Bull's Eye

Debt, Debt & More Debt

lauren — Mon, 20 May 2013 08:16:48 +0000

Open any newspaper or magazine, log onto the web or turn on the TV… you are guaranteed to find only bad news surrounding the subject of debt.

Whole countries are in deep financial crisis mode. The European Union is buckling under the weight of record debt, and the USA just keeps printing more money like there is no tomorrow. I need a one of those printers!

State run institutions are failing every possible financial audit, yet at the drop of a sob story, can access untold amounts of public taxes to bail them out. Your taxes!

So where does that leave you and I? Well, unfortunately, no one is going to bail us out. You need to venture out on your very own personal debt crusade. As we all know, when going into battle, best we are appropriately armed. Going into a gun fight with a knife, as the saying goes, is not the best starting point.

DEBT: what is the solution?

Google the word ‘Debt’ and you will find a host of articles on ‘what you should and shouldn’t be doing to climb your way out the debt pit. Most of it is impractical and unachievable. There is however,, one very clear trend that almost every economist, advisor, author, bank or expert suggests … To set up and maintain a budget!

Now this advice is most definitely practical and achievable. However, it ‘s how and where should you start?

Our main goal is to firstly identify the state of your personal and business finances individually. Secondly, you either need to involve yourself in general discussions or open forums with others, to find simple and reliable solutions to solving our crisis. If we find our situation is to complex or possibly delving out of control, it is vital that you contact your Financial Planner or banker to assist you in achieving your end goal.

Debt destroys your ability to save, is stressful and just downright unpleasant. Start with setting up your budget, this will generally reveal the reasons behind your debt problems.

Debt is a heavy burden to carry and it doesn’t disappear overnight. It’s a bit like eating an elephant… huh? How do you eat an elephant? Just one bite at a time!

By Craig Shelley

The Subject Nobody Wants To Discuss …

lauren — Fri, 17 May 2013 07:37:26 +0000

It came to my attention, after the loss of a wonderful man, just exactly how important it is for families to be financially educated and well-informed.

It is all very well, knowing that our spouses or relatives have Life policies, Retirement Annuities (RA’s) or investments in place. However, should family members or dependants not be properly informed about the intricacies and whereabouts of these documents, they can be left in complete disarray.

Unfortunately, often you’ll find policies are spread across various organisations. This makes it difficult to track down the relevant companies or contact people.

Being a topic very few people openly discuss, we have drawn up a basic ‘4-step checklist’ to assist you:

STEP 1 – Commit yourself to getting your finances in order

It is recommended that you appoint a Financial Planner. Do not feel obliged to settle with the first consultant you meet. Ask your accountant or friends to recommend someone if you are undecided. A good Financial Planner should consider your family’s specific needs, requirements and budget allowance, before offering you any form of financial advice.

To assist with budget allowances, see the budgeting tools available on our ‘Home’ page.

STEP 2 – Distribute your income effectively

The general rule-of-thumb suggests that 60% of your monthly income should go towards fixed expenses, namely mortgage, motor expenses and school fees. The remaining 40% should be devoted to settling debt, holiday savings, household extras and luxuries and Investments, Life Policies and RA’s.

With minimal research, you will find Life policies which cover both education and mortgage costs, in the event of the death of the policy holder.

STEP 3 – Create a ‘Family Finance’ box

This box should include all important or legal documentation, such as:

Copies of ID’s, Marriage and Birth Certificates
Health Membership Certificates
Annual investment or policy documents
Copies of Trust and Will documents
Regularly update your list of important contact numbers, such as: Personal Banker, Financial Planner, Accountant and Attorney details

Should there be confidential documents, they should be placed either in a safety deposit box or with your personal banker.

STEP 4 – If you have not yet done so … draw up a Will today!

A Will is a legal document that comes into effect on your death. The effect of the Will (in its simplest form) is to decide:

Who should look after your affairs after you pass away?
Who should benefit from the estate – how you would like your assets to be distributed?
Who should be appointed as guardians to any minor under your care?
Funeral arrangements

A Will is a relevantly cost-effective, efficient and speedy manner in which the administration process of the deceased estate can be managed. Everyone over the age of 18 should draw up a Will. This Will should be updated at least on an annual basis, to reflect your most recent wishes for the dissolution of the deceased estate. Additional updates should be considered in the following circumstances:

Marriage
Co-habitation
Divorce
Becoming a parent (this is essential to avoid the proceeds of your estate being tied up for a lengthy period, whilst being administered by the State Guardian’s fund. Thus resulting in your dependents having no access to their inheritance.)
Inheritance
When starting up a business

The effect of dying intestate will result in a costly and arduous administrative process for the dependants. In a time where they should be trying to come to terms with their loss, they will have to bear the unenviable task of having to deal with state institutions in order to get the deceased’s estate in order. This process can be extremely lengthy. A Will provides the dependants with clarity as to how the deceased wished the estate to be distributed.

Everyone should consult their Financial advisor, Attorney or Trust Administrator in order to have their will drafted.

Get organized today … Avoid worrying about tomorrow!

By Lauren Henderson

Where there’s a will there’s a way!

lauren — Wed, 15 May 2013 10:16:41 +0000

Wills and trusts should work together, but sometimes don’t, as Advocate Karen Coetzer explains. Our ‘Matters of Trust’ columnist is head of the trust division of KC Trustees.

Where there’s a will there’s a way. But in the realm of estate planning the way forward is complicated immeasurably when wills and trusts are at odds.

Advisers can add great value by ensuring clients adopt a holistic approach to estate planning and align testamentary and trust provisions. But before setting out the case for alignment, let’s look at some examples of what not to do.

Defective directive No 1: In this example the testator (person making a will) made several bequests to a trust he had set up years before. Unfortunately, the trust deed stated that the trust would terminate on the death of the trust’s founder.

Defective directive No 2: This time the testator left assets to various beneficiaries without distinguishing between personal assets and trust assets. Those in the trust were not his. They belonged to a separate juristic person – the trust.

Defective directive No 3: This will indicate that the testator was aware of the distinction between personal and trust assets. Even so, the testator then divided up trust assets between various heirs. The testator had no right to bequeath assets owned by someone else (the trust).

There is a possible way to attempt to exercise some control of assets from beyond the grave.

In the trust deed, a testator-trustee-founder can make a provision that allows him to nominate a successor trustee to take his place after his death.

If the remaining trustees decide to respect the dead founder’s wishes (it’s not obligatory), the nomination goes to the Master of the High Court, who may or may not approve.

However, the notion that trust assets somehow remain under a trust founder’s control is fundamentally flawed as assets are placed in a trust to secure legal separation from an individual’s assets.

Confusion is inevitable unless those drafting a will are conversant with this basic principle. Unfortunately, those taking on the drafting function sometimes have only sketchy knowledge of such issues.

Problems frequently occur when will-making and trust formation are carried out in isolation.

A time-gap between the processes and memory lapses in between, lead to all sorts of confusion.

A further difficulty is created by the different priorities that apply when a will is drafted or a trust deed formulated.

Drafting a will seems a straightforward exercise and can become a matter of routine. A standard question is often asked: ‘Is a previous will already in existence?’ It is just as important to ask ‘Has a family trust been set up?’

If the answer is ‘Yes’ it is only prudent to obtain a copy of the trust deed before proceeding further.

Ideally, professional advisers should draw up the will and develop the trust deed at the same time. At the very least, the person entrusted with the drafting of the will should have access to the trust deed or vice versa.

A will should accurately reflect the wishes and intentions of the testator at a particular time. A trust deed is different as it can take on a timeless quality. A trust does not die. It can endure for generations. Therefore, it is necessary to obtain absolute clarity on the founder’s intentions, now and into the future.

Questions about intentions should ideally be put by a specialist as trust professionals are well aware that legislation and policy change over time. Wording has to enable trustees to carry out the founder’s wishes to the best of their ability in a constantly evolving legal and taxation landscape.

Liquidity requirements must also be addressed. Some stipulations (in a will or trust deed) can’t be fulfilled unless money is available. A common method of addressing the liquidity challenge is to take out a policy on the founder’s life.

This spotlights the desirability of treating will-making and trust formation as part of a holistic estate planning exercise.

A knowledgeable adviser will point this out to clients and stand ready to take on a coordination role while facilitating access to the products and services that complete the full, professionally structured package.

Written By Karen Coetzer (Advocate)

Investing in the stock market… long-term!

lauren — Wed, 15 May 2013 09:29:02 +0000

Equities (listed shares), both in South Africa and the United States…

… have outperformed inflation by meaningful amounts over the long run and should form part of every person’s retirement portfolio.

In more recent times, investing in shares, particularly in the U.S., has been seen as more hazardous due to the effect on the overall market of the collapse of the internet bubble in 2000/2001, the housing and credit crisis of 2007 as well as the more recent European debt and “fiscal cliff “crises. In fact, in the 12 years since 2000, the S & P 500 has hardly grown at all (in USD terms.)

Our local JSE by comparison, has stormed ahead since 2000 with average annual returns well into the double digits, partly due to the explosion of spending power from the new black middle class and more recently due to the “search for yield” by overseas investors consequent upon money printing and the very low interest rate environment offshore.

Both the local JSE and the S & P 500 can be considered fully valued at the beginning of 2013, if not overvalued, particularly if one believes in a “low growth” scenario over the next 5 to 10 years (which historically has been the norm after a banking crisis.) Due to the headwinds and uncertainty over Europe and also some doubts about the ability of the U.S. to fundamentally solve its own fiscal and debt problems, stock markets are likely to maintain the above- average volatility of recent years.

The conundrum however, is that long term returns are equally impaired by sitting on the side-lines in cash for any lengthy period of time, particularly in today’s low interest rate environment where money market returns, both here and in the U.S., are below inflation.

One strategy, assuming an average risk-averse investor profile, is to limit downside by investing in those unit trusts which have a balanced mandate and historically low “maximum drawdowns” (maximum drawdown is the biggest percentage value decline experienced by a fund before it starts to recover again.) Over the 2008/9 period many “equities only” funds experienced more than 40% maximum drawdowns whereas more defensive, lower equity funds experienced maximum drawdowns of only 5% and below. (NB: To recover fully from a 50% drawdown , a fund must subsequently grow by 100% , which has largely happened in recent experience as markets recovered on the back of aggressive central bank stimulus, but is the U.S. Federal Reserve Bank, in 2013, now “out of bullets” should markets dive again?)

In the above strategy, one could enhance long term returns even further by rotating a portion of one’s defensive portfolio into more aggressive funds following any big market dips. (NB: Retail investor psychology is to chase returns by trend-following.) Such an investor normally enters the market near the market highs after a trend seems to have been established, only to be “whiplashed” when the market turns suddenly. Investing for the long-term is somewhat contrarian in nature in that one should be “anti-trend”, buying when the overall market is despairing and selling when the market is euphoric.

Michael R Aley C.A. (S.A.), CFP

About the Author

Michael Aley: I am a qualifed CA (SA) and Certified Financial Planner . My areas of expertise are Retirement Planning, Estate Planning, Personal Taxation, Local & Offshore Unit Trust Investments and Personal and Business Assurance

How easy is it to save money?

lauren — Tue, 14 May 2013 12:48:35 +0000

As with most difficult tasks in life, we tend to defer our actions, procrastinate a little or a lot, and then ultimately do nothing about it. Procrastination at its best!

So the question is why don’t we save?

Well, there are a number of reasons. Ranging from budgetary restraints, to not having a plan or a big enough motivation to save.

We each have our own challenges, but in the end it boils down to priorities, and unfortunately the majority of us are under substantial pressure just to make ends meet. With having to pay bonds, rent, car payments and with more stealth taxes finding their way into our wallets, it’s no wonder that South Africans can’t save. There just isn’t enough money left after everyone else takes their piece of the pie!

But it need not all be doom and gloom…

Back to those ‘difficult tasks in life’ - losing weight, running faster, stopping smoking, doing the impossible - sometimes all it takes is… Simply starting! Saving can be very rewarding as there is reward and satisfaction in achieving results. These little victories are all the more satisfying when you really start to see progress. Then, with the benefit of hindsight, realise that you could and should have done this ages ago.

There is a popular belief that if you repeat any action around 7 times, you begin to create a habit. Saving is a healthy habit, and gets easier if you make it a regular routine. All good and well, but it also doesn’t help if you just rush in headlong and foolishly neglect your obligations and commitments.

So how and where do we start? Firstly, as with anything, you need to make a firm decision. Ok, so you’ve decided to start. As with any important decision it is always advisable to get expert advice as there are numerous types of savings plans and various tax implications. Ask yourself whether you’ll need access to your funds in the short-term? Or are you looking to invest over a slightly longer period?

The South African stock exchange has had an unbelievable run over the past few years and many people who are investing should have made substantial returns. I personally have clients who have seen returns way in excess of inflation. As we always recommend though, please get advice from a certified, qualified advisor or send your query to info@bullseye.co.za.

Here are a few steps to help get you started:

Create a new healthy habit - Saving!
Get advice from your financial advisor
An accredited advisor will also give you a little push, along with a solid plan on how to get the best returns. If you really want to see results, start with the basics
Look at all your monthly commitments in order to obtain an overall view of the state of your income and expenses.
Then see if you can cut out the small unnecessary spend items ie: get a comparison quote for your car and home insurance, and anything else that prevents you from saving.
Reduce expenses that you know you waste money on, force some budget cuts on things you unnecessarily spend money on and redirect these funds to your new savings plan.
Remember a habit is the repetition of any action or in this case a decision. Once you start, you are on your way!

Financial freedom is only a decision away!

Do you have personal debt ? Here are 5 simple steps to help you…

lauren — Mon, 13 May 2013 12:08:45 +0000

Personal debt relief can be achieved in various ways. The most important aspects are to maintain discipline and to stay motivated.

Do you feel like you are continously throwing money into the bottomless pit of debt? If so, trying to find a practical solution is often a challenging task.

It takes commitment to remain focused. Remember that the main goal at the end of the day is to eliminate all your debt.

Firstly, carefully re-evaluate your current spending habits. Secondly, you need to develop a realistic strategy to help motivate you to reach your goal!

5 STEPS TO HELP GET YOU STARTED:

1. Put together a list of ALL your debtors

It is important to compile a list of all your debtors. One of the highest causes of personal debt in most countries (besides mortgages) is credit card debt. Therefore ensure, right from the start, that you have gathered information regarding all areas of your debt.

2. Commit yourself!

If you are committed and diligent, and have a well-thought out budgeting strategy from the word go, you are likely to persevere long-term and adhere to your monthly commitments.

3. Payment Strategy Options

There are various options to choose from. You can either opt to pay off debts which attract the highest interest rate first, whilst continuing to make minimum payments on your remaining debts. Although this may appear to be the least attractive option, it will save you in the long-run by eliminating avoidable interest payments. Or alternatively, pay off the lowest debts first and work your way up to focussing on your largest debt payments.

Although it may feel as though you aren’t making progress, once you have eliminated your highest debt, you will have eliminated an enormous amount of pressure on yourself and the rest may seem easier.

Do not reduce the maximum payments you are currently making, continue contributing as much as your budget allows each month. Your island holiday is that much closer with every large contribution you make … Stick it out!

For further assistance, discuss the various payment options with your financial planner to confirm which option is best suited to you.

4. Never borrow more than you earn!

We are taught that a certain amount of debt will benefit us later in life. The thought is that it will benefit us when requesting a loan for a property or vehicle IF we have a good credit rating. This is all very well, providing we have control over our finances and do not get sucked in by the debt whirlpool.

It is therefore imperative that you pay your credit card balance on time and in full each month. You will attract little or no interest by doing so. Check your credit card statement for the interest rate, then use our free online ‘credit card calculator’ to work out what interest is being accrued each month.

If you cannot afford that snazzy new car … Rather opt for a 2^nd hand or demo model of the same make.

5. Debit Cards

Debit cards reduce the risk of getting yourself into debt, as you are limited to the funds available in your account. Most debit cards allow for a low overdraft amount, however, the interest rates are generally high. Every R10, R100 or R1000 you save, should immediately be placed into a separate savings account.

TIPS TO STAYING DEBT-FREE

Spend less than you earn! Create a monthly budget (see our Free Budget Planner provided on our website (www.bullseye.co.za) or request professional advice from your Financial Planner).
Pay your credit card account in full each month, this will save you money by avoiding high interest charges.
Withdraw a weekly cash budget to be used for everyday expenses.
Avoid using your credit card to pay off debts or monthly expenses which you are unable to afford on your monthly income.
Avoid using your credit card to buy expensive gifts or for holidays.
Avoid using your credit card to pay off a student loan. There are companies who assist with student loans at far better interest rates than credit cards offer.
Just think, if credit card interest ranges between around 9 and 15%, you are essentially paying an item off twice over 6 to 12 months.
Do not buy on impulse – those extra few hundred rands add up at the end of month (using a fixed amount of cash for the day helps avoid over-spending).
Keep a list of the luxury items you enjoy and only purchase them at month-end should you have income leftover.
Limit yourself to one credit card! Use it for emergencies only (ie: medical emergencies).

GOOD LUCK! Please provide us with feedback or any further ideas you may have…

By Lauren Henderson

Medical Aid in Retirement – what you need to know

Bull's Eye — Fri, 10 May 2013 12:40:53 +0000

With the continued high escalation in medical costs, many individuals will find they cannot afford their medical aid contributions once they retire.

A fair number of companies subsidise 50% of the contributions until retirement at which point the member is required to pay their own way. We frequently receive calls from new retirees asking for a downgrade of option at the very time they ought to continue being a member of a high level option.

Medical inflation (10.3%) has always been higher than the CPI index (6.2%).

As pensions erode due to inflation, the cost of healthcare could easily escalate to unaffordable levels.

Coupled with higher medical expenditure as one gets older, increasing numbers of individuals who thought they were well off, will find their asset base severely depleted.

To illustrate this point, for similar operations, the average length of stay in hospital for pensioners is likely to be 50% longer than for younger individuals in the 30 to 50 year range.

There is only one way to address the situation. Pre-fund for health on a regular basis from a young age.

There are a number of options of pre-funding solutions for individuals of all ages. If you are an employer, check that your staff are aware of the situation.

Once again we emphasize the need to start all of your financial planning at an earlier age, it’s not ‘sales talk’ … it’s simply a reality!

Hospital Plan or Medical Aid ?

lauren — Wed, 10 Apr 2013 12:59:40 +0000

There’s no disputing the fact that being a member of a medical aid in South Africa is expensive. When you decide to join a medical aid, you are in effect paying for a service which, in many other countries, you get for free. True, you can make use of government hospitals and doctors, and it will cost you nothing or very little, but the service levels at these government hospitals are notoriously lacking – but that’s a subject for another day! Let’s discuss your options, when you do decide to opt for ‘private cover’.

THE CHOICES

Because of the high cost of medical aid cover in South Africa, many families are, these days, only interested in obtaining cover for the major medical expenses that can have a long-lasting effect on their lifestyle, such as an extended hospital stay. When they start investigating the costs of these ‘hospital plans’, a huge discrepancy seems to exist.

On the one hand, a hospital plan offered by a registered medical scheme could, for a family of four, range in price from about R2 500 per month, to R4 000 – quite a large chunk of the family budget! Then you see adverts on TV offering hospital cash plans (or hospital insurance) from as little as R1 200 per month, for the same family size. The consumer, not having made an in-depth study of the subject, invariably decides to go for the cheaper option, with the end result being that only when a claim is submitted, they realise that they are not covered for the full hospital event.

THE DIFFERENCES

While there definitely is a place in the market for both products, consumers need to be aware of the differences between the two, in order to make an informed decision:

MEDICAL AID	HOSPITAL INSURANCE
Regulated by Medical Schemes Council	Short-term insurance product
Cannot refuse cover to any individual, irrespective of age or health.	Can refuse cover, or stop cover at any stage
Have to cover the full cost of life-threatening conditions, regardless of the cost	Pays only a stated benefit for certain procedures (could be a short-fall in your hospital account)
Regulated as to the nature of waiting periods or exclusions	Can permanently exclude certain conditions
Pays the hospital / service provider directly	Reimburses the policy holder (service provider not guaranteed payment)

While a hospital insurance plan is a good policy to have in addition to a medical aid, it is never a good idea to rely on such a plan to fully cover you for a hospitalisation event. Reimbursement from a hospital insurance policy will assist you financially while you recover from your illness, while your medical aid will take care of the cost of the hospitalisation.

Another important point to take note of is that a medical aid could charge you a Late Joiner Penalty if you are not a member of a medical aid by the age of 35, depending of the number of years you were not part of a scheme. Many younger people opt for hospital insurance plans, and when they want to join a medical aid when they get older, they are subject to these penalties.

A financial planner who specialises in medical schemes will be able to advise you on a suitable plan for you and your family –just remember, it is never a good idea to simply go for the cheapest option, and then end up financially compromised when you have to claim.

By Vanessa Roux

Contact Vanessa on (011) 465 0508 or vanessa@bullseye.co.za

What is Gap Cover and why we need it?

lauren — Mon, 08 Apr 2013 07:18:05 +0000

One of the most frequently asked questions I hear from clients is “Why did my medical aid not cover the full cost of my hospitalization?” I thought I was covered for 100% of costs.

Medical aid, being fraught with small-print, is a minefield for the regular Joe out there, who is just looking for the peace of mind that our medical aid cover is supposed to offer us. All Joe wants to know is, as long as he pays his medical aid contributions, he will be covered in the event of a catastrophe, such as a car accident, as well as all his normal day-to-day expenses at a healthcare provider. Joe definitely does not want to become bankrupt over additional costs he becomes aware of only once he has been discharged from hospital. Additional costs which he can ill afford, and which are likely to put him back in hospital due to the financial stress he is now placed under.

In South Africa, medical schemes have different options from which you can choose, and these options vary in the benefits offered, and of course also the cost of the contributions. When choosing a medical aid option, you will see that professional services (such as the surgeon or anesthetist) in hospital will be reimbursed at either 100%, 200% or 300% of the scheme rate. Now anyone will be forgiven for assuming that being covered at 100% means exactly that – you are fully covered! However, specialists in South Africa are not regulated as to what they can charge patients for their services, and could charge in excess of the 100% rate which medical schemes are willing to pay – sometimes as much as 500% of the scheme rate! The end result – the patient ends up with a short-fall on the specialist’s account, which he has to pay out of his pocket.

To give an example of how significant these costs could be, have a look at this example of the cost of a caesarean section:-

Specialist	Cost	Scheme Rate (100%)	Gap Claim	%
Anaesthetist	R3 770.90	R1 482.65	R2 288.25	254%
Gynaecologist	R8 833.20	R2 759.09	R6 074.11	320%
Total	R12 604.10	R4 241.74	R8 362.36

From the above, you see that if you belong to a medical scheme option which pays at 100%, you would have to fork out in excess of R8 000 for the birth of your baby. This is an expense you did not consider when joining the medical aid, as you mistakenly believed you were fully covered for hospital expenses.

HOW DOES GAP COVER WORK?

Gap cover does not form part of your medical scheme membership – in fact, it is not even regulated by the same laws. While your medical scheme is regulated by the Council for Medical Schemes, and the Medical Schemes Act, Gap cover falls under the Short-term Insurance Act.

Although there is on-going debate between government and the different stakeholders as to whether Gap cover products are in fact doing the business of a medical scheme, this matter has not yet been resolved, and for now, Gap cover products are available to the public. The value of having Gap cover cannot be stressed enough – even for members of medical scheme options that pay at 300% of the scheme rate. Although government has published draft regulations to prohibit the marketing of these products, because of the on-going debate, these products are still being marketed – and their value is self-evident!

While your medical aid will reimburse the hospital or specialist directly when you are hospitalised, because of the regulatory issues, your Gap cover provider will refund you, the member, directly. It is then your responsibility to reimburse the service provider.

The process of claiming is also separate from your medical scheme. Usually, a Gap cover claim must be submitted after your medical scheme has paid the service provider. Having a Gap policy is also not dependant on a specific medical scheme. You can change medical schemes, but still keep the same Gap cover.

IS GAP COVER THE WAY TO GO?

When advising clients on a medical aid option, I advise them to take additional Gap cover, no matter what rate their scheme reimburses at. However, this does not mean that I would advise them to downgrade to a less expensive medical scheme option. Because medical scheme membership is perceived as expensive in South Africa, many members think that by downgrading their option, and taking Gap cover, they will be paying less but getting more. However, the old maxim of “you get what you pay for” is still true. When downgrading your option, you might be sacrificing additional benefits not related to the in-hospital cover.

While there definitely is a place in the market for Gap cover, you should only downgrade your medical scheme option after obtaining advice from a qualified financial advisor, who is accredited to give advice on your specific circumstances.

By Vanessa Roux

Contact Vanessa on (011) 465 0508 or vanessa@bullseye.co.za

Proposed Changes to Retirement Funds

lauren — Thu, 28 Mar 2013 10:03:01 +0000

Proposed Changes to Deductibility of Contributions to Retirement Funds…

In Finance Minister Pravin Gordhan’s recent budget speech, he outlined some important changes to the way contributions to Retirement Funds will be treated for taxation purposes.

Currently 15% of taxable income from non-retirement funding employment (non-salaried taxable income) when contributed to a Retirement Annuity Fund is deductible from Taxable Income.

For the tax year which started 1^st March 2013, Taxable Income in excess of R638, 600 per annum is taxed at 40% which means that such an individual would get the maximum relief i.e. for every R100 in contributions made, he/she effectively gets R40 back from SARS.

Currently 7.5% of retirement funding employment income (salaried income) when contributed to a Pension Fund, is deductible from Taxable Income. Again, assuming the Taxable Income levels as above, for every R100 in contributions made, he/she effectively gets R40 back from SARS.

Currently the limits on tax deductibility are only bound by total Taxable Income as split between salaried and non -salaried Taxable Income as above.

It is proposed that from 1^st March 2014, individuals will be allowed to deduct up to 27.5% of the higher of taxable income or employment income for contributions to pension, provident and retirement annuity funds with a maximum annual deduction of R350000.

On the one hand this is welcome news as it introduces more equity between the treatment of salaried individuals and those who are self-employed or live off, at least in part, investment income.

On the other hand, for higher income individuals, a ceiling on deductible contributions has been introduced, which in future is unlikely to keep pace with inflation.

Thus high income clients should note that the current tax year ending 28^th February 2014 looks likely to be the last year where there is no absolute cap on tax –deductible contributions to Retirement Annuity Funds.

Should you have any queries, please do not hesitate to contact the writer of this tax note:

Michael R Aley, C.A. (S.A.), CFP

Contact details: (011) 465-0508 or mike@bullseye.co.za