Your questions answered

Published Jun 27, 2015

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Email queries to [email protected] or fax to 021 488 4119. Feature sponsored by PSG Wealth

Calculating the social old-age grant

Readers have sent Personal Finance a number of follow-up questions since Marius Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, answered a question about the social old-age grant in May. Here are some of them:

In February, my wife and I (both in our 80s) started to receive a social old-age grant of R192 each. I do not understand why the amount is so small, although it seems to vary each month. I raised my concerns with the South African Social Security Agency (Sassa), but I have not received a reply.

We receive a pension from the United Kingdom. The rand amount varies depending on the exchange rate. I also have a South African annuity. Our combined income is R7 336 a month.

Our medical scheme contributions are R2 774 a month. Our investments and bank savings do not exceed R500 000. The cottage we live in is owned by my family.

Are we receiving the correct amount? How did Sassa calculate our grant?

GG Belcher

Marius Cornelissen: The amount paid is determined by a sliding scale. The maximum amount for which you can qualify is R1 410 a month, unless you are older than 75, when you qualify for up to R1 430. However, these amounts are typically paid to people with no or very little income.

It is clear from your income and investments that you qualify for a grant. However, it is important to note that the monthly amount will decrease significantly as your income approaches the threshold of R129 360 a year for a married couple. It might even drop to as low as R100 a month for a couple who are close to the cut-off point.

Sassa will typically use your combined income net of tax and allowable deductions, such as contributions to a medical scheme, to calculate your grant. It is important to notify them of any changes to your income and deductions, because these will affect the size of the grant paid to you.

I cannot provide you with the exact amount of the grant you should receive, because Sassa could not provide PSG with the sliding scale it uses for 2015.

There is a link on the website of the Department of Social Development that provides the sliding scale for social grants in October 2013. From this, one can glean that, at that time, a married couple with an income of about R5 000 a month would receive a combined grant of about R770 a month. The sliding scale is not quite in proportion to income, because the full grant seems to be available to couples who earn less than R2 500 a month, and it dips by about R10 a month for every extra R50 of income earned. Again, this scale is two years old, but it provides an indication of what the grant could be.

I would advise you to go to a Sassa office in person; it might well be that the increase in your medical scheme contribution has not been adjusted in the new financial year. However, it does seem that your grant payment is not that far off.

Regarding the income criterion to qualify for a social grant, is the combined income for a married person gross or net (after tax and allowable deductions)?

MA Bath

Marius Cornelissen: The income is net of tax and allowable deductions, such as contributions to a medical scheme.

For the purpose of the means test, what constitutes “assets”?

John Wallander

Marius Cornelissen: Your assets can be:

* The value of any properties that you or your spouse own (excluding the property in which you live);

* Cash held in a bank account; and

* Investments such as shares or unit trust funds.

With regard to retirement funds, the following criteria are applied:

* A person who has not retired from the fund: The annuity is not taken into consideration when a person’s assets are calculated. However, Sassa will ask what the fund value is and when the member intends to retire from the fund.

* A person who has retired from the fund: An annuity received from a retirement fund is taken into account when calculating income.

Investment options in retirement

I will be taking early retirement after working for the government for 36 years. I have chosen to take two-thirds of my retirement savings as a monthly income and the rest as a cash lump sum. I am a single parent with no debts. What are my best investment options?

Sarah Naicker

Graham Lovely, a financial adviser at PSG Wealth in Claremont, Cape Town, responds: The monthly pension will be paid from the Government Employees Pension Fund until you die. This pension cannot be transferred to a private pension fund, and it cannot be commuted. Annuities (or monthly pensions) are taxed as income. However, you are free to do with your after-tax lump sum as you wish. This is known as your discretionary capital. When investing this capital to supplement your pension, you need to take the following into account:

* Your household income and liquidity requirements;

* Your investment horizon;

* Your risk profile and/or specific instructions regarding risk appetite;

* Risk of different asset classes and diversification across different asset classes;

* Exposure to different fund managers and institutions;

* Costs of products, funds and administrators; and

* Tax aspects of different products or structures.

Importantly, you, as a retiree, need to optimise asset allocation as far as possible. Growth assets require more time to overcome the inherent volatility in returns in order to provide good growth. Certain investments are better at providing an income (yield). An appropriate balance between investing for growth in the long term and capital protection in the short term must be achieved.

Before selecting the appropriate discretionary investment funds or unit trusts, you need to determine your income and capital requirements for the projected term of retirement.

How long will my pension last?

I retired recently and received a pension payout of R1 356 000. I want to use R1 million to buy a living annuity and take the rest as a cash lump sum. How I am going to be taxed? If I draw down R7 000 a month, how long will my pension last?

Ronald Cornelius

Anton Prinsloo, a financial adviser at PSG Wealth in Silver Lakes, Pretoria, responds: I would need far more information about your financial situation to provide you with comprehensive advice; therefore, my comments are only guidelines.

Lump-sum withdrawals at retirement are taxed as follows:

* R0 to R500 000: no tax;

* R500 001 to R700 000: 18 percent;

* R700 001 to R1 050 000: R36 000 plus 27 percent; and

* More than R1 050 001: R130 500 plus 36 percent.

If you have not used the tax-free lump sum of R500 000 to date, the R356 000 that you take as cash will be tax-free. It is normally wise to withdraw the maximum amount that is tax-free.

An income of R7 000 a month from capital of R1 million means an initial withdrawal rate of 8.4 percent, which is very high.

To achieve capital growth on your investment in the first year of retirement, you will have to earn a return of more than 8.4 percent just to cover your income. If you want your income to keep pace with inflation, you will have to add six percent to this return, which brings the required return to 14.4 percent.

It would not be wise for your financial plan to assume that you can achieve a return of 14 percent.

If I do a cash-flow projection based on an income of R7 000 a month from capital of R1 million, and assume investment growth of 10 percent a year and inflation of six percent, I find that your capital will be depleted in 16 years.

Can I take another cash lump sum?

I went on pension in 2011 and received a tax-free benefit of R350 000. The balance of R1.2 million is invested in a living annuity. Do I qualify for another lump sum?

Name withheld on request

Riaan Strydom, Financial Adviser at PSG Wealth in Mill Park, Port Elizabeth, and the PSG Financial Planner of the Year 2015, responds: A living annuity does not allow for lump sum withdrawals under any circumstances.

Your only option is to increase the annual income you withdraw from the living annuity to the maximum of 17.5 percent. The withdrawal will be taxed as income and not as a retirement fund lump sum. However, it is seldom a good idea to draw down an income at the maximum rate, because this is likely to deplete your capital, as well as the income you can safely withdraw in the future.

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