2012 – Quo Vadis?

By Matthew Lester, Professor of Taxation Studies at Rhodes Business School, Grahamstown

January 2012.

The Subprime Crisis and the Global Credit Crunch may be two years gone. But the aftershocks will no doubt continue through 2012. Hopefully, a year from now, the world will be on a steady road to recovery. But that will depend on an orderly resolution of the European crisis.

If Europe does fall into a major recession the general concern is that it will drag down the world economy and even the new emerging economic powers of China and India will be affected. Finance minister, Pravin Gordhan has already made it clear that this would have severe consequences for South Africa.

In amongst this there is little talk about financial planning; except for those who try to second guess what surprises will be arriving in the National Budget on 22 February 2012.

But there is so much more to financial planning than the National Budget Speech. What about the basics?

Here is a list of basic financial planning basic processes and tips that need annual attention. Try them out and see where you may be falling short.

PART A

THE POPULAR OBVIOUS STUFF

1. Last Will and Testament

Last wills and testaments should be reviewed annually. The obvious reason is to make provision for changes in bequests. But there are other matters that require attention:-

 

  • Check who the nominated executors are. Are they qualified and will the nominated executors be accepted as being competent by the Master of the Supreme Court? What will the nominated executor charge?
  • Have estate duty and capital gains tax benefits, available through the ‘inter-spouse bequests and related abatements,’ been properly considered?
  • Has adequate provision been made for the administration and distribution of assets held offshore?
  • Will there be sufficient cash in the estate to provide for all costs, creditors, taxes and bequests?

 

But remember, the vast majority of us will still be here this time next year. Few South Africans will die with an estate duty problem during 2012. For most, the problem is rather, ‘how will I live, retire and die in the new RSA without landing on somebody else’s doorstep?’ That is the biggest challenge in financial planning today.

2. Retirement annuity contributions

Retirement annuity fund contributions remain tax deductible to the extent of the greater of:-

 

  • R1 750
  • R3 500 – pension fund contributions
  • 15% of Non Retirement Funding Income

 

The ‘capping’ of retirement annuity fund contributions at R200 000 per taxpayer, scheduled to take effect from 2013, seems to have been postponed at this stage.

At super-tax level (40% on taxable income greater than R580 000), a contribution to a retirement annuity fund effectively results in an investment acquired at a 40% discount. Nothing can match that! But there are other benefits:-

 

  • The investment growth within the fund is almost completely tax-free. And once the new dividend tax is implemented on 1 April 2012, dividend income will also be tax-free within a retirement fund.
  • Proceeds from the payout of a retirement annuity fund on death are exempt from both estate duty and capital gains tax.

 

Few taxpayers appreciate that the modern day retirement annuity fund can be legally used as a tax haven. Contributions thereto are encouraged by granting tax benefits and cannot be attacked as being overly aggressive tax planning practice.

Here is a useful rough and ready rule of thumb to remember during 2012:-

‘For every R6 000 per month required in retirement you will need R1 million of retirement capital!’

With the above in mind it is not difficult to conclude that few South Africans will ever accumulate enough to retire.

PART 2

THE LESS OBVIOUS STUFF THAT WE DON’T WANT TO TALK ABOUT

1. Tax Returns

The absolute D-Day for submission of tax returns for the tax year ended 28 February 2011 is 31 January 2012. No extensions will be granted. And the monthly fines for non-submission are automatically levied and are seldom waived.

Even if you think your tax returns are up to date ask for a SARS statement of account. Check that all returns are submitted and assessed and that there is no outstanding balance or refund due. You will simply sleep better with such assurance on paper.

2. Interest receipts

Let’s face it, with the world economy in tatters the prospects of increases in interest rates during 2012 are remote. Taxpayers will be lucky to achieve a pre-tax six percent return and that is about equivalent to the official inflation rate. After-tax interest rates are now well below the inflation rate.

Money left in interest bearing accounts is simply rotting away.

Investors have to take the view that to keep pace with inflation they have to create a portfolio with a heavy weighting towards equity investments. But professional advice should be taken before storming into uncertain world markets.

3. Rand Hedge Investments

Almost every South African is concerned about the future, the vulnerability of the Rand against other currencies and increased inflation rates.

The threat of losing substantial amounts of a portfolio as a result of a currency decline is probably the biggest investment risk South Africans face today.

Yet few South Africans create a proper Rand hedge in their investment portfolio.

Offshore investment is no longer the old sport of buying up Kruger Rands or ‘schlepping’ cash to an offshore bank box or trust. There are investment structures available through local institutions that are both legal and tax efficient.

Remember all South Africans, over 18 years old and of good tax standing, are entitled to invest up to R4 million per annum in offshore currencies. In addition, SA resident individuals may also use their single discretionary allowance (R1 million per calendar year) for foreign investment purposes.

4. Medical aid

Many medical aid members have no idea of what their medical aid covers, or more often, does not cover. Some are over insured and never claim. Others are hopelessly under insured.

Time well spent is to simply review the medical aid package on the internet. And, when in doubt, obtain professional help from the service providers when they visit the employer’s offices.

5. Life insurance requirements

Most South Africans simply rely on their employers’ Group Life Scheme. Most of these schemes provide a death benefit of two to four times’ annual salary. And the actual need ranges between eight and 12 times annual salary.

Talking life insurance is less popular than visiting the dentist. But it has to be done. The State will not provide the shortfall.

6. Disablity insurance cover

Many confuse death and disability insurance cover. Remember that surviving a disaster is far more expensive than dying. Again this needs comprehensive reassessment on an annual basis.

7. Short term insurance audit

Every South African either has too much insurance or too little. Some are insuring assets they no longer even own. Others have acquired assets they have forgotten to insure.

Contact your service provider and request a comprehensive assessment of assets and premiums.

8. Bank accounts and stop orders

Review your bank account and you will find:

 

  • Miscellaneous bank charges you did not know about.
  • Old stop orders, particularly on old cellphone accounts and short-term insurance policies that are no longer in use.

 

PART C

PREPARING FOR THE FUTURE

Property, property, property, lifestyle, lifestyle, lifestyle

South Africans own far too much property. It was all fine in the days when the holding costs of property were low, but those days are long gone.

During 2012 South Africans are going to face a barrage of increases in rates and taxes and fuel and electricity levies. RSA will probably introduce carbon emission taxes in 2013. These taxes, coupled with inflation and the ESCOM debacle, will probably result in the costs of keeping a household and commuting to work increasing by as much as 50% over the next two years. And after tax earnings will simply not keep pace.

For many South Africans their properties are literally eating their retirement savings and the time has come to downsize substantially. Yes, this is often a painful process, but for many it is fast becoming a process of survival.

The painful issues are going to include:-

 

  • Living in smaller properties, closer to work and school, or
  • Sharing bigger properties with retired parents or working children
  • Working from home more often
  • Holidaying closer to home
  • Use of smaller cars and appliances
  • Retiring later not earlier

 

Education, education education

Even if there is an orderly recovery of the world economy, retirement funding has suffered a tremendous setback over the past three years.

The lucky will be those who can recover enough between now and retirement. But even if they do, there will only be enough for them to support themselves.

Younger generations are going to have to become more self-sufficient. And the only way this can be achieved is through education and the resultant increase in earning power. The reward for sitting will be to sit.

Those still working, will have to accept that every effort must be made to continue working for as long as possible to allow retirement savings to recover. Again this can only be achieved through on-going education and keeping up to date with new technology.

Conclusion

The outlook created in this article is depressing. But the time has come for South Africans to realise that with 15 million people claiming social security grants out of a population of 50 million and a 25% unemployment rate, Government has priorities that extend far beyond looking after the 3,5 million taxpayers.

Yes, taxpayers are going to have to look after themselves. And the only way to achieve that is through comprehensive financial planning.

“Eddie is a good advisor that always explains everything in dept, and he always has your best interests art heart”

Edward Pitcher
Fourier Approach


“Eddie did a complete financial profile with detailed calculations of myself before recommending any financial products. His calculations were very transparent and easy to understand which made choosing the right financial tools that much easier. I recommended his to my family - something I wouldn't normally do unless I felt very comfortable with the level of expertise and integrity of the service”

Modes Cloete
CP Project Management & Training Consultants