1. Save enough for retirement
Do you know what pension you are likely to receive in retirement? If not, regardless of how young you are, how young you feel, or how far off you think your retirement is, a must-do for 2017 is to find out what pension your retirement savings will be able to provide.
The younger you are when you find out that you are not on track to a financially secure retirement, the better your chances of putting things right. A small increase in the amount you save over a long time, or switching to a low-cost retirement savings product, could make a big difference to your pension.
Typically, if you are saving for retirement through a company pension or provident fund or a retirement annuity, you will regularly receive a statement showing how much you have saved. But you need to know what pension that lump sum will provide.
If your retirement fund is progressive, it will provide you with a statement that shows your replacement ratio, which is the percentage of your salary that your retirement savings is likely to provide as an income.
Remember that your replacement ratio may be based on your pensionable salary, not your total cost to company, and your pensionable salary may be 80 percent of your total pay package.
Retirement fund contributions are often based on pensionable earnings, or retirement-funding income, which typically excludes bonuses, allowances for travel or cellphones and overtime payments.
Many retirement funds allow their members to adjust their pensionable income relative to their non-pensionable income so they can increase their take-home pay.
Funds typically aim to provide a pension that is between 60 and 80 percent of your income.
If your fund aims to provide a pension that replaces 75 percent of your income, but that income is based on your pensionable earnings, which may be 80 percent of your total pay, the targeted retirement income will essentially be only 75 percent of 80 percent of your total remuneration. As a result, you can expect a big drop in your income at retirement.
The targeted pension of 75 percent of your income is expected to be adequate if, by the time you reach retirement, you have paid off your debts, such as a home loan, and your children have left home. But many pensioners are not in this position.
Working out what your savings will provide as an income is not that easy. At retirement, you will have to choose between a guaranteed annuity, which provides a predetermined income for life, and a living annuity, where you decide on the underlying investments and take the risk that the investments will generate the income you require for the rest of your life.
You can obtain quotes from the life assurance companies that provide guaranteed annuities, such as Old Mutual, Sanlam, Discovery Life, Momentum, Liberty, Metropolitan, Paramount Life and Just Retirement.
Alternatively, you can use the guidelines for people with living annuities. A common guideline is that you should not draw more than four percent of your income as an annuity annually. So for every R1 million, you can draw R40 000 a year, or R3 333 a month. Guidelines put out by the Association for Savings & Investment SA show what percentage pension you can draw at different ages and different investment returns – the older you are and the higher your investment return, the more you can draw. Go to https://www.asisa.org.za/asisadocs/living-annuity-standard.pdf
If you want a rough idea of what income your retirement lump sum and future savings will provide, you can try Sanlam’s or 10x’s retirement calculators: https://app.sanlam.co.za/ppr/Calculator#adjustments or http://www.10x.co.za/retirement-tools/pre-retirement/#.WG--BFN96rs
2. Get the right medical cover
It is likely that you made your decision about which medical scheme option to join at the end of last year, unless you are changing schemes or joining one for the first time this year. Even if you belong to your scheme’s most comprehensive and expensive option, you will probably find that some medical expenses will not be covered.
If your scheme offers a medical savings account for day-to-day medical expenses, you may find that it is insufficient to provide for all your day-to-day needs. Even if you have an above-threshold benefit, which provides cover after you have exhausted your savings, you will face a self-payment gap before you again qualify for insured benefits.
If your scheme offers unlimited day-to-day cover through a network of healthcare providers, you may have the best protection, but these options often have limits on, for example, visits to specialists or medications.
If you have a hospital plan with no day-to-day cover, you will have to provide for day-to-day expenses yourself. Settle on a monthly amount to set aside in a savings account and build up a healthy balance for unforeseen medical expenses.
If your option pays doctors who treat you in-hospital at scheme rates, you may be treated by a doctor who charges a higher rate and face an out-of-pocket expense for the balance of the bill not covered by your scheme.
You could consider taking out gap-cover insurance against the additional costs that you may incur if your doctor charges more than your scheme pays. The amounts paid out by gap-cover policies will be limited to R150 000 annually on new policies from April this year and on existing policies from next year.
Top-up cover for cancer, for example, is not likely to be allowed on insurance policies. Dread disease policies, which are intended to cover non-medical expenses related to an illness such as cancer, will still be allowed.
3. Get your tax admin in order
If tax administration feels like a dark thunder cloud hanging over you, simplify your life by getting more organised.
If you are a provisional taxpayer who has not yet filed your 2015/16 tax return, it is due on Tuesday, January 31, if you are using eFiling. Then, you have just a month to file your first provisional tax return for 2016/17 by February 28, and your second return will be due on August 31.
Non-provisional taxpayers will have to file a tax return before the end of November – the date has yet to be announced – while provisional taxpayers are likely to be able to take until January 31 next year to file their returns online.
If you don’t already have one, make a 2016/17 tax file – a lever-arch file if you receive most tax-related correspondence on paper, or online if you receive your statements via email. As you receive them, file any IRP5 or IT3 certificates, as well as certificates from your medial scheme, donations you have made to recognised public benefit organisations and records of home-office expenses if you work at home. This file is also a good place to keep transactions that result in capital gains tax (CGT), but remember that any capital gains made after February will be declared only in the 2017/18 tax year. If you have such gains or losses, open a 2017/18 tax folder for these.
If you do have to declare capital gains, you will need the base cost or acquisition cost of your investment or property. If you bought the asset a long time ago, tracking down the base cost can take time, so record the base cost when you file the paperwork related to the purchase, rather than leaving it until tax-filing season.
If you need a tax practitioner but can’t afford one, consider an online facility, such as TaxTim. It’s easy to follow the questions designed to help you fill in your return.
If you use a private vehicle for work purposes and struggle to keep a log book, TaxTim offers an app that logs your business mileage.
Don’t forget to do the calculations on your retirement fund contributions well before the end of February and if you can afford to top up your savings to ensure both a better retirement and a lower tax rate. You now receive a tax deduction on contributions to retirement funds up to 27.5 percent of your taxable income or your total remuneration, whichever is higher. This amount includes contributions made by your employer to your fund. In most cases, the combined contributions of employers and employees are much less than this, so you can top up either your employer-sponsored fund, as long as the fund’s rules allow this, or your retirement annuity fund.
4. Invest with a long-term view
Last year was a volatile one for investors, with local and global events churning up the financial markets. These included two narrowly averted downgrades of South African debt to junk status and, overseas, the Brexit vote in the United Kingdom and Donald Trump’s unexpected election victory in the United States.
Looking at the year ahead, the winner of the 2016 Financial Planner of the Award, Bruce Fleming, and his colleagues at Old Mutual Wealth in Cape Town, say the local market is likely to remain volatile in the short term because of “a lot of uncertainty in the South African political and economic landscape”, with the ratings agencies having South Africa on a negative outlook.
It is not all gloom and doom, however. In the Old Mutual Investment Group’s 2017 Investment Outlook, Macrosolutions boutique manager Peter Brooke says inflation should begin to come down, resulting in lower interest rates, a stabilisation of the rand and slightly better economic growth.
Fleming says the general view on Trump’s economic policy is that he will spur growth in the US by, among other things, decreasing taxes and increasing government spending on infrastructure. This has resulted in optimism in equity markets but some trepidation in the bond market. “The net message, however, is that no one knows what the Trump presidency will entail,” Fleming says.
“In the European Union (EU), the fact that there are prominent elections coming up in France and Germany, where you are seeing growing anti-EU, populist sentiment, is creating further uncertainty.”
Investors have consistently received lower, single-digit returns for the past three years (the FTSE/JSE All Share Index rose by 6.59 percent in 2016, with the Top 40 Index rising by only 3.99 percent, according to ProfileData), which most fund managers and market commentators have predicted for some time, Fleming says.
“Political and macro-economic events create short-term volatility, but it is important to remember that fundamentals (such as how well a company is managed and its long-term prospects) drive long-term performance.” He says 2017 will be no different, so now is not the time to panic and radically change your long-term investments.
“As an example, had you panicked after ‘Nenegate’ (in December 2015, when the markets went awry after the removal by President Zuma of then finance minister Nhlanhla Nene) and transferred money offshore, you would be worse off than if you had left it in South African assets. It is for this reason you should have a sound long-term investment framework,” Fleming says.
If you don’t have a sound long-term investment framework in place, the best-qualified person to turn to is a financial adviser with the Certified Financial Planner (CFP) certification. CFP professionals are members of the Financial Planning Institute (FPI). To find a CFP professional near you, consult the FPI’s website.
5. Make sure your income is adequately protected
Your biggest asset is not your house or your retirement savings, but your future earnings. Your income over your working life supports you and your dependants, and you save part of it to provide an income in retirement. The loss of that income as a result of disability or ill-health will therefore have a major impact on you, and you need to protect yourself against this possible loss.
Most South Africans have no cover to provide them with an alternative income if they become disabled. Those that do typically have too little cover and have lump-sum disability cover, which may be suitable to pay off a debt or provide for the education of their children but is risky to use to replace an income.
The best way to ensure that your income is adequately protected is to take out an income protection policy that pays an income, typically until you reach retirement.
An income protection policy can also provide for temporary disability, where you must take off work for longer than your annual sick leave, but your long-term ability to work is not threatened.
Lump-sum disability assurance typically provides cover only if you are permanently disabled.
Temporary disability can result in a significant loss of income, particularly for the self-employed.
If you have lump-sum cover only, you face the risk of living longer than the lump sum can generate an income. You also risk not earning good returns on your investment or ensuring that your income will keep up with inflation.
If your disability shortens your life expectancy, you may value a lump sum more than an income for life. For this reason, some assurers offer you the choice of a lump sum or an ongoing income.
If you have taken out income protection yourself, or it is one of your employee benefits, make sure you know when the cover will pay out. Some policies define disability in terms of your ability to perform your occupation – an assessment that can be quite subjective. Others define it in terms of physical and/or medical impairment or your ability or inability to perform certain tasks of daily living – for example, dressing or feeding yourself.
Watch out for certain “medical exclusions” in your policy or limits on high-incidence health events, such as depression and back disorders, and check what you will be paid in the event of partial disability.
You must ensure that the income benefit will escalate each year in line with inflation, both before and after any potential claim. And if your remuneration increases because of a promotion or merit increase, for example, you should review your income protection cover to ensure it is still adequate.
Be particularly careful about relying on group income protection cover offered by your employer, because it is common for the maximum cover you can take out to be restricted, the cover will be based on a single definition of disability, and the cover will probably be for only 75 percent of your income, even if you are permanently disabled.
Group disability cover may also be based on your pensionable income, which means that the benefits may be much less than you expect.
6. Check your household contents insurance
Household contents insurance covers all your belongings in your home, and it’s a must for anyone who has accumulated items that have a substantial overall value. Insurers advise that the only way you can realistically assess what you own is to compile a comprehensive inventory of all the items in your home, big and small, not forgetting what’s in the garage and garden. This is no mean task, and many people regard it as too much trouble, or something they’ll “get to one day” (but never do). They get by relying on a thumb-suck figure for the total value of their belongings.
There are two big disadvantages to this approach, as the insurance website hippo.co.za explains:
• Without a complete household inventory, it is impossible to know exactly what was stolen or destroyed following a burglary, fire or natural disaster; and
• It’s likely that your thumb-suck figure will be too low, in which case your insurer will not cover the full value of your losses.
Your insurer will provide you with an inventory form or list, or you can devise one yourself. Put aside a day – or perhaps a whole weekend – to go through everything in your home, keeping the following in mind:
• Take one room at a time, listing each item and its estimated replacement value. (An item’s replacement value is what you would pay for it new at current retail prices.)
• Valuable items need proof of purchase, or should be valued by an assessor or professional valuer. These items may even need to be specified separately on your insurance schedule.
• On its website, insurer MiWay says that for electronic devices you need to include the make, model and serial numbers in your inventory. The insurer also suggests you use your smartphone to take pictures of your more precious possessions, including jewellery and antiques.
• MiWay says it is not a good idea to under-value your contents in order to keep your premiums down. Again, this may result in your insurer paying out less than the actual value of your goods in the event of a claim.
Undertaking such a task provides the opportunity to have a good de-cluttering or clear-out. And once accomplished, it is easy to update your inventory once a year, or when you acquire or discard items.
7. Use credit wisely
Although the cost of credit has come down, it’s still high, so it’s important to use credit judiciously.
What you pay for credit is determined in part by your credit score. However, with some credit agreements, you will always be charged the maximum prescribed interest rate. For example, a micro loan attracts interest of five percent a month, no matter how good your credit score. A micro loan must be paid off in six months, which means you’ll pay interest of 30 percent for such a loan. On the other hand, if you take out a personal loan, the maximum interest you can be charged is 28 percent a year. If you have a good credit score, you can negotiate with a credit provider for a more favourable rate than 28 percent.
On a credit card or an overdraft, the maximum interest that you can be charged is 21 percent a year. And if you have a home loan, the maximum rate that you can be charged is 19 percent year.
When you know how much interest each type of credit agreement attracts, you will be able to use credit more wisely. You want to avoid using a personal loan if you can borrow against your home loan, for example.
It’s equally important to know the value of a clean credit report and a high credit score. A clean credit report has no adverse listings (an adverse listing is when a credit provider classifies you as a delinquent or slow payer) and no record of enforcement action, such as judgments against you. These things will adversely impact your credit score. A high credit score indicates that you’re a low-risk borrower and therefore qualify for a good interest rate; a low score means you’re not a good risk and therefore you’ll pay more for credit.
Credit bureaus calculate your credit score using a number of variables, of which the most important is your payment history. Your payment history indicates how you manage your accounts – in other words, whether you pay on time or late.
The other variables that determine your score include how long you have been credit active, the amounts you owe and recent applications for credit.