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I hate filing!

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Doing the bare minimum

Sometimes all that is needed to turn a chaotic personal financial plan into something that is usable, and even valuable to plan from, is a little bit of organisation. Some people love filing, they find it therapeutic. Not many of us are blessed/cursed with that gene, but sometimes they are onto something. To stop the task becoming overwhelming, do it in small bites. Start with the important bits first.

I developed by “RED FILE” approach with exactly this approach in mind. Often as I gathered information for a financial plan or estate plan I found clients battling to put their hands on important documents. Not only did this make it difficult for me to try and put a coherent plan together with them, it meant that if anything were to happen to the client – it would be almost impossible for another family member to take care of their finances. What medical aid plan are they on? Who is their short term insurance provider? Do they have life cover? Funeral cover? Where are the investments? Is there a bond on the house, and with whom? Where is the Will? The simple act of getting all the most important information into one file is 90% of the problem solved. All the other files can be delegated or outsourced – can’t it? If you hate it so much why not pay someone who loves that kind of thing to do it for you? You could even get them to come in once a quarter to file the rest of the bumpf you’ve accumulated. You can get your RED FILE divider template HERE
Once you’ve got everything in the red file, you and your advisor can start consolidating it and simplifying it. If it isn’t broken, there is no reason to fix it. But if it is ineffective, expensive or no longer ‘fit for purpose’ then at least you can have a strategy to sort it out. If everything is in one place, an annual review should be quick and painless.

Do this one thing now: Start your red file with a copy of the Will. That is a ten minute job. Buy a red A4 file, print out the dividers – even if you don’t have time to personalise it yet – and put a copy of your will there. No will? Bad idea! Dying intestate puts your family at huge risk. I have a short eBook on the topic you can get HERE or another blog on the topic HERE

Author Dawn Ridler 

Retirement Annuities – The Ugly Duckling?

in Financial Plan, Investment, Retirement Leave a comment
red rose
Is the bad reputation of RAs deserved?

Retirement Annuities (RAs) have fallen out of favour over the last decade, in large part due to the confiscatory penalties imposed by the big insurers when a client wants to make the policy paid up, or retire from it ‘early’. On RAs started before 2007, this can amount to 30% of the current market value. In 2007/2008 there was a flurry of bad publicity which saw the insurers magnanimously dropping the penalties from up to 100% down to 30% (well actually, they didn’t do it magnanimously, they were forced to). New RAs were restricted to a penalty of “only” 15% in the first 5 years. Personally I think it’s time the 30% cap on pre-2007 RAs bit the dust. It is easy to say that ‘it’s a client’s own fault’ for getting into financial difficulty, but this is only the tip of the iceberg. For example, if someone started an RA when with a company that had no retirement fund, only to move to a company that has a compulsory contribution, the poor guy is saddled with contributions he cannot afford. If an old RA hasn’t been managed, and been parked in a non-performing investment, then the return on investment will add to the depressing picture. Some RAs still have a pathetically small choice of funds, most of them dogs. So, that’s why RAs have had a bad rep – is there a positive side?

If you aren’t contributing to a company retirement fund, from a tax perspective, Retirement Annuities are a no-brainer. The deductions of 15% of your gross income is generous. This however is likely to be changed ‘some time’ (that can has recently been kicked down the road yet again thanks to Cosatu inference), the amount you can deduct is likely to be capped ( the number being bandied around is R350 000), but the threshold percentage increased to 22.5% and will include all retirement savings. This is important because employees who have been severely restricted in the amount they can claim as a tax deduction will be changed. The higher your tax bracket, the bigger the tax break you will get – in other words you could be getting as much as 40% of your premiums back. The tax breaks don’t stop there, when invested there is no tax in the investment : no CGT, no tax on interest, rental income and dividend tax is rebated back.

So what? If you’re contributing the same amount into exactly the same fund in a flexible investment versus a RA, then the RA is going to outperform the flexible investment significantly – and by orders of magnitude if the rebates are invested back. The tax man always takes the tax back, and RAs are no exception. On retirement from the fund (from age 55) to you can take 1/3 as a lumpsum, the other 2/3 has to go into a compulsory annuity which will be taxed as income. The first R500k of the lumpsum is tax free, and at retirement it is likely that your margin tax rate will be lower, and rebates are increased. Another advantage is that, if you choose, you could keep the RA open ‘forever’, it will then go into your estate free of estate duty.
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Simple finances can come at a cost

in Behavioural finance, Financial Coaching, Financial Plan Leave a comment
black arum

Simplifying may not be as great as it sounds

Financial Advisors love simplicity, almost as much as they love ‘assets under management’ (read: your investments that they look after, give you advice on and take an annual fee on). When your personal finances are simple, it makes it easier for you to understand , and easier for the advisor to report back to you on. Consolidating your various financial portfolios – retirement planning, endowments, share portfolios, flexible investments – can make a lot of sense, but you need to be aware that occasionally the advice you’re being given is more in the interest of the broker than you. You might have missed it, but there was recently a case taken to the Bloemfontein Supreme court of appeal by the FPI dealing with exactly this issue ( the process started in 2007, so not exactly swift justice…) (READ HERE if you’re interested).

Before you throw away some valuable bonuses or get lumbered with penalties, here are some pointers:

Retirement Annuities (RAs). This is the one area that I come across multiple policies, often from different providers, and it seems like it is the obvious place to consolidate. The method used to consolidate RAs is called a ‘Section 14 transfer’. This method preserves the tax status of the investment and the advisor cannot charge an upfront fee, but can charge an annual fee (usually 1%) which should be renewed annually. All good so far. The biggest problem here is that 99% of these RAs have not yet matured, and when on an insurance platform will attract penalties. These penalties can vary and go up to 30% ( plus other ‘costs’ like losing guarantees etc), but quite frankly if you do the math, the amount of growth the investment has to catch up on when the penalty has been removed, is just not worth it! If you lose 30%, the investment has to grow 60% to stay in the same place. That can take years! Until the RAs have matured your advisor should try and manage these investments by doing appropriate fund switches on the platform, or if they do not have access to that platform . Once they have matured, consolidating them all onto a single LISP platform with a wide variety of fund choice and low fees may make sense.

Endowments: Many people are under the misconception that these are ‘tax-free’ investments. They aren’t. They are taxed within the fund at 30%. Anyone who reads my blogs frequently will know that I am not a fan of these instruments. They make tax sense for people taxed over 30% who have used all their interest rebates and trusts. At a push they might be good for the undisciplined. Insurance platform endowments are popular at the lower end of the market because they start at R400 a month or so. In order for brokers to make a low premium like this viable, they charge upfront commission, and as a result if the client tries to cash it in early or even stop it, then penalties become payable. Endowments ‘mature’ in the tax sense after 5 years, but you might have unwittingly signed on for a much longer term (in order to give your broker more upfront commission). When they have matured Capital gains tax will not be levied (they’ve already taken their share!). Before withdrawing or consolidating it, make sure your advisor tells you about the future tax implications. If you’ve been lucky enough to get out of an endowment on an insurance platform, and want any more endowments, use a LISP platform or ensure your broker takes his/her commission ‘as-and-when’ so that there is no penalty. The potential penalty should be clearly stated on the form.
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Starting 2015 in a new job?

in Behavioural finance, Financial Advisory, Financial Plan, Social Media Leave a comment

Before you go…

At this time of the year many people change jobs, this comes with great potential to a career but it has its risks to your long term financial health. Unfortunately, many times, changing jobs is the only way to get a meaningful increase in salary and promotion, but there are a few things you need to do before you go:

  • I always tell my clients that are employed in the corporate world to call me first when you decide to resign, before even your boss, because that is when I can make the most difference to your long term wealth.
  • When you’re changing jobs, it is one of the few times that you can change medical aids without waiting periods. If the company you are going to does not have a compulsory medical aid and you haven’t been happy with the one you’re with – but been lumbered with it where you are – now is the time to look at changing. If you’ve built up considerable history with one of the loyalty programs linked to your old medical aid and are being forced to change, there may be ways to keep it – for example linking it to a small life cover policy instead. Properly managed over years these loyalty programs can save you thousands, but that shouldn’t be the reason for staying with a company.
    If you’ve got a ‘restraint of trade’/ ‘non-compete’ clause in your contract that might cause problems, speak to a lawyer. Many of these clauses are unenforceable and companies put them there to scare you, betting on the fact you won’t pay a lawyer to give you the advice. Of course you have to respect intellectual property and you can’t take any of their documents or clients with you, but you cannot be stopped from earning a living.
  • Are you going to have group benefits in your new job? No? Do you have adequate cover in your own name? If you haven’t already, call your financial advisor. You may be able to take out a ‘continuation option’ on your existing benefits – without any underwriting. This is particularly valuable if you’ve got any medical issues – previous accident, pre-diabetes, asthma etc. You only have 60 days to exercise this option so don’t procrastinate – even if it is the silly season.

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Passive Aggressive Investing

in Uncategorized Leave a comment

Volatile Asset classes

I know this sounds like a contradiction, but bear with me. In Investment terms, an aggressive portfolio is a pure stocks or equity.An aggressive client is one who calls me when his stock portfolio tanks. You can get even more ‘aggressive’ by investing in niches within that asset classes – like commodities (hurting yet?) or small cap stocks (so-called penny stocks). In the long term it is in equities where you’re going to get the best growth, but it has to be long term (in excess of 7 years) so that you can ride out the highs and lows and make the inflation plus 6 or 7 percent per annum. If you can’t sit on your hands(within reason, don’t let a donkey pull your portfolio down too long) and ‘have to’ try and time the market, or you aren’t properly diversified then all bets are off. Ultra aggressive investing (or pain stupid if you don’t have plenty of bucks) is the domain of day trading, options binaries and all those other ‘get poor quick schemes’.

You can get ‘aggressive’ exposure in your investment portfolio by having a stock portfolio or investing in Unit trusts. If you’ve got the stomach for it, and enough cash to buy a diversified portfolio, then a stock portfolio can be ‘fun’. Fees charged by stockbrokers are usually lower than those you’ll be charged in a collective investment. You can of course do it yourself, and many people do – but just like you wouldn’t fix your car if you were clueless as to its workings, don’t rush in where amateurs lose their shirts. Before you go out and buy yourself a nice little program that tells you when to buy and sell, get your mind-set right, and do your homework. Can you afford to lose it all? If not, build up your investment more traditionally, paying the asset manager and advice fees, until you have money to play with (and in the meantime, learn, learn, learn). A financial plan, monitored annually will soon tell you how much ‘play money’ you have.
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Priority ‘du jour’

in Behavioural finance Leave a comment


How do you prioritise personal finance?

Lives are busy and complicated, everyone wants a piece of your time and hard earned money. More often than not financial priorities change from day to day – usually going to the squeakiest wheel. In this era of ‘pick me, pick me’ how do you put some order into how you allocate your money?

The obvious answer is having a plan, but it goes further than that. Your plan needs to be advice that covers every single aspect of your life, not just the one your broker specialises in, or the one you understand best. To be in your best interests it must be in you and your families best interest. Most of us are aware of the Maslow hierarchy of needs which graduate from the basic needs of food, shelter, security up to ‘self-actualisation’ once all the other needs are met. Let’s have a look how this hierarchy can help with priorities:

Physiological : Most of us take these basic needs for granted : Food, water, sleep and ‘existence’  – but if money gets really tight, this is all we focus on. It isn’t just the very poor that have to worry about this, anyone who has lost their job or is pouring all their money into a fledgling business will understand this. It’s about cash flow. If the overdraft and credit cards are maxed out – you still have to live. All of a sudden the ‘Salticrax’ advert isn’t so funny anymore. This is one of the areas where an emergency fund is invaluable. If you’re putting money into retirement annuities or endowments and don’t have an emergency fund, speak to your advisor about putting those on ice for a few months until you have the emergency fund (even old-fashioned insurance providers might allow this). An emergency fund is best in a low-cost savings account, but if you don’t trust yourself with that, ask your advisor for a low cost investment (that can be liquidated in 7 days say). Because the capital is important, it should be conservatively invested, and you shouldn’t be charged excessive fees. For my existing clients I do not charge any fees on conservative investments (money market and bonds) like this, so if you’re being charged upfront and ongoing fees over 0.5%, look elsewhere.
Safety : Family, health and home. This is where traditional insurance kicks in – but not all needs are equal. This is the priority ranking I use :
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