​Press Room

I’m about to reach 65 – do I resign or retire?


Laurie Wiid
Nov 07, 2017

I have two options, namely retirement or resignation from government service.

Q: Within the next few months I have to make one of the most important decisions of my life. On May 30, 2018 I’ll be 65 and it will be time to retire. At that stage, I’ll have 42 years and five months’ continuous service in the government. During this whole period I contributed monthly towards the GEPF.

I’m married (anti-nuptial contract) and my resignation benefit/retirement benefit will be our second income. I have savings, but plan not to draw from them at least for five years after retirement/resignation. To replenish my income, I plan to work for a few days per week.  I have a professional career (Speech-Language Therapist registered with HPCSA) and there is no shortage of work with my experience in this field.

I have two options, namely retirement (option 1) or resignation (option 2). I’ve always assumed that I’d retire and still feel positive about option 1. However, more and more state employees feel that it’s probably best to resign and take the lump sum (actuarial interest) instead of a monthly pension. The reason for this is that GEPF funds can perhaps be used in future to rescue financially-struggling state departments and semi-state departments. The growing perception of corruption in our country adds to this uncertainty.

 

Option 1

Retirement on May 31 2018

Option 2

Resignation on April 30 2018

Age

65 years

64 years and 11 months

Bonus

Receive annual bonus – 13thcheque on May 31 2018

Lose annual bonus

Funeral plan

R7 500 for member and spouse

None

Capped leave

Capped leave will be paid in the form of a cash amount.

Capped leave won’t be paid

GEMS

Medical subsidy (taxable). At the moment it’s R2 159 per month. It’s increased annually.

None

Death after retirement

The pension’s guaranteed for five years. Should I pass away the balance of the first five years will be paid out to my spouse in a cash amount.

A monthly pension of 50% for my spouse is guaranteed.

 

Retirement

A gratification amount will be received. The first R500000 will be tax free.

A monthly pension with a guaranteed annual increase of 7.5 % of the inflation rate is paid.

 

Resignation

 

A resignation benefit (actuarial interest) in the form of a single amount will be paid. To pay as little tax as possible. This amount will be transferred into a private pension fund


What do you recommend?

A:In order to provide a client with holistic and sound financial advice, it is vital to have a full understanding of your broader financial position. This would include: current assets and liabilities, monthly income and expenditure, tax profile, investment portfolio composition, estate planning provisions and your risk tolerance. We could then formulate a tailor-made plan that would suit your specific circumstances.  

In the absence of the above-mentioned information, this response will be specifically aimed at providing guidance between the option of resignation versus retirement payments.

Option 1 – Retirement on May 31 2018

  • The guaranteed 13th cheque can be added to your discretionary savings and will enhance the capital sum available in 5 years’ time.
  • A funeral plan for R7 500 per spouse is nice to have, however this may not necessarily meet the full costs related to a funeral, tombstone, etc. Private provision for additional expenses will need to be made.
  • The capped leave payment will be taxable, but will not be forfeited if you resigned.
  • The medical subsidy of R2 159 pm with annual escalations – paid for the rest of your life can amount to a significant benefit over time.
  • If you pass away within the first 5 years of pension, your spouse will receive a capital lump sum for the pro rata period remaining. Thereafter your spouse will receive a 50% share of your monthly pension. On the demise of your spouse, no payment is made to your heirs. Any remaining actuarial reserve is therefore forfeited. This is the price you pay for the certainty of a pension with an annual escalation of 7.5% (a generous increase above the current inflation level).
  • You mention a lump sum gratuity at retirement. The first R500 000 is tax free – so any amount more than this sum could be taxable per the lump sum withdrawal tables.
  • Given your employment term, a portion of your retirement lump sum benefit will be tax free per the rules pre-31 March 1998.
  • In my opinion it is highly unlikely that the Government Pension Fund will be in danger of meeting any shortfalls in state-run enterprises or state departments. Such shortfalls will be funded by the taxpayer. The Pensions Act should protect state pensioners from any risk of “attack” on your lifetime savings.

Option 2 – Resignation on April 30 2018

  • Unfortunately, under this option the following benefits are forfeited:
    • Your annual bonus
    • The funeral plan
    • The medical subsidy
    • The capped leave payment
  • The resignation benefit can be the be transferred to a private retirement annuity and your capital can be preserved in your own investment until you choose to retire.
  • At retirement, you will have the option to withdraw up to 1/3rd as a lump sum (again this will be tax free for the first R500 000 and taxable per the lump sum withdrawal tables).
  • The 2/3rds (or greater amount) can then be invested in a living annuity or a joint life annuity with a life assurer.
  • The joint life annuity can be purchased from a long-term insurer. Various options are available and the annuity can be linked to inflation with the annuity payable until the death of the last dying spouse. A life policy could be structured to pay out a capital sum on death, but this would reduce the monthly annuity.
  • The living annuity option transfers the investment decisions to yourself and your financial advisor. Under this option, the income withdrawal is determined annually (the minimum amount is 2.5% of the capital sum and could be as high as 17.5%) although we would recommend between 5%-6% as a guideline. Upon your death, the full capital is transferred to your heirs who can either commute the lump sum (taxable) or continue to draw the income at a withdrawal determined by them.
  • The downside of the living annuity is that you bear all the risk regarding investment choice and the drawing rate. Poor investment performance or excessive drawings could be to your detriment over time. It is therefore essential that you seek advice when you retire.

As this cannot be construed as formal financial advice, it would be in your best interests to contact a certified financial adviser, who will be able to conduct a full financial analysis and provide professional guidance with regards to your entire financial and retirement plan.