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 be 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 receive a tax break. So expect your take-home pay to 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 27,5% including contributions towards a pension or provident fund.

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 45% will get back 45 cents from SARS for every rand contributed towards the retirement annuity. Subject to the limits mentioned.

So, effectively you pay 55 cents for every rand invested. Not a bad deal!
But wait.. there’s another benefit which is lesser known to most. SARS taxes the returns on investments, such as interest earned from cash and bonds, and 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 taxpayers – the tax deduction on the contributions is not that appealing.
For 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 a 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 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 needs 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 for 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 advice of a financial planner 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 on 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 online 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 creditworthiness.

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:
Accounts
Enquiries
Judgments
Notices
Defaults
Collections
Total Balance Exposure
Total Monthly Exposure
Total Overdue Amount
You are also provided with a Credit Risk Rating
ranking from
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 that reports 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 and 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 for the future. Keep a close eye on it – it’s for free.

The recent drop in the oil price creates an opportunity for all South Africans and we should take full advantage whilst the price of petrol is low.
We as a country import 95% of oil needs and therefore are totally dependent on
the exchange rate as oil is bought in Dollars with Rands and the weaker our rand the more expensive oil becomes. However, the price of oil has dropped by half in a very short space of time resulting in a notable drop in the petrol price.

The pump price this year has fallen by R1,27 and indications are that the next review of our petrol price will drop by another 50 cents.

So what should we do about it?

Take control of what we can while petrol is cheaper as indications are that the price will increase again. Some pundits seem to think that we have a window period of around a year or two. Who knows? Already we are seeing oil-producing countries starting to struggle with job layoffs and widening deficits on their balance sheets. It points to the fact the current price cannot sustain certain economies whilst it is benefiting others.

So what is the current saving?

Unleaded 95 on the reef peaked at R14,33 in August 2014. The current price is R11,01 providing a saving of R3,32 per litre.

If your average usage per month is R100 litres then you are R332 better off.
If you divert the savings into your high interest-bearing debts you squeeze out even more savings as you effectively earn the same rate of interest of the debt. So, if your credit card balance is costing you 22% per annum then you effectively save this on interest over a year. Where else can you currently get a 22% guaranteed return on investment?

Don’t forget the emergency fund.

If you don’t have debt then you should allocate the savings to your emergency fund so that you can tackle unforeseen expenses in the future. This fund is an essential provision in your financial plan and should be saved in cash and enough to provide between 3 to 6 months of your monthly expenses. Why? Well, if you have any unforeseen expenses then you have immediate access to funds and don’t have to borrow.

There are more savings to come. The current drop in the fuel price should start to translate into lower prices for goods and services which depend on fuel to transport their products. This should improve your cost of living for the year providing more relief on the family budget.

Take advantage while prices are low. Enjoy this economic gift horse whilst you can.

Amongst the many questions asked on the Morning Breakfast Show during the year, these were the most pressing. The common thread was that people were struggling to make ends meet and needed advice on how to manage their money better.

Are money market accounts safe investments?

After the demise of Africa Bank South Africa invested in money market funds and learned the hard way that these investments were not as safe as they were made out to be. The Reserve Bank in its rescue plan ordered that a 10% “haircut” be applied to investors to help recover some of the losses. Side pockets have been created in some accounts whereby the investor cannot touch the money or earn interest until the bank is in a better position to pay it back. Doesn’t look likely at this stage!
The lesson learned is that the money market is as safe as the banks trading in them. This risk is found where the bank cannot pay back the debt it is trading in.
My view is that Africa Bank took on too much risk in an economy which has been struggling. Most banks are sound and the likelihood of this happening again is quite small. Therefore, money markets are still relatively safe investments.

Should I cash in my pension fund and pay off my debt?

Earlier this year the Minister of Finance tabled a report in parliament concerned over the fact that more and more South Africans were withdrawing from their pension funds. This was probably a result of being under financial pressure and seeing the funds as a way to get back on their feet.
The problem is not only the tax that is payable on withdrawal ( up to 32% depending on your tax rate) but also the lost opportunity to compound the returns of the funds into the future. If you work out the amount the funds will be in the future effectively earning interest on the tax payable if you withdraw, then the cost is huge.
In most cases, pension funds should be left alone and only cashed in as a measure of last resort. If you really have to.

What is the ideal balance in my budget?

Governments and businesses are governed by detailed budgets which help them navigate through economic cycles. Households should also adopt the approach is creating detailed budgets. It follows the principle of ” If you can measure it, you can manage it” Essentially, a budget is a measurement of expenses against income. What comes into the household and what goes out?
An ideal budget should allocate:
30% towards provisions for your financial plan. i.e. Insurance, pension, medical aid, savings and investments.
30% towards debt on cars, houses and credit
40% towards the cost of living

When compiling your budget you should split the expenses into “Must haves” and “Nice to haves”. This will give you a clearer picture of where you can trim your costs and re-allocate to the savings.

Difficult to get right but budgeting is an essential element in a successful financial plan.

We are victims of being preyed upon by criminals who want our money. They are creating ways and means to get information about us to enable them to access our bank accounts and credit cards.

Scamming is rife and becoming more and more sophisticated as the various security measures are improved to avoid them.

In most scams, there is a hook. Something that will get your attention and lure you into responding:

Updating information on you banking details
You’ve won money in a lotto
You’ve inherited from a distant relative
You are owed money from SARS

The vital information that the scam aims to get from you:

Banking details
Financial information
Passwords
CSV number at the back of your credit card
Cell phone number

With this information, the game is on to access your money quickly before you realise it.

Banks and financial institutions spend a lot of time and money tackling the problem. It is a moving problem as criminals learn to navigate through security systems as they are upgraded.

We need to be much more aware and diligent in the cyber world, recognising that scamming exists.

What can we do?

It stands to reason that we should never part with the information above. We should cross-check with the institution if we suspect we are being scammed. Phoning the security/fraud line before responding is that extra step which will avert being scammed.

Link your banking transactions to your cellphone. Every time a transaction is made against your credit card you get a message on your phone which you can take action on.

Some other ideas…

Blank out your CSV number on the back of your credit card and memorise it. This number is used for online purchases and is often obtained by criminals at the ‘point of sale credit card machines.

Be suspicious of any email with urgent requests for personal financial information

Avoid filling out forms in email messages that ask for personal financial information

Look more closely at the Logo and design of the letter or website. Often there are grammatical errors which are not consistent with professional companies.

There is a lot more that can be done on our part. Be aware that the criminal is on the prowl.

If in doubt opt-out…..

Looking through the rearview mirror at the stellar performance of the world stock markets over the past 4 years as they have soared into the stratosphere, one stands in bewilderment as to how they got anywhere near these heights. Furthermore, one wonders how much further investors can convince themselves that there are more reasons to push the records to new highs. All it takes is a smidgeon of positive news in the US to find justification to take the indexes across the globe to new dizzy heights.

Drastic times call for drastic measures.

The devastating crash of 2008 needed drastic invention on an unprecedented global scale to avert the worst global depression in economic history. Governments scrambled to create concerted plans to pour money into their systems. This was achieved through borrowing money and sharply dropping interest rates to create liquidity.

Banks sustained their low-interest rates to save their economies. They also committed to the desperate monetary policy of quantitative easing for as long as necessary in the hope that their economies would recover.

Risk on!

The interventions created a safety net for investors which enticed them into the markets taking on much higher levels of risk in the face of the uncertainty of where the economies would end up. It didn’t seem to matter as investors drove the indexes to record highs in the knowledge that banks effectively provided a put option for them.

Where are we now?

Commentators will have you believe that there is no connection between the markets and fundamentals. Well then, “why buy a share”? Fundamentally, a share is bought with the expectation that the company will make a profit in the future which in turn will pay a dividend as a return to the investor. If the company performs consistently the share price will rise. How can companies make profits in economies that are weak and fragile? The current prices of some shares both on the JSE and global markets leave one bewildered over how returns will ever be realised.

With six years of drastic intervention, the world finds itself deeper in debt with low forecasts for growth and employment. Yet the markets continue to find reasons to pay more for expensive shares.

Where are we heading?

Economics 101 warns that intervention creates cracks in and flaws in economies. What will the drastic and sustained intervention over the past six years create for the globe? We have never been through this in our economic history so we have to wait patiently to see how things play out.

If you lose 50% of your capital you need 100% to get it back. The risk of the capital loss is high at the current stock market levels. This has been the case year after year since 2010 in the face of weak fundamentals.

Is this another year of spectacular returns? How much further can investors push the price of expensive shares? How much longer can banks sustain their debt levels in the hope of growth?

Markets do not like surprises and all it could take is an unexpected event to bring everything down in a heap. Coming from a dizzy height the fall could be steep paying the price for speculating rather than making sound and rational investment decisions based on fundamentals. The risk is now higher than ever…

There are many aspects to be aware of in the financial universe which have a direct impact on the value of your money. Being aware of them can help navigate towards better outcomes and expectations.

Inflation

Inflation discounts the value of your money over time.
The official inflation rate or CPI is an average rate of price movements based on a set weighted basket of goods and services over time.
The average rate points to how the value of your money is discounted over a period.
The higher the rate persists then the less your money will be worth in the future.

Fees

Advice fees either improve or erode the value of your money over time.
If your financial advisor is adding value to your financial planning through qualifications, knowledge and experience which in turn translates into the delivery of your expectations then the fees you pay are worth it.
If you can do everything yourself then you can save the fees. So it depends on how much you are prepared to do on your own.

Admin fees are charged by service providers and they vary according to the functionality and service that they provide. These fees will affect the value of your money over time.
Many providers off a sliding scale of fees based on the total value of your investments made with the provider.

Fund management fees will erode the value of your money depending on how successfully the fund outperforms its benchmark.
If there is no outperformance greater than the fees over the performance of the benchmark then you would be better off investing in the benchmark directly.
For example, equity fund managers may choose the Satrix Top 40 as its benchmark and charge a management fee of 2%. The charge of Satrix is bout 1% per annum, so the fund will have to outperform it by at least 1% just to break even. Many funds don’t manage to do this consistently over time.

Tax will erode the value of your money over time.
One of the most ignored aspects of investments is the various taxes that are applied to them.
Endowment policies are taxed at a flat rate depend ending on the entity that owns it.
In the case of an individual, the rate is 30% on all interest earned from bonds and cash which are derived from the various funds that you choose.
Dividends are taxed at a flat rate of 15%.
Capital gains tax is also applied to all investments once you dispose of them.

Debt

Expensive debt is an opportunity cost.
The longer you stay in debt the more interest you will keep on paying your creditors. The quicker you pay off your debt the sooner you will be able to divert the interest payments to investments which can increase your wealth and you away from dependency on institutions to your own financial independence.
The exception is when one borrows to invest in an asset at a lower rate than it appreciates by such as a property and shares in some cases.
Conversely, why cars are not investments?

Real Returns

Compounding catapults the value of money into the future provided the net return is above the prevailing inflation rate.
The magical effect of interest on interest compounding over time is where your money greatly appreciates in value. The highest net returns that you can achieve over the longest period of time will provide phenomenal returns on your investment.

What is the best investment for you? Is there such a thing as best? How do you go about choosing one?
The best is only found in the rearview mirror. Therefore best is only known when you’ve passed it and you can look behind. So best cannot be predicted into the future. The way forward should rather be determined by what is appropriate for you and your circumstances. This often is more about investing appropriately according to your lifestyle needs taking your risk profile into account, rather than setting out to chase the highest returns.

For example, someone who has a few years to retirement should not be 100% exposed to shares as there is a considerable downside risk of losing capital which should be there to provide for income.
At the same time, someone in their mid 30’s wishing to build up capital over 10 years will probably do well to save monthly into shares through a unit trust or exchange-traded funds.

This points to realistic expectations measured against one’s circumstances. A function of financial planning.
Some ideas on how to manage one’s expectations and plan appropriately.

It’s all about risk versus returns. A successful plan is not based on the highest returns achievable. In fact, you may be exposed to far too much risk relative to your situation if your returns are too high. High returns do pay off more times over the long term but in the short term, they sometimes don’t. This is why we advocate shares for the long term.
Therefore the plan is all about appropriateness. Where are you now in relation to where you want to be financial?
As a rule of thumb
Short term 3 years – conservative
Aim:
To protect capital, beat current interest rates after tax, and keep up with inflation.
Money market, bonds, capital protection investments, segregated funds

Medium-term 5 years – moderate
Aim:
Diversification across all asset classes to beat inflation by 3% after tax and fees
Unit trust balanced funds,

Long term 10 years – assertive
Aim:
Optimum exposure to equities to beat inflation by 6% after tax and fees
Unit trust equity funds, Exchange Traded Funds, shares,