Should my mom preserve her retirement fund until she reinvests it in a living annuity?

She wants one third of the fund as a capital payout when she turns 55 and a living annuity at 60.

My mom is 50 years old and has just retired. She has around R1 million in retirement funds. She plans on reinvesting it with an asset manager or wealth manager. She wants one third of the retirement fund as a capital payout when she turns 55 and a living annuity at 60. I was thinking she should get a preservation fund during this time. Is this a good idea?

Which product should she consider?

Thank you for your question. 

Investing in retirement can be complex and nuanced, so it’s important to consider your mother’s circumstances and risk tolerance before making any decisions. 

I am not sure what retirement funds your mom is invested in. The following table might be helpful to indicate where she can transfer to now that she has retired. 

Transferring fund Receiving fund
Pension fund

Preservation pension fund

Pension fund

Pension preservation fund

Retirement annuity 

Provident fund

Preservation provident fund

Provident fund

Preservation provident fund

Pension fund

Pension preservation fund

Retirement annuity  Retirement annuity 

Income-generating options

You can only retire from pre-retirement funds once you have reached the age of 55.

From there, your mother has the following options:

  • Linked living annuity or linked life annuity: This allows her to draw a regular income from your retirement savings. She can choose from different payout options, such as a guaranteed income for life or a variable income based on investment performance.

Once a person retires from their pre-retirement investments, they can’t ‘stagger’ it. You can only retire once; take one third in cash and reinvest the balance in a retirement income fund investment.

While preserving her current retirement savings, she needs to focus on portfolio construction. A diversified portfolio is still very important to ensure she benefits from various asset classes when they ‘move’ in different cycles. 

Growth-oriented investment options

  • Equity investments: Stocks and unit trust funds offer the potential for higher returns than fixed-income investments, but they also come with more risk. This option may be suitable for retirees with long-term horizons who can tolerate market volatility.
  • Cash and bonds: These are shorter-term investment options. While the volatility is very low, the medium to long-term growth expectations are also low.

Other considerations

  • Tax implications: Different investment options have different tax implications. A pre-retirement investment’s growth is not taxable. Taking money from the investment at retirement can have tax implications if she has used her tax-free withdrawal options. Income-paying investment growth is also tax-free within the investment, but incomes are taxable in her hands according to the income tax tables.
  • Risk tolerance: It’s important that she choose investments both now and in retirement that are appropriate for her risk tolerance.
  • Financial goals: What are her financial goals in retirement? Does she need to generate a lot of income to cover her living expenses, or is she looking to preserve her capital for future generations? Your mother’s goals will help determine the best investment strategy for her.

Remember, it’s always a good idea to consult a qualified financial advisor before making investment decisions, especially in retirement.

I hope this information is helpful! 

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