As retirement planning evolves, financial professionals are increasingly turning to discretionary products to optimise post-retirement income strategies. These solutions offer a powerful blend of flexibility and tax efficiency – key ingredients for delivering better outcomes to clients navigating their golden years.
The power of discretionary money
Discretionary money refers to savings not bound by regulation i.e. not saved in an official registered retirement fund. This translates to greater freedom in how these savings can be invested and withdrawn. In other words, it is your “own” money that you can spend at your discretion, subject to product rules. The savings in your retirement fund or annuity product, can only be used as determined by the laws that govern the products, alongside the contract terms you signed with the provider of the product/s. When used strategically alongside compulsory retirement funds, discretionary money can significantly improve a retiree’s financial position.
Strategic blending for tax efficiency
Generally, withdrawals from discretionary products are treated as capital withdrawals, not income – meaning they’re not taxed as income. Growth from interest and dividends is, however, taxable. On the other hand, income drawn from compulsory retirement products is taxed at the client’s marginal rate, but growth from interest and dividends within these products is tax-free.
By drawing more income from discretionary sources, retirees can reduce their drawdown from compulsory funds, potentially lowering their overall tax bracket while maintaining the same net income.
It is not a one-size-fits all situation though. The underlying investment performance of the products alongside each client’s tax liabilities need to be considered holistically.
The approach could enhance the client’s financial outcome and also strengthen the adviser’s value proposition by integrating tax planning into holistic financial advice.
Voluntary life annuities: certainty with potential tax benefits
Life annuities offer guaranteed income for life – a feature increasingly sought after by retirees. When purchased with discretionary money instead of with money coming from a retirement fund, these annuities provide unique tax advantages: Unlike compulsory life annuities, where the full income is taxable, the income from discretionary life annuities may be eligible for a tax exemption if the requirements of section 10A of the Income Tax Act are met. This exemption is only available when the annuity is payable to the purchaser of the annuity or his spouse, or their respective deceased or insolvent estates. A purchaser can only be a natural person or a curator bonis or trust created solely for the benefit of a natural person declared of unsound mind.
Voluntary life annuities provide both predictability and potential tax relief, making them a compelling solution to include in retirement portfolios.
Endowments: a versatile investment
Traditionally seen as tools for high-net-worth individuals, endowments are gaining traction in broader retirement planning due to their flexibility and tax advantages.
- Income: After the initial five-year restricted period, endowments become open-ended, allowing income withdrawals that are treated as capital withdrawals and thus not taxed.
- Ongoing benefits: Clients retain tax efficiencies and creditor protection even after the restriction period, subject to limitations.
- Trust applications: Trusts can use endowments to provide income to beneficiaries, adding another layer of utility in estate and retirement planning.
Endowments can serve a dual purpose – growth during a client’s wealth accumulation phase and income during retirement – making them versatile tools in an investor’s arsenal.
A new era of retirement planning
The future of retirement planning lies in the thoughtful combination of products, tailored to individual needs. Whether it’s blending discretionary and compulsory money, leveraging voluntary annuities, unlocking the potential of endowments or other investment solutions, innovation and creativity are key.
Financial advisers are now empowered to move beyond traditional models and embrace a more nuanced approach – one that considers income certainty, tax implications, and long-term flexibility. By doing so, they’re able to craft individualised solutions that truly enhance a client’s retirement experience.
Retirement is different for everyone
From doing less to doing more, every retirement vision is unique. At Glacier, we help you get where you want to be. Save for your retirement with confidence by investing in a retirement annuity from Glacier. Talk to your financial intermediary about the best option for you, based on your lifestyle and needs.
Unlock infinite retirement opportunity.
Glacier Financial Solutions (Pty) Ltd is a licensed financial services provider.
Sanlam Life Insurance Ltd is a Licensed Life Insurer, Financial Services and Registered Credit Provider (NCRCP43).
