RETIREMENT – Transnet example

2015-10-21 06:00
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AS a Transnet employee, Gert (59), has some unique options available when he retires. Below is a simple example to illustrate the principles.

Gert has a pension fund worth R3-million. When he retires he would be able to take 1/3 of that (R1-million) as a lump sum (the other R2-million must be invested to provide a pension). If he were a member of a regular private sector fund, then the first R500 000 of the lump sum would be tax-free and the remaining R500 000 would be taxable. In this instance , he would pay R117 000 tax on the lump sum. However, because Gert is an employee at Transnet with, say, 37 years of service, he could get the full R1-million tax-free.

MARCH 1998

Before March 1998 lump sums from government retirement funds were totally tax-free. The portion of the lump sum attributable to Gert’s employment before 1998 will still be totally tax-free, and over and above that the first R500 000 of the portion attributable to his employment after that (17 years since then) will also be tax-free.

In this example 54% or R540 000 of his lump sum is attributable to his employment before 1998 and will be totally tax-free (note that all of the figures in this article are rounded to keep the example simple). The remaining 46% or R460 000 is attributable to his service after that. Since anything up to R500 000 of this portion is also tax-free it means that he will not pay tax on this either. That is why the full R1-million lump sum in this example is totally tax-free.

TO RESIGN OR TO RETIRE?

However, as a Transnet employee under the age of 60, Gert also has another option. He could resign instead of retiring. If he did this he could get a tax-free lump sum of just over R1,6-million.

The reason for this is that the pre-1998 tax- free formula would be applied to his full fund credit of R3-million and not just the 1/3 lump sum. That means that 54% of the R3-million is attributable to Gert’s employment before March 1998 and would therefore be tax-free. That gives him just over R1,6-million.

If he followed this route (as a number of his Transnet colleagues have) he could ultimately end up with around R1,4-million in a pension generating investment like a living annuity and about R1,6-million in discretionary funds. The benefits of this structure are 1) his income in retirement will be a lot more tax- efficient, and 2) his portfolio will be more liquid.

A NOTE

Whenever there are tax breaks like this available, it makes sense to consider taking advantage of them. For Transnet employees who are considering leaving before age 60 the example above illustrates an option worth considering. However, remember that leaving early means cutting off the last few years of contribution and growth and this might make the difference between being comfortable or not. Therefore, ask a skilled financial planner to do retirement calculations for you before making your final decision.

FREE FINANCIAL PLANNING CALCULATION

To have a free retirement financial planning calculation or scenario done for you (or someone you know) contact us on

041 37 37 999 or email: vanessa.berry@consolidated.co.za.

CONSOLIDATED FINANCIAL PLANNING (Pty) Ltd is an authorised financial services provider - FSP Licence Number 12978.

) PAUL LEONARD CFP® is an Executive Director at Consolidated Financial Planning and presenter of MONEY TALK on Algoa FM for 21 years

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