2021 has been another year dominated by COVID19? It’s left a deep scar in our global history having devastated lives and livelihoods. Yet as life goes on there are some questions which were raised in the year affecting our personal financial planning which need to be addressed.

Should I invest in shares?
In spite of lockdowns and restrictions records have been set in the markets. The S&P 500 which is an index of 500 large companies in the US broke all time record highs 50 times this year. The JSE managed to break through 70 000 points. Shares are risky especially at these levels. The sharp fall experienced in March 2020 which was the sharpest in financial history is a harsh example of what can happen. The current valuation of shares are not a reflection of our economy so be very aware that equities are trading at extremely high levels of risk. Entering into these markets is a very brave move. A cautious approach is to average in over a period of time limiting downside risk on all of your money. Mt personal view is stay away for the short term.

Should I fix the interest rate on my bond? Interest rates were raised this year for the first time off the back of the lowest they have been in 47 years. This marks the beginning of an upward cycle and begs the question of fixing your rate on your bond. The bank sets the rate if you decide to fix it. You will probably be offered at a higher rate than the current one as they anticipate future interest rate movements and cover themselves for probable outcomes. You probably would be better off riding the interest rate cycle and focussing saving a little extra into your access bond as and when you can. The extra in your bond compensates future rate hikes as your balance owing is that much less. You will also reduce the term which will save thousands.

Should I invest offshore?
The rand broke through R16 to the US$ this year raising the question around investing offshore. Our currency has always been volatile and undervalued. Conventional wisdom is to invest abroad in other currencies to protect value. The problem is which currency and what investment? Interest rates offshore are zero. Property and stock markets expensive and risky. The decision is difficult with the uncertainty of the pandemic still playing out through the globe.

Some pundits will argue that offshore is a far better place to be than South Africa. Only hindsight will determine which is better. Most unit trusts have taken up their offshore asset swaps in their portfolios so you probably have exposure which you are not aware of. In times of uncertainty a prudent approach is to invest in certainty. Paying off debt whilst interest rates are low is a certain option which should not be ignored.

These questions do not have quick answers. They should be considered holistically. The COVID19 era is here for the foreseeable future. If in doubt take the cautious root.

What is inflation?                                           

The Consumer Price Index (CPI) is the measurement of the average increase in prices of goods and services in an economy. It is a key indicator used by central banks to protect the value of the currency into the future. The current inflation rate in South Africa is 4.9%%. This means that your rand is worth 95.1 cents compared to a year ago.

CPI averages a basket of 400 items one of which is food which has increased by 6.9%. 

Whilst this becomes a concern amongst struggling South African households we can take some solace when comparing ourselves to other emerging countries:

Argentina 53.4%

Brazil 13.94%

Ethiopia 37.6%

South Sudan 35.11%

Syria 39.1%

Zimbabwe 54.5%

Zambia 31.6%

Deflation on the other hand is when prices year on year decrease. Some countries have experienced cheaper food inflation.

Japan -1.1%

Norway -2.9%

Switzerland -1.2%

UAE -1.53%

In economic speak price is determined by supply and demand where people are prepped to pay more when goods are scarce.

Food security is vital for an economy and we will have to navigate our way through all options to contain the price of food. 

A green paper has just been published by the Department of Social Development which proposes to force all South Africans to pay 12% of earnings into a state managed fund.

The new  National Social Security Fund will aim to enlarge the country’s social safety providing for retirement, death, disability and unemployment benefits.

Employees will initially have to contribute up to 12% of earnings to a proposed ceiling of R276 000 per year. This is a maximum R33 120 or R2760 per month. 

Those who earn less than R22 320 per year won’t have to contribute. 

People earning above the ceiling will probably have to split their contributions between the mandatory fund and continue with less contributions with a private – sector fund. 

The questions the paper raises:

Can we afford it?

With the devastation that the COVID19 pandemic has created, can indebted South Africans who can’t  afford to save find the extra.

Will private sector funding diminish?

If an employee cannot afford the extra they will have to reduce their current contribution to the pension fund. Making way for the compulsory contribution to the state fund first. This will have a marked impact on the future growth of private sector funds.

How well will the fund be managed?

As it will be a state managed fund will this be competently managed given the track record of the state owned enterprises and the corruption and fraud that has been exposed over the years. Credibility and competence is certain a question.

Where will the fund be invested?

Is the fund going to be soundly invested for the future? It will be a defined benefit fund which will guarantee future pensions at retirement based on length of memberships and contributions made. This type of fund has to be financially sound and viable resting on reliable investment strategies. 

The proposal will be challenged in many ways from many sectors. Being a green paper it will probably take some years before it comes into law. Whilst intentions to provide better benefits for South Africans are much needed. The funding and management of such fund needs to be ruthlessly evaluated and scrutinised to ensure that it actually delivers.

So National Treasury are working out a way to access your retirement fund in an attempt to help those that are financially destitute in the aftermath of the COVID19 epidemic. 

The current position

If you leave your employment you can cash in on your pension or provident fund. It comes with a tax penalty giving you an exemption on the first R25 000 and then punishing you on a scale above. 

Retirement annuities left behind

So, if you are self employed you would have to set up a retirement annuity as a provision for your future pension. If you went out of business you cannot cash in. There is a clear discrepancy. 

Preservation is the target 

Treasury is aiming to encourage you to preserve your retirement funding. The main incentive is the tax deductibility of up to 27,5% of contributions against your taxable income. National Treasury is aiming to close the access to retirement funding when leaving your employment. Aligning with the position of the retirement annuity.

COVID19 exposes a real problem

Whilst providing for your retirement one day is a sound strategy and should be encouraged in every way there is a dichotomy that COVID19 has brought forward. Immediate needs are more important than the future. 

If you are in a position where you have lost your income and you have expenses to meet like your bond and you have money in your retirement annuity, how do you ever reason with losing your house? How do you justify not being able to access long term savings when you have dire needs for the short term?

Kick the can down the road

The normal argument is accessing your retirement savings now leaves you with a long term problem down the road. COVID19 has taught us that things are not normal and now is more important!! 

Retirement funding should be an option

We should be given the option to access our retirement funding at our discretion. Yes, educate the pros and cons but leave the decision to the owner of the fund, If they are coming to take my house away and I have a retirement fund which can save me and perhaps leave me with a contingency fund whilst I try to find a new source of income. I would rather take my chances now and deal with the long term consequences later. Who knows where we will end up with this pandemic.

There’s such a good feeling owning a new car. It has all the reasons why you should have it! With the new technologies and stylish designs and you in control what else is there?

Well, there is a reality check which needs to be considered. Cars cost you a lot more than you think. You keep paying long after:

The feeling has gone

The great feeling of owning your new car soon diminishes but the financing still lives on. The longer the period of repayment the more this problem extends itself.

The value has gone

R100 000 financed over 5 years @ 10% costs 27,5% more. 

Cars lose value at an alarming rate of around 20% per annum yet you are still committed to paying at 10%. Effectively, pouring money into something which keeps depreciating. The problem is exacerbated if interest rates rise during the period.

The opportunity has gone

Interest payable means you owe. Interest earned means you earn. The sure way to building wealth is compounding your own interest on your investments. So obviously, the less you pay the bank the more you pay yourself. 

Don’t be alluded with the deals.

Drive now – pay later. Take the car now and only start paying later. These deferred payments have the interest factored into the monthly installments when you start paying. The Bank still gets its money.

Ballooning reduces the monthly repayments but you still pay the interest on the residual. So it’s not free money. The bank still gets its money under the guise of lower instalements.

Buy a car you can honestly afford

Let’s face it. Cars in the main are a social symbol of success. Ironically, you show off what you are prepared to lose.

The bottom line is if you finance a car with a residual or deferment you are probably are buying something you can’t actually afford. The car you can afford is in the price range where you can put down a healthy deposit and pay it off comfortably in a shorter period of time. The monthly instalments should be budgeted for in a way that they are lower than your monthly savings. 

Uber verses Ownership?

Perhaps its a better option to Uber. Taking into account the extra costs of insurance, maintenance, licensing and petrol you could do far better without a car. You could calculate the monthly cost of owning a car and compare this with using Uber to get around. In many cases there are huge savings to be found. A broad brush calculation on a R200 000 car is R160 per day. This allows you Uber usage of R4 800 per month with the convenience and no worries about parking. Think about it?

Your home loan application is probably the largest and longest loan you will make in your lifetime. We all aspire to having our own homes instead of renting from a landlord  – (which pays off his property). 

There are some important considerations to understand before planning to buy. 

Your credit worthiness 

Banks will want to be assured that you can afford the loan over the period. 

Build this up with a credit card, paying off the full balance on time every month before the due 

date which avoids any interest. You do not have to max out the card during the month. Just be in a position 

to pay it off comfortably at the end of every month. After a while the credit card company will recognise your 

credit worthiness and invite you to increase your available credit. This in turn will improve your worthiness with the banks. 

The banks will scrutinise your financial stabilty

How long have you been employed? – The longer the better.

How much do you earn? – The more the better.

What are your current debts? – The less the better.

What is your disposable income after your monthly costs of living? – The more the better.

Your home securitises the loan

Banks work will lend a percentage of the market value of your home (loan to value).

Generally, they will lend up to 80% of their assessment of the value of your property. This subsides the risk should you default as they have 20% of the value to play with when having to sell off to recoup the loan. Banks will own your property until you pay it off. 

So, to improve your loan application you should aim to have more than the minimum deposit of 20%. If you qualify on the 20%, take it and put the extra savings into the access bond once it is registered. 

Follow the 30% rule

Your repayments should not exceed 30% of your monthly income inclusive of other debt repayments.. If you have other debts, these should be paid off as much as possible to improve your application for a bond. 

Buy a home you can comfortably afford

Don’t get enticed into buying up to the maximum you qualify for.

Take into account probable interest rate hikes over the period of the loan which should not threaten your affordability. Ideally, if you buy a smaller property you can pay off sooner by increasing the monthly instalments.

A home you can comfortably afford and pay off sooner is a key aspect of a sound financial plan. 

Ideal saving for the medium term
Endowments are policy contracts which commit you to a minimum investment period of 5 years after which the proceeds are tax free. They are ideal vehicles for saving towards children’s education, holidays and deposits for a car or a house.

Not included in your tax return
An endowment basically provides a “wrapper” around various funds of choice (mainly unit trusts) which may be invested across various asset classes such as, shares, property, bonds and cash. The returns from these funds are taxed inside the endowment and paid to SARS by the service provider at a flat rate of 30%.

Capital Gains are taxed
If and when you decide to take the proceeds of the endowment you trigger capital gains tax which is dealt with inside the wrapper.
During and after the 5 year period you can switch between funds and this also leads to a tax on any capital gain. The effective rate of capital gains tax is 12%. Again, this is paid to SARS by the service provider and is not included in your tax return.

Pays outside your estate
In the event of death the proceeds of an endowment will be paid to a nominated beneficiary.This avoids executor fees (3,5% plus VAT) which charged on assets inside your estate.

Not for everyone
The tax applied to endowments benefits you if your marginal rate is above 30%. You will get a better return investing directly in the same unit trusts if your tax rate is lower. You also can use your exemptions on interest and capital gains which are not applied inside the endowment

An endowment offers attractive benefits as a savings vehicle which should be compared with other options to optimise your investment portfolio.

There is value

The recent tax free savings account (TFSA) presents value for everyone by escaping the taxes which are levied on interest, rental income and capital gains tax. Depending on the funds that you invest in, this could reduce the return by a few percentage points. This makes a big difference in the compounding over time. So, there is a distinct value proposition found here.

Fees still apply                                            Don’t ignore the fees as they still apply. You will pay fees to the administrator, the fund manager and the financial advisor if you use one. You can go it alone and invest directly but then do your home work.

Depending on the funds chosen for the investment the collective fee could be as high as 2%. So, if the fund performs at 10% the actual return which will be 8%. If tax was applied this would be further reduced. This which is where the real value of the TFSA is found.

The limits

You can invest a maximum of R36 000 per annum (R3000 per month) with a maximum life time contribution of R500 000 which will take around around 13 years to reach. The ceiling will hopefully be adjusted over time to compensate for inflation as there is no provision for automatic inflation increases if you take up the maximum annual allowance.

If you withdraw you will not be credited with the contribution against your overall lifetime limit when you invest again. For example, you contributed R100 000 over a few year and decided to withdraw R50 000. Your lifetime limit will still remain at R400 000.

The same investment principles apply

The investment is liquid, meaning that you can withdraw at any time. You should be careful, however, if you have a short term view. In which case, more cautious funds should be considered as opposed to funds invested in equities which need time to smooth out the risk of loosing capital.

You can invest online but do your homework and understand the T’s and C’s before signing up. Understand the funds and the relative costs along with the mechanics of investing and withdrawing.

Tax savings are a huge advantage

In a highly taxed environment such as ours, any tax break on investments should be taken advantage of to improve your savings over time. Compared to endowments which are taxed at 30% on all returns the tax free savings account are the first port of call. A must for everyone.

Assurance covers you for just in case, providing you with capital to cover the financial loss you may experience as a result of the life changing event.
It’s expensive if nothing happens, but is probably the best financial decision that you will make should something like a having a severe illness occur.
Assurance provides a capital or income when you do not have it. As you improve your financial wellbeing by creating your own capital wealth then your dependency on assurance should lessen.

Severe Illness

Heart attack, stroke, cancer, coronary arterial bypass systems are the four main and most common severe illnesses you are likely to contract.
The assurance covers you for a capital sum which is determined by the severity of event. If you have a mild heart attack your payout will be a smaller percentage of the capital sum assured than a major heart attack which will pay out 100% of the benefit.
Dreaded disease cover fits into your assurance portfolio between your medical aid which cover the costs in hospital and costs for recovery.

Medical aid covers medical costs
Severe illness covers the costs of:

Recuperation – it may take a while to get back to work and in the interim bills need to be paid. Your disability cover normally has a waiting period before paying out so the the payout from your servers illness will take up this gap.

Lifestyle adjustments – Some severe illnesses can leave you  incapacitated resulting in costs in modifications to your new lifestyle . If you end up in a wheel chair, for example, you will need modifications done to your home and perhaps your motor vehicle.

Get the right balance

Seek advice from advisor to find the appropriate cover for you. Understand the definitions and what you are actually covered for.

There is an overlap of cover between medical aid and severe illness cover. Assurance is there to replace financial loss and is expensive if you never claim. So your cover should be adequate. If you get it right your medical aid and severe illness should provide you with enough funds to carry you through a dreaded disease.

Q and A……

1) What is dreaded disease cover?
It is assurance which covers you for a severe illness related to major organs or systems such as heart attack, kidney failure, liver disfunction, cancer.

2) Why should you consider buying this type of cover?
A dreaded disease can have a serious impact on your financial security. The assurance provides a lump sum to cover costs associated with a severe illness. Such as,
Absence from work
Home care during extended periods of illness
Lifestyle modifications should the illness lead to not being able to work anymore
3) What do you need to know before buying this type of cover?
The severity levels and the definitions of the various dreaded diseases covered. Does the assurance cover multiple events? The older cover paid once off. The newer assurance covers for multiple events.
The assurance is normally an accelerated death benefit. Claims will therefore reduce your life cover and because of the illness you will probably not be able to get more cover.
4) What are the benefits of having this type of cover?
A successful financial plan makes provisions for all life changing events. Severe illness is one of them. The provision should provided adequate capital to allow for the costs associated a severe illness for the duration it takes to get well and back to a normal life.

5) How does age and gender fit into this type of cover?
Underwriting is based on risk factors and age and gender are some considerations. Certain dreaded diseases are experienced more with certain genders and at certain ages.
Cancer is more prevalent in the 50 plus age group than, say, the 30’s. Breast cancer is obviously a bigger threat and concern to women than men.

6) Core diseases covered by dreaded disease cover?
Core diseases are more prevalent.
Heart attack, cancer, stroke and CABS…coronary artery bypass surgery….
The benefits have been extended to scores more which have less of an occurrence.
Safer to apply for a comprehensive cover, however, will cost you more…

Speak to a financial planner who will advise on how much severe illness cover you should apply for and study the benefits carefully so that you understand what the cover will provide.