Good day, reader.
Thank you for your question.
Assuming that you are planning to retire with more than 10 years of pensionable service, legislation within the Government Employees Pension Fund states that your benefits include a once-off cash lump sum called a gratuity and a monthly pension called an annuity.
When you retire, you have two options:
- Two-thirds of your retirement benefit must be invested in a compulsory life or living annuity, and you have the option of taking the remaining one-third as a lump sum benefit.
- The second option is to invest your full retirement benefit in a life/living annuity.
In your case, we assume that you have already opted to invest your two-thirds in a life annuity where you will be receiving a monthly income of R70 000, and you will be left with a R3.2 million cash lump sum.
Please note that before you receive your full cash lump sum it will be subject to tax and considering that you are a member of the GEPF you will have two tax benefits. The first R500 000 of your cash lump sum will be tax-free and furthermore, all the contributions you may have made prior to 1 March 1998 to your pension fund will also be tax-free.
Once these two tax exemptions or benefits are taken into account you will then be taxed according to the retirement tax tables. The balance remaining after tax you will receive in cash and then you can decide what you would like to do with the money. Below are a few investment options for your cash lump sum that we believe will be beneficial for you.
Since you have reached retirement age, we would suggest you consider investments that are easily accessible so that when you need the money, whether it be for an emergency or special occasion, you are able to receive it without being restricted.
Furthermore, we would suggest you look at a moderate investment strategy. A moderate investment strategy is an approach to investing that balances risk and potential returns by allocating funds across a diversified portfolio of assets. This strategy typically involves investing in a mix of equities, bonds, and other assets that are tailored to an individual’s risk tolerance and investment goals. The goal of a moderate investment strategy is to generate reasonable returns while minimising the risk of significant losses.
Local unit trust
A local unit trust is a type of investment fund that pools money from multiple investors to invest in a diversified portfolio of assets, such as equities, bonds, and other securities, with the aim of generating returns for the investors. Investors can buy and sell units in the trust on an open market, with the price of the units reflecting the underlying value of the assets held by the trust. Investing in a unit trust is one of the most affordable ways to invest because, if you do not have a large amount of start-up capital, you can invest through a debit order.
This type of investment comes with the added benefit of diversification, as the investment risk is spread across various asset classes and securities. The trust is managed by a professional fund manager who has the expertise and resources to analyse the market and make informed decisions on your behalf. Investing in a local unit trust offers the benefit of liquidity, as investors can easily withdraw their funds.
Although you can easily withdraw funds, it might trigger a capital gains tax event. Furthermore, local unit trusts are subject to market risk, which means that the market value can fluctuate with changes in the market, so the performance of a unit trust is not guaranteed.
Offshore unit trust
Investing offshore offers tax advantages, access to international markets, and diversification. If you’re an active investor, you’ve probably heard the term “diversification” a lot because it’s the key to risk reduction. By not putting all your eggs in one basket, you do not lose heavily when one fund performs badly but the next fund performs well. Besides diversification, offshore investing allows you to invest in a myriad of currencies, whichever suits you best. When we look at the volatility of the rand, offshore investing is a great way for investors to gain exposure to developed and growing markets.
Investing offshore comes with great benefits. However, while it can benefit most investors, not every investor has a high-risk tolerance and can handle the pressures of market volatility.
If you choose to invest offshore, a start-up capital of between R20 000 and R50 000 would be required; it all depends on the product provider.
There are also a few restrictions on the amount of money that can be taken offshore per calendar year. Every South African citizen is given an individual offshore allowance of up to R11 million. Of that R11 million, you may invest up to R1 million offshore each year without having to apply for tax clearance. To utilise the remaining R10 million, you would need to apply for tax clearance from Sars.
Offshore endowment
An offshore endowment is a tax-efficient investment suitable for investors with high marginal tax rates and those who want to invest large sums of money offshore. There is a 30% tax rate on all taxable income generated within an offshore endowment, while capital gains are taxed at a 12% effective rate.
One of the benefits of an offshore endowment is simplified tax administration, as the tax is levied and recovered within the endowment. There is a broad range of underlying investment options, and there are no restrictions on underlying asset location. There is creditor protection on the value of the policy for three years from its inception and for five years after it has matured or been terminated. With some product providers, withdrawals may be tax-free. Regarding beneficiaries, they benefit in terms of liquidity, as the payment of the death benefit does not depend on the winding up of the estate.
The disadvantage of an offshore endowment is that there is a restriction period of five years during which you are only able to make one withdrawal. However, once the five-year term is over, all restrictions fall away. Contributions are limited to no more than 120% of your previous contribution, and if exceeded, a new five-year restriction term begins.
Whisky casks
Besides the investments I have mentioned, if you are looking for an alternate offshore asset class with entry-level and high upside potential, you could invest in whisky casks through various product providers. These types of investments can produce average annual returns of 10-15%. It is a tried-and-true maturing asset, and the longer the whisky ages, the more valuable it may become. Whisky casks are a store of wealth that is becoming increasingly valuable as a dependable hedge against economic unpredictability and uncertainty.
Read/Listen: Is investing in whisky casks as smooth as the tipple itself?
One of the advantages of investing in a whisky cask is that there are multiple exit strategies, such as selling the cask at an auction, selling the cask back to your product provider, or bottling your own whisky with a corporate label. Furthermore, you are also able to sell your cask at any time while keeping 100% of your profits with no tax implications in South Africa. One disadvantage of a whisky cask is that if you do not allow it to mature over the five-year period, you may lose the chance to enjoy the returns, or worse, make a complete loss. This means that it might not be a very liquid product.
There are various investments you could consider; however, the ones discussed above were recommended because they offer numerous advantages that are ideal for the moderate investor seeking diversity, higher returns, and stability at the same time.
