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You will not be able to replace withdrawn amounts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.
The ebb and flow of money
Money isn’t static, it flows in and it flows out – if you can manage that effectively then you’ll master the key to personal wealth. You can’t just plug that hole in your bucket. The money has to flow, the bills have to be paid. It’s like going on diet. You can’t stop eating altogether or you’ll die. Unlike other ‘bad’ habits, where going cold turkey won’t kill you (but it might hurt like hell). Until you’re saving or investing at least 15-20% of your family income a month, then the money flowing out of the bucket needs to be watched carefully.
So how do you manage that flow? How do you plug the hole? With internet banking and low-cost savings pockets it’s easier than you think.
There is no getting around it, you need to know your family budget. You don’t have to follow it slavishly, but the one number you really need to know is your ‘disposable income’ after all your fixed expenses and investments have been taken care of. THIS is the money that leaks out of your bucket onto barren earth and doesn’t nurture anything. Look at your budget carefully and objectively – are you getting the best deal on medical aid, short term insurance, life insurance? Are you paying for things you never use – gym contracts, loyalty cards, memberships, subscriptions. Clean them up.
Using a nanny to look after your investment
Discussions around endowments can often get pretty heated, but when you boil the argument down to the basics there is the camp that thinks investors need a nanny, and those that don’t. The former camp are usually well entrenched in the insurance provider investment camp.
Let’s decode the government regulations quickly : If you invest for 5 years, then the proceeds will be ‘tax-free’. This is the hook that brokers will use to reel in inexperienced investors.
The small print reads like this:
- It isn’t tax-free, it is taxed within the fund at 30%, not giving you the opportunity to use your annual rebates and if your average tax rate isn’t 30%, then it’s a double whammy.
- On an insurance platform the advisor often ties you into a 10 year, not 5 year commitment, and take all their commission all upfront, lumbering you with penalties if you need the money. This isn’t just being a nanny putting the cookies where you can’t reach them, she comes with a big stick to whack you if you are naughty enough to need it.
- There are plenty of old ‘graveyard’ endowment policies floating around. They are called ‘graveyard’ policies because they mature when a client is so old, he or she is likely not to be alive. Believe it or not, these policies sold for terms of up to 50 years will still have a 30% penalty imposed on them! It is frustrating to note that in a recent case brought before the FSB READ HERE the FSB had no alternative but to allow the penalty, despite declaring it was substantively against the ‘Treating Customers Fairly Act’. Sanlam (in this case) was deemed to have acted within the law, as it stands. I don’t think I am alone in hoping that ‘law’ gets overturned tout suite