How a marital regime can impact your wealth
When two people decide to get married, the marital regime, (the marriage contract – Ante nuptial Contract, Community of Property) is often the last thing on their mind. It’s uncomfortable to talk about, planning the wedding, the dress, the party, the cake, the honeymoon and all that other ‘stuff’ is exciting, why would you want to have a discussion about nasty splitting of finances if it all goes pear-shaped? There is also the misconception that Community of Property is the same as Ante Nuptial Contract with accrual. Not so. Today, more than 50% of marriages end in divorce, and nobody goes into a marriage thinking they might form part of that statistic. Financial strain is often at the root cause of marriage discord, and the sooner a couple discusses this ‘nasty’ topic, the better. Financial incompatibility is a real red flag to the longevity of a union. I always recommend at least one session with a financial coach to help facilitate those uncomfortable conversations without either party dominating or becoming defensive. This also applies during a marriage. If the family unit has financial difficulties or wants to make a large change or purchase, use a financial coach to facilitate the discussion for you.
Finding the sweet spot
At this time of the years there is a flood of emails from your investment providers imploring you to add to your retirement annuities (RAs) before the end of the tax year – should you?
That depends on where they are, and how long they have been sitting there.
Insurance platforms: The vast majority of RAs out there are currently invested on insurance platforms: The big boys, Liberty, Old Mutual, Sanlam etc. Most of these RAs were structured to give the broker maximum upfront commission (especially prior to 2007) and any increase in the annual amount and addition of lump sums is likely to expose those additions to penalties should they be matured ‘early’ or contributions stopped. Hint: this practice STILL continues.
Don’t do it.
Rather start a new RA on a LISP platform (Investec, Allan Gray, Sanlam Glacier etc) that doesn’t expose you to penalties. In terms of the pension fund act you can ‘retire from the fund’ from age 55. (No, you don’t have to retire from work at all!). Most of the insurance RAs will lock you in until 65, and penalise you if you want to shut it down earlier. If the RA was started before 2007, you could be penalised up to 30% of the market value of the fund! (Treating Customers Fairly anyone?).LISP platforms usually have a R1000 and R50 000 lump sum minima which might be problematic.
TESAs – a viable alternative
For once, there is a viable alternative to those nasty insurance-based endowments, that have (I.M.H.O) been a huge contributor to the shoddy reputation of investments among the middle class. Yes, billions of rands have gone into these funds which otherwise might well have been frittered away, but the legacy of ‘graveyard’ endowments – put in place for 50 years and STILL attracting up to 30% penalties if they are ‘matured’are still souring the market. Unfortunately, these TESAs aren’t going to do away with those termination penalties even on these new products, but the biggest advantage should be to the bottom line of the investment. Endowments are not ‘tax-free’, they are in fact taxed at 30% within the fund, not allowing the investor to use his or her interest and CGT annual rebates.Being a ‘middle class’ investment of choice for ‘education’ – with average interest rates well below 30% – this one of those ‘nanny’ policies I hate (read my blog HERE).
TESAs will be tax free. This could add as much as an extra 1% to the fund, which when compounded annually soon adds up. Retirement funds already have this advantage.With a bit of luck (let’s face it the government sometimes does a last minute about-turn) on 1/3/2015 these TESAs will be available on most platforms. I have yet to see any of the details of the structure and offerings from a provider yet – perhaps they are also anticipating a sudden about-turn too. After all, the government suddenly postponed the retirement reforms die to be implemented 1/3/2015 when Cosatu had a temper tantrum – most retirement platforms had already spent millions doing the changes that would have been required.
I have put the government report on my website, you can get it HERE
- Every individual will be able to invest R30k per annum ( this will increase with inflation)
- There will be a lifetime CONTRIBUTION cap of R500k. This does not include the growth of the investment. I have done a table to illustrate the potential growth:
- These TESAs are intended to be long term investments, there to supplement retirement savings and other long term goals rather than for short-term goals.Obviously retirement is an obvious goal, but an 18 yr investment for a child’s education is also viable. let’s face it in 18 year’s time who knows what the regulations will look like.
- Banks, asset managers, life insurance companies and brokerages will be able to provide these products
You will not be able to replace withdrawn amounts
Now that our digestive systems are getting back to normal after the silly season and in ten days time the ‘Dry January’ challenge will be over – no, Sauvignon blanc doesn’t count – why not detox your finances in Feb? Your wallet is probably still reeling from all those expenses, and there is nothing like a behavioural ‘reset’ than putting your finances on diet – just for a month.
So, how does this work? Pay all your fixed expenses on the first of the month. Work out what you need for food, fuel and essentials and withdraw that as cash. Take all your credit and store cards out of your wallet and hide them, give them to a friend, freeze them in a block of water. Make it difficult to get them back (the friend option is the best for this – you will then have to admit to them you’re breaking your money-diet). This is all about returning to simplicity and getting a clear understanding of materialism in your own life. Like losing weight, going on a ‘money diet’ is difficult. You can’t go cold turkey. You have to spend to live, but you have to count your money calories.
When it comes to ‘life’ or ‘risk’ assurance, putting a monetary value on Dread Disease cover is almost impossible. Life cover and disability cover are easily reduced to numbers, you just work out the cost to you or your family should either of those events happen.
So, say (just as an example) you have a massive heart attack with triple bypass surgery. You have a decent medical aid, so your out-of-pocket expenses are minimal. Your doctor books you off work for 6 months – that’s going to cost, right? Yes – but that is what temporary disability cover is for. The doctor recommends lifestyle changes – no more smoking or drinking. Financial implications? A saving.This sort of story repeats itself for most dread diseases, so why is dread disease cover so popular?
There are a couple of ways to look at it: Genetic gambling and anger.
If you have a family history of dread disease, especially heart disease or cancer, there is a far greater chance that dread disease cover will be high on your agenda in terms of risk cover. This is very sound reasoning, there is a higher chance that you will have inherited similar genes. Recent studies have shown that lifestyle only accounts for 30% of the potential risk of getting a dread disease, and genetics certainly pays a role. Ironically the biggest contributing factor is ‘bad luck’. By covering this risk you will effectively be playing the genetic/bad luck lottery. The pay-out you get will effectively be a windfall and compensating you for the ‘bad luck’, basically because you can’t take your ancestors to court and sue them for the ‘bad genes’. Make no mistake, there is nothing wrong with this. It gives one closure, and more importantly should stop the unhealthy need to blame someone – or yourself. With a dread disease payout, someone has ‘paid’ for the crime of your bad luck, or genetic predisposition. That windfall gives you financial freedom to make changes in your life that you might not have been able to before. Early retirement, new career, start a business, move to the coast and so on.
Can anything be done to reverse a poor savings culture?
A healthy attitude to savings is the key ingredient to personal wealth. All over the western world savings are dropping, somehow by blaming poor behaviour on ‘culture’ makes it more acceptable – and easy to ignore. There is a pervasive attitude that ‘someone’ will eventually bail us out. In South Africa that ‘safety net’ is very flimsy and isn’t going to protect anyone but the very poor. The old fashioned values of only buying things with cash are long gone. Credit is ‘cool’ and easy to get your hands on. The NCR has at least reigned in the credit excesses of the early 2000’s, but the ugly scourge of ‘microloans’ or ‘Payday loans’ that exploit gaps in the credit act is still there. The collapse of African bank was caused by that scourge, but others are still out there, and advertising on primetime TV. The interest rates run into the hundreds per annum!
The government has recognised the problem, and is trying to implement various carrots and sticks to change the ‘culture’. The NCR was one of them. One of the ‘carrots’ is ‘Tax Exempt Savings Accounts’ (Tesa) – due to come into effect in six weeks time. These are primarily equity accounts (so they will need to be long term investments) with a R30k pa maximum and R500k lifetime maximum contribution limit (and you will not be able to withdraw and deposit back either). Doesn’t sound like much does it? Well, have a look at the table below. It will take almost 17 years to reach the R500k max, and at a modest 10% annual growth it will be worth R1.77 million.