As South Africans, we are fortunate to have a wide range of tools available to us to plan our financial affairs and ensure that our estates are well-structured. However, the range of products and product types can sometimes be overwhelming making it difficult to decide what product to put in place, or even whether we need it in the first place. Let’s take a closer look at 8 common financial planning tools, when they may be necessary, and how much you can expect to pay for them.
A Will
What is it?
A Will is one of the most important documents in your estate plan because it allows you to determine how your assets will be distributed when you die. Freedom of testation means that your written Will can include detailed instructions of who you would like to benefit from your estate. In addition, your Will can be used to ensure efficient administration of your deceased estate, provide for your dependants, reduce Estate Duty liability and protect the assets intended for your minor children. In the absence of a Will, the state will appoint an Executor Dative to wind up your estate in accordance with the law of intestate succession, which could result in people who you would not necessarily have appointed as heirs inheriting from your estate.
Who needs one?
If you own immoveable property and other assets, are married and/or have children, then you should definitely have a Will in place. Through your Will, you are able to make provision for your spouse and children in the event that you pass away. A testamentary trust, which you can set up in terms of your Will and which only comes into being on your passing, is an effective vehicle to house assets bequeathed to your minor children. Having said that, anyone over the age of 16 can write a Will and appoint an executor to wind up his estate.
How much does it cost?
Most law firms and financial planning practices will have in-house estate planning experts who are able to draft a Will. The cost of a simple Will starts at around R500, with the price increasing as the complexity of the estate increases.
Advance Healthcare Directive
What is it?
An Advance Healthcare Directive is a document which sets out your wishes for future medical treatment if there ever comes a time when you are unable to communicate. An Advance Healthcare Directive only becomes effective when you lose the ability to communicate for yourself through injury, illness or other medical condition. This document allows you to set out detailed instructions on what medical treatment you do and do not consent to in various scenarios. An Advance Healthcare Directive allows you to appoint a medical proxy, normally a partner or close family member, who will make decisions on your behalf if you are incapacitated, and can include specific details regarding treatments, medical interventions, pain management, infection control and palliative care at the end-of-life stage. It can be a particularly valuable document for the families of those in advanced stages of dementia, persons in a permanent vegetative state or those suffering from a terminal illness.
Who needs one?
Illness and/or injury can affect any of us at any time. If you would like a say regarding your medical treatment in the event that you cannot speak for yourself, and if you would like to appoint a spouse, friend or family member to be your medical proxy in such circumstances, then you should definitely have an Advance Healthcare Directive.
How much does it cost?
Your financial advisor should have a template for you to use and should not charge for it. Alternatively, the Cansa Association of South Africa, Dignity South Africa and hospices provide online Advance Healthcare Directive templates that you can download.
Income Protector
What is it?
An income protection benefit is designed to replace your income, or a portion of your income, should you become disabled and unable to generate an income. While you are young and still accumulating your wealth, your ability to generate an income is your greatest asset and should be protected at all costs. When taking out an income protection benefit, you will need to determine what level of income you would like to insure and until what age. In general, most income protection benefits cease at age 65, although this can depend on the insurance company. When deciding what income to protect, you should take into account your debt, retirement funding shortfalls and monthly living costs. It is important to ensure that, when putting an income protection benefit in place, the income keeps pace with inflation. Bear in mind that an income protector does not cover income lost as a result of retrenchment.
Who needs one?
If an injury or illness prevents you from earning a living, will you be able to pay the bills? If not, then you need an income protection benefit. If your illness or injury puts you off work for three months, you may have enough money in your emergency fund to tide you over. But, what if it is a lifelong disability or illness that permanently affects your ability to generate an income? Would you be able to pay your bills and save for retirement? If not, then you need an income protection benefit.
How much does it cost?
The cost of your disability cover will be based on your risk profile and the most important consideration is your health. As part of the underwriting process, you may need to undergo a medical examination. Your premiums will also depend on other risk factors such as your age, education, qualifications, smoking and drinking habits, your occupation and any dangerous activities that you partake in.
Gap Cover
What is it?
If you are a member of a medical aid, you will know that your medical scheme does not guarantee full cover, especially when it comes to specialist consultations and procedures. Many medical doctors and specialists charge more than medical schemes will pay. This creates a shortfall ‘gap’ between what the medical aid is willing to pay and the actual cost of the medical practitioner. Gap cover is a short-term insurance policy that covers this shortfall (up to certain limits) in the event of hospitalisation, medical treatment and certain out-of-hospital procedures. Example: According to the rules of your medical scheme, your medical aid covers hospitalisation at 100% of medical aid tariffs. You are booked into hospital for a tonsillectomy, but your surgeon and anaesthetist charge a rate of 200% of tariff. You will need to pay the shortfall directly to your surgeon and anaesthetist and then claim back the difference from your gap cover provider.
Who needs one?
Firstly, you have to be a member of a medical scheme to qualify for a gap cover benefit. Also, it is important to consider your health status and that of your dependants when making the decision to purchase gap cover. If you are comfortable that you can self-fund the shortfall in the event of a hospitalisation, then you may not need gap cover. However, bear in mind that hospitalisation is very expensive and some medical practitioners charge in excess of 600% of medical aid tariff. If you can afford it, gap cover is definitely an option worth considering.
How much does it cost?
The price of gap cover ranges from around R220 to R600 per family per month, but the benefits vary from provider to provider so do your research before simply choosing the cheapest cover. The most popular and/or common gap cover options provide gap cover for in-hospital treatment, a co-payment benefit, additional cover for cancer, and a benefit extender to enhance sub-limits imposed by the medical aid. Some policies provide reimbursement for emergency room visits, MRIs, CT scans, chemo, radiotherapy and dialysis, but you would need to check the wording of your policy to determine exactly what is and is not covered.
Retirement Annuity
What is it?
As in the case of provident and pension funds, retirement annuities are registered in terms of the Pension Funds Act and are tax-efficient investment vehicles designed for individual investors and employees who wish to supplement their workplace retirement fund. South Africans are permitted to invest up to 27.5% of their taxable earnings towards a retirement annuity on a tax-deductible basis, making it a very attractive investment option. Investors have complete flexibility to determine their own contribution plan – with monthly, quarterly, annual or ad hoc contributions being possible – making it idea for those who earn irregular commissions, incentives or bonuses. With invested funds being inaccessible before age 55, investors can avoid the temptation of dipping into their retirement nest egg prematurely.
Who needs one?
A retirement annuity is ideal for anyone who is self-employed or for an employee seeking to supplement the contributions to their workplace retirement fund. For example, if you have an existing workplace pension fund to which you contribute 15% of your taxable income, you would be able to contribute an additional 12.5% towards a retirement annuity – making it a useful tool for those who are behind on their retirement savings. Retirement annuities are great for housing commissions, rental income or interest that is generated over and above one’s pensionable income.
How much does it cost?
There are no costs involved in setting up a unit trust retirement annuity, and your financial adviser will be able to facilitate this process for you relatively easily. Generally speaking, most retirement annuities have a minimum monthly contribution requirement of R500, or a once-off lump sum minimum of R20 000. Investment fees will be charged as a percentage of the funds you have invested and will be fully disclosed to you before setting up your RA.
Tax-Free Savings Account
What is it?
In general, a Tax-Free Savings Account should be viewed as a long-term savings vehicle in order to achieve maximum benefit from it. The greatest benefit of a TFSA is that all proceeds earned from it – including interest income, capital gains and dividends – are exempt from tax. This means that you get your full investment return without being taxed on the growth you earn. Unlike retirement fund contributions, it is important to bear in mind that contributions towards a TFSA are not tax deductible. Annual contributions towards TFSAs have just been increased to R36 000 per year, with the annual limit remaining at R500 000. If you do not use your annual contribution of R36 000 in a tax year, you will not be permitted to roll it over to the following year, and your contribution will therefore be forfeited.
Who needs one?
Your investment horizon, goals, returns, debt levels, income and the extent to which you are making use of the other tax-efficient savings options are all factors to be considered before setting up a Tax-Free Savings Account. Before investing in a TFSA, it makes sense to ensure that you are first maximising your tax-deductible contributions towards a registered retirement fund, such as an employer pension fund or retirement annuity as thee tax benefits of a retirement fund outweigh those of a TFSA.
How much does it cost?
Most life insurers, banks, unit trust companies and LISP platforms offer Tax Free Savings Accounts (TFSA) which are easily accessible and attractive to those wanting to reduce their tax liability, and fees will vary from provider to provider.
Life Cover
What is it?
Life insurance is a way of protecting your loved ones financially if you were to die by creating liquidity in your estate. In the event of your death, the insurance company will pay out the claim to your nominated beneficiaries and these funds can be used to pay for funeral expenses, cover the costs of winding up the estate, settle the home loan, pay off vehicle and credit card debt, provide for monthly living costs, and invested for future education costs.
Who needs it?
Not everyone needs life cover and it should only be recommended by your financial planner if there is a genuine need. It is advisable to consider life cover if you have a home loan or debt that your estate would be liable for in the event of your death, and/or if you have a spouse or children you would like to provide for if you pass away.
How much does it cost?
If you have a genuine need for life cover, your financial planner should prepare a number of comparative quotes from a range of insurance companies, together with a detailed explanation of how the premiums escalate over time. Your premiums will be determined by the insurer’s underwriting department who will assess the risk that you pose in respect of health, pre-existing conditions, dangerous activities, smoker status and so on.
General Power of Attorney
What is it?
A power of attorney is a formal document by which a person (the principal) authorises another (the agent) to conclude juristic acts on his behalf. By signing a power of attorney, the principal indicates to third parties that he will be bound by the acts performed by his agent. Essentially, a power of attorney can be used to give someone else the right to manage your affairs if you are physically incapacitated or unavailable to do so yourself.
Who needs one?
If you are physically ill, aged and/or physically impaired, you may want to consider giving your spouse, adult child or close friend power of attorney over your affairs. If you plan to travel out of the country for an extended period of time, you could grant someone power of attorney over your affairs in South Africa while you are travelling. It is important to bear in mind that a power of attorney automatically lapses if the principal becomes mentally incapacitated, which means that it cannot be used where a person suffers from dementia or Alzheimer’s disease. This is because, in terms of our law, an agent cannot do that which the principal has no capacity to do himself.
How much does it cost?
Power of attorney templates are freely available, although attorneys will generally charge a fee for drafting one.
Have a great day!
Sue
