When drawing from your life savings
Choose a sustainable income level
When you retire, legislation will force you to invest at least two-thirds of your retirement capital in either a guaranteed life annuity or a flexible living annuity. Whichever option you choose, make sure that your income levels will sustain you for life. A common error with a living annuity is choosing too high a drawdown percentage in the light of the return offered by your investment portfolio and your expected longevity. The investment industry’s table on living annuity drawdowns will help you to choose an income level that lasts.
Make sure you beat inflation
People with less investment experience tend to invest only in familiar products, such as money market funds and fixed bank deposits. The problem is that the interest or returns on these products seldom beat inflation – certainly not after tax. To beat inflation, you need to look wider at more diversified sources of income and growth, such as inflation linked bonds, government and corporate bonds, listed property and shares. Your financial planner will show you how to enhance the return on your investment without taking on more risk than you’re comfortable with.
Watch the tax
If you’re drawing income from a unit trust investment and you’re under the age of 65, you pay no income tax on the first R23 800 of interest earned. If you’re 65 years and older, the exemption amount is R34 500. As far as your dividends from an SA unit trust investment are concerned, dividend withholding tax at a rate of 15% is subtracted from the dividend and automatically paid to SARS on your behalf. If you’ve made a capital gain, you will also become liable for capital gains tax on a withdrawal from your unit trust. In comparison, if you’re drawing income from a life or a living annuity, you’re taxed on your total taxable income according to SARS’s income tax tables (updated after the budget speech every year).
Your financial planner will help you optimise your income while keeping in mind longevity, risk and tax.