How should you invest a retirement lump sum to supplement annuity income?

In this episode of the Jaco² podcast, we tackle a common but critical dilemma faced by those nearing retirement: what to do with your pension lump sum. We base our discussion on a real reader’s question from Moneyweb.

https://www.youtube.com/watch?v=8kw0KAK5DAs

The reader anticipates a pre-tax lump sum of R2.2 million, which is one-third of their total retirement capital of R6.6 million. Their plan is to invest R1 million in South African retail bonds for a monthly income and place the rest in a fixed deposit.

We begin by clarifying the rules. You may take up to one-third of your pension fund as a cash lump sum; it’s not a requirement. Often, from a tax perspective, it can be more beneficial to take slightly less.

For this reader, taking the full R2.2 million would result in a tax bill of approximately R600 000 (little less), based on the specific retirement tax tables.

We then analyse the reader’s proposed strategy. Investing R1 million in retail savings bonds at around 8.75% would yield about R7 300 per month. The remaining capital in a fixed deposit might earn 6%.

Read: Tax on investments: What investors need to know in 2026

This generates a total pre-tax interest of about R121 000 annually.

However, after accounting for the annual interest exemption (for those over 65) and a marginal tax rate of 31%, the net interest income is closer to R100 000.

The biggest risk we see with this plan is inflation. By drawing all the interest earned, the capital amount of R1.6 million (after tax) never grows.

Over time, its purchasing power diminishes, and you effectively become poorer each year, even though your nominal income remains the same. The reader is drawing around 8% of their capital, which is significantly higher than the sustainable guideline of 4-5%.

We propose considering an alternative: a ‘bucket’ strategy. Instead of putting it all into low-risk, interest-bearing investments, consider separating the capital. Take about five years’ worth of required income (for example, R700 000) and place it in a conservative, income-focused fund.

This provides peace of mind. Invest the remaining balance (around R900 000) in a growth-oriented portfolio aiming for returns of 10-12% per year. This portion is designed to outpace inflation and grow the capital base. Periodically, you can then move funds from the growth bucket to the income bucket to replenish it.

Read: How much cash should you take at retirement?

The episode concludes with a clear message: managing a retirement lump sum is complex and has long-term consequences. While the reader’s plan is a start, it fails to adequately protect against inflation.

A balanced strategy that separates funds for immediate income and long-term growth is often a more robust approach. Getting professional advice to navigate these options is invaluable.

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