How much should you take as a retirement fund lump sum?

There is no perfect formula that would be right in all cases.

By  Wouter Fourie
CEO of Ascor® Independent Wealth Managers and co-author of The Ultimate Guide to Retirement in South Africa

One of the most important decisions you must make at retirement is how much of your pension you should take as a lump sum. All lump sums, whether they are from pension or provident funds, retirement annuities or deferred leave, are subject to tax on retirement, withdrawal, or death. There are, however, initial exemptions, after which taxation must be paid.

As a rule, you should always take any tax-free lump sum to which you are entitled from your retirement fund. The question of whether you should draw the second and third R550 000 depends on your marginal rate of taxation in retirement, the time value of money (namely, inflation), the investment returns, and the deferment of tax on your investment returns.

You need to consult a certified financial planner who has knowledge and expertise in the field of taxation. They need to consider your current and future tax obligations. There is no perfect formula that would be right in all cases, and it could be beneficial to take more than just the first tax-free portion of R550 000.

The only real reasons for drawing the maximum lump sum and paying 36% on amounts over R1 155 000 are:

• To start your retirement debt-free, using the lump sum to put yourself firmly into the black by paying off all debt, including any outstanding amount on your home loan;

• To start a retirement business (but you must accept that you could be putting your financial security in retirement at risk if the business fails); and

• For estate-planning purposes, if you are a member of a fund that does not permit you to purchase a pension outside of the fund and your pension dies with you (or your surviving spouse). In other words, there will be no capital payout to your heirs. In this case, you may want to take the maximum lump sum, as the money can then be used to make an investment to create an income, together with any residual capital, which passes to your heirs on your death.

For up-to-date retirement information, consider purchasing the 2023 edition of the Ultimate Guide to Retirement in South Africa – Third Edition – authored by Bruce Cameron and Wouter Fourie

This article first appeared on moneyweb.co.za at https://www.moneyweb.co.za/financial-advisor-views/how-much-should-you-take-as-a-retirement-fund-lump-sum/

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