The right choices after the death of a spouse

In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who needs advice for a widowed relative.

Q: Someone in our family is 60 years old, has never worked but has a tax number and is a recent widow. She currently has no means of receiving an income other than the option of renting out her immediate residence as a way of earning a little income every month to take care of expenses.

 The house is fully paid for and therefore she won’t have to worry about a bond. With her monthly expenses in mind, the rental from her unit will be enough to look after rates and levies as well as 90{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} of her monthly expense which is very positive.

Our question is simply, with a sizeable spousal inheritance of around R8 million, what would your advice be to someone in that specific situation?

We believe that she would require to use some of it – possibly dividends or withdrawals over time – to assist her with maintenance to her house or to supplement her lifestyle in some way, shape or form.

We’re not naive to know that having a rental income would provide her the ability to never need to touch her capital investment, but should she need to, what would the correct investment be and are there any penalties involved in investing that amount of money? And what are they?

We do not know what would be the best route to take and would really appreciate your time and expertise.

It seems as if it has already been decided that your relative will rent out her residence for income. I assume that you have taken alternative living arrangements into account in your calculation of expenses and there will be a shortfall of around 10{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} of her monthly expenses thereafter, which must be provided for in deciding on an investment strategy.

So what we are left with is R8 million inheritance to invest, with the objectives of providing a small income and allowing for ad hoc withdrawals should the need arise.

Firstly, you need to determine the rand amount of monthly income that she will require, and the portion of the R8 million capital that will be needed to provide this income, remembering to take inflation into account. This portion can be invested to provide dividends and interest, and the decision of the underlying investment would depend on her risk preferences and need for capital protection.

If she wants complete capital protection, then she could use an interest bearing bank account such as a 32 day notice or fixed deposit, where she would get in the region of 7{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} per annum at current rates. But bear in mind this would not allow for inflationary increases. If she wanted some dividend income then she could look at a share portfolio, or she could consider income focused and cautious unit trust funds as a mix of both dividends and interest.

If she invested through a voluntary structure such as a unit trust investment or share portfolio, 15{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} withholding tax would be applied to dividends, and any interest above R23 800 per annum would be taxed as income. Capital gains tax would apply to any units or shares sold if applicable.

If she invests through a living annuity structure, local dividend tax and tax on interest will not be applied, and capital gains will not be taxed, but all income withdrawn will be taxed at her marginal rate of tax.

Deciding which investment is best for her needs will therefore depend on the rand amount of income required. The most tax efficient structure will differ depending on the amount she needs.