MONEY CLINIC | I'm a teacher looking to resign. How can I best invest my R3.6m payout?

A teacher looking to resign during Covid-19, taking interest in property and franchising, seeks the advice of an expert on the best way to invest her payout.

She writes:

I am a 55-year-old teacher. Before lockdown I went to Government Employees Pension Fund (GEPF) offices to check how much money I would receive If I were to retire early or resign. 

I discovered that if I take an early retirement I would receive a R1.2 million lump sum. But if I resign I would receive R3.6 million. All before tax.  

How can I invest my money? I am interested in property and franchising. Please also advise on food and fuel franchises that I could afford with my resignation money.

I don't want to make the mistake many teachers make when they resign. 

Hardi Swarts, director of Autus Private Clients, and Financial Planner of the Year, 2019, responds

Dear Reader,

Early retirement is a big decision, especially considering the current harsh economic climate. I don’t believe that early retirement is wise considering the uncertainty of life, longer life expectations and many failing businesses owing to the Covid 19 pandemic. It is, however, a personal decision, only you can make.

It’s essential to question yourself regarding the reason for an early retirement. Are you motivated to retire because of emotional or health issues, or are you seeking financial independence and success elsewhere?  You should also question your ability to manage risk?  Are you willing to risk your life’s savings on a food or fuel business which may not be successful? And are you ready to spend countless working hours in an unfamiliar business?  

It may be prudent to start a side hustle and ‘test the waters’. You could consider online tutoring or something like handyman work for your community. A colleague of mine retired from corporate life, started a handyman business and now employs ten people. His initial capital outlay was minimal, which made his venture less risky. 

If you’re absolutely sure that you’d like a franchise business, then the following will apply: 

If you retire from the fund and take the R1.2 million lump-sum, you will need to pay taxes according to the Retirement lump sum Tax table.

When you retire as a member of a pension fund, pension preservation fund or retirement annuity fund and you wish to take a portion of your retirement interest as a lump sum, you are allowed to take (commute) a lump sum equal to a maximum of one-third of the retirement interest in that fund.

The lump sum is taxed upon retirement using special tax rates, as indicated below:

table 1 sharp

If you decide to resign from the fund and take the R3.6 million lump-sum, then you will pay taxes according to Withdrawal Benefit lump sum Tax table.

table 2

In both scenarios, you are going to pay tax. However, if you resign from the fund, you are going to pay much more tax than if you retire from the fund. Taking this into consideration, I would not suggest resigning from the fund.

If you do decide on early retirement and you want to invest your money, there many aspects to consider such as your risk appetite, health, debt levels, disposable income, budget and the extent to which others rely on you financially.

I highly recommend that you make an appointment with a certified financial planner professional to discuss all of the above before you make any decisions.

Compiled by Allison Jeftha. 

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