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SHOULD MY BOND TAKE PRIORITY OVER AN RA?
I’ve bought the property that I currently live in, and I’ve decided to rather pay my usual monthly retirement annuity (RA) premium into the bond instead, with the aim of lowering the bond as soon as possible. Is this the right thing to do, or is it better to be paying towards an RA as well as trying to pay off the bond? Paying both just seems very inaccessible to me at the moment.
Name withheld
Pierre De Bruyn, Wealth Manager at PSG Wealth, Northcliff, responds:
The simple answer is generally that one should first pay off debt before investing.
Paying off your bond generally gives you access to capital and hopefully you only use this for acquiring assets and not for consumption expenditure. It also makes most people feel free of the debt burden. All of these are important financial goals.
Paying into an RA is also a good investment option, but with an entirely different investment horizon, as you can generally only access these funds after age 55. Assuming a growth rate of 10% and a tax rate of 25%, you can see that there are great advantages to investing effectively 25% more into an RA than any after-tax alternative. If you are paying R5 000 per month into your bond with after-tax money, you would effectively have been able to pay (R5 000/75) x 100 = R6 667 per month into the RA, as you would get a 25% tax deduction. There is also an amount of R500 000 available at retirement which is taxed at 0%, provided the aggregation of retirement benefits is not applicable.
As you cannot afford both the bond and RA, I would support your decision to pay off your bond first.
The results above are dependent on your actual tax rate and return assumptions and I would advise you to approach a professionally qualified adviser to give you a more comprehensive answer than that set out above.
THE BENEFITS OF A LETTER OF WISHES
In the case of my will and testament, what are the most important points for me to focus on to leave clear instructions to my loved ones to avoid any confusion or drama?
Name withheld
Richus Nel, PSG Wealth, Old Oak, replies:
A letter of wishes can be added under separate cover to a final will and testament or trust deed. Drafting a letter of wishes conveys the principal wishes of the author, to future estate or trust custodians. This conveyance of personal wishes, while not legally binding, can provide guidance to custodians in their decision-making regarding the preservation of family benefits, relationships, family beliefs/values, religion, and sentiment. It is against this distinct “framework” that key management and money decisions should be considered.
Typical information included in a letter of wishes added as a separate document to a will:
- Funeral arrangements (guests to invite, burial/cremation/organ donation, type of service, location of the scattering of ashes).
- Distribution of personal items of only sentimental value (perfumes, clothing, photos, music, books, self-made items, tools, sports gear).
- Guidance for guardians of children (in religion/relationships/education/money matters).
Typical information included in a letter of wishes added to a testamentary or inter-vivos trust:
- Wider description of the objective of the trust than what is provided in the trust deed.
- Specific privileges/benefits to certain individuals (such as special-care needs).
- The exclusion of certain benefits/privileges/individuals.
Finally, a “letter of instruction” can also be included in a will to assist the surviving spouse and children in the aftermath of your passing. This letter contains a list of instructions on what needs to happen with the necessary confidential information – for example, people to notify (financial adviser), security codes/keys, bank/investment accounts, property deeds, vehicle/fire-arm registration documents, and tax details.
A letter of wishes/instruction always remains confidential – only seen by executors or trustees. The private nature of this document will therefore not be compromised, even in a legal dispute or grant of legal representation.
EMPLOYEE BENEFITS FOR SMALL FIRMS
I run a small interior construction business that employs around 40 people. We try to give them the best employee benefits to set them up for secure financial circumstances. However, I find that most employees don’t understand or utilise these benefits correctly. How should I manage this going forward?
Name withheld
Mariska Comins, Head of Technical at PSG Wealth, responds:
It can be very daunting for your employees to understand how their benefits work, and how to structure them to best suit their individual needs. The most crucial part is for them to understand the group life benefits, the family benefits (in other words, if the employee suddenly passes away, what benefits does the family receive?), and which unit trust funds to select when investing into pension or a provident fund. It’s also vital for them to understand their options in case of retrenchment, resignation, or retirement.
As an employer, it’s your responsibility to consistently educate your employees from a financial as well as a psychological perspective to make sure they stay on track with their financial goals. They will, in turn, pass the lessons on to their families and friends, making an even bigger impact than just the employee.
Financial advisers also play a vital role in assisting the process involving employees and their benefits, so you can encourage your employees to get in touch with a financial adviser to help structure their benefits in a way that is advantageous to them and their families.
INSURANCE AND THE NEW GENERATION
Should I be teaching my children about insurance?
Name withheld
Karen Rimmer, Head: Distribution at PSG Insure, responds:
The youth of today live in a very different world, with its own unique risks, which require a very different approach to insurance. The emergence of wearable technology and the rapid acceleration of digitalisation has heralded an entirely new array of insurable risks, and given the dynamic nature of the risk landscape, parents should view educating their young adult children about short-term insurance as an important life skill.
Insurance can provide an important safety net, and is an integral part of our financial plan, helping us recover from financial setbacks due to the loss of, or damage to, possessions. A good place to start is to help your children understand their risk profile. This is unique to each individual and based on factors such as age, claims behaviour, where they live and how they store their valuables.
All these are taken into account to determine their level of risk, and ultimately their insurance premium, but importantly, some factors are under their control, and parents should always encourage children to put the appropriate safety measures in place and take the necessary precautions to keep possessions safe.
PERSONAL FINANCE