Question:
I am currently a member of a provident fund and understand that I have to make a one-third withdrawal at retirement. Is this compulsory, or can I buy a living annuity with the entire amount? For argument's sake, lets say my provident fund is worth R1.7 million. Does the withdrawal amount have to be one-third or can I just take R200 000 tax free and invest the rest in a living annuity? My invested amount in a living annuity would then be R1.5 million. Conservatively calculated, what would my approximate monthly income be, taking into consideration that I want my wife to continue collecting the benefit if I should pass away before her.
Answer:
Cass,
With a provident fund, you can take all or any part of your fund as a cash lump sum. The one-third rule applies to pension and retirement annuity funds and defines the maximum cash lump sum these members can take (they must buy an annuity with at least two-thirds). If you are in a provident fund, you can use the whole R1.7m to buy a living annuity or you can take out your tax-free cash lump (R315 000 if you have not previously withdrawn from a retirement fund) and use the balance for your living annuity.
With a living annuity, you decide how much you draw down each year. It must be between 2.5% and 17.5% of your residual capital every year. So on R1.5m, you could receive between R3 125 and R21 875 per month. To be conservative, you should not draw more than 5% pa (keeping your fees low ie below 1% pa), invested in a medium or high equity portfolio. That would translate into a monthly income of around R6 250 (growing annually with inflation).
Your residual capital is affected by your investment return (which can be positive or negative), volatility, the fees you pay and the amount you draw down every year. So you run the risk of depleting your residual capital during your lifetime if you draw down too much, too soon, or if you earn poor returns or pay too high annual fees.
10X is in the process of doing a living annuity retirement calculator, to help investors decide on their appropriate asset mix and draw-down rate to ensure they do not run out of money. This is not yet "live", but please come back over the couple of months to our web site, to see if it is, and to see how all these factors affect how much money you can conservatively draw every year.
