This article was first published in the fourth-quarter 2014 edition of Personal Finance magazine.
There is a memorable scene in the animated Disney film Finding Nemo where a flock of seagulls keeps fighting over food while crying: “Mine! Mine! Mine! Mine! Mine!” Unfortunately, many people have exactly this attitude when they are in a long-term relationship or married.
Cape Town clinical psychologist Maryna Johnson says most money-related relationship problems occur when there is a lack of transparency and communication. One person may take complete control of the couple’s financial affairs, or the partners may manage their finances totally independently of each other.
“Nowadays, with both partners working and earning, it often happens that they run their finances so separately that neither has any knowledge of threats to the other partner’s financial well-being,” she says.
Debt is usually the intruder that rocks the boat. By the time the debt-ridden partner is compelled to reveal the predicament he or she is in, the situation is serious. The other party may feel a sense of betrayal at having been kept in the dark, which can put the relationship under severe strain. If the couple can’t solve this problem on their own, Johnson says, they may have to enlist the help of an independent third party to get their financial situation on track and to overcome the problems it has caused in their relationship.
Benevolent dictatorship
When one partner is the sole breadwinner or earns significantly more than the other, the lesser-earner often falls into the habit of letting the high-earner handle the finances. In fact, Warren Ingram, the executive director of Galileo Capital and the 2011 Financial Planner of the Year, estimates that there is a controlling partner in about 80 percent of the couples he advises.
Gregg Sneddon, a partner in MacConnell Sneddon Personal Wealth Management, agrees. “There is usually one partner who takes the lead with the couple’s finances. This is not peculiar and not necessarily a bad thing, but it becomes bad when that partner takes complete control, or the other has no interest at all,” he says.
Education seems to have no bearing on a person’s level of involvement in money management. Both Johnson and Ingram find that it is often highly educated individuals who have little or no knowledge of their financial situation. Among older couples in particular, one partner may not know how to manage the finances at even the most basic level – internet banking, for example – because he or she defers to the other partner. “In situations like this, the partner takes on a parent role,” Johnson says.
It may seem benevolent to shoulder the burden and spare your partner, but the problem is that people die, they become disabled and couples split up. Ask yourself what would happen if you or your partner was suddenly left alone or incapacitated. Are both of you able to manage the budget and pay the bills? And are both of you equipped to deal with your investments, insurance and retirement planning?
One of you may be more financially literate, more organised, more careful with money, but that is not the point. Both of you need to be involved. If you are the partner in charge, it may be cruel, rather than kind, to create dependency. And if you are the one who has opted out, you need to empower yourself. Ditto for partners who operate in ignorance of each other’s financial situations. Neither of you is doing the other a favour. It is time to change your strategy.
“Sharing financial affairs means changing from a ‘me’ to a ‘we’ mentality,” Henry van Deventer, the head of wealth development at Old Mutual Wealth, says. “While this does not miraculously happen overnight, couples need to sit down and agree to what will be shared and how it will be done. And they need to stick to the plan, even when their natural instincts at first prompt them to do otherwise.”
Have that conversation
Regular and open discussions are vital for a healthy financial relationship. “It all comes back to the importance of communication,” Johnson says.
Ideally, these discussions should begin as soon as a couple commits to a long-term relationship, to avoid disagreements later on.
“Being in love or in a relationship does not make these differences disappear. In fact, living together and sharing expenses can highlight differences, positively or negatively,” Soré Cloete, the senior legal manager at Old Mutual, says.
All agree that real communication requires you to share your full financial status, and that honesty is the key to building a solid financial platform for the future. “Dishonesty about money matters will surface eventually and can cause major problems in a relationship,” Sneddon says. “Secret debt, for example, will not remain hidden for long; the moment you and your partner apply for a loan product, such as a mortgage bond, it will come to light.”
Van Deventer suggests that there should be no secrets – and that applies to assets, such as your home, cars and investments, as much as to liabilities, such as credit card debt, overdrafts, personal loans, mortgages and vehicle financing.
It is also important that both parties know where all the files and documents can be found and how to reach important contacts, such as your financial planner, attorney and accountant, in the event of a crisis. “And yes, this can include sharing passwords,” Sneddon says.
Joint planning
Agreeing on your goals and priorities is the first step towards a combined financial plan and creates the foundation for financial harmony in a relationship.
First, Ingram’s advice is to try to set some high-level goals together, such as saving for a holiday, working out when you will buy a new car and deciding on your retirement age.
“Usually, you will find there is some agreement over the bigger goals. Using these common objectives as the framework, you can start on the small steps towards building your joint financial plan,” he says.
A step in the right direction is budgeting together. Drafting a joint budget will establish how your shared income should be spent each month and how the expenses should be split between the partners. Be honest about your income and spending and expect honesty from your partner, but always be sensitive to your partner’s feelings. If you tend to overreact to certain purchases, it may cause your partner to become secretive.
“Draw on each other’s strengths. The partner who is a spreadsheet guru can chart your income and expenses, but it is vital that both of you are involved,” Ingram says.
“The benefit of a budget is that it helps you track your goals, but it also gives you an overview of your financial position and where you could be over- or even under-spending. Part of the exercise should be to set further financial goals.”
Budget discussions should take place on a regular basis, preferably monthly. With the daily expenses and certain key goals taken care of, couples can go on to plan their saving programme for future needs, such as retirement, or tertiary education for the children.
Together but separate
Ideally, both parties should maintain their financial independence within a long-term relationship, provided there is unity about the financial plan and joint responsibility. “That way, each will be able to cope without the financial support of the other,” Cloete says.
Some couples choose to pool all their monthly income in one bank account, but there are good reasons for maintaining separate – but not secret – accounts. When budgeting, you can plan ahead how much should be paid into each account.
“But you must be attentive to your partner’s needs,” Sneddon says. “If one partner isn’t earning and is, for example, raising the kids, it would be completely wrong to expect the non-earner to ask for money. You should be transparent about your spending and work together towards the same financial goals. The moment you start to hide your spending on a mountain bike or laser hair removal, because your partner wouldn’t approve, you are on a slippery slope.”
Richard Sparg, a chartered accountant at Netto Invest, agrees. “The ideal is an open relationship with no secrets. Partners should have some money of their own. It just cannot be good that one partner should have to beg for monthly pocket money.”
When it comes to household expenses, both partners can contribute to a separate account, Sneddon says. If both are working, they could, for example, contribute amounts proportional to their salaries. It should be discussed and decided upfront who pays for what and what is paid for jointly.
Sharing a bank account can create problems when one partner dies. In terms of the Administration of Estates Act 1965, no one can take control of a deceased’s assets and liabilities without an official letter of appointment from the Master of the High Court. This means that all bank accounts that form part of the deceased estate are frozen – not automatically, as some people fear, but once the bank has been presented with the death certificate.
Obtaining the letter from the Master can take four to six weeks, and during that period, the surviving partner will be unable to do any debit transactions on that account, such as ATM withdrawals, and electronic transactions and vital debit orders will not be paid. The surviving partner will then have to open an account of his or her own. This illustrates the importance of partners having some independent income or financial reserves of their own.
When it comes to a marriage in community of property, the bank will not freeze the accounts of the surviving spouse, according to Laurianne Hollings of Hollings Attorneys, who specialises in estates. The bank will, however, provide the administrator of the estate with a certificate giving the balance in the surviving spouse’s account at the date of the deceased’s death, for the purposes of administering the estate.
Credit record
Having separate bank accounts and credit cards is essential for another reason: to provide you with your own credit record. Without one, it is difficult to obtain a credit card or any type of loan from an accredited financial services provider.
If a couple relies on one partner’s income and record, and that partner dies, the surviving partner will be a non-person in the records of the credit bureaus. Sneddon gives the example of an acquaintance who died recently, leaving his wife without a credit record and facing an uphill battle to get so much as her own cellphone contract.
He suggests that everyone should start building up a good credit record as soon as possible, even if it is by spending a very small amount on a credit card and paying the balance at the end of each month.
Investments and tax
“As part of a couple’s long-term strategy, the partners should have their own investments right from the start, to make the most of the tax benefits,” Sparg says.
Suzanne Marais, a chartered accountant who specialises in tax, echoes his advice, explaining that individuals are entitled to an annual exemption on interest income. For the 2014/15 tax year, it is R23 800 for people younger than 65 and R34 500 for those older than 65.
“If you don’t use it, you lose this benefit, as it won’t be carried over to the next tax year.
“Instead of one person doing all the investing and paying tax on all interest-bearing income over and above the exempt amount, it would be better to split the investments and divide the interest-bearing income between the partners, each of whom will be entitled to the exemption. It could be that they pay no tax on this income at all when they make use of both exemptions,” Marais explains.
When it comes to capital gains tax (CGT), cash investments are not subject to this tax, but shares and property are. Individuals receive an annual tax exclusion for the first capital gains made; for the 2014/15 tax year, this is R30 000.
“If two people keep their investments separate, each will be entitled to the exclusion in that tax year. If they invest together in one person’s name, the exclusion will apply to that person only,” Marais says.
The marginal rate can also make a difference to the total tax liability, she says. Take, for example, a couple in which one partner has a marginal tax rate (before investment income) of 38 percent. If investment funds are pooled and all the investment income is in that partner’s name, it might push him or her into a tax bracket with a marginal rate of 40 percent. Then every rand of taxable investment income will be taxed at 40 percent. If investments are split, the increase in the marginal rate might not apply. On top of that, if one partner’s rate is lower than 38 percent – for example, if the partner is working very little or not at all – the tax rate for his or her share of the investment income will be lower.
Although these are the major advantages of investing separately, Marais adds that divorce and estate planning are other important reasons for keeping assets separate. “This depends on certain factors, such as the couple’s antenuptial contract and wills, and this is where professional advice is so important. However, when it comes to estates, if assets are bequeathed to the longest-living spouse, it doesn’t matter if the investments were kept apart or shared.”
Insuring each other
Insurance protects your lifestyle in the event of something going wrong. Couples need to consider whether, if one partner dies, or becomes disabled or ill and can no longer work, the other will be able to maintain the same standard of living and provide for dependants.
“At a minimum, each partner should have adequate life cover, preferably taken out by the other spouse, so that it is protected against creditors or divorce,” Cloete says.
“A life policy can be taken out on a husband’s life by his wife, for example. She pays the premium and owns the policy, giving herself a measure of financial security. Spouses and partners have an insurable interest in each other’s lives, so theoretically can insure each other without the permission of their partners, but in practice, permission is required, as the partner whose life is being insured would need to answer questions about his or her health for underwriting purposes.” The younger and healthier you are when you buy insurance cover, the greater your chances of keeping the premiums relatively low, she says.
Then there is disability and severe illness cover, which provide funds when illness or injury disrupts the ability to earn and results in additional costs. Sparg says that life, disability and severe illness cover should focus on the main breadwinner, because the loss of his or her income would affect the couple’s financial situation most severely.
“Generally, less protection is needed for a non-working partner – although disability cover would be very useful if a stay-at-home parent were to become seriously ill and need to employ an au pair, for example,” he says.
Every couple’s situation is different, so a joint meeting with a financial planner, who can identify any shortfalls and recommend appropriate products and investments, is vital.
Retirement planning
According to the Old Mutual Retirement Monitor 2013, 85 percent of respondents fear they will not have enough money when they retire, while 42 percent have no formal retirement provision in place at all.
Stay-at-home partners are particularly at risk of having no proper retirement plan. While provision may be made for the working partner through the employer, there may be little or nothing being saved for the partner who is not formally employed. You are very unlikely to be able to maintain your lifestyle in retirement on the proceeds of one partner’s retirement savings, and if the employed partner were incapacitated, the situation would be even more serious.
Adequate retirement provision for each partner should form part of your combined financial plan, Sparg says. This might mean that the working partner invests on behalf of the other, in his or her own name.
“Both partners in the relationship must be realistic about their retirement expectations. Will the amount they are projected to have be enough? If only one person is contributing and the retirement plan falls short, something needs to change,” Sparg says.
Divorce can also play havoc with your retirement provision. However, “the law is quite good at protecting former spouses who were not members of a pension fund”, Sneddon says.
If a marriage is in community of property or out of community of property with accrual, the non-member is legally entitled to a portion of the member spouse’s retirement payout. The portion would be specified in the divorce order and payable immediately after the divorce. If the divorce settlement agreement does not stipulate the portion to be paid to the non-member and/or is not made an order of the court, the fund will not pay out.
The result of the divorce may unfortunately be that neither party has enough funds for retirement, and urgent re-planning is necessary.
Niel Fourie, public policy actuary at the Actuarial Society of South Africa, advises couples who expect to retire with a regular payout from one guaranteed life annuity to consider the risks involved.
“Even if a couple has a guaranteed annuity with a joint and survivorship option, when one partner dies, the income for the surviving partner is likely to be reduced by between 25 percent and 50 percent. This is because these pensions are structured to pay a higher guaranteed monthly pension while both partners are alive, and then less after the death of one partner,” he explains.
The higher the reduction factor, the higher the guaranteed pension payout that you will receive as a couple while both of you are alive. The lower the reduction factor, the lower the initial guaranteed pension. For example, if you choose a reduction factor of 25 percent when you buy a guaranteed life annuity, you and your partner will receive a lower monthly income than you would have got if you had chosen a reduction factor of 50 percent. But if you die, your partner will receive a higher pension than he or she would have done if you had opted for the higher reduction factor. The principle is that starting out low means more later on, and a high payout at the start means less later.
“It is important for both partners to understand the long-term implications of the percentage chosen. If you have not planned for this sudden reduction in pension, the surviving partner will be left with a considerably lower income to cover monthly living expenses,” Fourie says.
Your will
Make sure both of you have a will, and if you opt for a joint will, be sure you discuss the implications for each of you of the other person dying first.
It should be clear who the beneficiaries of the will (or wills) will be; if a will includes a testamentary trust, who the trustees will be; and what provision has been made for each other and any children or other dependants.
Your will should also take into account the possibility of both partners dying at the same time, particularly if you have minor children, Cloete says. “Review your will at least once a year, to make sure it is still relevant,” she says.
Liability for debt
You should be aware of any liability for your partner’s debt. Signing surety is one way of becoming liable, but being married in community of property is another. In this marital regime, your separate estates become one, making you jointly liable for debt incurred by either of you.
If you are married out of community of property, with or without accrual, you are liable for your spouse’s debts only if you have signed surety for him or her.
Women and money
Research by specialist wealth manager Citadel shows that many women lack confidence and feel vulnerable when it comes to making financial choices. Consequently, the company launched its Women’s Strategy aimed at empowering women financially through information and networking.
Caren Rennie, who heads the all-female team that runs the programme, says women are not socialised in financial matters as men are, and may not start to invest and save until something bad happens, or they have a very specific goal.
Financial management is not a priority for many women, she says.
“We straddle multiple roles – worker, mother and lover – so to find time in our diaries to plan for our financial futures is a real challenge. Family and career come first, but take note that, statistically, one in four women are on their own by age 64, whether through divorce, separation or widowhood. Eight out of 10 women will manage their own money at some point during their lives.”
According to Walker’s research, in many instances, married women use their salaries to pay for household expenses, such as school fees, food, domestic help and electricity, while their husbands take responsibility for the mortgage bond, the car loans and the investments. “This can leave a woman with very little to show for all the years she contributed to that marriage – and in a vulnerable position, should something go wrong with the marriage.”
Statistics from the Old Mutual Savings and Investment Monitor show that 58 percent of partnered women worry that if their partner leaves them, they will not be able to cope. Ingram says he often explains to couples that it is the woman who is likely to be his client in the end, because women generally live longer. It is also the woman who is likely to rely on the money for longer and will eventually have to manage it. Hence, both partners should be involved.
According to Peter Dempsey, the deputy chief executive of the Association for Savings & Investment SA, the worst mistake any woman can make is to assume that she is financially taken care of by her partner no matter what might happen.
“The reality is that men tend to die at an earlier age than women, marriages end and spouses sometimes hide assets. While this is certainly not always the case, there are many examples of women left destitute by their spouses.”
Here is a financial check-list for women, no matter what your circumstances:
* Make sure you have adequate life, disability and income protection cover while you are healthy and insurable. “There are many things that can impact on your or your partner’s ability to earn an income: death, disability, or severe illness. Both of you need to have sufficient cover for these events, to minimise the impact,” Cloete says.
* If you are married or in a civil union, understand the ante-nuptial contract and the possible financial effect on your life should you divorce.
* Do you have adequate retirement planning? Women tend to outlive men, so they need more retirement capital than their male partners to secure the same level of retirement income for the rest of their lives.
* Dempsey advises women to read their partner’s wills. “You are entitled to know what will happen to your partner’s assets, so that you can plan ahead.” You should also have your own will in place and assets in your name. “If none of the assets are in your name, you should ask your partner why. Remember that splitting assets between two estates may reduce estate duty when one partner dies.”
* Do you have your own savings and emergency fund? According to the Old Mutual Savings Monitor, partnered mothers are more likely to have insurance and precautionary savings (60 percent) compared with single mothers (35 percent).
* Ask yourself if you are comfortable with your financial adviser. Women approach financial decisions differently from men, Rennie says, because women have different appetites for risk and are more emotional investors.
“Call it our gut feeling or sixth sense, but many women make investment decisions emotionally, not rationally,” she says. Whatever the gender of your adviser, make sure you are working with someone you trust and who empowers you.