Willy asks: I have just recently retired and have an extra R500 000 available. Would it be wise to invest this amount in RSA Retail Bonds fixed for two years?
At the moment I have a pension plus a living annuity that pays out monthly. I would like the interest to be paid monthly.
Maya replies: It is very important that you sit down with a financial advisor and work out a proper cash flow for your retirement. This will determine the best investment for your lump sum.
Does your pension increase with inflation? How much are you drawing down from your living annuity — is it sustainable? Do you need to live off the interest of the R500 000?
If your pension does not increase with inflation or you are drawing more than 5% from your living annuity, you will need to top up your retirement income in five to 10 years’ time.
In that case you would need that lump sum to grow. You would need to cut back your lifestyle today and to re-invest any income so that you can use it to boost your income later in life. You may also need to consider investing it in a fund that has some exposure to growth assets like property and equities.
If your current pension provision is sufficient to meet your needs going forward and you are just looking for some income for ‘nice to haves”, then the 7.25% interest rate paid by the Retail Bond is very attractive compared to bank deposits.
Although we are expecting interest rate hikes, the general consensus is that these would only start next year when you were nearly one year into the investment. After the two year period you would be able to re-invest at a higher rate.
Another consideration is your tax rate. As your other investments are housed in retirement funds, any interest income from those investments would not be taxed. If this is your only interest income you can apply your full tax benefit of R33 000 tax-free interest income per annum.
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