The Income Stream: Sustainability, Costs, and Taxes
“At retirement, you need a strategy that provides the best sustainable income for the rest of your life without wasting money on unnecessary taxes.”
Categorizing Your Wealth
To plan effectively, we must separate your assets into two distinct buckets based on how they were funded and how they will be taxed in 2026.
Pension, Provident, and RA funds. You received a tax break to grow these, so at least 2/3 must buy an annuity. Income drawn here is taxed at your normal income tax rate.
Unit trusts, shares, and bank deposits made with after-tax money. These are taxed as Capital Gains (CGT), which is roughly 40% of your normal tax rate.
Building the “Spine” with a Life Annuity
I like to use the Life Annuity as the backbone of a retirement plan. You trade a lump sum for a guaranteed pension for life. It is “cheap to run” with minimal wastage. Use this to cover your basic fixed costs to eliminate the risk of outliving your money.
Flexibility via the Living Annuity
The Living Annuity offers control over your investment portfolios and a flexible drawdown rate (between 2.5% and 17.5%).
Key 2026 Strategy: These assets do not form part of your estate, making them a “clever way” to transfer wealth to heirs without attracting estate duty.
2026 Tax Efficiency Spotlight
| Mechanism | 2026 Benefit |
|---|---|
| CGT Exclusion | The first R40,000 of capital gains per year is excluded from tax. |
| Lump Sum Tax | The first R550,000 of your retirement lump sum is tax-free. |
| Estate Duty | Retirement funds (Compulsory) do not attract estate duty upon death. |
The Optimal Mix
Combining these products creates a “buffer” system. Use the Life Annuity for certainty, the Living Annuity for legacy, and Discretionary plans for emergency capital. Finding the right ratio is where a CFP® professional adds true value.
Optimize Your Retirement Paycheck
Don’t leave your tax efficiency to chance. Let’s model your 2026 drawdown strategy to maximize your net income.
Kenny Meiring, CFP®
Independent Financial Adviser at SFP Wealth
