The one big lesson we can learn from the Budget
The 2015 budget proposal confirmed that we as a nation are between a rock and a hard place. It was clear that the minister needed to find every smidgeon of revenue (the rock) and try to curb expenditure (the hard place) with very little room to manoeuvre.
The principles followed in the national budget are no different from our own personal budget. Income needs to cover expenses. If you cannot increase income you either borrow more ( not so easy when you are already stretched) or you tackle expenses. So the one big thing we should take from the budget is that we will need to get our own households in order, in the face of the pending tax increases.
The tax scales for the next year have not compensated for inflation so we are all worse off from the start. Add to this the waive if items where taxes were increased, namely:
Then still to come is the effect of the fuel levy on inflation which is bound to take away the brief respite we were having from the drop in the oil price.
The average South African household is already struggling and income streams for those lucky enough to be employed are limited. So the one and only thing to do is become our own ‘minister of finance’ and make an extraordinary attempt to tackle our expenses and cut the cloth accordingly.
Tough economic times call for tough economic measures. The National Budget has laid down the cards. We need to play them diligently.
Income protection policies are essential in a sound financial plan. They cover you in the event of a disability by providing a monthly income when you cannot work. They are offered by most assurers as free standing policies and through pension and provident funds as employee benefits.
Up to now the contributions made to income protection policies are tax deductible on your individual tax return. However, if and when the policy pays you the income it will be taxable in your hands …no free lunches with SARS.
From March, the tax treatment changes for everyone. You no longer will be able to get the deduction, however, the income provided should you claim will tax free.
If you have income protection provided on a scheme paid on your behalf by your employer, you will have the contributions added to your payslip as a fringe benefit which results in you no longer receiving a tax break. So expect your take home pay be less from March.
SARS recoups the tax now and you only benefit if you claim.
Before the end of the tax year (February) there is an opportunity to look at your retirement provisions and take advantage of the tax break that is available by topping up your retirement annuity. Currently, you are allowed to deduct the amounts paid to a retirement annuity on your personal tax return. The maximum is 15% of amounts that do not contribute towards a pension or provident fund. This is captured on your IRP5 or pay slip as “non-retirement funding” income.
If your entire salary is pension funding then you can deduct up to a maximum of R1 750 towards a retirement annuity in the tax year. If, however, you salary funds a provident fund you can then contribute up to R3 500 a claim the deduction.
It stands to reason that the higher one’s tax rate is, the more beneficial the investment will be. A taxpayer with a marginal rate of 40% will get back 40 cents from SARS for every rand contributed towards the retirement annuity. Subject to the limits mentioned.
So, effectively you pay 60 cents for every rand invested. Not a bad deal!
But wait.. there’s a another benefit which is lessor known to most. SARS taxes the returns on investments, such interest earned from cash and bonds, the rentals from property and dividends have a withholding tax applied before being paid out. Retirement annuities are exempt from these taxes which gives them a better return and therefore your values will be better over time compared to the same investment in other vehicles.
So given that you get a discount on your contributions and the returns are not taxed, there is a value proposition in a retirement annuity compared to the same investment in a unit trust or an endowment policy.
However, retirement annuities are not for everyone.
Low tax payers – the tax deduction on the contributions is not that appealing.
Young people starting out in their new careers – retirement annuities can only be accessed at retirement. There are so many provisions to make when starting out and saving in a retirement annuity will be restrictive.
Taxpayers in debt – Better to get rid of your debt first. You also need an healthy contingency fund and some short term discretionary savings before locking up your money for the long term.
The misnomer commonly perceived by the “ordinary” person is that financial planning is just for the wealthy.
Far from it! You see, a successful financial plan does not set out to make you rich, especially in a short space of time. Rather, it sets out a framework which makes provisions to maintain the lifestyle that you are accustomed to, using your resources in the most efficient and effective way possible.
So, whether you need to maintain a lifestyle of R10 000 per month or R100 000 the approach is the same. Your plan will answer to three basic questions:
Where am I now?
Gathering information on all your current provisions that you have.
Where do I need to be?
Establishing how much you and your dependants need to live on in the event of a life changing event such as your death, disablement or retirement. It also includes, getting married, divorced, having children and even caring for a retrenchment. The bottom line is your monthly income need to maintain the lifestyle you and your family are accustomed to.
How do I get there?
This is where you will need to explore the many options of assurance and investments. If you have the time and inclination to do it yourself then you can avoid the services of a financial advisor. If you need help then you could call on the advise of a financial panner and pay for a few hours to set up a plan which you could implement yourself. Of course, if you have a complex plan that needs more attention you will have to depend more upon your financial advisor.
It is essential for everyone to have a financial plan. Don’t avoid it because of the complexities and accompanying jargon. It is relatively simple and having a basic plan is certainly better than no plan at all.
There are many tools and calculators on the web that can help you to quantify the provisions required to maintain your lifestyle if you experience a life changing event.
Your credit report is available to you on-line and for free. Just a few fields to fill in with one or two security checks and your report arrives in your mailbox
rating your credit worthiness.
The report verifies your ID with the Department of Home Affairs
Detects if you are subjected to possible ID Fraud
Provides a credit summary of:
Total Balance Exposure
Total Monthly Exposure
Total Overdue Amount
You are also provided with a Credit Risk Rating
1 – very good
2 – good account conduct
3 – account conduct neither good nor poor
4 – poor conduct
5 – very poor account conduct
0 – no rating – insufficient information
Why should you get this report?
Your creditors access this information when they need to. So you need to know what they are seeing. You will want to know if the information is accurate and correct. You also will see who has been accessing your information.
Did you know that companies like short term insurers use these reports as part of their underwriting process on you when you apply for a policy and submit a claim.
The information, I guess, profiles you in terms of your risk to the company. If you are financially stable then you probably will not submit false or exaggerated claims. So, you want to know if the profile is based on accurate information.
Your competitors in business can also access this report to get an idea of how well your company is doing in terms of creditworthiness. Talk about market intelligence…
You also want to know if your information is not being used in ID fraud. There is a verification provided which report if there is any possible ID fraud on record.
You can also use the records to find ways to improve your credit rating. If you are a slow payer on one account, for example. you can target that account over a period an pay on time and in full to improve your rating.
The overall credit rating does affect how much you can borrow and at what rate of interest. The better the profile the better your chance of a more favourable application.
Credit reports are there for free and the information is useful to firm up your financial planning into the future. Keep a close eye on it – its for free.