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When a pension is a safer bet than a lump sumPackage options A NUMBER of Transnet employees have been given notice that we are to receive either an early pension or a severance package. I was given these options:
I still owe R50 000 on my home loan. Should I take the full lump sum less tax and invest it, or would a smaller lump sum plus a monthly pension be better?
Dave Crawford, an independent financial educator in Johannesburg, replies: Because the Transnet pension fund is technically a state fund, lump sums are still not taxable, while the pension is taxable as income. Tax on lump sums will apply to Transnet retirees from next tax year. Unfortunately you provided too little information and I had to make some assumptions in order to answer your query. These assumptions are that you are 58 and your wife is 56; long-term inflation averages at 8.5% a year; your pension is reduced to 70% of what it had been when you die; and that your taxable salary was in the region of R100 000 a year.
I understand that the Transnet pension increases by 2% a year for the first two years after retirement, then moves up to a total of 7.5% a year. (The 7.5% is not guaranteed but rather a reflection of what has happened in the past.)
The pension option seems better because someone else is managing the money and your employer guarantees that the pension never reduces.
The main advantage of the lump sum option is that if there is any money left when you and your wife are deceased, it can go to your children. The main disadvantage is that you must bear all the investment risk. To compare the options it was necessary to convert both into cash flows and arrive at the after-tax amount available to you every month. Assuming inflation to be 8.5% a year and making provision for a budget that will rise each year accordingly, your monthly income, if you take the pension option, should start off at about R3 252 per month. This income is after-tax. Any excess should be placed in a secure investment. If you choose the lump sum option your monthly long-term budget should start at about R2 344 a month. This is based on an annual increase of 8.5%. Both incomes are calculated to continue until both you and your wife have passed away. This is presumed to be 84 for your wife or 80 for yourself. The calculation is based on the pension increasing at 7.5% against an inflation rate of 8.5% a year. This necessitates building and enhancing a lump sum in the earlier stages of retirement you can draw on in the later stages, when inflation pushes the living standard up beyond the ability of the income.
As you can see, you will have less money available, while taking substantially more risk when taking the lump sum. My advice is go for the pension option.
Tax and travelling DURING a recent radio programme it was mentioned that where the employer pays for a business trip, the employee can claim a reduction of taxable income of R65 per day for incidental expenses. Is this so and what proof will the Receiver require?
Sayuri Moodliar, tax consultant with KPMG, replies: The Income Tax Act permits employers to pay employees certain tax-free allowances for personal subsistence and incidental costs when on a business trip. The following rates apply for each day for which the employee is away from his usual place of residence:
If the subsistence allowance does not exceed the deemed amounts, it must not be reflected on the employee's tax certificate as income.
If the allowance exceeds the amounts, the full subsistence allowance must be shown on the employee's tax certificate. In such cases the employee will be obliged to show how the amount was expended, by producing the relevant vouchers. Matter of fact UNFORTUNATELY an error crept into the reply by Beric Croome, tax partner of Grant Thornton Kessel Feinstein, to a letter published last week under the heading "Taxing problem". The correct version is: "Where one sole proprietor owns two businesses that both turn over less than R150 000 a year and in total do not exceed R150 000 a year, there is no obligation to register for VAT."
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