The factors you should consider when deciding how to invest a lump sum to generate an income in retirement.

Over the next four weeks this column will be about how to invest the money you receive at retirement from discretionary savings and a retirement fund lump sum payout. The topics will be:

* The factors that should affect your decisions about which products to use to generate an income from after-tax discretionary savings;

* Whether or not – particularly in the case of a defined benefit fund – you should take the entire one-third cash lump sum you are allowed to withdraw from a pension fund or only the R315 000 you can withdraw tax-free;

* The choice of products; and

* The investment choices, including estate planning, so you will have money for a rainy day.

When you retire, your income will come from the money you have saved (if you have saved) in:

* A tax-incentivised retirement fund, such as a pension fund and a retirement annuity (RA) fund;

* A semi-tax-incentivised provident fund; and/or

* A non-tax-incentivised investment (usually referred to as an after-tax product), such as a unit trust fund.

All the money you have saved in a provident fund is normally paid out as a lump sum, on which the tax exemptions on lump sums taken at retirement apply. The first R315 000, plus any amount on which a tax deduction did not apply while you were building up the savings, are tax-free.

The tax exemptions apply to all lump sums on a cumulative basis. In other words, you receive the amount only once. It is always wise to take the tax-free R315 000.

From pension and RA funds, you may take a maximum of one-third as a lump sum. You must use the rest to purchase a pension for life – known as a compulsory purchase annuity.

This column is about what you need to consider when deciding how to invest discretionary savings and retirement fund lump sums in order to generate an income in retirement.

For the purposes of this column, it is assumed that all the money will be required to provide a sustainable income stream until death.

There are numerous choices, all with different potential outcomes. Before deciding which product to use, you need to consider a number of factors, including:

Rate of withdrawal

A key factor is the rate at which you will withdraw your money – draw too much and your savings may not last for the rest of your life, particularly if the savings have to support both you and a spouse.

Statistics show that if both members of a couple retire when they are aged 65, the last-dying partner will probably live into his or her 90s.

Capital growth or income

If you will not rely on the money for an income for a few years, the underlying investments should be weighted towards capital growth – that is, a greater percentage of the assets should be invested in equities and property.

However, if you need to generate an income, your investments should be weighted towards assets that will provide you with some capital growth but that also reduce the volatility (the propensity for an asset to rise and fall in value rapidly) of your investment portfolio. Volatility can play havoc with a steady income stream. So you need to favour interest-earning investments as a significant component of your portfolio.

Investment risk

Many pensioners who have not saved enough money try to make up the deficit by going into high-risk investments, which all too often turn out to be scams, and lose all their money.

Even if a high-risk product is not a scam, the underlying investments are often driven by the potential – without any guarantee – to earn very high returns. The biggest risk with well-regulated formal products is volatility.

Your income needs

You cannot have your cake and eat it, too. In other words, the more money you want to leave to your beneficiaries, the less you will have to generate an income, no matter how you structure your investments.

Your priority in retirement should be your and your partner’s financial needs; then come the needs of those who are dependent on you; and only then the needs of those who are not actually dependent on you.


Again, the rule of “you cannot have your cake and eat it, too” applies. Guarantees cost money. The more guarantees you want, the more they will cost. In other words, the more guarantees you buy, the lower your income will be.

You can buy different types of guarantees, including those that will:

* Ensure an income flow for life, even when adjusted for inflation;

* Ensure an income flow for a fixed period, whether or not you are still alive during the period you choose;

* Fully or partially guarantee your capital; and

* Fully or partially guarantee both your capital and your income.

Personal factors

Your choices can be affected by a number of personal factors. These include:

* How dependent you will be on the income flow. If you have other sources of income, such as a compulsory purchase annuity, you can afford to take higher risks.

* Your age. The older you are, the better the income you will receive from a guaranteed income product, mainly because you are expected to die sooner.

* Your health. If you suffer from a terminal illness, you may want to maximise your income to improve your standard of living in your remaining years, as well as to pay for medical treatment.


Your investment choices will often be affected by the advice you receive. You must exercise caution, because a financial adviser will not necessarily set out all the investment choices, which will be detailed in part three of this series of columns.

You can invest with or without a financial adviser. You should obtain advice if you do not have investment expertise, but be warned: the advice may be limited or self-serving.

The two main sources of advice are:

* Representatives of financial services providers (FSPs), who can be people employed by a bank, a life assurance company or a company that specialises in financial advice.

When dealing with representatives, be aware that there are restrictions on the products they are allowed to sell and on which they may advise you.

You are entitled to, and should demand, a list of the approved products, and you should keep it with your documentation.

The product restriction has an upside and a downside. The FSP will have approved the products, so you can expect that “the nasties” will be excluded. However, many useful products, such as inflation-linked RSA Retail Bonds or exchange traded funds, may also be excluded.

Also to your detriment, particularly when it comes to banks, is that the list of approved products will be affected by what side deals, over and above normal commissions, the FSP has negotiated with product providers.

If you are sold “a nasty” that is not on the list, when the investment goes sour, in all probability the FSP (the employer of the agent or representative) will not be willing to compensate you. The financial advice ombud may order the FSP to compensate you, depending on the circumstances.

Simply because someone sits in an office at a high-profile company does not mean that he or she is not out to cheat you; it happens all too often.

* Independent advisers, who are not restricted in the products they may sell. This has advantages for you, but there are also dangers, of which the main one is the adviser’s fee or commission structure. If your adviser works on a commission basis, he or she may look to maximise his or her commission by, among other things:

– Not telling you about products on which he or she will earn little or no commission, such as bank term deposits or RSA Retail Bonds.

– Receiving (often indirectly) kickbacks of various kinds, over and above the commission, from unscrupulous product providers.

– Being dishonest. People, particularly pensioners, who have discretionary amounts to invest are the targets of unscrupulous financial advisers who try to mislead them into investing in high-commission-earning, high-risk products with phoney guarantees, such as property syndications (which are imploding at an horrific rate) and currency trading (remember the Leaderguard scam?).

Your better bet is to deal with someone to whom you pay only a fee for advice, calculated in a way you can understand – for example, an annual retainer plus an hourly rate. And a “fee only” means just that – not a fee plus commissions or kickbacks. (You must demand that the adviser tells you, in writing, about any incentives that he or she may receive directly or indirectly from a product provider.)

By paying only a fee for advice, you have a better chance of receiving advice on the full range of products that are available to you.

When you obtain advice, ensure that the adviser:

* Is registered as an FSP or a representative of an FSP. You must demand to see the adviser’s FSP registration number – and check its validity on the Financial Services Board’s website, (go to the “FAIS” link at the top right-hand side of the home page).

* Performs a financial needs analysis, taking into account your entire financial situation.

* Provides you with appropriate advice based on your circumstances and needs. You are entitled to, and must demand, a written account of the options that were considered and why particular products were sold to you.