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How to ensure a tax-savvy retirement income stream

How to ensure a tax-savvy retirement income stream
Kenny Meiring
By Kenny Meiring
11 Feb 2025
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Key factors you should consider when looking for an investment that will provide an income after you retire.

Question


I am 72 and will be retiring. I will receive an income of R10,000 a month, which is sufficient for my living costs. My wife will work for three more years until she is 65. She will then receive a modest pension, so a bit of help for her from me may help. I will be downsizing my house and expect to have a capital sum of R2-million available to help my wife. Can you please advise how best to invest this?

Answer


When you’re looking for an investment that will be used to provide someone with an income when they retire, there are two key factors that you should consider: the investment and income must be tax efficient; and the income needs to be sustainable.

Tax efficiency


If you invest the money cleverly, it will trigger little tax and maximise the amount of income that you can get from the capital.

Your and your wife’s pensions will both trigger income tax at the normal tax table rates. The proceeds of this R2-million investment will trigger capital gains tax, but if you invest it cleverly, you can minimise this tax.

Each person gets a R40,000 annual exclusion in terms of capital gains tax. So, if you split the investment and invest some of it in your name and some of it in your wife’s name, you will be in a position where the first R80,000 in capital gain from this investment will not trigger any tax.

I would therefore recommend that you consider splitting the investment. Remember, donations between spouses do not trigger donations tax, so there is no problem on that front.

Since a big chunk of any income you receive from this investment will be classed as a capital drawdown, you could be in a position where most of the income generated by this investment will be tax-free.

Sustainability


It is important that the money be correctly invested and the drawdowns you make from it can be sustained by the investment growth.

Once your wife retires, you should be able to sustainably draw an income of 5% a year from it. A R2-million investment should be able to provide an income of about R8,500 a month. Because you will not be making any drawdowns from the capital for three years, this amount should be higher, so the initial income should be in the region of R9,500 in today’s money.

If you find that the income is not sufficient, you could use the proceeds to buy a voluntary life annuity. If you choose a joint life annuity that provides an income until both you and your wife have died, your starting income would be about R11,000 a month, increasing by 5% a year. 

With a life annuity, because the R2-million will be used to buy this continuing income stream, the capital will not be available for your children to inherit.

So, with a bit of planning, you can create a sustainable and tax-efficient income stream for you and your wife with the profit from the sale of your home. As always, I recommend that you talk to a financial planner who can help you to evaluate these options and find the right solution. 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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