How to inflation-proof your inheritance and make it last with alternative investments

10 Apr 2025

Here are three more profitable alternatives to keeping your inheritance in the bank.

Question: My mother (75) inherited R5-million after the death of my father. The money is in the bank and she’s using it to fund her day-to-day living expenses, which come to about R20,000 a month.

I am concerned that this may not be the best way of managing her finances. Do you have any suggestions?

Answer: Primarily, your mother must ensure that the R5-million she inherited will give her enough income for the next 25 years, and this income must cope with pensioner inflation, which is higher than regular inflation.

Keeping the money in the bank is not the solution, so here are three alternative investments that she could consider:

Flexible investment

This is a portfolio of unit trusts where some of the funds are in conservative, short-term investments that will provide her with a stable income, and others are in portfolios that have a longer-term focus.

It is important that these portfolios are correctly structured and monitored to ensure they deliver the returns needed without risking the capital.

The advantage of using a flexible investment is that the income your mother receives will attract little tax. The bulk of the income would be classed as a capital drawdown and the remaining part as a capital gain. Capital gains tax is much lower than normal income tax. You get an annual R40,000 exclusion, after which only 40% of this gain is taxable.

If she drew an annual income of R350,000 and 10% of this income was classed as a capital gain, then the gain would be R35,000. As the first R40,000 of the gain is excluded, no tax would be payable on this income.

I would recommend that she does not draw down more than the 5.5% recommended for a 75-year-old. Her monthly income would therefore be about R23,000 after tax.

Voluntary life annuity

A nice way of removing the risk from your mother’s investment is to take out a voluntary life annuity. She would receive a guaranteed monthly payment for the rest of her life, which would typically be structured to increase by an agreed amount each year.

For example, if she invested the full R5-million in the life annuity, she would get a monthly income of R45,000 increasing by 5% a year for the rest of her life.

What is nice about this annuity is that only part of the income is taxable. In the example mentioned, only R14,400 will be taxable, so her monthly after-tax income will be R44,600. A downside of investing all the funds into an annuity is that your mother will not have access to any capital should she need a lump sum for an emergency.

Hybrid solution

An option to consider is to invest, say, R1-million in a life annuity and keep R4-million in a flexible investment (see table below). With the hybrid solution, your mother will have access to R4-million of the funds should she have an emergency or, for example, have to move into frail care.

As you can see, there are several options to consider when it comes to investing her inheritance. I recommend that she speak to a skilled financial adviser. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected]

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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Flexible investment

Voluntary life annuity

Hybrid solution