Natasha Huggett-Henchie, Consulting Actuary at NMG Benefits

Many retirees feel like they’ve won the lotto when they see the total of their pension savings. But this initial excitement can quickly turn into financial stress if the money isn’t managed carefully.

Natasha Huggett-Henchie, Consulting Actuary at NMG Benefits, explains how understanding the tax rules and planning ahead can help make your savings last:

Understand your tax position

The South African Revenue Service (SARS) treats monthly pension payouts as regular taxable income. For people under 65, annual income that’s less than R99,000 (whether from a salary, retirement savings, or any other form of income) is tax-free. Ages 65-74 enjoy a higher limit of R153,250 per year, and those 75 and older have R171,300 per year, tax-free.

However, once these limits are reached, your payouts start to incur tax. This table gives some examples:

Avoid the lump sum pitfall

Lump sum withdrawals have separate rules. You can withdraw up to R550,000 as a once-off, tax-free amount. Amounts above this, up to R770,000, are taxed at 18%, and higher amounts incur a higher tax rate.

For example, withdrawing R770,000 results in R39,600 in tax, leaving you with just R730,400 in your pocket. And, any amounts you’ve drawn previously like two-pot withdrawals, or lump sums you’ve taken out following a retrenchment reduce your tax-free allowance.

Huggett-Henchie says that it’s usually better to take only the R550,000 tax-free portion and invest the remainder in an income-generating product.

Understand pension products

On retirement, your pension savings must be reinvested into a financial ‘product’ that pays out a monthly income. There are two main options for this:

• A living annuity earns interest on the capital amount you invest. However, if you withdraw more than what your investment earns in interest, your capital amount will reduce. A disadvantage is that you may run out of money at some point, but an advantage is that any ‘leftover’ funds can pass on to your heirs when you pass away.
• A life annuity guarantees a monthly income for life. This income is partly determined by how much you invest to start with. However, it doesn’t leave any capital for your heirs.

Huggett-Henchie advises a combination approach: “Putting 20-40% of your savings into a life annuity should ensure that your basic living expenses are covered. Putting the remainder into a living annuity can allow for non-essential spending, and could ensure that some of your money can be passed on to your heirs.

Maximise your pension

Huggett-Henchie shares some tips for growing your retirement savings, which you should consider while you’re still working:

• Pay off all debt before retiring, including bonds, car loans, and credit cards.
• Increase contributions to your retirement savings, especially when other expenses, like school fees, fall away.
• Adjust your lifestyle gradually, for example, by reducing travel, work clothing, and entertainment costs.
• Think about joining a private medical scheme. Even a basic plan can give you access to private hospitalisation, and cover the cost of some chronic medication.

She also warns against relying on SASSA’s Older Person’s Grant to get you through your retirement: “This is currently R2,320 per month for those aged 60-74, and R2,340 for those 75 and older – far less than what most retirees need to live comfortably.”

Get advice before you retire

It’s advisable to start planning early, ideally three to five years before retirement. Consulting a retirement benefit counsellor, like those at NMG, or a financial adviser, is crucial. They provide guidance, help you understand your pension options, and help you to plan effectively. A sensible plan will ensure that you receive 75% of your monthly working income every month after you retire.

Huggett-Henchie emphasises that retiring shouldn’t mean the end of earning: “It’s the start of making every rand work harder. The choices you make in the years leading up to retirement determine whether your savings will provide financial freedom or cause stress. Plan early, act wisely, and your pension can sustain your life, not just your lifestyle.”

ENDS