Most people (at least when they reach the age of 45 or older) start thinking about retirement and the possibility of receiving a nice sustainable income in retirement.

For this to happen people need to start planning well ahead of retirement.  As a lot of people still belong to company funded pension or provident funds, they normally spend little time thinking or planning a dynamic income structure once reaching retirement, as they believe they will receive the “right” income in retirement from their pension or provident funds.

Supporting this belief is the new regulations that company pension and provident funds must provide default annuities for members who obtain pensionable age. What this means is that the company fund must have a vehicle when the member gets to retirement where he/she can seamlessly transfer their pensionable interest to such a default living annuity or fixed annuity. On face value this makes a lot of sense because many people receive bad or even no advice at this critical juncture in their lives.

The problem with this cheaper employer default option is the fact that investment in a living annuity requires constant good advice pertaining to sustainable income levels, (draw down rates) the appropriate asset allocation levels (how much equity, bonds, property and money market the investment should consist of). All relevant data shows that, left to their own devices, investors tend to migrate towards higher, unsustainable draw down levels and correspondingly lower risky assets (shares) in their portfolios. The combination results in greater capital loss quicker which then result in lower incomes when it can be ill afforded.

When in retirement people generally want as high a tax-free income as possible and when your monthly income results from one source only (normally a company pension, provident fund or living or fixed annuity, it is fully taxable. Because of this it is very important to start thinking and planning a better and more income tax friendly situation in retirement.

You can still receive interest that is tax free up to R23 800 for people below 65 and R34 500 for people above 65. So you can have R340 000 in a money market if you are below 65 and R493 000 if you above 65 which should be utilized to optimize the tax free income situation.

One of the best sources of income in retirement is simply drawing an income off your existing unit trust investments. Few people realize that the income you derive from such a source is not deemed income from a SARS perspective. If you then draw an income of R20 000 per month from your unit trust portfolio, the R20 000 per se is not included in your taxable income, but only possible capital gain, dividends or interest you receive from the portfolio. This is normally substantially lower that should you be taxed on R240 000 (R20 000 X 12).

Another excellent source of tax-free income in retirement could be a draw down from a Tax-Free Savings investment. These investments were instituted some time ago to entice more people to start saving. Currently you can only invest a maximum of R33 000 per annum and a total over your life time of R500 000. If you start to invest early in your life into such a tax-free savings investment and allocate the investment to 100% equites (shares), even though currently you can only invest a total amount of R500 000 over your life time, growth with compound interest will result in a sizable amount at retirement from which you then can withdraw a total tax-free income.

I’m confident that this will maybe just get your thinking going on one day being able to structure a more tax friendly income in retirement which could save you millions in taxes over your life time.