Choosing the right retirement date for your living annuity

AS A wealth manager, one of the key principles to understand is that while we cannot control everything, like market performance, we can control strategic decisions that impact a client’s financial future.

- BONGANI MSIMANGO

One such controllable factor is the timing of retirement. Your retirement date is set in your employment contract, but you can choose the date that you want to retire from your employer's retirement fund.

When it comes to retiring and transitioning into a living annuity, timing is not just a detail, it can become a strategy to consider.

When you retire, there are three important dates to consider:

1. Retirement date: Your official last day of work.

2. Retirement date of the fund - Date you decide to start the process to convert your retirement fund into a living annuity and receive your cash lump sum.

3. Effective date of the living annuity: The date your living annuity funds are invested and the month when it begins to pay an income. This month becomes your anniversary month.

This is not just a ceremonial milestone, it determines when you are allowed to:

adjust your income withdrawal (payment) rate annually.

change the frequency of your income payments (monthly, quarterly, semi-annually, or annually)

While this may sound straightforward, the real complexity lies in the tax, especially when switching from monthly to annual income frequency payments.

How tax implications can affect your retirement income

When the South African Revenue Service (Sars) calculates your annual tax liability, it assesses the total income received in one tax year, including your living annuity payments. In South Africa, a tax year runs from the beginning of March to the end of February.