldom delivered perfectly every year).

Skilled asset managers seldom miss the return goal when you are invested for the right period. In the long term, the lesson is: don't be fearful. Giving in to the fear of loss will nudge you into low-risk and low-return solutions, which do not line up to your long-term goals.

Like everything involving financial products, the choice is daunting and many times overcomplicated. It is best to enlist the services of a reputable adviser who holds the certified financial planner accreditation.

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