![]() People often believe that if you gather significant assets during your lifetime and put enough into your retirement or pension fund during your career, you don't have to worry about living comfortably in your later years. But in an environment where medical costs are rising and markets are constantly fluctuating, is that really true? Here's a figure that might be surprising if you are planning to retire soon and haven't considered your health care costs. If you are 65 and retiring this year, you will need about R990 000 during retirement to keep up the same cover you currently enjoy. For a couple, that total is about R1 990 000. (assuming you are on the Discovery Health Medical Scheme, on the Classic Delta Comprehensive Plan, a contribution of R4059 to your plan, and that your retirement grows in line with medical inflation- currently CPI +4%). These numbers are based on the assumption that a man will live to be 85 and a woman 87, however with publications like the scientific research journal Nature reporting that children born in 2000 will live to be 100 years or older we may need even more retirement and medical savings in the future. With our longer life spans, financial planning for retirement has never been more important if we want to maintain your lifestyle over the long term. So how much is enough? It’s easy to miscalculate how much you’ll need in retirement. Underestimate what you will need and retire too soon and you could run out of money in your retirement years. Overestimate and you might keep working longer than is necessary or deprive yourself of trips, restaurant meals and other luxuries unnecessarily. Bottom Line Personal asked retirement-planning professor, Michael Finke, what he sees as the top 3 most common mistakes made by people when planning for retirement. Number one, he says is that people often overestimate the amount medical aid and insurance will cover, number two, that they underestimate health-care inflation and the third mistake that they do not consider or factor in the possibility that they could need long-term care in retirement. On how to more accurately estimate medical expenses in retirement Finke suggested that you start with what you currently spend on health care annually, or if that figure has fluctuated greatly, take the average you have spent over the past five years. Then also factor in that the Consumer Price Inflation (CPI) in South Africa has increased by 6.3% a year on average since 2008, and medical scheme contributions are increasing by at least CPI 3-5% annually. What can we do to plan better for the future? It is important to engage in a healthy lifestyle. 60% of diseases afflicting people worldwide are lifestyle diseases. To help aid in a happy, active retirement, protect your health by embarking on regular exercise, a balanced diet and maintaining a weight that is correct for your body type. The healthier you keep your body; the better the chances are that you would not need to spend as much money on healthcare bills as you age. Of course, there are will always be unforeseen illnesses which will catch you off guard but it is important to make provisions where you can, so that medical bills will be one less thing that you would need to worry about as you enter into retirement. Invest in yourself and pick the right plan Government care may be sufficient for many pensioners; however, many may require immediate or specialised levels of care that are not readily available at state facilities. Some medical schemes may also impose substantial late joiner penalties, waiting periods and exclusion if a pensioner joins for the first time. Having adequate retirement funds to cover medical cost will ensure you get the care and treatment you need when you need it. Covering your medical expenses in retirement requires planning and Discovery Invest has created funds that help you fund your healthcare expenses in retirement. They also give you up to 15% more money for your retirement savings. To get us to review so as to ensure sufficient retirement savings, please contact Kevin or Thato, email: [email protected] tel no: (011 658-1333) Source: Finance24
0 Comments
![]() Avoid typical mistakes In times of stress, the human impulse is to take action. When investment returns start to sink, this instinct could drive investors to do something – anything – just for the sake of taking action. This is precisely the wrong reaction in challenging times. There are many knee-jerk responses to short-term underperformance – all of which will ultimately detract from long term returns Switching to cheaper products In a low-return environment, clients typically consider cheaper managers or passive products to save on fees. However, this is precisely the time that outperforming the market becomes even more important. In a high-return environment, alpha is nice to have. When the market delivers 15%, it’s nice to achieve an outperformance of 2% or 3%. But in a low-return environment, outperformance really starts to matter. Outperformance of 2% to 3% on a base of 9% is a must-have: The difference between 9% and 12%, compounded over years, can transform your retirement. Skill in delivering strong outperformance becomes more valuable (not less) in challenging times. Investing with managers that have a demonstrable track-record of successful asset allocation will become even more important. Cutting exposure to risk assets When the investment outlook and market sentiment are poor, stressed investors often lose their tolerance for volatility. However, it is crucial that investors maintain appropriate exposure to growth assets, which are the only investments that will provide the real long-term growth investors require. Shortening your time horizon The temptation is to shorten your investment horizon – instead, it should be lengthened. Identify long-term winning managers and asset classes, and back them for the long run. Don’t fidget or lose faith at precisely the wrong time. Retirement investing In a low-return environment, it is key that your clients exact strict discipline in their draw-downs. The gains from reducing annual drawdowns is non-linear. A small reduction in the drawdown rate can add years of additional retirement income. It is also important to understand the place of underwritten annuities in the market. In times of low returns, it is tempting to buy an underwritten annuity. But investors should be sure that the product is suitable to their needs. Be very careful of annuities that escalate by a rate below inflation. Currently, a 65-year-old investor typically gets a 4.7% yield in an underwritten annuity, which escalates at 5% a year. This may feel like a low-risk option, but in fact it is actually a proposition that holds a lot of risk. Over a 30-year time horizon, the power of compounding will not be on your side. In 30 years, something that costs R1 today will cost R4.3 at 5% inflation (compounded), compared to R5.70 at 6% and R10.10 at 8%. No-one knows the future; South Africa is a volatile and uncertain place, and inflation could just as easily average 8% as 5%. Inflation protection is crucial, and we do not believe investors should consider anything less than an inflationary escalation. Source: Coronation ![]() “In these tough times we draw strength from the resilience and diverse capabilities of our people, our business sector, our unions and our social formations.”Pravin Gordhan, Budget Speech 22 February 2017 Personal tax
Business and trusts
Employers
Retirement reform
Other tax proposals
Discovery Invest has been around for about 10 years, it has grown in leaps and bounds, judging by its phenomenal growht in Assets Under Management (AUM). It has some interesting innovations, are they worth considering?
According to Discovery's brochure, they have three Classic products: Classic Preserver Plans: The Discovery Invest Classic Preserver Plans provide additional efficiency, improved performance and protection. Classic Retirement Plan: The Discovery Invest Classic Retirement Plan provides the ability to invest in a highly tax efficient product with improved performance and protection. Classic Offshore Endowment Plan: The Discovery Invest Classic Offshore Endowment Plan gives investors additional tax efficiency and protection against negative portfolio performance. Classic Preserver Plans has 6 unique benefits:
Clients should weigh up the cost against the benefits carefully, as these products require long-term commitment from clients. Question: I'm 42 years old and self-employed and I would like to have a retirement vehicle. Monthly I earn around R10 000 after my expenses and I would like to invest this money for retirement. Do you have any suggestion?
Answer Johan Stadler from FNB Financial Advisory division: As a self-employed client, the most suitable retirement vehicle could be a retirement annuity. This is a tax efficient vehicle for investors who wish to enjoy a certain standard of living when they are no longer employed. Contributions to a retirement annuity could either be in the form of a lump sum amount or monthly contributions. We generally advise our clients to carefully consider their retirement goals and make financial contributions that will help them meet those goals. It is important to always consider your financial circumstances as an individual and to ensure the contribution is always affordable and in line with your goals.As a business owner, it is even more important to consider self-funding of your retirement savings due to the fact that you may not be contributing to a company pension fund. You probably see your business as part of your retirement plan in the sense that you can sell it at some stage to unlock your wealth. This is not always an easy option and very often, business transfers are complicated. The future value, provided you find a willing and able buyer, is not certain.Over and above simply considering retirement savings, we would suggest that you also consider succession planning and the impact of your business on your personal estate. Each and every situation is unique and your personal circumstances will influence the solution that is best suited to you. We strongly advise that you consult a financial planner who will conduct a thorough needs-analysis and provide advice according to your individual goals and current financial position. Please contact Kevin or Thato in our Life Department; email [email protected] , to get a retirement annuity quote Source: Fin24 The end of the tax year is fast approaching – but there is still time to take advantage of some of the incentives the government has put in place to encourage savings. The introduction of the tax-free savings legislation last year has added an extra arrow to the quiver of tax-efficient options available to investors. Options are great, but having to choose often stops people from acting and can get in the way of our good intentions. If pressed to make a decision between a unit trust-based retirement annuity (RA) or a unit-trust based tax-free investment (TFI) product, which should you choose?
Begin with the end in mind At this time of the year maximising tax breaks is a common, top-of-mind goal. However, it is important to look at your portfolio holistically, either on your own or with the help of a good,independent financial adviser, to ensure your decisions fit in with the long-term plan. Let’s talk tax There has been much debate about the benefits of TFI products versus RAs. First, remember that both an RA account and a TFI savings product grow free of dividends tax, income tax on interest and capital gains tax. In our simple example1., because you are compounding all gains tax free, your investment value at the end of 30 years would end up roughly 45% higher than in a discretionary investment. The main difference between the two products is that an RA offers tax savings now, i.e. you pay less tax now because you make contributions with earnings on which you have not paid tax, but you will pay tax later, i.e. you defer paying tax. With TFI products, on the other hand, you use after-tax money to invest, but you pay no tax later; your withdrawals are completely tax free. So which offers the best deal tax-wise? Let’s consider the detail: Only 15% of non-retirement funding income is eligible for a tax deduction. This is set to change on 1 March 2016 to allow a tax deduction of up to the higher of 27.5% of taxable income or remuneration capped at R350 000 per year. This is a solid increase and will make the tax savings on an RA more relevant for higher income earners (albeit lower for the very high earners where the new annual rand cap is less than the previous 15% limit). Apart from deferring tax in an RA, the tax saving comes from paying a lower average tax rate on the benefits withdrawn from the RA at and after retirement, versus the tax saved on contributions. The first R500 000 of any lump sum you withdraw from your RA is currently tax-free (you can withdraw up to one-third, but this includes any pre-retirement withdrawals), and the rest of the benefit must be transferred to an income-providing product, such as a living annuity or a guaranteed life annuity. When income tax is paid on this benefit, you are likely to be taxed at a lower rate than when you were making contributions, which is where the additional tax savings comes in. Because of this, a disciplined investor paying income tax at marginal rate of 36% could pay more than 50% less tax on their retirement savings over their lifetime. This obviously varies depending on each investor’s personal circumstances, salary, age, how much and how long they have saved and any withdrawals made along the way. When comparing to a TFI product, the difference is that you have a future tax liability, whereas in a TFI your tax would already have been paid, but at a higher rate. What’s the catch? While the tax benefits of the RA and TFI are clear, it’s important to be aware of the restrictions before making a decision. RAs are governed by the retirement fund regulations, specifically Regulation 28 of the Pension Funds Act, which limits the exposure you can have to more risky asset classes, such as equities and offshore investments. In TFI products, there are no restrictions on asset classes but you can only invest in investments that charge fixed fees, which limits your selection. We have recently launched afixed-fee version of our flagship Balanced Fund to accommodate investors who would like to invest in our Tax-Free Investment Account. Another critical point, is that you can only invest R30 000 per year in TFI products. This is the maximum limit for all TFI accounts in your name, across product providers. If your goal is to save for retirement, the maximum annual contribution of R30 000 in a tax-free savings account may not be enough to sustain your lifestyle, and if you over-contribute SARS will hit you with a hefty 40% tax penalty. Access to cash may be another deal breaker: your investments in an RA cannot be accessed before the age of 55. You can access your TFI investment at any time. However, withdrawing from a TFI account impacts negatively on your lifetime investment limit of R500 000 – you cannot replace money that you have withdrawn. Other distinguishing features Both the Allan Gray RA and TFI2 are protected against the claims of creditors and do not form part of your insolvent estate. This feature is not applicable to all TFI products but it is applicable to the Allan Gray TFI, which is a life policy. You may nominate beneficiaries for an RA, although the trustees determine the allocation between your dependants and nominees. You may nominate beneficiaries when the TFI is a life policy. RAs are exempt from estate duty, whereas TFIs forms part of your estate and attract duty, although there are no executor fees if beneficiaries have been nominated. Which product wins? From a retirement savings perspective, in most cases RAs offer the best tax deal. However you need to be able to live with the restrictions described above. For long-term discretionary investments, it probably makes sense to put your first R30 000 into a TFI product. Remember, however, that you will need to be disciplined and resist the temptation of withdrawing from your TFI account. You only get to enjoy the long-term compounding benefits if you don’t dip your hands into the cookie jar along the way. Source: Allan Gray Please contact Kevin or Thato, email: [email protected], if you have any queries about Retirement Annuity or Tax Free Investments Around this time of the year, we would like to remind you to consider topping up your retirement annuity fund. According to the current legislation, you may contribute up to 15% of your taxable income (strictly speaking, non-retirement funding income) to a retirement annuity fund and enjoy tax deductions. As 28 February is the end of the tax year, you must calculate and pay the additional amount to your retirement annuity prior to this date, in order to qualify for tax deductions and tax refunds.
Below is an example of topping up your retirement annuity: Mr Thomas has a monthly salary of R50,000. In December he received a bonus of R100,000. Every month he contributes R3,000 to a personal retirement annuity fund. His annual income is then R50,000*12 + R100,000 = R700,000. The maximum tax-deductible contribution to retirement annuity is R700,000 * 15% = R105,000. Over the year he has contributed the following to retirement annuity: R3,000 * 12 = R36,000 The additional amount he may top up in his retirement annuity (RA) is R105,000 Less R36,000 R69,000 He can expect a tax refund of R105,000*39% = R40,950 from his retirement annuity contributions. Should you have any queries on retirement annuity , please contact Kevin or Thato , tel 011-658-133, or email [email protected] |
AuthorKevin Yeh Archives
January 2025
Categories
All
|