Do you recognise this in your budget?
Lifestyle creep a hidden effect, especially in higher inflation environments like ours. Basically, it is the continuous upgrading of one’s lifestyle and increases in consumption in REAL terms as our incomes increase. I have capitalised REAL for a very good reason, it is the actual increase minus inflation. In other words if your increase is 6% and inflation is 6% then the real growth is zero. When it comes to after-tax income though, it may even be negative. This is usually a problem when it comes to the big lifestyle expenses, like houses and cars. I have gone into the wealth implications of both these purchases HERE, so I am not going to repeat myself, but if you ‘upgraded’ your house or car because you’ve received an increase or promotion, then read on…
What has tax got to do with it?
Tax is levied on a sliding scale in groups called “Income brackets”, have a look at the graph below which is for the 2017/2081 tax year.
Let’s look at the middle of the range of income tax bracket, which is where most of the lifestyle creep occurs: In the tax year ending 2016 the range was R393201 – R550100 the marginal rate was 36%, in the year ending 2017 it was R406401 – R550100 and this year ending Feb 2018 it is R410,001 – R556000 tax rate 36%. it’s all 36% so there will be no tax rise? Not so fast…
In 2017 this translates into a 3.35% movement in the bracket when inflation was around 6% and 2018 it was even worse, with a minuscule 0.88% movement when inflation was around 6%. In other words, the government is deliberately pushing your income into a higher tax bracket every year. In effect, therefore, in the 2016/17 tax year, unless you had an increase above 9.35% you had no real increase in take home pay. In 2017/18 it would have to be over 12% to have a REAL increase in take-home pay. If you feel that you’re poorer, that is why.
Before you emigrate, find out how your investments will be impacted
Whenever uncertainty increases, South Africans start looking at how liquid they are if they want to get up and go, and this is one of those times. Noises from the government recently are that they want to ‘document’ emigration to prevent it (a complete non-starter and just more jobs for pals). Emigration of educated youngsters has been happening for decades, and because they have very little in the way of assets so do not have ‘financially emigrate’. Those stats are ‘hidden’ and become part of the brain drain because those youngsters just cannot find the jobs they want here. For older and more established South Africans though, emigration as opposed to a leave of absence to work outside the country, comes with a myriad of investment or disinvestment decisions that need to be made. This is also known as official or financial emigration.
Capital gains tax: One factor many emigrants do not consider is that emigration triggers Capital Gains Tax (CGT), whether or not you leave your investment or property here. If you merely work elsewhere but remain an RSA resident (as many people do if they work in Dubai for example) then this does not apply. Be aware though that the government is itching to bring those ‘tax-free’ earnings into the RSA tax net. Capital Gains Tax was initially introduced to replace Estate Duty, but I am sure it of no surprise that not only do we have both but CGT is creeping up steadily and is now a nasty corroder of any investment.
If you’re thinking of emigrating, and if you have a large property or stock portfolio, I recommend you make yourself familiar with CGT. You can get a simple 15 page brochure on it HERE. There is, of course, the 800+ page brochure available too if you’ve run out of sleeping pills. Working out CGT is not simple and is a multistep calculation, as you will discover if you read the brochure, so I recommend you get your tax advisor or Certified Financial Planner ® to do this for you (your broker probably won’t be able to help you). There are 2 aspects to Capital gains, the ‘inclusion rate’ (the percentage of the capital gain that is used in the calculation) and your marginal tax rate.
Flexible investments: These are relatively easy. Either you leave it or sell out and use your Forex allowance to take it out – either way, you’ll have to pay Capital Gains Tax on Shares or Unit Trusts. If you leave it here, you’ll have to keep submitting returns and paying tax, but if you move to a country that has a tax agreement with RSA, then the tax paid here will be a credit on the other side so double tax is not paid.
Pension and Provident preservers: These are put in place (with the help of a financial advisor) in order to preserve the tax status. If you withdraw from that fund (one withdrawal before retirement (age 55) is allowed – it can be the full amount) but is taxed according to lump sum withdrawal tables. An R22,500 lifetime tax-free amount, and thereafter a sliding scale starting at 18% and going up to 36%. If you officially emigrate, Pension Preservers can also be left and handled at retirement or age 55 –but that involves substantial administrative PT, especially if you do not have an RSA bank account. Hint, keep one in place if you go this route, even if it is a cheapo like Capitec. Depending on the size of the Preserver, Tax could take a sizable chunk out of your investment. You still have the option of never retiring from it, in which case it will go into your estate.
Highlighting problem areas to save you heartache later
Financial advisory is highly complex and it is far too easy for the man on the street to get hoodwinked. These are the questions to ask your traditional broker that has given you the advice on an insurance or investment product. Be aware that call centres are allowed (by the FSB) to operate on a ‘low or no’ advice model and you probably won’t get an answer to these important questions and you are going to have to do the homework yourself. Over the last decade the regulatory environment has reigned in many of the dodgy practices that used to be rife in the financial advisory industry, but there are still some practices (allowed by the FSB) that can hurt your wealth. Here are some questions to ask your broker before signing up to new life cover or investment:
What are the differences between the benefits on the new and old policies? You need to ask this to protect yourself from a broker that is just churning a policy for more commission. There must be a compelling reason to change, and not just because it is ‘cheaper’. It is way to easy to manipulate a premium to make it look cheaper, often with an aggressive premium pattern or less comprehensive benefits.
How much is your “loyalty bonus” costing me and what are the terms and conditions? A number of traditional and call-centre insurance products offer some sort of payout after a certain amount of time but it is never ‘free’. Not only do they come with golden handcuffs (making it difficult for you to move to a better product in the future) but cost an additional premium that might be hidden in the small print.
Is the life premium “level” or “age-rated” and please can I have a graph comparing them? An age-rated premium is going to be much cheaper now but could well be unaffordable post-retirement when you need it most (because the prices are incremental and exponential) and when there is the biggest chance of having to claim.
Is the dread disease pay-out severity based and what are your alternatives? A severity based benefit pays you out a percentage of your cover depending on how severe the diagnosis is. The medical costs aren’t proportionately lower and it may make sense to have a product that pays you out more sooner.
Survive or even thrive during a downturn
The economy has been slowing down for over a year now, and the threat of a recession is a very real possibility. Post 2008 the economy has never really recovered to the extent we have come to expect in previous cycles. It is a new normal. When there is a long-term change in the environment you cannot keep spending or saving in the same way and expect the same results. If you haven’t started making those changes, here are some pointers:
Fire-proof your career. There are careers out there that are dying or shrinking, make sure yours isn’t one of them. For example, car salespeople, estate agents, recruiters, bank tellers even financial advisory. Over the last couple of decades some jobs, like secretaries, have changed enormously (who remembers typing pools?) Many jobs are now service/concierge orientated. If you need skills, now is the time to bite the bullet and get them. This might not be a degree like it was in the past. It might be English and communication skills, technology or sales skills like self-confidence. Today everyone is expected to ‘manage’ themselves, those are skills worth acquiring if you want to advance. Computers are never going to replace a skilled salesperson or manager.
Get your affairs in order
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It’s not a one trick pony anymore
I don’t think anyone can argue that the cost of medical aid is out of control. A once off, above average annual increase is bad enough but when it happens year after year, and often 4-5% over inflation, the compounded effect becomes a real problem and eats a bigger and bigger chunk of your disposable income. Not only do you have to contend with the increases, but silently, the benefits are also being eroded. The various ‘caps’ on cover don’t keep up with the increases, the ‘medical aid rate’ that used to be defined across the board, now differs from medical aid to medical aid and at 100% barely covers the cost of an entry level Cuban import. Many doctors now charge 500%, and this continues to climb. You’re stuck between a rock and a hard place – a bad event like an accident or heart attack can cost hundreds of thousands and if you don’t at least have a hospital plan, you have 2 choices. Find the money – or go into the public health system, and hope you come out.
Before the November deadline comes to change your plan, why not do a medical risk audit and see what combination you need…
- Ask your medical aid for a printout of your claims over the last 2 years, and have a careful look. Are you getting bang for your buck or subsidising several dozen hypochondriacs? Is there one member of the family that is using the lion’s share of the medical aid – can anything be done about it? When did your Medical Savings Account run out in he year? On average, how much did the medical aid pay out per provider and how much did you have to pay in excess?
- How much are you paying for the loyalty card, and is it worth it? 85% of people with a gym contract don’t use it – or if they do it’s at the absolute minimum required to keep it going. Warning – before you cancel the loyalty card please speak to your financial advisor because it might have implications on your life cover premium. The price increases of the loyalty cards are also above inflation.
- If you’re healthy, is a hospital plan a viable option? Play with the numbers from those statements. Compare the premiums of your existing plan with a plain hospital plan. What were your true expenses, this is the savings plus your out of pocket.