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."
Tuesday, June 22, 2010
Monday, June 21, 2010
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.
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.
Monday, June 14, 2010
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
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
Monday, May 17, 2010
The price of Motherhood
Make sure you have a financial plan when you take off time to raise your family
Women live longer and therefore need more money on retirement than men. Yet statistics show us that women have significantly less savings on retirement than men.
Time off from work affects retirement savings
The role of motherhood, which is so vitally important to the fabric of our society, is the reason many women find themselves more financially vulnerable in their later years.
Mothers tend to stop working in order to raise their children and even if it is just for a short period of time, it has an enormous impact on one’s savings. Even when a mother returns to the workplace, she may choose a less demanding position in order to have a balance between family and work, further reducing her ability to provide for her retirement.
Let’s look at the numbers:
If you contribute 15% of your salary towards your retirement for 35 years, from the age of 25, you should achieve an adequate pension.
If you take off 5 years from age 30, you will get a pension of 80% of this amount, or would need to contribute 3.5% more (18.5%) while working.
If you take off 5 years from age 34, you will get a pension of 85% of the first example, or you would need to 3% more while working. The reason why you will be able to save slightly less than the previous example is because you have a greater lump sum saved by the age of 34, benefiting from compounding growth
If you take off 10 years from age 30, you will get a pension of 65% of the first example, or would need to contribute 8% (23%) while working
Living longer you will need more money to retire
To make matters worse, because women live longer they actually need a larger lump sum on retirement than men. With a guaranteed inflation- linked annuity (a regular income that keeps pace with inflation) a women would not need to save 10% more than her male counterpart to receive the same monthly income. This means that women cannot afford to save just 15% for 35 years, but would need to save 16.5%.
Shared retirement savings on divorce
The pension fund laws were recently changed so that a non- member spouse can now immediately receive a portion of their ex- spouse’s pension fund in the case of a divorce. This is deferred as the “clean break principle”.
While this is aimed at protecting the spouse who has taken time out to raise the children, one should not rely solely on one’s partner to provide for retirement.
Insuring your work
Women always tend to have less insurance cover than men. Stay- at- home mothers may believe that, because they are not earning an income, they do have to insure against the loss of income.
The reality is that as a mother you are providing a very important function for your family. If you were unable to care for your children, your family would have to hire help to fill all those roles in that you normally carry out. Your partner may also want to change to a less stressful position as he would now be the sole caregiver to your children. If you are disabled or become critically ill, your family will have increased medical costs to carry. Also remember that if you are not earning today, you may have plans to re- enter the work force one day and if you are unable to, that will affect your future earnings.
The good news is that, due to better longevity, the cost of life insurance is cheaper for women.
Be your own person
Just because you do not bring in an income or you are not the breadwinner does not mean that you should not have your own financial plan. Put yourself first and speak to a financial advisor to ensure that you are taking care of your own financial needs so that you will never be financially vulnerable.
Article by: Liberty
Women live longer and therefore need more money on retirement than men. Yet statistics show us that women have significantly less savings on retirement than men.
Time off from work affects retirement savings
The role of motherhood, which is so vitally important to the fabric of our society, is the reason many women find themselves more financially vulnerable in their later years.
Mothers tend to stop working in order to raise their children and even if it is just for a short period of time, it has an enormous impact on one’s savings. Even when a mother returns to the workplace, she may choose a less demanding position in order to have a balance between family and work, further reducing her ability to provide for her retirement.
Let’s look at the numbers:
If you contribute 15% of your salary towards your retirement for 35 years, from the age of 25, you should achieve an adequate pension.
If you take off 5 years from age 30, you will get a pension of 80% of this amount, or would need to contribute 3.5% more (18.5%) while working.
If you take off 5 years from age 34, you will get a pension of 85% of the first example, or you would need to 3% more while working. The reason why you will be able to save slightly less than the previous example is because you have a greater lump sum saved by the age of 34, benefiting from compounding growth
If you take off 10 years from age 30, you will get a pension of 65% of the first example, or would need to contribute 8% (23%) while working
Living longer you will need more money to retire
To make matters worse, because women live longer they actually need a larger lump sum on retirement than men. With a guaranteed inflation- linked annuity (a regular income that keeps pace with inflation) a women would not need to save 10% more than her male counterpart to receive the same monthly income. This means that women cannot afford to save just 15% for 35 years, but would need to save 16.5%.
Shared retirement savings on divorce
The pension fund laws were recently changed so that a non- member spouse can now immediately receive a portion of their ex- spouse’s pension fund in the case of a divorce. This is deferred as the “clean break principle”.
While this is aimed at protecting the spouse who has taken time out to raise the children, one should not rely solely on one’s partner to provide for retirement.
Insuring your work
Women always tend to have less insurance cover than men. Stay- at- home mothers may believe that, because they are not earning an income, they do have to insure against the loss of income.
The reality is that as a mother you are providing a very important function for your family. If you were unable to care for your children, your family would have to hire help to fill all those roles in that you normally carry out. Your partner may also want to change to a less stressful position as he would now be the sole caregiver to your children. If you are disabled or become critically ill, your family will have increased medical costs to carry. Also remember that if you are not earning today, you may have plans to re- enter the work force one day and if you are unable to, that will affect your future earnings.
The good news is that, due to better longevity, the cost of life insurance is cheaper for women.
Be your own person
Just because you do not bring in an income or you are not the breadwinner does not mean that you should not have your own financial plan. Put yourself first and speak to a financial advisor to ensure that you are taking care of your own financial needs so that you will never be financially vulnerable.
Article by: Liberty
Protect your children through your Will
Michelle Human: Liberty advisory Services
A testamentary trust is a necessity if you have young dependants
All parents want to protect their children. Unfortunately the time may come when you are no longer here and cannot protect them yourself. Making preparations for such an event does not mean that it will happen, only that if it does, that your children will be taken care of.
Make sure you have a valid will
One of the best ways to protect your children is to make sure that you have a will in place. A will is a simple document, but to make sure that your intentions are carried out it is crucial that you will is drafted correctly so that the executor of your estate knows who will inherit which of your assets.
Use a testamentary trust to provide for minor children
A testamentary trust is one of the most efficient ways to provide for minor children in the event of your death. This trust will only come in effect once you die, as stated in your will.
The trust controls how your funds are spent after your death, according to your wishes. For example, you could dictate that only income is used for daily maintenance and education, but the capital can be distributed once the children reach a certain age.
Choose a right guardian and trustees
A testamentary trust allows you to appoint a guardian who will take care of your children’s daily needs. You also choose the trustees who will manage the funds on behalf of your children.
You need to think carefully about who will make the best trustees. Your children’s guardian may not be the best person to manage their financial affairs. Ideally you want to appoint a trustee that has sound financial knowledge and can manage the estate’s finances to provide for the long- term welfare of your children.
Give instructions for life and retirement policies
In the ordinary course of events, the trustees of a testamentary trust are authorized to take control of the assets in the estate for the benefit of the minor children. But remember: proceeds from life insurance policies that pay directly to minor children, as nominated beneficiaries, and retirement fund benefits are not estate assets.
Unless you authorize the trustees to take control of your life insurance policies and retirement benefits, the trustees will not be able to take control of these monies and administer them in terms of the testamentary trust, even if the guardian agrees to them doing this.
The guardian will then have to open a bank account in the name of the child and the proceeds will be paid into this account, which means that the guardian will have full control over the bank account and how the money is spent.
Life insurance proceeds and retirement fund benefits can form a significant portion of your estate so make sure that your will is correctly worded.
A testamentary trust is a necessity if you have young dependants
All parents want to protect their children. Unfortunately the time may come when you are no longer here and cannot protect them yourself. Making preparations for such an event does not mean that it will happen, only that if it does, that your children will be taken care of.
Make sure you have a valid will
One of the best ways to protect your children is to make sure that you have a will in place. A will is a simple document, but to make sure that your intentions are carried out it is crucial that you will is drafted correctly so that the executor of your estate knows who will inherit which of your assets.
Use a testamentary trust to provide for minor children
A testamentary trust is one of the most efficient ways to provide for minor children in the event of your death. This trust will only come in effect once you die, as stated in your will.
The trust controls how your funds are spent after your death, according to your wishes. For example, you could dictate that only income is used for daily maintenance and education, but the capital can be distributed once the children reach a certain age.
Choose a right guardian and trustees
A testamentary trust allows you to appoint a guardian who will take care of your children’s daily needs. You also choose the trustees who will manage the funds on behalf of your children.
You need to think carefully about who will make the best trustees. Your children’s guardian may not be the best person to manage their financial affairs. Ideally you want to appoint a trustee that has sound financial knowledge and can manage the estate’s finances to provide for the long- term welfare of your children.
Give instructions for life and retirement policies
In the ordinary course of events, the trustees of a testamentary trust are authorized to take control of the assets in the estate for the benefit of the minor children. But remember: proceeds from life insurance policies that pay directly to minor children, as nominated beneficiaries, and retirement fund benefits are not estate assets.
Unless you authorize the trustees to take control of your life insurance policies and retirement benefits, the trustees will not be able to take control of these monies and administer them in terms of the testamentary trust, even if the guardian agrees to them doing this.
The guardian will then have to open a bank account in the name of the child and the proceeds will be paid into this account, which means that the guardian will have full control over the bank account and how the money is spent.
Life insurance proceeds and retirement fund benefits can form a significant portion of your estate so make sure that your will is correctly worded.
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