The Taxation Laws Amendment Act, 2015 passed some of government’s retirement reform proposals into law, creating an opportunity to significantly enhance saving for retirement. From 1 March 2016, the deduction cap for retirement fund contributions increases to 27.5% of the greater of remuneration or taxable income. However, with that said the 2nd Davis Tax Committee released a recent report suggesting that National Treasury should re-visit the overall limitation of retirement fund deductible contributions since it has not been increased to keep pace with wage inflation.
To date, 2016 has been a year filled with challenges for South Africans who have had to cope with higher inflation, volatile markets and uncertainty. The one bright spot was the national budget which offered savers increased tax relief on a number of personal investment fronts – something that investors should capitalise on, says Standard Bank.
With all these and other factors impacting on our lives, it is advisable to review personal investments ranging from insurance policies to retirement annuities to ensure that they are keeping pace with changes, and that you are benefitting from the tax changes that apply to investments, says Errol Gottfried Meyer, Senior Manager Standard Bank Advisory Propositions.
“Ultimately, building financial security and wealth is about taking a long-term view. Markets tend to be cyclical and move up and down in periods that vary. Overall, however, they do correct. But, what is important is that, when external circumstances change, that you take the time to assess where your investments are, how they are performing and whether they still meet your needs. If your personal circumstances have changed, it may be necessary to review your policies and align them with your new objectives.”
How your insurance policies are structured depends on your personal and family situation, as well as the value of your assets. Mr Meyer offers the following advice on spring-cleaning your insurance:
Review your policies every year
Life circumstances change from month-to-month, let alone every year, so it is important to ensure that you update your policies on a regular basis. Life events that will affect your policies include getting married, divorced, death, having a child, selling or acquiring an asset or even losing or gaining a business.
Unless you review your policies at least once a year, you run a very serious risk of being underinsured or going into retirement with inadequate income to maintain your lifestyle – and when in retirement, facing the harsh reality of running out of money. Not having the appropriate cover and annuity income that you need is a problem affecting more and more South Africans. It is a good idea to choose a specific date every year to review your policies and update your details.
Choosing the right policy
Fortunately, people today have a wide variety of policies to choose from. Understanding the different products is vital, as choosing the wrong one can mean you don’t get paid out for certain claims or therefore incur major costs; or retire with inadequate income to replace your salary. Speak to your financial planner to make sure you are adequately covered.
Avoid cancelling policies
You may decide on reviewing that it would be nice to save money by cancelling policies, but you should try to avoid this as your health circumstances change the older you get, and the cost of life cover increases, meaning that it becomes more expensive.
“Failing to keep policies updated can have consequences that can vary from not keeping up with inflation and the value of the policies being reduced over time, or finding that insurance policies have not been adjusted and that you are under-insured and will not receive what you expect when you claim or enter retirement.
“More importantly, if you have life insurance policies ensure that that your beneficiaries are updated from time to time to ensure that your wishes come into effect and that your loved ones are taken care of. This could impact negatively on the financial stability of your dependents.”
In times of financial stress, payments on long-term investments could lead to you considering whether to opt out of insurance; reduce payments on other policies and even cancel others so that the accumulated value can be paid out and used to meet everyday costs.
“These temptations should be avoided at all costs as nobody can predict when things will go wrong, or when the weather will turn. That’s why it’s so important to be insured and to make sure that all your insurance policies and documentation is up to date. This will ensure that your loved ones, are protected financially, should anything happen – also, premiums to begin building wealth are significantly less if you start young”, says Mr Meyer.
The role of financial planners is increasing in importance due to the challenges and complexity clients are facing on a daily basis. But this crucially entails helping clients plan for the future rather than just for the short term and building an ongoing relationship of trust, concludes Mr Meyer.