In his 2019 Budget Speech, Finance Minister Tito Mboweni gave details of the government’s measures to reduce the public sector wage bill and counter the sluggish economy’s effect on public finances. One of these measures is to allow public servants between the ages of 55 and 59 years to take early retirement, without any negative impact on their pension benefits.
If you have a public servant client, your advice could be invaluable in helping them decide whether to take up this offer, which is available from 1 April 2019 to 30 September 2019. The process is completely voluntary – it’s each individual’s choice to apply or not.
It’s estimated that a maximum of 30 000 public sector employees will be considered, provided they meet the criteria of age and others set by each sector department.
The National Treasury will carry the cost of any penalties relating to the pensions of those who are approved for early retirement, so they’ll suffer no financial loss as a result.
Why is this offer being made?
The government urgently needs to spend on critical areas such as health, education, social security and infrastructure – and this has to be balanced against its wage bill. When considering applications for early retirement, the government will ensure service delivery isn’t affected and that those with scarce and critical skills such as doctors are retained.
The following details may be helpful for you to share with your public servant clients.
Retiring as a public servant
The retirement rules of the specific fund will apply. Those who have less than 10 years’ public sector service will receive a cash lump sum that is taxable. Those who have more than 10 years’ public sector service will receive a taxable cash lump sum together with a monthly income.
The lump sum needs to provide a sustainable monthly income for the rest of your client’s life or top up their government pension. Options are available that allow them to continue to grow their capital amount invested, while providing them with a monthly income. Certain of these options also let your client leave a legacy to their dependants. They may also choose a vehicle that guarantees their income for the rest of their life.
Those considering taking up this offer should obtain advice from a qualified financial adviser in order to understand the different retirement income solutions available. Each of these solutions has its own advantages and disadvantages – relative to the circumstances of the individual concerned.
In some instances, combining different solutions may provide a better outcome in the form of a more sustainable long-term retirement income and the provision of a legacy for dependants.
Meeting monthly income needs
If a guaranteed income is needed
A life annuity provides a guaranteed income for the rest of your client’s life. They can choose a single life annuity, or a joint life annuity if they wish to have an income paid to their spouse after their death. They could also opt for an inflation-linked life annuity, with income adjusted annually in line with inflation, for the rest of their life.
If a top-up to your client’s monthly government pension is needed
The above life annuity options are also available in this instance. Alternatively, if your client has appetite to invest in the market, they can opt for an investment plan. This will give them market, or equity, exposure tailored to their tolerance for risky or growth assets.
They could invest their lump sum in collective investments (unit trusts), wrap funds or even a share portfolio. There’s no fixed investment term and your client can add amounts to the investment plan at any time. They can also draw a regular income from the investment plan.
Growing your client’s capital
If your client wants to grow their capital to provide for a future financial goal
Investments are available that provide a fixed return (the original investment amount plus growth) after your client has been invested for a five-year term. After the five-year term, they may withdraw the funds or remain invested until they require the money. Another option is an investment plan comprising collective investments, wrap funds or a share portfolio.
If your client wants to grow their capital while still drawing an income
Some of the fixed-return options discussed above will also pay your client a guaranteed monthly income during the investment term. The client can choose whether their income will be level or increase with a fixed percentage yearly.
They may also select the investment plan, but the income won’t be guaranteed as in the case of the fixed-return investment.
Leaving a legacy
If your client wants to leave a legacy for their dependants
Your client can appoint a nominee for ownership on a fixed-return plan, which means that the proceeds are available as a legacy or that their chosen beneficiaries can continue the investment. With the fixed-return plan with income, the remainder of the payments will be paid out to your client’s dependants if their death occurs within the five-year term.
Money invested in an investment plan will form part of your client’s estate on their death and could be paid out to their dependants by the executor of their estate, should their last will and testament provide for this.
Proper advice is crucial
Navigating the retirement journey alone can be daunting. All people face certain risks in retirement, with inflation arguably the biggest risk. When your client is no longer earning a salary, it’s more important than ever that their money is invested correctly to allow it to grow, provide a sustainable income and keep up with inflation.
In addition, we all have personal goals, dreams and unique needs – and most times, fulfilling these requires money. If your client is considering early retirement, they need a plan – not just for their investments but also for how they’re going to use their free time. The funds your client has available, and their health, will largely dictate their daily activities.
A qualified financial adviser can look objectively at a client’s financial situation and advise accordingly. Advisers working with Glacier by Sanlam have access to our Retirement Income Planner web-based tool, which assists with the decision by showing the end results of selecting a particular product or combining different products.
Click here to view an infographic showing the different options available to your clients who are members of the Government Employees Pension Fund (GEPF) and aren’t eligible for the government’s early retirement offer, but who need to start thinking about retirement planning.
Source: Glacier by Sanlam