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Im 61 years of age and not working. I am not due for the age pension for another four years. I have $265,000. Is this money better off in a superannuation fund or in a monthly paid term deposit - currently around 3.1 per cent for five years?

I suggest you seek advice because if you are considering Centrelink benefits such as Newstart, prior to your turning 65 you will be much better off having the money in super where it will not be counted for the assets or income test. If this does not apply to your situation, it is a matter of deciding whether you wish to enjoy a guaranteed 3.1 per cent for five years while accepting the risk of interest rates and inflation rising in that time.

I am 58, earn $75,000 a year and live with my partner. He owns the house we are living in. I sold mine and put most into super in 2003. I have $500,000 in super and contribute by salary sacrifice every fortnight. My defined benefit superannuation fund is currently worth $154,000.

I started a share portfolio when the stockmarket dived and now have $98,500 worth of shares. I am hooked on following the stockmarket and love to do my own research on companies before buying shares.

CAPE TOWN - In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who wants to know what the benefits would be of investing a lump sum into a retirement annuity at retirement.

Q: I am of retirement age, have worked for myself my entire life and never contributed to any retirement scheme. I have a lump sum to invest, which is my accumulated savings on which I now plan to retire.

I have been advised to invest this money into a retirement annuity, but I am unsure if this is the best approach. Why should anyone invest money that was not previously tied to a pension fund into a vehicle that will tie up the capital forever? I could invest it elsewhere to generate the same returns and have access to the capital at any time.

Are there tax or fee implications that would make putting the money into an RA a better deal, or is my adviser the one trying to get the good deal?

Contributing a lump sum of voluntary money to a retirement annuity has various advantages and disadvantages. Some apply to the retirement annuity itself, and some apply to the vehicle you choose for producing your income in retirement. For the purposes of your question, I have assumed this to be a living annuity.

First of all, the lump sum you contribute to a retirement annuity will be allowed as a deduction against your income. This is up to a limit of 27.5% of your remuneration or taxable income, or R350 000 (whichever is lower) in the current year. So initially, you will get a tax deduction.

The amount that exceeds this limit would however be carried forward and can be deducted against your income in subsequent years, or will be deducted against your annuity income that you receive from your living annuity at a later stage. So although you only get an immediate tax deduction up to the limit, you dont lose the full 27.5% allowance.

In addition, within the retirement annuity, and later in a living annuity, you will not pay tax on interest, dividends or capital gains.

However, within a retirement annuity there are restrictions as to how you may invest. These place limits on the amount you may have in equity (no more than 75%), property (no more than 25%) and offshore assets (no more than 25%). As you are close to retirement, it is unlikely that you would want to take on the risk of exceeding these limits anyway, but it is something to take into consideration. When you retire and move the funds to a living annuity, these regulations will not apply.

In addition to this, as you have mentioned, your funds would be tied up to a certain extent. You can only take one third out at retirement and the remaining amount must provide you with an income thereafter. Assuming you invest the remainder into a living annuity, you will only be allowed to withdraw between 2.5% and 17.5% per annum of the value, and this amount can only be reviewed once a year.

It is best to explain how this all works by way of an example. Let us assume that your accumulated savings are R5 million and your current year's taxable income is R500 000. Let us also assume that you intend to work for two more years and retire thereafter, and that your taxable income remains constant for the next two years.

If you contribute R5 million to a retirement annuity now you may deduct R137 500 (27.5%) against your taxable income, which will also move you from the 36% tax bracket into the 31% tax bracket. You will then carry over the disallowed portion of your contribution (R4 862 500) to the following year and repeat the process until retirement.

Over the next two years, you will not pay tax on any dividends, income or capital gains earned within the retirement annuity. This means that if you are able to invest in the same assets as you would in your voluntary portfolio, you will receive a higher after-tax return in the retirement annuity.

At retirement in two years time, you will have a remaining disallowed contribution amount of R4 587 500. This amount will be tax-exempt in future, whether you take it as a lump sum now or as income from your living annuity.

Keep in mind though that the lump sum allowed will only be one third of the value that your RA has grown to. So let us assume that your original R5 million contributed has then grown to R6 million, you will be able to take R2 million tax-free as a lump sum if you wish. The first R500 000 of that will be your tax-free allowance in terms of the retirement tables, and the other R1.5 million will reduce your previously disallowed contributions to R3 087 500.

Your living annuity income will then be exempt from tax until you have used up the entire remaining previously disallowed contribution. What will then be left in the living annuity is effectively growth and income earned over the period, and income tax will apply from that point forward, with your various annual rebates, exemptions and deductions applied.

Take note that any previously disallowed contributions made after March 1 2015 will be included in your estate for estate duty purposes but the portion that represents deductible contributions as well as any growth earned, will not be included in your estate.

If you are to pass away before retirement, the benefit in the retirement annuity must be paid to your dependants and/or nominees. This means that any person who is either a legal or factual dependent of yours, or any future dependants identifiable at the time of your death, will have a claim. This does not apply to the living annuity, as benefits will be distributed according to your will or beneficiary nominations.

The value of your retirement annuity would form part of your assets at divorce but once in a living annuity, it would be protected in this instance. Both the retirement annuity and living annuity are protected from creditors. 

The above explanation is quite technical and there are many things to consider, but all other things being equal, you would not have to pay any additional tax by investing your retirement capital in a retirement annuity. You may fall into a lower tax bracket prior to retirement, your after-tax returns would be greater and you would not pay tax on capital growth. You would also receive certain protections in retirement vehicles that you would not receive in voluntary investments, and the amount included in your estate will be reduced to previously disallowed contributions.

This does however come at the cost of the various restrictions mentioned. The fees you pay your advisor should not be materially different for either option, but that would depend on the fee arrangement you have with your advisor, so there should be no benefit to your advisor in choosing one vehicle over another.

Mikayla Collins is a private wealth manager with NFB Private Wealth Management in Cape Town.

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Have you ever had a client tell you they want a charitable lead annuity trust, a grantor-retained annuity trust or a sale to a (defective) grantor trust? No? Along with trusts and life insurance, the estate-planning terminology causes peoples eyes to glaze over. While a client might eventually have one or more of these strategies as part of their plan, they came to you to for help in accomplishing their goals and wishes when they die or become disabled. For the client, what its called and how it works are not the most important things. What is most important is what it does for the client. If the client likes the result, youll need to be able to explain how the technique works. Clients want to make informed decisions.

Think of your client as a mouse (pardon the analogy) that wants cheese. To get it, the mouse has to successfully run through a maze. The mouse doesnt want to go through the maze. It just wants the cheese. In estate planning, the names of the techniques and how they work is the maze. The client has engaged you to get them through that maze to get results that match their goals.

A good estate planner finds out what the client wants to accomplish (the subject of a forthcoming blog). A good communicator uses stories, metaphors and analogies to relate to the client whats being done to help them accomplish their goals. Heres a way to describe trusts that may work for you.

A Trust Is Like a Bank

People know about banks. They know theyre financial institutions that accept deposits, protect those deposits, allow for withdrawals, invest money and make loans. They operate under a special instrument called a charter, which contains rules about how they can operate. In very many ways, a trust is like a bank. Its meant to hold assets and operates under a special instrument called a trust. The trust has rules as to what can and cant be done with the assets. But why would a client want one?

Client Makes Giving Decisions

Wealthy clients often help their children financially. If a child needs money for medical expenses, the client may help. If a child needs money to fund education, the client may take care of all or part of it. If a child is in a worthy but low-paying occupation (for example, teacher, cleric), the client may support them. If a child needs money to buy a house, the client may give the child money outright or loan money in the form of a mortgage. If a child wants to start a business, the client may give them money or a loan or become an investor. In effect, the client is acting as a special bank in which they make all the decisions. (In my own case, my children used to call me The National Bank of Daddy.)

There are also things a client definitely wont do. A client wont give money to support addiction. They wont want the money they give to be available to a beneficiarys creditors or future ex-spouses. They wont support a lifestyle they dont approve of. While the client is alive, they determine if, when and how a child receives assets.

A Trust Is Like a Bank Charter

What are the alternatives to a bank when the client dies? The client can either leaves assets to a child outright or allow for unconditional distributions from a trust at arbitrary ages. This is counter to what most clients do during their lifetime. Is this want the client wants? Without a mechanism in place to stop this, the inheritor can do whatever they want with the money without regard to what the client would have wanted. Thats where a properly drafted trust comes in.

A trust, like a bank charter, creates a framework for administering assets. Instead of a loan committee, it has power-holders (trustee, trust protector, investment advisor) who administer the terms of the trust. In effect, after the trustor dies, depending on the trustors wishes as expressed in the trust document (and sometimes a separate letter of wishes or intent), their wishes are carried out by the power-holders. Additionally, this bank can protect assets from beneficiary creditors including future ex-spouses, and it can make sure that there wont be gift or estate taxes on the assets in the future.

Life insurance is a particularly attractive trust asset because it can be funded without making gifts. (See No-Gift Irrevocable Life Insurance Funding.) Hence, the Irrevocable Life Insurance Bank.


There still are hurdles. In talking to your client about an irrevocable life insurance trust that becomes the bank, or about any trust (bank), its important that your client understand one thing: The result (as with everything else in life) isnt going to be perfect. You cant account for every contingency, especially if the trust is meant to last for multiple generations. How can you make sure that the power-holders follow the clients wishes? If a trustee is to be replaced, how is the selection process implemented? The client has a clear choice: to leave assets so that the beneficiaries can do whatever they want or set up a properly drafted trust. If you use the metaphor of the bank to describe a trust, it should be easier for your client to understand and make an informed decision.