David asks: I am looking at possible retirement in three to four years’ time. The current value of my pension fund is R4.5-million but I have a home loan of R800 000. Should I use part of my fund to settle the bond?
Maya replies: You don’t want to cash in a portion of your pension before retirement because of the tax consequences. Every rand you pay over to the taxman is money that cannot grow for your retirement.
Right now every year counts as your lump sum is growing. It is likely that your retirement fund is being moved to a lower risk portfolio closer to retirement. If your lump sum grows at 9% for the next four years, it will be worth about R6.5-million (this is not taking additional contributions into account).
In retirement you want to be debt free, so it would make sense to settle your mortgage using the R300 000 tax-free provision.
Your first R300 000 is tax-free, you pay 18% on the next R300 000 and then 27% on the remaining R200 000.
Your total tax bill will be R108 000. So once you have settled your bond and paid your tax you could expect to have R5.6-million to retire on. At current annuity rates (R65 000 a year per R1-million lump sum) you could receive an income of R364 000 a year.
Another option is that you switch some of your current retirement premiums into paying off your mortgage. Can you settle R500 000 over four years and does the tax benefit of saving into a retirement fund over the next four years outweigh the tax bill of R108 000?
This would be based on your personal circumstances so you need to sit with a financial adviser or tax consultant to work out the tax benefit.
I would strongly recommend that you meet with a financial adviser now to plan your retirement strategy. You still have time to make decisions like what age to retire and what portfolio would best suit your needs.
For example, if you plan on buying a fixed annuity you would need to start moving more into cash. If you plan on investing in a living annuity then you would continue to hold a portion of equities.
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