How to reduce insurance costs

I want to save on my short-term insurance costs without putting myself at risk. Are there any safe adjustments I can make?

Name withheld

Riana Wiese, an insurance adviser at PSG Meesterplan in Pretoria, responds: In difficult economic times, you might consider trimming your monthly expenditure on insurance, because you believe you probably won’t have to claim, but crime is a reality and accidents can happen. One safe option is periodically to adjust the sum insured on your car insurance. Vehicles do depreciate in value, and this adjustment could reduce your premiums. 

Another useful tip is that the more items you insure under the same policy, the cheaper your premiums, so it can be more cost-effective to have everything, from your car to your household contents, under one policy. 

On the subject of household contents, it is essential not to under-insure in an attempt to reduce your premiums. If you are under-insured, your claim may be repudiated, or you will be paid out proportionately. For example, if the value of your contents is closer to R1 million, but you are insured for R250 000, your insurer may pay out only 25% of the claim.

On the other hand, if you over-insure, your premiums will be unnecessarily high. You must get an accurate idea of what it would cost to replace everything in your home, keeping in mind that the value of the rand might affect the replacement values, particularly of imported items.  

I suggest that, before you make any cuts, you speak to a financial adviser and make sure your short-term insurance needs are met and that you are adequately covered. A slightly higher monthly premium will cause less damage to your budget than if you claim when you are under-insured.

Benefits of saving in an RA

I have a pension fund with my employer, but I want to supplement my retirement savings, because I am lagging behind. I’m considering a retirement annuity (RA). What should I know about this product? 

Name withheld

Shreekanth Sing, a technical legal adviser at PSG, responds: It definitely makes sense to make the most of the tax benefits that come with retirement-savings vehicles such as RAs. No taxes are paid on the interest, capital gains or dividends earned within retirement-savings vehicles. This results in your money growing faster than it would in a taxed product. 

Contributions to retirement funds are tax-deductible up to 27.5% of the higher of your taxable income or remuneration, with the deduction capped at R350 000 a year. Many people are unaware that they are allowed to offset contributions that were not previously deducted. The offset can be used to lower the tax payable on the cash lump sum you can take at retirement, and even the tax payable on the income from your annuity.

RAs are free from estate duty, which is typically levied at 20%. At death, retirement fund benefits are paid directly to dependants. 

Creditors cannot attach money in a retirement fund, so your retirement savings are protected from your creditors if you cannot repay your debts or you are declared insolvent.

Regulations require all RA fees to be disclosed to investors. It is important that you know how much you will pay in fees, because excessive costs can significantly affect the growth of your retirement savings over time. 

RAs are regulated by the Registrar of Pension Funds, are governed by boards of trustees, and must adhere to the asset allocation limits set out in regulation 28 of the Pension Funds Act. Regulation 28 limits a fund’s exposure to certain types of assets, to ensure that investors don’t “bet” all their money on a potentially volatile asset class, putting their ability to retire securely at risk. 

A financial adviser can help you to allocate your savings within an RA. 

Saving for retirement is a long-term undertaking, so your investment should have time to recover from short-term market dips if you adhere to your investment strategy.

Tips for teens

Do you have any suggestions on how I can encourage my teenagers to save? They both have weekend jobs and receive an allowance. I also think it would set a good example if I was saving more.

Name withheld

Pierre Puren, a financial adviser at PSG Wealth in Jeffrey’s Bay, responds: I am thankful that I was taught the value of saving from an early age, and I encourage you to try an approach based on the one used by my parents. 

Of every R1 I received in pocket money or from holiday work (you could make it every R10 or R100, depending on how much your children earn), I was forced to save 40% for “one day” or something specific. I was not allowed to spend this money, except on a specific pre-defined goal. Of the remaining 60%, I could spend 40% to my heart’s content, while I had to donate 20% to a charity or less-fortunate person, or spend it on a good cause.

You could adjust the percentage allocations. The main purpose is to get your children to see that they should not spend all their disposable income at once. 

If you share with your children how saving from an early age can grow their money (provided the money is earning interest), they will be very grateful when they are older. Compound interest is effectively the interest earned on interest – it compounds over time and produces more money than was contributed. 

You could open tax-free savings accounts in your children’s names, or mirror their efforts (perhaps with larger amounts) to boost your savings, or help your children to grow their savings. 

Tax-free savings accounts offer tax-free growth and are ideal for smaller amounts, because individuals are limited to contributing R33 000 a year. Endowment policies are tax-efficient investment vehicles for individuals on a marginal tax rate of more than 30% a year. Retirement-savings products such as retirement annuities offer great value, as well as tax benefits, for long-term savers. 

Once you’ve identified an appropriate investment vehicle, you can choose from an array of actively or passively managed unit trust funds, exchange traded funds and listed shares. If you’re unsure, speak to a financial adviser. 

Can we cash in our investments?

In 2012, my wife and I annuitised our retirement annuities (RAs). At present, she has R173 658 with Stanlib, and I have R209 023 with Old Mutual. We would like to invest the money elsewhere. Can we commute these investments to cash?

Name withheld

Magdeleen Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: Based on the information you have provided, I assume that you and your wife are invested in living annuities.

The rules governing the commutation of a living annuity investment to cash differ from the rules that apply when a client has the option to retire from an RA.

In the case of a living annuity, you may withdraw your total investment if it is less than R75 000 and no portion of the original value was taken in cash at retirement. If a cash amount was taken at retirement, the total investment value can be withdrawn only if it is below R50 000.

It is therefore my opinion that, if you and your wife have invested your capital in living annuities, you cannot commute your investments to cash.

However, I strongly suggest that you discuss the changes you propose to make and your financial planning needs with a qualified financial adviser. 

The ins and outs of shares

What are ordinary shares, and how do their dividends work?

Name withheld

Grant Meintjes, the head of securities at PSG Wealth, responds: With ordinary shares, the company in which you are invested chooses whether to pay a dividend or employ the capital elsewhere. This is unlike preference shares, where you are entitled to a dividend. 

Ordinary shares can be broken down into sub-categories, which include:

• Growth shares, which increase in value faster than the rest of the market;

• Income shares, which pay dividends regularly;

• Value shares, which can be bought at prices below their true value;

• Blue-chip shares, which provide steady, stable growth over the long term;

• Defensive shares, which are issued by companies – such as food retailers and utility providers – that aren’t affected by swings in the economy;

• Cyclical shares, which are affected by economic swings; and 

• Speculative shares, or penny stocks, which are unpredictable but potentially highly rewarding shares in new, smaller companies.

The type of share that is right for you depends on your risk appetite and investment strategy.