RETIREMENT ADVICE FOR GOVERNMENT WORKERS
My wife and I have worked for the government for about 40 years. My wife will retire at the end of next year, and I will retire in May 2017. Although we are confident that the lump sums both of us will receive will cover most of our major debts, we are not sure if our annuities will last. For this reason, we would like advice on how best to structure our retirement savings. In particular, would it be better for both of us to retire, take the one-third cash lump sums and live on the annuities, or should only one of us retire and the other resign, withdraw all his or her savings and invest them with another fund?
Maleho Peter Israel Motshumi
Francois le Roux, Certified Financial Planner at Old Mutual Private Wealth Management, replies: Although you are entitled to one-third in cash per member, the portion exceeding the R500 000 tax-free retirement allowance plus your pre-1998 Government Employees’ Pension Fund (GEPF) tax-free portion will be taxable. This is taxed according to the retirement lump sum tax table*. Avoid withdrawing taxable cash if possible, unless you need it to settle debt, or for some other pressing need. Also, the smaller your cash withdrawal, the higher the annuity income that you will receive monthly for the rest of your lives. Ask the GEPF for a quotation to illustrate these options.
If you choose not to take the GEPF monthly annuity with the two-thirds compulsory annuity portion, you have the option to purchase a compulsory annuity from various product providers. An example of such an annuity would be an investment-based living annuity or an annuity providing a guaranteed income for life. Compare these to the GEPF’s offer.
There is no simple answer as to which choice will be best, and how long your money will last. An analysis and comparison will need to be done. Having said that, my experience has been that the GEPF offers a very competitive monthly pension.
If you resign as opposed to retire, be aware that you might lose valuable retirement benefits – for example, subsidised medical aid contributions. Please check with your employer.
Should you decide to resign and take cash, you will be taxed according to the withdrawal lump sum tax table** as opposed to the retirement lump sum tax table. This means that you will lose out on the R500 000 tax-free exemption.
WHAT HAPPENS TO MY ANNUITY WHEN I DIE?
I am 69 years old and have a living annuity, which is growing well. If there is a balance in the fund when I die, will my wife receive a monthly annuity or a lump sum?
Name withheld on request
Lesego Monareng, Certified Financial Planner at Old Mutual Private Wealth Management, replies: You have a living annuity, which means your income payments are directly linked to the performance of your underlying investments (which you choose and can switch between). You may draw down between 2.5 percent and 17.5 percent from this investment to meet your income needs.
On your death, the capital remaining in the annuity is paid to your nominated beneficiary or to your estate (in the absence of a beneficiary). If you have nominated your spouse as the beneficiary, there are various options available to her. The first option is commutation – that is, your wife can elect to receive a lump sum. Any lump sum will be taxed at your retirement lump-sum tax rate and the net amount will be paid to the beneficiary.
Another option is for your spouse to continue receiving an income (annuity) from the policy. The income will be taxed at your wife’s marginal rate of tax (subject to applicable rebates, exemptions and tax credits). Your spouse may also select a combination of the two options, provided the remaining balance complies with the living annuity provider’s prescribed minimum amount of investment.
It is important for your spouse to be aware of the importance of obtaining the right financial advice on your death. For example, it may not be in her interests to elect to receive a lump sum.
WHY DOES MY SCHEME NOT FULLY PAY MY PMB?
I am getting tired of reading in the financial press that medical aid funds are obliged to pay in full for the diagnosis and treatment of prescribed minimum benefit (PMB) conditions. Maybe they are obliged to pay in full, but I wonder how many actually do, which clearly makes them in breach of the law – or so one might think.
I quote the example of my hypertension medication. Clicks charges R150.42 for my tablets for 30 days, which I understand makes it one of the cheapest on the market. When I get my claims report from Discovery, it states that the scheme rate is also R150.42, yet the scheme pays Clicks only R115.00. The amount I pay in is not going to render me bankrupt, but I have to wonder how Discovery gets away with this.
Clive Kihn
Durbanville
Dr Ryan Noach, deputy chief executive of Discovery Health, replies: The Medical Schemes Act states that schemes may use designated service providers and lists of medicines (formularies) to afford cover [for PMB conditions] on a sustainable basis. [In this respect] Discover Health Medical Scheme (DHMS) has agreements with healthcare and service providers and a comprehensive list of approved medicines (formulary).
The member is registered for cover for one of the 27 chronic PMB conditions. The medicine he currently uses is not included in this list.
On the higher plans, such as the member’s plan, members may choose a medicine not included on the formulary. On these plans there is an additional monthly chronic drug amount (CDA) funded from the chronic benefits, up to a limit. The member receives a CDA of R115 a month for his condition. The medicine the member uses costs slightly more than the CDA, which results in him being exposed to a small co-payment, above this R115.
By choosing medicines on the formulary, the majority of DHMS members using chronic medicine do not have co-payments.
I’M RETIRED AND WANT TO INVEST IN RAs
I am retired and earn quite a good income from my living annuity. Please could you clarify the following:
1. Do retirement annuities (RAs) and living annuities form part of one’s estate, or are they exempt from estate duty?
2. I would like to buy an RA once a year (to benefit from the tax deductions) and convert it into a living annuity. Is this allowed?
3. Can I deduct 15 percent of my income to buy more RAs?
Thys van der Merwe
Francois le Roux, Certified Financial Planner at Old Mutual Private Wealth Management, replies: Technically, RAs and living annuities are part of your deceased estate, but the relevant fund values are exempt from any estate duty liability in the estate.
You can buy an RA every year, but you don’t have to. You can make annual top-up payments into a single RA. In principle, you can retire from any RA from age 55 onwards, and purchase a living annuity.
Regarding deducting 15 percent of your income, I assume you are referring to making tax-deductible contributions to RAs. In essence, the rule is that you can make tax-deductible contributions amounting to 15 percent of non-retirement funding taxable income. Your post-retirement income is all non-retirement funding in nature, as you would no longer be a member of a retirement fund.
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* & ** The lump sum tax tables are in Treasury’s Tax Pocket Guide 2015. Go to www.treasury.gov.za/documents/national%20budget/2015/default.aspx