Don’t get a bond at age 56

Answer: First off, 56 is very young to retire and, if life expectancy is between 95 and 100 years, she’ll have to fund about 40 more years! We are assuming the R2 million is in a retirement fund and that your mother has no partner. If she still has debt on retirement she should look to settle this, but the house is a different story.

Is the intention to extend the house and rent out rooms to supplement her retirement income? If so this may make sense, depending on how much she wants to spend and what she will earn renting. We would not encourage your mother to get a bond at age 56. She can’t put up her retirement fund as security as this is prohibited in terms of the Pension Funds Act. However, what she does with any fund proceeds is up to her, but we wouldn’t recommend taking on large debt at her age.

If this is a pension fund and her only retirement savings, she can withdraw a third in cash, or R666 667. The balance would be invested to provide income – a living annuity or a life annuity. This income will be taxable. On the lump sum, the first R500 000 is tax free, but the balance is taxed at 18%. After paying off her debt, we would encourage your mother to guard this money closely. The two-thirds balance can be invested in a living annuity or compulsory life annuity.

This money is illiquid, and she will be unable to make an ad hoc lump sum withdrawal. However, doing a rough calculation, R2 million at a 4% annual draw-down would provide R6 666 per month (before tax). If she takes the largest allowable lump sum and only relies on the rest for an income, R1.33 million at a 4% annual draw-down would only be R4 444 per month.

We urge your mother to delay retirement so she has more time to earn and save and fewer years to live off her savings. Proposed retirement reform changes are hopefully not the reason your mother is retiring early. There is no danger that any of the proposed changes will have an adverse effect on her savings.

• Please send queries to editor@moneyweb.co.za