Actuarial news and views from Cape Town and beyond

How much to draw as a lump sum?

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Having assets is not enough to sustain your lifestyle in retirement. You cannot live off of your money if you do not have access to it. In what follows we consider factors which affect the lump sum you should withdraw, taking in to account the recent changes to regulations surrounding pension fund lump sum withdrawals.

When you retire from a retirement fund and take a lump sum the first R500 000 you withdraw is tax-free. This lump sum can be up to a third from pension funds and retirement annuities and up to 100% from provident funds. It is a one-off lifetime allowance and applies to the combined value of all lump sums you have taken since October 2007 (with some exceptions). Lump sums before that are disregarded.

Members of government retirement funds are allowed to take any value of their lump sum attributable to their period of employment prior to March 1998 totally tax-free above the R500 000 tax-free upper limit. The tax-free portion should definitely be withdrawn. How much to withdraw above this depends on your specific future liquidity needs (e.g. to settle debts). Remember that you will not have access to the capital in a pension-paying investment vehicle like a living annuity or life annuity.

Paul Leonard provides a practical example looking at the needs of a fictitious pension member, which can be found in the link below. This example illustrates the trade-off between tax and sustaining one’s lifestyle (i.e. liquidity) and, hence, finding a compromise between the two.

Taking more than just the tax-free lump sum may seem undesirable, but keep in mind that the purpose of having money is not merely to have it but rather to enable you to support your desired lifestyle in retirement.



One thought on “How much to draw as a lump sum?

  1. Deciding how much to take as a lump sum is a great exam question – in fact I’m pretty sure it WAS an exam question a few years ago!

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