Don’t blow the pension claim from your “Ex”…..

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In what is known as the “Clean Break Principle” recent regulations entitle divorced spouses to claim from the pension fund of the ex before retirement. These rules apply to government pension funds as well which have left members with interest-bearing debts which have to be repaid to the fund. The problem rests with the time it will take to put the fund back in a position to honour its obligations to pay future pensions.

A defined benefit pension fund takes on the obligation to pay a member a specific pension at retirement based on the number of years that the member has contributed to the fund. It is a very onerous task for the fund as it needs to be in a sound financial position at all times to ensure that all members during retirement receive their pension benefits. The problem is compounded by the fact that members are living longer which puts enormous pressure on the present and future values of the fund. The sustainability of many funds is questionable as it is, so these premature payouts in divorce claims will cause serious problems for actuaries and trustees.

The claims against pension funds are on the rise and there is even a suggestion that many members are arranging their divorce just to get their hands on the cash.

Ideally, the funds should not be cashed in and, instead, they should be preserved. It takes time to catch up on the value accumulated through compound interest on the investments made in the fund and quite often there isn’t enough time left for most to make catch up before reaching retirement.

So the message is clear. Your entitlement to the pension fund should you get divorced, should rather be preserved and included in your retirement provisions for the future. As a divorcee your financial independence is even more crucial in the future as you are all on your own. Your pension claim should therefore be protected at all costs and should not be seen as a windfall.

Keep a close eye on the future value of your pension after a divorce claim and make adjustments sooner than later. The defined benefit funds in the latest changes charge the member interest on the debt and in many cases, members won’t have enough months left before retirement to pay back the money. This is a dilemma for the trustees on defined benefit funds and serious adjustments will have to be made for future benefits.

3 Don’ts to avoid getting scammed….

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 In the face of the current explosion of scams reaching you through emails, SMS and advertisements it is evident that many unsuspecting people are getting lured into the web leading to financial disaster.
Scamming or phishing, as it is also called, is a plot aimed at getting you to hand over your banking details by falsely tempting you into believing that you are dealing with an authentic and genuine company or person. A common scam doing the rounds is the SARS Phishing Scam which advises you in an email that you have a refund due to you and you should set up your banking details with the sender to claim the funds. The email uses the SARS logo and looks credible. However, it is a fraudster trying to convince you that you are dealing with the Receiver of Revenue.
Here are three “Don’ts” which will keep criminals at bay.
Don’t be so trusting
You need to be more suspicious about your financial transactions. Especially, having received a communication from out of the blue congratulating you on some fantastic win which you never expected!
Many scams promise things that are too good to be true. You should the attitude that there is no such thing as a “Get Rich Quick” scheme. You should too aware that there are criminals in this world eager to take advantage of you. Sad but unfortunately true. So if in doubt opt out!
Don’t give out your details
It sounds so obvious, doesn’t it? Yet the continuous bombardment of scams reaching us from all angles suggests that scammers realise that there are many of us that are willing to give out our banking details without batting an eyelid.
Banks and Financial Institutions will never ask you to provide your banking details in an email or an SMS. So, the moment you find yourself being persuaded to provide these details you should stop the process. The internet creates an opportunistic platform for criminals to use your bank account. They can be in and out of your account in seconds, long before you even realise that your money has been stolen.
Don’t leave it
When you come across a scam you should report it to the institution that the scam is pretending to be. You can also post it on a useful website at www.scambuster.co.za which creates awareness of scams in South Africa. Don’t fall over when you see what scams are going on out there.
Let your own social network know about scams that you come across so that more of us can be made aware of what is going on. Talking about scams should sharpen our senses and make us more diligent the next time someone tries to steal our money. Being aware is probably our best defence towards being scammed.

Is your loyalty program worth it!

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In these tough times when households are under pressure to make ends meet, perhaps it is time to have a closer look at loyalty programs to unlock some value to help get through. The more successful loyalty programs help you to change towards lifestyle behaviours which align with their business models and they reward you with useful benefits for doing so.

Here are some areas you should focus on with your loyalty program to ensure that you max out the benefits on offer.
Understand the program
Understand as much as you can about the program. What you have to do to get the most out of it. If you just, say, join it for a free gym contract, then you probably will miss out on a whole lot more.
There was probably a lot more to understand about the program in terms of its philosophy of say” wellness”. It probably would encourage you to eat well and focus on other areas like stress and mental health. The program probably also offers much more and the more instant the rewards the more gratifying it will be. So, getting to understand the program completely will obviously unlock a lot more value.
Are the values real?
As a premium member of one of my loyalty programs, I have diligently kept up with the required behaviours towards a healthier lifestyle. The rewards, in the main, are real and immediate with discounts on healthy food and retail items. However, when booking an air ticket recently, I realised that my 35% discount was applied to the “rack rate”. This ended up being no cheaper than similar air tickets available on the “Travel Start” website. So this reward had no real value. Check out the actual value of what is promised and try not to be lulled into perceived values.
Commit fully to the program
You will do better with fewer programs. You should align your goals with the program. If the program sets out to encourage you to improve your health, help you to drive better or manage your money more efficiently then you should commit fully. By so doing, you will enjoy most of the rewards on offer and improve your lifestyle at the same time. Dabbling in the program won’t unlock much in rewards and will just end up being a cost to you in membership fees.

Equitable provisions between spouses are a ‘no brainer’…

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In these modern times, there is a strong shift away from the traditional breadwinner to a more equitable contribution by both spouses towards the income in the household. In more and more cases, there is even a reversal to where the husband stays at home with the children whilst the wife pursues her career as the breadwinner.
Either way, it makes sound financial sense for both spouses to approach their financial planning jointly. Spouses should focus on building equitable portfolios wherever possible into the future. The advantages are clear when a balanced approach is applied:
Your average rate of tax is reduced
If both spouses accumulate separate portfolios over the years then it positions the household to draw income from two sources. Our income is taxed on a progressive scale, so if more of it comes from one source then the tax rate is higher than if it was drawn equally from two taxpayers. The average rate of tax is reduced.
You claim double the rebates
What further reduces the average rate of tax between spouses are the rebates applied to each partner as well as the exemptions on interest and inclusion rates on capital gains tax. So having two interest-bearing accounts instead of one allows for a higher exemption on the interest and therefore a lower rate of tax overall. Joint ownership of assets will also make way for lesser capital gains tax being applied when selling off a property or shares as two inclusion rates will be applied instead of one.
You provide access to funds should you lose your spouse 
Having your own equitable portfolios is a very practical plan in the event of a death or a divorce. Investments tied up in the estate are locked up whilst the executor winds things up. This could take a long while leaving you financially stranded in the process. Having your own portfolio provides you with some financial freedom in the meantime.
If you get divorced you already have equitable investments in place between you which avoids having to sell off things and creating unnecessary taxes and costs.
The approach is one of interdependence making equitable provisions for each spouse and, if applied effectively, has the outcome of “one and one makes three”.

Financial Planning Week … Quality advice for free!!!

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The annual Financial Planning Week kicks off on the 7th of September. It aims to raise awareness of the importance of financial planning and how relevant it is to all South Africans. It’s an initiative from the Financial Planning Institute which has become a successful annual event over the years.

Financial planning differs from financial advice in that it follows a deliberate process to arrive at an appropriate solution as opposed to a sales approach which is purely product focused.
The week devotes itself to educating the public about financial planning by arranging workshops and exhibitions throughout the country at various venues as well as offering free financial planning to the public from CFP professionals.
There are well over 100 000 advisors in South Africa and only 2 000 practising CFP professionals. This a rare chance to engage with a qualified financial planner ‘pro bono” ….gratis….free
All you need do is go to www.fiancialplanningweek.co.za for details on what is happening in your area and where to find a Certified Financial Planner who will offer you a free consultation. There is also a very useful course you can register for called My Money 123 which helps you to get a better understanding of things financial.

Black Monday…a dress rehearsal of things to come?

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This week saw trillions wiped off global markets in a very short space of time as investors panicked over the developments in China. By the end of the week some stability was restored mainly in the US but other markets, especially emerging ones, were left battered and bruised. South Africa was a victim of the carnage. Was this a dress rehearsal of things to come? Or are we through the worst? What we can learn from this week is how volatile things are around the world.

So what are 3 concerns for South Africans in the face of this risk?
A weaker rand
The rand easily found R14 to the dollar in no time before settling back to its current range. This showed how vulnerable our currency is during a panic. This has a knock-on effect on our imports which in turn impacts our inflation resulting in more pressure on households.
Increase in interest rates
The Reserve Bank has been very hawkish over the rising inflation rate and we are already in an upward interest rate cycle. It is likely that interest rates will move upwards which again adds more pressure on households.
The risk of losing capital 
The stock market has corrected during the week but by no means is the risk off. Valuations are still very high relative to the fundamentals and returns will be affected.
In the short term, you can expect big swings as markets navigate through the uncertainty.
So what can we do?
It is far easier to change your sails before the storm than during one. This week sent out a strong signal to all of us. We need to get our personal finances in order, curb spending and get debt under control. Yes, it’s about tightening your already strained budget and squeezing out whatever you can, diverting the savings to pay off debt. In the short term, the savings on high interest-bearing debt will be a much better bet than the probable yield on the markets.

Credit Card. Friend or foe?

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Your credit card can be a great financial tool if you understand how it works and how to use it effectively. In the same breath, it can be the single cause of your financial demise if you let it run away from you.

How credit cards differ from debit cards.
The credit card differs from a debit card in that you pay an exorbitant rate of interest currently around 21% on the outstanding balance at the end of each month. The other main difference is that credit cards do not charge transaction costs at the point of sale, whereas, debit cards do.
Use your credit card wisely.
Understanding that you pay a huge rate of interest on your credit card balance you should only spend up to an amount that you can comfortably afford to pay off in full at the end of each month. Bear in mind that you get up to 21 days to pay your credit card off from the statement date. So, effectively, you can have free use of cash for the whole of the month plus. You need to keep a careful eye on the due date and settle just before.
Squeeze out the extra.
If you are really savvy you should keep the agreed amount that you decide to spend each month in your access bond earning some interest and then settle the credit card in full one or two days before the due date. If you don’t have an access bond then a money market account would be the next best thing as the interest rate is a little lower.
The bottom line is that you are keeping your money during each month working off interest and making use of free cash without transition fees. This does, however, need control and discipline.

Things you should know about life assurance……

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One of the more complex financial products is a life assurance policy. You need to understand the definitions of the benefits taken and the conditions under which they will be paid out. You also need to be aware of the various exclusions that are applied. The explanations have over time been simplified but you still need to study the policy carefully so that you know what to expect in the event of a claim.
Here are some answers to questions which should help you understand the broader aspects of life assurance.
What is the purpose of life assurance?
Life assurance is a provision in your financial plan which becomes available in the event of you dying, becoming disabled or contracting a severe illness. It follows the basic principle of insurance where a group of people contribute to a pool which pays out should anyone have a life-changing event. Those that claim are effectively subsidised by those that do not. It’s about paying a small premium to cover you for a large amount should something happen, thus taking away the financial risk. Ironically, you do not really want to claim from this policy. You really are paying for peace of mind should something happen.
How much cover should you have?
The payout is normally a lump sum which should be enough to pay off all your debts leaving enough behind to maintain the lifestyles of you and your dependents well into the future. Make sure that you include enough cover to wind up your estate. There are certain costs and debts which need to be paid when you die and if you do not have sufficient cash available in your estate then your executor may need to sell off assets which may not be ideal. Don’t underestimate the effects of inflation on your provisions over time.
How long do you need assurance?
You need it for as long as you are in debt and have dependents.
If life assurance makes a capital provision for a life-changing event at a time when you do not have the money, then you need to have the cover for as long as it takes you to build up your own capital through your investments. Let’s face it, assurance is very expensive if you never use it. The price you pay for the cover depends on your age. So the older you get the more it costs. Ideally, you need to wean yourself off the dependency on assurance as your wealth grows over time. You should frequently evaluate the amount of cover relative to your personal balance sheet. If your financial plan is on the course your debts should be diminishing as the value of your assets appreciates.
Life assurance is necessary for a sound financial plan. You should frequently evaluate your need for the cover relative to where you are in your stage of life.

Investing on you own? Do your homework….

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Taking the option to go it alone with your investments takes some work. The financial universe is huge and navigating your way through the options takes a lot of research and study before making an appropriate choice. You could choose investments that are actively managed by specialist investment managers or you could go the passive route investing in funds which offer the average of certain markets.

Unit Trusts – The active route

They are managed by fund managers along specific guidelines. So you can choose funds which align with your objectives. In South Africa alone there are over 900 to choose from and globally there are thousands more. Each fund provides a fact sheet which is a good resource to help you understand where and how the fund manager invests. It explains the risks associated with the expected returns providing past performances relative to their benchmarks.

You will need to carefully study this information to get a better appreciation of your investment. If you don’t have the time or inclination to do this work then perhaps a financial planner is the better route.

Exchange Traded Funds – The passive route

You may want to simplify your plan by investing in the average of certain markets. Exchange Traded Funds offer investments in various sectors and asset classes.
For example, an index of the Top 40 shares on the JSE. You can invest in these quality shares and get the average of their returns without having to trade yourself. You simply invest an amount per month or a lump sum and you then track the performance of the 40 shares.

The costs are very low ( around 1% per annum) compared to unit trusts ( 2,5%) and share portfolios ( 2%) and you can start with as little as R300 per month.

Where to go

To help you understand what you are doing, there is a lot of information on websites that offer these investments, such as, www.satrix.co.za and www.etfsa.co.za, where you can invest in specific assets like gold and property.

As a general rule, it’s time in the market that will produce your results, Shares are for the long term so don’t look for get rich quick results.

Your wealth is created over time with the phenomenal effect of compounding.

How risky are your investments?

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If you expect a higher rate of return on your savings then you need to take on more risk. Generally speaking, the risk is the potential of your investment to fluctuate in value over a period of time. It is important to realise how risky your investments are relative to their returns. What tends to smooth out the swings in valuations is the time that you invest. So if you save in risky investments then you need to commit for a longer period. On the other hand, saving in less risky investments will not produce the same rates of return.
 To help you understand where you should be investing over time relative to the risk, here is a simple investment spectrum which provides a broad brush on where to save:
Up to 5  years – low risk 
These investments are very low in risk and provide more certain returns.
Debt – Don’t ignore this opportunity before committing. It is the most certain investment. You know what you are paying off and the exact interest you are saving. The effective rate of return is the interest you are being charged.
Savings accounts
Money market accounts
RSA retail bonds
5 years plus – medium risk
These investments need this time period to compensate for the fluctuations and to compound their returns.
Property exchange-traded funds
Balanced funds – unit trusts
10 years plus – High risk
These investments have a high probability of big swings in their valuations in the shorter term and therefore need a longer time to smooth out. They tend to provide higher rates of returns over time so need a longer view.
Equity Unit trust and exchange-traded funds
Shares – direct portfolios
Ideally, you need to invest over all these time periods to provide for the various savings needs in your life. Your investments should be aligned to your appetite for risk.