Keep your medical scheme for tax reasons says Resolution

14 May 2010
Resolution Health Medical Scheme

Medical aid costs and general medical expenses are fairly extensively tax deductible and hard pressed consumers should not act too hastily when it comes to cancelling or downgrading their medical aid cover, warns Resolution Health Medical Scheme.

Principal Officer Mark Arnold argues strongly that medical aid cover is not merely a nice to have and that, while cancelling or reducing that cover may bring temporary relief to household budget, it's in fact "false economy" that exposes you to potentially huge medical expense risk.

"Our basic message is retain your medical aid cover if it's at all financially feasible to do so," he says.

"While this obviously affects cash flow in the short term, a large proportion of medical expenses are deductible in a given tax year and it's obviously far preferable to remain covered for medical costs until those deductions begin to filter through."

"The tax benefit for medical aid contributions and medical expenditure are straightforward and can easily be explained " he points out.

The tax free allowance granted by the Receiver toward medical aid contributions during a given tax year, now amounts to R670 per month for the member and the first dependant and R410 per month for every other dependant.

"This works out at a substantial R2160 deduction pm (R25 920 pa) for a family of four, applicable after Minister Pravin Gordhan announced some welcome relief on the tax front for medical contributions in his budget speech."

In addition to that, the Receiver allows deducted against tax, your contribution that exceeds this total, together with the unclaimed portion of your general expenses (the amount not paid by your medical aid) where the total of those amounts exceeds 7,5% of your taxable earnings.

Also tax payers over the age of 65 enjoy a full deduction for qualifying medical aid contributions and expenses while tax payers under 65 may claim all qualifying medical expenses where the taxpayer or the taxpayer's spouse or child is disabled. So taken as a whole, these deductions and potential deductions can be substantial.

"It should be borne in mind however that any contribution made by the employer on behalf of the employee toward his medical aid contribution, either by way of a subsidy or a salary sacrifice is regarded as income in the hands of the employee and this has to be taken into account in your tax calculations."

The exception to the rule is where a company subsidises low income staff medical cover in which case that contribution is still either 100% tax deductible for the employee, resulting in a "zero effect", tax wise for the employee. Other tax free exceptions apply where contributions are made by a company on behalf of pensioners, or dependants of deceased pensioners.

"The fundamental fact is that medical expenses for individuals are already substantially tax deductible and maintaining your medical aid membership is crucially important against the background of rising medical costs and the questionable alternative of being reliant upon the State health system."

RA Solution

Source: Discovery Life

This is the start of a series of articles showing how flexible RAs have become since the rule changes last year and how they should be an integral part of planning for a client.


RAs are no longer just a tool to reduce a client’s taxable income, as was the case in the past.

Background

Since 1 January 2009 all payouts from RAs on death are free of estate duty

Subsequent to all the rule changes on RAs, on death, the full cash proceeds of the policy can be paid to dependants if they so wish

In terms of the Second Schedule to the Income Tax Act, any taxpayer contributions to a RA which did not “rank for deduction against the taxpayer’s income in terms of section 11 (k) or (n)of the Act” will pay out tax-free in addition to the R300 000 allowed. Section 11 (n) of the Act allows a deduction up to a maximum of 15% of non-retirement funding, taxable income. (The section has been paraphrased.)

Scenario

Client aged 84 has R3 million to invest. He does not need the money, but wants to invest it for his family. He has an estate duty problem.

Solution

The client invests the R3 million in a single premium RA. With this simple investment, the client has achieved five benefits:

The R3 million has been removed from the client’s estate, and will be free of estate duty when it pays out. This equates to a saving of R600 000, without taking growth of the investment into account

The investment will be in the untaxed portfolio in the insurers hands

When the client dies, his dependents can draw the full proceeds of the policy in cash if they so choose. This makes it a fully liquid investment for them

The policy proceeds will pay directly to the dependants on death and not be subject to executor’s fees in the deceased estate. Assuming no growth, and the normal executor’s fee at 3,99%, this equates to a saving of R119 700

Finally, the R3 million paid into the RA would have been well in excess of the allowable deductible amount (see above). It would be safe to assume that it would not have been tax deductible going into the RA. This would mean that it would come out tax-free on top of the R300 000 allowed. If a small part of it was deductible, that bit would not come out tax-free, but then the taxpayer could still use the R300 000 tax-free allowance (assuming that has not been used before).

Benefits

The client has been given an investment in an untaxed portfolio, which is fully liquid for the family, free of executor’s fees and estate duty, and in most cases, tax-free when it pays out. No other investment product can match this.

Conclusion

RAs are an integral part of a client’s estate planning since the regulatory changes last year. All elderly clients should be using them as an estate duty shelter.

Review your circumstances: Things to think about when your life changes

When you experience a life-changing event, speak to your financial advisor and update your financial plan.

I have started working
Start a savings plan and make sure you have enough risk cover (insurance) to protect your future income. Understand the details of your company's pension scheme if there is one.

I have changed jobs or have been promoted
Rather than spending your extra cash, increase your monthly savings by the same percentage as your salary.

I have lost my job
Understand what your options are and whether you need to draw from your pension, and what that means for your retirement. Find out if any of your policies include retrenchment cover which will cover your insurance or investment premiums.

I have just got married
Review your life cover and your will. This is also a good time to sit down with your spouse and discuss your financial priorities and what you both hope to achieve over the next five, ten and twenty years.

I have just had a child
Reassess your life and make sure that you will have a will that includes a testamentary trust. You also need to start  a savings plan for your child's education.

One of the breadwinners has stopped working to raise children
Reassess your family budget. Also make sure the stay- at- home parent has retirement provisions and risk cover.

I have just got divorced
Assess the impact the divorce has had on your income and your assets and adjust your spending accordingly. If you receive a lump sum from your ex- spouse's retirement fund, make sure you use a preservation fund to keep your retirement benefits. Update your will.

There has been death in the family
Understand the financial impact on the family. If you received death benefits, speak to your financial advisor about the best possible way to invest these. Review your risk cover and your will.

I am about to retire
Understand your financial situation and the changes you may need to make your investments and risk cover.

Source: Liberty Life