How to make your pension keep up with inflation

By Kenny Meiring

4 Aug 2024

Many pensioners struggle to make ends meet. Here’s why, and what to do about it.

Question

My wife and I retired seven years ago and are finding it increasingly difficult to come out on our budget. What should we do?

Answer

Many pensioners are in the same situation as you. There are two main reasons:

Pensioner inflation is higher than your pension increases

Items like medical aid premiums and electricity, which make up a significant part of a typical pensioner’s budget, have increased a lot more than your pension has increased.

Your investments have a short-term focus

The portfolios that many pensioners use aim at preserving capital in the short term. The problem is that there is not enough long-term growth.

Because one in 10 of us is likely to live to the age of 100, we need to ensure that the funds can last for 30 years.

Here are some solutions that you can consider:

Restructure your living annuity portfolio

You need to introduce a growth element into your investment portfolio. A model that I use for some of my clients is as follows:

Each year, you should rebalance this portfolio with the help of your financial planner.

Another option that you can consider is to look at a portfolio that targets a high return but uses guaranteed funds and hedges to reduce the downside risk.

pension inflation

Guaranteed life annuities

Guaranteed life annuities are still a great deal. If you convert your living annuity into a guaranteed life one, as a 70-year-old, you will effectively be locking in a return of about 12%. That can make a significant difference to your retirement income.

I have noticed that the income that you can get from a guaranteed life annuity has dropped each week since the election, so, if you want to do this, you should do it sooner rather than later to lock in these rates before they drop further.

Reduce the tax you pay

If you have funds that are not retirement funds, you can use them to provide you with some of your income. The big advantage here is that most of the income you receive from these funds will be classed as a capital drawdown and not attract income tax.

The part that is taxable will only attract capital gains tax, which is less than half your tax rate. By using these tax structures to your advantage, you can increase the income from your savings.

When using your non-retirement funds to generate an income, you must ensure that you keep enough funds available for emergencies. It requires some expertise to manage your assets to generate the right level of income that is sustainable into the future, can keep up with pensioner inflation and is tax-efficient. I strongly recommend that you discuss your situation with a financial planner. 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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