LIVING ANNUITIES AND EMIGRATION
I am a 76-year-old widow who has applied to emigrate to Australia. I have two living annuities, and I would like to know whether, on emigration, I will be able to send these invested funds to Australia. If I can, what will be the tax implications?
Graham Lovely, a financial adviser at PSG Wealth in Rondebosch, Cape Town, replies: You cannot transfer your living annuities to Australia when you emigrate, because legislation does not provide for this. After you emigrate, you will continue to receive the income from the living annuities in South Africa. The income will be taxed at your marginal rate of tax, in South Africa.
The income will be paid into your blocked rand account in South Africa. This is an account to which exchange-control restrictions have been applied. Once your emigration status has been recorded, all capital transfers must flow offshore via this account.
The onus will be on you to expatriate the income received. This can be costly and an administrative hassle, so it is wise to expatriate the funds once a year.
HOW LONG CAN I DELAY RETIRING FROM FUND?
I am 70 years old and no longer in employment. I have not officially retired and my pension and provident fund investments from my previous employers are in preservation funds.
Am I permitted to delay my retirement indefinitely – in other words, how much longer may I remain invested in the preservation funds before I will be compelled to “retire” and buy an annuity?
After I retire, I intend to buy a living annuity for R1 million and draw down the minimum of 2.5 percent annually. However, I believe the minimum amount that one is permitted to withdraw from a living annuity is R150 000 a year. Does this mean that I will be forced to withdraw R150 000 (that is, 15 percent), rather than 2.5 percent? If this is the case, does the minimum withdrawal of R150 000 apply only to the first year, or to every year in which I draw down?
Wico Strydom, a financial adviser at PSG Wealth in Silver Lakes, Pretoria, replies: In terms of current legislation, you never have to retire from a preservation fund. On your passing, it is deemed that you retired the day before your death, and your preservation fund will be transferred to your beneficiaries. Your beneficiaries can withdraw the money in the fund, or transfer the money to a life or living annuity, or a combination thereof. Any lump-sum withdrawal will be taxed according to the retirement fund lump-sum withdrawal benefit tax tables (in the deceased’s name).
Regarding your second question, you do not have to withdraw a minimum rand amount from a living annuity.
WHAT SHOULD MY RISK APPETITE BE?
I always hear about risk appetite, but I am not sure how to work out mine, or what it should be. I am 32 years old, have retirement savings, but could save a little more, am paying off my home, and have a comfortable job. Should I be taking more risk, with the possibility of earning higher returns, such as getting more equity exposure because of my investment time horizon, or should I be mixing my assets more conservatively to allow for steady growth? I have about R3 000 a month to invest.
Jonathan Fisher, a financial adviser at PSG Wealth in Sandton, Johannesburg, replies: In view of the brief description of your situation, I need to make a few assumptions. As you are relatively young – the official retirement age is 65 years – you still have at least 33 years to build up capital during your working life. I’m assuming that your retirement savings are in a medium-risk investment that complies with regulation 28 of the Pension Funds Act, in which case you could probably go for a bit more risk with higher equity exposure.
You can choose from exchange traded funds, a suite of higher-risk unit trust funds with good track records, or, if you don’t have a tax-free savings account, I suggest you consider starting one and investing in a couple of good equity funds within this structure. It may be worthwhile to chat to a professional financial adviser about your circumstances to make the best decision.
INVESTMENTS AND PAYING OFF DEBT
Should I use money from my investments to settle debt, or is this a bad idea?
Ruan Vorster, a financial adviser at PSG Wealth in Tygervalley, replies: Before you decide to use investment capital to settle debt, you need to ensure that you do not fall into the same debt trap again.
Divide your expenses into necessities and luxuries and list your debts in order from those with the highest interest rates to those with the lowest. If possible, consolidate your debt into a product with a low interest rate. If you do this, you should ensure that the debt is repaid over the original term or faster, otherwise you will lose the benefit of the lower interest rate and may even end up paying more in interest.
Another possibility to consider is to consolidate the debt in your home loan, for example, which would be at a much lower interest rate than a credit card or personal loan.
Once you have “structured” your debt in the most advantageous way possible, it’s time to decide on the best settlement plan, either repaying the debt with a capital lump sum from your investments or repaying every month. To make the right choice, you need to compare the expected return on your investment with the interest you will be charged while repaying the debt. So if, for example, the expected return on an investment is 10 percent and the interest you are paying on the debt is 14 percent, it would be beneficial to liquidate your investment and repay the debt.
If the capital is not enough to repay all the outstanding debt, you need to revisit your budget where you listed your luxuries and necessities. Some luxuries may need to be cut.
Keep in mind that liquidating an investment has an opportunity cost. The opportunity cost is the lost compound interest on the capital liquidated and the monthly contributions not made. As I do not know your exact circumstances, you should consult your financial adviser before making a final decision.
ESTABLISHING AN EMERGENCY FUND
I have recently received a policy payout of R100 000 and would like to put most of it aside for a rainy day. How do I work out a sufficient emergency fund, and where would be best to invest this money? I am single and have two children under 10 years old, and I belong to my employer’s pension fund.
James Wiles, a financial adviser at PSG Wealth in Melrose Arch, Johannesburg, replies: A sufficient emergency fund is between three and six months’ income or household expenses. Your emergency fund needs to be easily accessible and invested in a low-risk fund, such as a money market fund or a call account.
Three to six months is only a guideline. You need to assess for yourself whether this will be enough based on your specific circumstances. For example, if your monthly after-tax income is R20 000 and most of it is used to cover expenses, it would be a good idea to have access to at least R60 000 in an emergency fund. With two young dependants, you might feel that R80 000 is a better amount.
If you have access to affordable credit from a bank, a portion of this amount can be made up of easily available credit. Remember that if you decide to use credit, you need to make sure you can pay it back quickly and at a reasonable interest rate.
You should try to have as little debt as possible, because the more you must pay in interest, the harder it will be to recover from a crisis.
The easiest way to invest the money in your emergency fund with low risk is with your bank in something that earns reasonable interest while still being available at any time. Generally, a call account will work for this. Alternatively, you can invest in a money market fund or a stable unit trust fund.
The excess cash you have left over can be invested for the long term in something more aggressive if you won’t need to use this money within the next three to five years. This can be done with a balanced or high-equity unit trust fund. You may consider starting a tax-free savings account with this excess, or making a contribution to your retirement annuity, in which case you will be entitled to a tax deduction.
Before making a decision, be sure to run it by your financial adviser to make sure you understand the following: the liquidity (access to money), the risk (volatility of the funds) and the tax considerations.