Here’s how to manage your finances post-retirement

Many retirees feel like they’ve won the lotto when they see the total of their pension savings. However, that initial excitement can quickly turn into financial stress if they don’t manage the money carefully.

Natasha Huggett-Henchie, a consulting actuary at NMG Benefits, explains how understanding the tax rules and planning ahead can help make retirement savings last.

Understand your tax position

She says the South African Revenue Service (Sars) treats monthly pension payouts as taxable income.

“For people under 65, annual income that’s less than R99 000 (whether from a salary, retirement savings, or any other form of income) is tax-free. Ages 65-74 enjoy a higher limit of R153 250 per year, and those 75 and older have R171 300 per year, tax-free.”

Huggett-Henchie cautions that lump-sum withdrawals have separate rules, advising retirees to avoid them.

“You can withdraw up to R550 000 as a once-off, tax-free amount. Amounts above this, up to R770 000, are taxed at 18%, and higher amounts incur a higher tax rate.”

Tax on lump sum withdrawals

“For example, withdrawing R770 000 results in R39 600 in tax, leaving you with just R730 400 in your pocket.

And any amounts you’ve drawn previously, like two-pot withdrawals or lump sums you’ve taken out following a retrenchment, reduce your tax-free allowance,” says Huggett-Henchie.

She adds that it is usually better to take only the R550 000 tax-free portion and invest the remainder in an income-generating product.

Understand pension products

Huggett-Henchie says that in retirement, you must reinvest your pension savings into a financial ‘product’ that pays out a monthly income.

There are two main options for this:

• A living annuity earns interest on the capital amount you invest. However, if you withdraw more than what your investment earns in interest, your capital amount will reduce. A disadvantage is that you may run out of money at some point, but an advantage is that any ‘leftover’ funds can pass on to your heirs when you pass away.
• A life annuity guarantees a monthly income for life. This income is partly determined by how much you invest to start with. However, it leaves no capital for your heirs.

Huggett-Henchie advises a combination approach: “Putting 20-40% of your savings into a life annuity should ensure that your basic living expenses are covered. Putting the remainder into a living annuity can allow for non-essential spending, and could ensure that some of your money can be passed on to your heirs.

Maximise your pension

Huggett-Henchie gives tips on how retirees can grow their retirement savings while working:

• Pay off all debt before retiring, including bonds, car loans, and credit cards.
• Increase contributions to your retirement savings, especially when other expenses, like school fees, fall away.
• Adjust your lifestyle gradually, for example, by reducing travel, work clothing, and entertainment costs.
• Think about joining a private medical scheme. Even a basic plan can give you access to private hospitalisation and cover the cost of some chronic medication.

Relying on SASSA

Huggett-Henchie also warns against relying on the South African Social Security Agency (Sassa)’s Older Person’s Grant.

“This is currently R2 320 per month for those aged 60-74, and R2 340 for those 75 and older – far less than what most retirees need to live comfortably,” she says.

“It’s advisable to start planning early, ideally three to five years before retirement. A sensible plan will ensure that you receive 75% of your monthly working income every month after you retire.”

Huggett-Henchie highlights that retiring shouldn’t mean the end of earning: “It’s the start of making every rand work harder. The choices you make in the years leading up to retirement determine whether your savings will provide financial freedom or cause stress. Plan early, act wisely, and your pension can sustain your life, not just your lifestyle.”