How much should you draw as a lump sum?

2015-10-14 06:00


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Did you know that it is possible to have enough money but still not be able to sustain your lifestyle in retirement? Having money is not enough. You must have access to it.

When retiring from a retirement fund and taking a lump sum (up to 1/3 from pension funds and retirement annuities, up to 100% from provident funds) the first R500,000 is tax free. This is a once off lifetime allowance and applies to the combined value of all lump sums you have taken since October 2007(with some exceptions). Lump sums before that are disregarded.

Over and above the R500,000, members of previous government retirement funds (e.g. Transnet, GEPF) can also take any value of their lump sum attributable to their period of employment before March 1998 totally tax free.

You should definitely take the tax free portion, but should you take more? This depends on your need to access more of your money in future. Remember that you won’t have access to the capital in a pension paying investment vehicle like a living annuity or life annuity.

Some examples of things that require cash:

1)Settling debt when you retire

2)Goals in retirement: travel, replacing vehicles, replacing appliances, future alterations to your home, etc.

Case study:

Bob retires at 60 with a provident fund of R5million. His lifestyle costs R200,000 per year. Other goals such as travel and vehicle and appliance replacement cost an average of an additional R50,000 each year.

If he draws R500,000 tax free as a lump sum he would pay no tax when he retires. However he would run out of liquid/accessible capital (green in the graph below) by age 69. This means that despite having money in the living annuity (red in the graph below), he would not have access to the capital and would therefore not be able to sustain his lifestyle.

If Bob drew R2million as a lump sum he would pay R472,500 tax when retiring but he would have more liquid capital (green). This would give him access to money when he needs it and enable him to sustain his lifestyle for longer (age 82). The liquidity could be further enhanced by increasing living annuity withdrawals in his 80’s. Bob can either save tax, sustain his lifestyle or compromise between the two. Tax and liquidity in retirement have to be balanced.

How much you should draw as a lump sum depends on your personal circumstances. As you approach retirement your financial planner should help you to do “liquidity scenarios” looking at least 20 to 30 years ahead.

Free consultation

If you are retiring soon or have been retrenched and want assistance contact CONSOLIDATED for a free introductory meeting. 041 373 7999 or email CONSOLIDATED FINANCIAL PLANNING (Pty) Ltd is an authorised financial services provider - FSP License Number 12978. – Paul Leonard CFP®,

Executive Director at Consolidated Financial Planning

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