I am a school principal and will end my career at the end of next year. I have accumulated more than R5 million as my resignation benefit. But the way it is paid out will differ considerably if I retire at normal age or if I resign from my position before then.
If I retire, I will receive a monthly pension that will increase by CPI every year and take a lump sum gratuity benefit of more than
R1 million. My medical aid subsidy of around R1 000 per month will continue and 120 days of capped leave due to me will be paid out. If I pass on, my wife will receive 50% of my pension until her death.
If I resign, however, I could transfer the full resignation amount into a preservation or other fund. I will, however, forfeit the monthly medical aid subsidy and the capped leave. The remaining capital will accrue to my estate when I pass on. Should I retire or resign?
There are two major advantages of not taking early retirement: the additional leave pay and the medical aid subsidy.
Medical costs look set for double-digit inflation. Carefully consider whether to forfeit assistance with these costs.
Do you want to keep the accumulated capital in your estate permanently or enjoy the income until death?
If you retire from the government pension fund (GEPF), you will hand your accumulated capital to it for the promise of income until death. If you and your wife die soon after retirement, the income payments would cease and there would be no capital for children or beneficiaries.
If you want to provide capital to your children or if you anticipate not living very long, resignation is something to seriously consider.
Inflation could severely affect your retirement plan. You need consider if your “basket of goods” is likely to have high inflation or if CPI increases will be enough.
A separately managed annuity can pose challenges. To beat inflation over an extended period, you would need investment assets like property and equity, which have volatility risk – often not advisable for the pensioner.
Either you accept the risk of a loss of capital if you and your wife both pass away soon after retirement (assuming you retired in the GEPF) or you resign and place your capital at risk.