How much will I receive monthly from my living annuity?

Question:

I transferred my previous pension to a retirement annuity and the current value of my retirement annuity is R 1,9m and I am contributing R1000 pm. I am 55 years old and after working in West Africa for the past year, earning an income in US dollars, the company went bankrupt and I am currently unemployed. The ideal scenario would be not to take the one-third in cash from my retirement annuity now, but my savings have run out as I have not been able to find employment since returning the end of January and this seems like the only option left to me. If I invest the remaining 2 thirds in a living annuity how long will this money last and how much am I looking at monthly? Can I reinvest the monthly pension paid to me and live off the lump sum paid out initially until I find employment again and should I then take out a new retirement annuity? I wish I can leave the retirement annuity to mature more, at least until 65, but I see no other option to tide me over. I work in the mining sector and with the current strikes few mine houses are hiring. Thanks for your help

Answer:

We sympathise with your problems. Unfortunately, we cannot advise you what you should do, but here are some numbers to work with: if you invest two-thirds of R1.9m in a living annuity (R1.26m), you must draw between 2.5% (R32 000) and 17.5% (R222 000) per annum (R2 700 – R18 500 per month). This money will be taxed on the normal income tax tables.

Even if you draw the maximum amount, this is unlikely to be enough to sustain you. Not only that, but your annual draw also-down will decline every year (because you are already drawing down at the maximum rate and your capital balance will most likely decline unless investment returns are very high, which is improbable). 

Ignoring inflation, and assuming your investments earn a 5% real return every year, and you pay an annual investment fee of 1% (both are optimistic assumptions, especially on fees as many living annuities charge 2% pa or more), your permitted draw-down in 10 years’ time would only be around R54 000 per annum (in today’s money terms), i.e. a quarter of what you would get initially. 

To be reasonably certain of a sustainable income, your draw-down rate should only be around 4% pa (R50 000 pa). That income would be below the tax-threshold. You can re-invest the monthly annuity income in a retirement annuity (and claim a tax deduction up to the permitted limits). Your one-third cash lump sum will be taxed (R24 000 tax if you have not previously withdrawn from a retirement fund).