Where should I invest my retirement fund savings?

The funds can be reinvested in a liquid investment, with the income required determining the strategy to be followed.



I have R1 580 370 in my retirement fund. Our company is busy with restructuring and we don’t know who is going and who is staying. I would like to know where to invest my money and how much will I get if I invest the full total.

Dear reader,

I’m not sure about your age at this stage which can change the recommendations. I also assume that you have not made any cash withdrawals from previous retirement funds.

I think the principle of retrenchment is something that is very important to address as the tax consequences are often not discussed.

There is firstly (normally) a severance package that forms part of the retrenchment as a result of a restructuring. This package (together with any cash lump sums you take from your retirement fund) is taxed by applying the retirement tax table (revised after the latest budget speech). This means that the first R550 000 of your severance package will be tax-free. Unfortunately, this package delves into this tax-free component of any lump sum that you take from your retirement fund. This becomes critical when planning how to reinvest/access some of these retirement funds – especially if a monthly income will be required until new employment is secured.

This is also imperative to keep in mind when reaching actual retirement one day as you won’t have this tax-free component anymore (or at least not all of it depending on the value of the severance package and any lump sums you decide to take from your retirement fund).

If you don’t have an income requirement from these funds, my recommendation would be to reinvest them in a preservation fund.

This option allows for a few possibilities. Firstly, there won’t be any tax implication in reinvesting the funds into the preservation fund. You do, however, keep the option of making one partial or full withdrawal before retirement (this will be taxed on the withdrawal tax table). This is not recommended if not necessary, but it is a good option to have should you possibly take longer to secure employment than planned and have any income requirements.

When reinvesting the funds within a well-diversified portfolio a return of CPI+6%/CPI+7% over a longer-term period can be reasonably expected.

This will of course depend on the investment strategy followed.

If you require immediate income from these funds, there are a few options you can follow. I wouldn’t advise withdrawing the entire investment as the tax implications will be quite severe. You will have the option of making a partial withdrawal and preserving the rest in a preservation fund. This can create a “best of both” scenario – keeping the tax implication as low as possible and providing you with liquidity to provide you with an income until securing new employment.

These funds can then be reinvested within a more liquid investment, allowing you to draw a monthly income. The income required will determine the strategy followed with the funds. For a short-term plan, it would, however, be a more conservative approach probably consisting of cash and bonds. An expected return of CPI+1% to -2% can then be planned for.

Was this answer by Elke helpful?


6
 

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *