Are you a public servant considering early retirement?
In the February 2019 Budget Speech, Finance Minister Tito Mboweni gave details of government’s measures to reduce the public sector wage bill and counter the sluggish economy’s effect on public finances.
One of these measures is to allow public servants between the ages of 55 and 59 years to take early retirement, without any negative impact on their pension benefits.
The offer is available from 1 April 2019 until 30 September 2019 and it is estimated that a maximum of 30 000 public sector employees will be considered, provided they meet the criteria of age and other criteria set by each sector department.
It’s important to note that this process is completely voluntary and up to the individual concerned whether they wish to apply or not.
National Treasury will carry the cost of any penalties relating to the pensions of those who are approved to take early retirement and the individuals will not suffer any financial loss as a result of taking early retirement.
Why is this offer being made?
Government urgently needs to spend on critical areas such as health, education, social security and infrastructure – and this has to be balanced against its wage bill.
Government will ensure, when considering applications for early retirement, that service delivery is not affected and that those with scarce and critical skills, e.g. doctors, are retained.
Retiring as a public servant
The retirement rules of the specific fund will apply. If you have less than 10 years’ public sector service, you will receive a cash lump sum that is taxable. If you have more than 10 years’ public sector service, you will receive a taxable cash lump sum together with a monthly income.
Your lump sum needs to provide you with a sustainable, monthly income for the rest of your life or top up your government pension. There are options that allow you to continue to grow your capital amount invested, while providing you with a monthly income.
Certain of these options also let you leave a legacy to your dependants. You may also choose a vehicle that guarantees your income for the rest of your life.
Those considering taking up this offer should obtain advice from a qualified financial adviser in order to understand the different retirement income solutions available.
Each of these solutions has its own advantages and disadvantages – relative to the personal circumstances of the individual concerned.
In some instances, combining different solutions may provide a better outcome in the form of a more sustainable, long-term retirement income and the provision of a legacy for dependants.
Meeting your monthly income needs:
If you need a guaranteed income:
A life annuity provides a guaranteed income for the rest of your life. You can choose a single life annuity, or a joint life annuity if you wish to have an income paid to your spouse after your death.
You could also opt for an inflation-linked life annuity - where the income will be adjusted annually, in line with inflation, for the rest of your life.
If you need to top-up your monthly government pension:
The above life annuity options are also available in this instance.
Alternatively, if you have the appetite to invest in the market, you can opt for an investment plan.
This will give you market, or equity, exposure tailored to your tolerance for risky or growth assets.
You could invest your lump sum in collective investments (unit trusts), wrap funds or even a share portfolio.
There’s no fixed investment term and you can add amounts to the investment plan at any time.
You can also draw a regular income from the investment plan.
Growing your capital:
If you want to grow your capital to provide for a future financial goal:
There are investments that provide a fixed return (the original investment amount plus growth) after you’ve been invested for a five-year term.
After the five-year term, you may withdraw the funds or remain invested until you require the money.
An investment plan, comprised of collective investments, wrap funds or a share portfolio is also an option.
If you want to grow your capital while still drawing an income:
Some of the fixed return options discussed above also pay you a guaranteed monthly income during the investment term.
You can choose whether your income will be level or increase with a fixed percentage yearly.
You may also select the investment plan, but the income will not be guaranteed as in the case of the fixed return investment.
Leaving a legacy:
If you want to leave a legacy for your dependants:
You can appoint a nominee for ownership on a fixed return plan which means that the proceeds are available as a legacy or that the beneficiaries of your choice can continue the investment.
With the fixed return plan with income, the remainder of the payments will be paid out to your dependants if your death occurs within the five-year term.
Money invested in an investment plan will form part of your estate on your death and could be paid out to your dependants by the executor of your estate, should your last will and testament provide for this.
Proper advice is critical
Navigating the retirement journey alone can be daunting.
All people face certain risks in retirement – arguably the biggest risk being inflation.
When you are no longer earning a salary, it’s more important than ever that your money is invested correctly to allow it to grow, provide a sustainable income and keep up with inflation.
In addition, we all have our own personal goals, dreams and unique needs – and most times, fulfilling these requires money.
If you’re considering early retirement, you need a plan – not just for your investments – but a plan for how you’re going to use your free time. The funds that you have available, and your health, will largely dictate your daily activities.
A qualified financial adviser can look objectively at your financial situation and advise accordingly.
Advisers working with Glacier by Sanlam have access to our Retirement Income Planner web-based tool, which assists with the decision by showing the end results of selecting a particular product or combining different products.