As the excitement of the festive season settles, and we start contemplating the year ahead, it is a good time to also take stock of your financial situation. It is also a good time to start setting objectives for what you would like to achieve in the next year.
A fine balance
The first exercise I go through is to update my balance sheet. I do this on an annual basis, and compare it to my balance sheet of 12 months ago. Secondly, I have a look at what my monthly costs are, and compare them to my costs a year ago. This helps to highlight wasteful expenditure, and where I possibly need to be more vigilant.
For younger people, the focus is then to reduce debt, specifically expensive debt such as credit card and motor vehicle debt. Interest rates have started increasing, and are expected to continue to do so, and this kind of debt will start to bite shortly.
Investment markets are volatile at the moment, and we are not sure of what is ahead of us. However, the important thing is to sit tight and not start making irrational decisions now, and focus on the longer term. We get lulled into a false sense of security when investment markets keep on giving us above expectation returns, and are then brought back to reality when the returns are more subdued. If you are worried in anyway, rather contact your financial planner to discuss the potential impact this may have on your financial plan, and together with them make any adjustments that may be necessary.
Where there is a Will … and a Legacy
The next thing I do is to review my Will. Is it still in terms of my wishes, or are there certain changes that need to be made? Very often, we forget that life changes have a knock-on effect on our Wills.
The last thing that I do on an annual basis is to ensure that my Legacy file (“in case of death” file) is up to date. This file should have all your updated information: your original Will, or a note of where your Will is; certified copies of your ID/passport; updated balance sheet and details of your monthly debit orders; bank details and PIN details of your accounts; if you are still employed, updated details of your retirement fund and life/disability cover; motor vehicle details; life insurance details; and whatever information you deem important enough to include. This file should be able to be picked up and handed to your Executor, should something happen to you. This may not be pleasant to think about, but can save your loved ones hours of frustration trying to find certain information.
Pat Blamire, Certified Financial Planner® at Chartered Wealth Solutions, gives us some practical advice regarding submitting our tax returns.
1 July is the start of the 2015 Tax Season for Individuals. During Tax season, you need to submit an income tax return called an ITR12 that covers the income you earned during the 2015 tax year (it runs from 1 March 2014 to 28 February 2015).
Important dates to be aware of are as follows:
- 30 September 2015 for those people who submit manual or postal submissions
- 27 November 2015 for those people who wish to call at a SARS branch and ask them to assist you with completing your tax return
- 27 November 2015 for you to complete your own tax return, electronically
- 29 January 2015 if you are a provisional taxpayer, and submit your tax return electronically
Certain people do not need to submit a tax return – those who have earned less than R350,000 during the tax year, provided:
- This income is earned from one employer only
- You have no allowances paid to you (e.g. a car allowance), and you do not earn other income such as interest or rental income
- You are not claiming any deductions, such as medical aid expenses or retirement annuity contributions
Make sure that you have all the applicable documents when you complete your tax return, such as:
- IRP5 or IT3(a) certificates from your employer or institution from which you receive your annuity income from
- Medical aid certificates, and, if you have incurred additional medical aid expenditure, receipts of this expenditure
- Retirement annuity fund contributions, and income replacement contributions
- Tax certificates for investment income (IT3(b))
- Tax certificates for capital gains (IT3(c)) or information on capital gains
- Travel logbook if you are claiming against a travel allowance
- Completed confirmation of diagnosis of disability form (ITR-DD) if you have a disabled person in your family, for which you wish to claim expenditure
Individuals are allowed certain exemptions for certain income, for example:
- Interest exemption: R23,800 if you are under age 65, and R34,500 if you are age 65 and over. If you earn foreign interest, there is not exemption on this.
- Capital gains: R30,000 of capital gains made on, for example, investments, when they are sold. R2million when selling your primary residence. One third of amounts in excess of these exemptions is added to your taxable income, and you will need to pay tax on this
- Dividends: You receive dividends after the 15% Dividends Withholding Tax has been deducted, and they are therefore tax free in your hands. Foreign dividends, however, will attract income tax.
It is very important that you complete your tax return correctly. If you omit to include any information when submitting your tax return, SARS may penalise you for not completing your return correctly. On the other hand, if you do not claim all your allowable deductions, you may not get the full refund that you are entitled to. If you are unsure, you can go to your local SARS office and ask them to assist you in completing this return. Alternatively, you could use the services of a professional who will ensure that your tax return is correctly completed.
We suggest that you do not wait until closer to the deadline, and get caught up in the rush. Submit it timeously, especially if you normally receive a tax refund.
We have had a fantastic five years in the market, in which we have seen investments grow at a higher rate than expected. The challenge with such a trend is that such great returns may be viewed as a ‘new normal’ – that is, investors expects such high returns to continue indefinitely, and fear may strike when the market turns … as if it were an unexpected event.
The reality is that market volatility is both expected and catered for in a good financial plan. Economists, planners and investors alike know that one in every four years or so could be a negative year in terms of market performance; 2008 is a reminder of this. So, while the media is currently painting a grim picture of the market, savvy financial planners are seeing a recognisable and predictable pattern … one that they have taken into account. They know that a return of 2% to 4% above inflation is a reasonable goal, without unnecessary risk, over a rolling three to five year period.
The value of a financial planner is two-fold: he can help clients achieve their investment objectives by planning long-term, thereby mitigating those downturns in the market by the inevitable upturns. In tandem with this, the financial plan, with a medium to longer term view, allows the client to resist the temptation to watch returns every day and every week … becoming unsettled by the fluctuations in the market as a result.
A financial planner encourages his clients to look at what their investments have made over the year, or longer period, and just to be patient during times of lower returns.
A different conversation
As financial planners, we get used to consulting to clients who are possibly moderately wealthy, and we help to guide them as to how much income they can expect to draw from their assets,
how their assets should be invested in order to last their expected lifetimes.
However, when it comes to consulting to high net worth clients, the financial planning is different.
These clients have more than sufficient assets to last their lifetimes, and the conversation is then not about how much income they can draw; the discussions start revolving around more complicated issues such as trusts (sometimes multiple trusts), the family company, philanthropic activities, and the different members within the family. The concern that these high net worth clients have is that their financial planner understands their different entities, and is able to advise with the requisite expertise on a number of different topics, or has access to people who can advise on these topics, if they are not expert.
Shirtsleeves to shirtsleeves
Issues such as the adage “shirtsleeves to shirtsleeves in three generations” start concerning them. The patriarch or matriarch who originally generated the family wealth becomes concerned as to how they can teach their family to look after this wealth, and to continue to generate future wealth. Very often they also become involved in philanthropic endeavours, and feel the need to give back to others who are not as fortunate as they are, and also to teach their families about the importance of philanthropy, and that not all people have as much as they
On the financial planning side, I have found that setting an investment strategy for the family as a
whole, is the best way to start. Once this investment strategy has been set, the financial planner can then set up various investments in order to address the different needs of the family. There can be a tendency for the family trust to be regarded as the family banker to allow the different members within the family to pursue their dreams. However, these monies should be repaid, at preferential rates, in order that there are funds available to assist future generations to follow their dreams. For this reason some of the investments within the trust may be shorter term in nature.
Other investments will be more longer term in nature, and are intended to be grown over many years to increase the overall family wealth. Thease investments need to be looked at from a tax-efficient and investment growth point of view.
As a financial planner consulting to such families, you are expected to add value to the family. The financial planner is expected to be able to do this in a number of different areas. Whilst being able to advise on the investment strategy, and how this should be implemented, the financial planner should also act in an educational capacity as well. They should assist to educate the family on how the family wealth should be viewed, and yet at the same time what they should be doing to increase their own wealth, and be a contribution to the family as a whole.
Not just about the money
The development of the human capital and intellectual capital within the family is extremely
important. It is vital that the human capital is nurtured, to ensure that the members within the family are happy, and pursuing their dreams.The development of the intellectual capital of these same family members is also significant to ensure that all the members are being educated to their full potential, as some of these members will also become involved in the future growth of the family. Whilst many people regard the financial capital as being the most important within the family, without the human and intellectual capital, the financial capital does not achieve the goal of making the family happy.
Pat Blamire deconstructs one of most pressing retirement questions – how much money do we need to retire?
I often get asked the question, “How much money do I need before I can retire?” And the question that follows is, “How much does a retired couple need as a monthly income in retirement?” But the truth is I really don’t know. Without going through the full financial planning exercise it is impossible to answer these questions.
In my position I see a lot of different people, each with their own specific circumstances. Some still have children or parents to support. Sometimes there is debt that still needs to be settled. In other cases there are properties that push up the client’s monthly income requirements. And then, of course, there is the question of lifestyle. Whilst some couples can survive on R20 000 a month, there are those who need an income of R50 000 plus.
As a starting point, before tackling the financial planning process, you need to be realistic about how much you are spending on a monthly basis. I don’t like the word “budget” and prefer instead to call it a spending plan. My recommendation is that you keep track of your spending for a few months to determine your cost of living. So many of us are living and spending unconsciously, and I have had more than a few clients who have been horrified to discover how much their lifestyles cost.
With this knowledge in hand, we can then factor in the cost of replacement vehicles, holidays, home maintenance, moving costs (if relocation is part of their plan), etc. As far as replacing vehicles is concerned, I find that in retirement, clients don’t do this as often as they did while they were working. Where they were buying a new car every four years before, the time period extends to six or seven years in retirement.
The next step is to look at their current investment strategy. Is their money sitting in a bank account and not keeping up with inflation, or is it invested across different asset classes targeting a specified return? Some clients are fortunate enough to have more than enough money to retire. However, this is not the case for everyone.
Only now, after some number crunching and fact-finding, can I begin to discuss what needs to be done in order to make the financial plan work. Some clients choose to carry on working for a few more years, and there are others who consult during retirement to supplement their income. We can also look at strategies, if it’s an issue, to reduce unnecessary monthly expenditure.
Once we are happy that we have a financial plan that works, it is important to review the plan on an annual basis at least. The original plan only takes into account possible expenditure, but we all know that life happens in the meantime. That is why we need to return to the drawing board to determine if the financial plan is still on track.
With careful planning and ongoing communication between the client and the financial planner, the necessary adjustments can be made to ensure the financial plan remains on track.
As a financial planner and retirement specialist, I have witnessed the benefit of starting the retirement planning process early. In my experience, the earlier you start the more chance you have of achieving your retirement goals.
Last week I met with Henry and Susan who were concerned that they were too young to start thinking about retirement, despite the fact that Henry turns 55 this year.
I explained to them that a retirement plan involved a great deal more than the average person is aware of. For me to do my job properly, they first needed to tell me what they wanted from their retirement.
When I go through the retirement planning process with a client we touch on a number of different financial issues such as investments, risk, tax, estate planning, wills and income planning. Each one of these aspects is important and we address each one to ensure we structure the client’s affairs correctly. A planner can technically take care of all of these elements, but the truth is that the finances are not the only consideration. There is in fact a step that comes first – a step that we call life planning.
I have found that some clients spend more time planning their children’s weddings, or their overseas holidays, than planning for retirement. In order to have a successful retirement you need to take the time to plan your actual life in retirement. Very often, I find that my wealthiest clients are not necessarily my happiest clients. My happiest clients sometimes have less financial resources, but have made it their business to plan their retirement. They have made it a personal goal to live fulfilling and meaningful lives when they retire. This may involve doing charity work, mentoring, going back to school, or fulfilling a lifelong dream of seeing the world. It is so important that you have a purpose in your life – something to wake up to in the morning.
When you start thinking about what you want your life to be like in retirement, you realise that you need to go through a number of steps before you get to where you want to be. Henry and Susan realised that they wanted to retire in Cape Town to be near their children, but moving to a new city requires a substantial amount of planning and thought. They came around to the idea of starting early, and thanked me for pushing them to start the process now.
I encourage every one of you to have a holistic retirement plan which addresses both the goalsyou have for your life and your money issues. I use the analogy of a road map and a journey to explain the benefits of holistic retirement planning: The map is your life in retirement and your goals and plans are the various destinations or stops along the way. The financial plan aspect of the retirement plan makes the entire trip possible, but without knowing what the trip involves how can you budget for it? You can thank me later for encouraging you to start this process early!
I am reminded often of the importance of reviewing a client’s financial plan on an annual basis. The original financial plan is relevant at the time it is drawn up, and we do our best to forecast future eventualities based on the clients plans and goals. However, as we all know, life happens and the financial plan often needs to be adjusted as circumstances change.
The following items should be reviewed on an annual basis with your financial planner:
- Your current income requirements and expected lump sum withdrawals in the future
- Calculate how long your retirement savings will last given any changes in variables (interest rates etc.)
- Revise your investment strategy to ensure it is still appropriate and make any necessary changes
- Given any changes in tax legislation, check to see if your income is still being drawn tax efficiently
- Check to see if there have been any legislation changes that will effect your retirement
- Discuss the Capital Gains tax implications for making any changes to your investments
- If you still have life cover review it to assess whether it is still appropriate or required
- Review the beneficiaries on your various investments to ensure they are still in line with your current wishes
Is your Will up to date and still in line with your current wishes?
Do you know where your original Will is?
Is it signed correctly?
- Make sure you understand how your monies are being invested and what fees you are paying
Ensure your financials are up to date
Check if your annual tax returns been submitted
Ensure the annual donations are being made to the trust
Make sure you understand the estate duty implications in the event of your spouse/partner passing away
Not all of these topics will be applicable to everyone, but they are a good guide for your review meetings. It is astounding how easily some of these aspects are overlooked, and which can have disastrous effects if not corrected in time.
Getting your finances in order
With Christmas and New Year now firmly behind us, it is time to look forward towards 2013 and to take stock of our lives. From a financial point of view, the following are some New Year’s Resolutions you could consider:
- Aim to reduce unnecessary debt. Becoming debt free is the most important financial resolution you can make. Prioritise your debt and start paying off the debt that carries the highest interest rate, which is usually your credit card. Set yourself a specific timeframe in which you want to do this, say over a 6 to 12 month period, so that at the end of the period you can evaluate your progress. By decreasing your debt, you can free up extra monthly cash that you can invest.
- Take advantage of the low interest rates we have in South Africa at the moment and pay an additional amount each month into your bond. By simply paying an extra R500 per month into a 20 year, R1 million bond, you can save yourself 36 instalments and pay off your bond in 17 years and save R161, 750 in interest. By paying an extra R500 per month into a 20
year, R500, 000 bond, you can save yourself 48 instalments and pay off your bond in 16 years and save R138, 930 in interest.
- Once you have reduced your unnecessary debt, commit to saving on a monthly basis. This
saving can be for different targets that you want to achieve; it may be to buy something
specific, save towards your children’s education, save towards a dream holiday, or to create an emergency fund. You should aim to have your emergency fund cover three to six months of expenses.
- Compile a list of what you spend your money on every month, and identify unnecessary expenses. Then draw up a realistic monthly budget and stick to it. You will be surprised at how quickly you get used to this discipline, and it makes you aware of how you spend your money each month.
- Review your financial plan with your financial planner, to ensure that it is on track. Discuss any adjustments you need to make to ensure that your financial plan remains on track. At the same time, review your investment strategy to ensure that it is achieving its objective (for example, a return of 4% above inflation). If you have too much money in cash, discuss with your financial planner how you should invest this. Over time, the interest you earn
on cash will not beat inflation, after tax. Your money should be invested in a mix of assets (shares, property, bonds, and cash) to ensure it at least keeps up with inflation.
- Is your will up to date? Does it reflect what your wishes are concerning who you would like to inherit from you in the event of your death? If not, urgently discuss this with a suitably qualified person who is able to assist you in this respect. Minor children under the age of 18 cannot directly inherit from you. If you wish to leave money to your children, discuss with an expert how to word your will to ensure that these monies are held for them in trust.
- Review the beneficiaries on your various policies to ensure they are correct. If not, make
the necessary changes.
- Review the benefits offered by your medical aid scheme. Not all costs are paid by
your medical aid, for example, if you suffer a dread disease. Ask your financial planner what the implication would be on your financial plan if you suffered a dread disease,
and what they suggest you do to protect you and your family financially.
- Review your life and disability cover when your salary increases. Is your income protected if you are unable to work for a certain time? Is your cover still appropriate for your
current circumstances? You should also review your life cover when you have a family.
If something were to happen to you and you were unable to provide for them financially, would there be sufficient capital available to pay for their basic needs and education?
- If you earn commission, are self employed or work for a company that does not have a retirement fund, consider investing 15% of your “non retirement funding income” in a Retirement Annuity. You will receive tax relief on your contributions, and the growth in the Retirement annuity is tax-free. At retirement you will have a larger capital amount to provide you with an income during your retirement years.
- If you belong to a company pension or provident fund and have the option of contributing different amounts to this fund, consider contributing the highest possible percentage that you can afford to save. These contributions should be out of pre-tax money, and will help reduce your monthly taxable income. The larger amount saved for retirement will help to ensure you have enough money during your retirement years.
I sometimes get asked the question – how does the man in the street find a reputable financial planner. Word of mouth is the best way to start looking for a financial planner. Talk to your accountant, or check with family and friends, or anyone else that you trust for referrals. Relying on a referral is always better than just picking up the phone book or searching the internet.
Once you have identified one or two planners that appear to meet your requirements, set up an appointment to meet with them. This introductory meeting is normally at no cost, and it provides both you and the planner with the opportunity to discuss what you are looking for and whether there is a mutual understanding of the task at hand. Certain financial planners specialise in different areas (e.g. retirement), so make sure that the financial planner you choose meets your needs.
Feeling comfortable with the financial planner that you choose to partner with is also very important. Remember, a financial planner needs to know much more about you than just your finances. It is vital that they understand your background and where you’ve come from, and what you have gone through up until this point in your life. They need to understand what you are going through at the present time, and where you want to go. With all of this information, a financial planner will be able to construct a personalised financial plan based on the plan you have for your life. And because you will be sharing these intimate details about yourself and your finance, make sure that you can trust your planner completely.
On a more technical note, the financial planner that you appoint should hold the Certified Financial Planner ® designation. The CFP designation is one of the most respected financial planning designations and it requires the financial planner to have passed a lengthy examination, follow a strict code of ethics, and have a certain amount of experience.
You are about to enter into a long-term relationship with your planner. They should take on the role of “Chief Financial Officer” of your life, and will be helping you with every major financial decision that you make. Your future will be shaped with their assistance so do your research, choose wisely and trust your gut.
In the build up to retirement we save in different investments – retirement annuities, unit trusts, endowments, our pension or provident funds through work, preservation funds, etc. However, when we start nearing retirement it gets a little confusing as to how all these different investments will work together to provide you with an income in retirement.
In saving for retirement, the tax treatment of your retirement savings is predominantly split into the two major categories:
- Monies on which you have received tax relief in the build up to retirement which include pension and provident funds through your employer, retirement annuities, and preservation funds in which you preserved your retirement savings when you changed employers. When you draw an income from these monies in retirement, this income will then still need to be taxed. And…
- Monies on which you have already been taxed – unit trusts, endowments, cash deposits, etc. When you draw an income from these monies in retirement only the growth within the investment is taxed, as you have already paid tax on the capital amount.
In order to encourage people to save for retirement, the government allows you certain beneficial tax rates on lump sums you may take from your retirement funds when you do retire (any time from age 55). The first R315’000.00 is tax free, and amounts above this are taxed according to a certain tax scale. Together with your financial planner you can decide whether to only take the tax free amount (R315,000) or whether it is necessary to pay a little tax in order to give you more discretionary money in retirement. The balance of your retirement monies (from pension and provident funds, retirement annuities and preservation funds) will be used to buy an annuity which will provide you with an income in retirement.
You have the choice of buying either a compulsory annuity or a living annuity. You buy a compulsory annuity from an insurance company. The insurance company will pay you a certain income in retirement for both yourself and your spouse, increasing (or not) by inflation each year. They take responsibility for the investment risk on your money, and one day when you die, your money dies with you.
A living annuity is more flexible, and does not have to be bought from an insurance company. You have the choice of deciding how much income you would like to draw from your living annuity on an annual basis (between 2.5% and 17.5% per annum). You also can choose how your money should be invested. These decisions should always be made together with your financial planner, who will help you to understand the implications of these decisions. Upon your death you can leave the remainder of the investment value of your living annuity to your beneficiaries who can either continue to draw an income from it, or can choose to cash it in (in which case it will be taxed in your estate).
Income drawn from an annuity is taxable in your hands, in terms of the Income Tax Tables. Within a living annuity we encourage you to draw as low an income as possible, to ensure that you do not pay unnecessary tax. We prefer you to draw the balance of your income from your other discretionary monies (unit trusts, endowments, and cash). Both your living annuity and discretionary monies should be invested to target a certain return above inflation, in terms of your financial plan. Your financial planner will be able to assist you with this decision.
Investment income within your retirement funds and annuities is taxed at 0%, and they are not dutiable within your estate upon your death. Income within your discretionary investments is taxed at your marginal tax rate (subject to certain exemptions), and is dutiable within your estate.
At retirement you need to make major decisions regarding the investment of your retirement assets. These decisions should always be taken together with your financial planner who can assist you in understand the implications of these decisions.