Save up to buy a second car

In this advice column, Zipho Mnyande from Alexander Forbes answers questions from a reader who wants to save up to buy a second car.

Q: I would like to start saving for a second motor vehicle. My current car is paid off and still in very good condition, so I don’t think I will need to replace it within the next five years.

I would therefore like to save the money that I was paying towards my monthly instalments to eventually buy a second motor vehicle for cash. Therefore, my savings term would be at least five years.

I have a money market fund with Allan Gray at the moment, but I find it difficult not to use these savings for other larger expenses. I would therefore prefer to use something that does not allow immediate and easy access to my savings. What would be best for this purpose?

The first step one should take is to identify the investment objective. In this case that is a car, with an assumed cost of R300 000 at the end of a five-year term horizon. It is important to understand this time horizon as well as your appetite for risk to decide on the most suitable investment vehicle.

Some of the most popular after-tax investment vehicles include endowments, unit trusts and the tax free savings accounts. These vary in terms of accessibility and tax implications and we would need to know the clients full financial situation before recommending a suitable product.

For a client who wants to lock their investment for a five-year period, an endowment would be a vehicle to consider. We do, however, have to take into account their marginal tax rate when making this decision.

This is because endowments are taxed within the fund at a set rate of 30{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}. This benefits investors who have a marginal tax rate greater than that, but can be prejudicial if their tax rate is lower.

Because the money in an endowment is taxed within the fund, your withdrawals are tax free. In order to get this benefit, however, endowments have a minimum investment time horizon of five years. At that point the money can be accessed or the investor can choose to extend the policy term.

You would be able to choose different underlying investments within the endowment, and given your time horizon, a moderate-to-balanced portfolio will most likely be appropriate. It is, however, important to take your risk appetite into account.

Reader about where to invest a 13th cheque

A lot of people who get a bonus or once off additional income for whatever reason, tend to ‘blow it’ as you have pointed out. It is therefore a very good idea to try to think of better things to do with the money. I would, however, suggest that you consider not only your immediate or short term needs but also the long term potential of any extra income you receive – no matter how small.

If you have a need for extra monthly income, which might be the case if you are currently using a credit card or overdraft because your expenses are close to or more than your current monthly income, then I support your idea of putting the money in a vehicle that will allow you to supplement your income for the next two years.

A two year term, however, is a very short time horizon for an investment and I assume you intend to be drawing the full amount over the two years. In other words, you will be left with nothing at the end.

If so, you will need access to the money and very little, if any, risk. With these constraints in mind, I would suggest either multi-asset income unit trusts – the top funds produce between 8{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} and 10{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} per annum historically – or a bank savings, call or money market account with cash immediately available. These bank accounts produce between 5.5{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} and 7.5{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} per annum, depending on the amount.

Let’s use an example and say the amount is R50 000. If you can achieve returns of 10{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} per annum for the next two years, this will produce an income of R2 307 per month for 24 months before being depleted. At 7{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} per annum, the monthly amount will be R2 194 per month, so there is only a small difference, which means it is probably not worth taking the extra risk.

The question is whether you actually need additional income or if you are just going to be spending it over 24 months instead of one month. If you don’t really have a requirement for the additional income, you may want to consider investing the amount for a longer term so that it can produce even more for you.

You could consider putting the money into a tax-free savings account or retirement annuity (RA). By contributing to an RA, you would be reducing your taxable income. This means you could get something more back from the South African Revenue Service next year, depending on what retirement contributions you are already making.

Let’s use the same R50 000 we used for the example above and assume that you are below the maximum deductible contributions to your retirement funding. This is currently 27.5{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of your remuneration or taxable income, or R350 000 per annum, whichever is lower.

Let’s also assume that you are in a 36{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} tax bracket. If that is the case, you would get an additional R18 000 back from SARS or have to pay in R18 000 less for income tax when you submit your next return. In other words, you receive your R50 000 dividend, you invest it into an RA which results in you having an extra R18 000 next year, and the R50 000 also grows until you retire. You can only access the money in an RA once you turn 55.

The tax free savings account option wouldn’t allow you to deduct contributions for tax, but it also doesn’t tie the money up until retirement. Taking into account that growth and income in the investment is not taxed, you can benefit hugely if you think of it as an additional retirement savings plan.

Let’s say that you have 20 years to retirement. If you put R30 000 per year into a tax free savings account and achieved growth of 10{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} per year, you would have an additional R1.7 million at retirement with no tax consequences at all. R1.1 million of that would represent gains which would otherwise have been taxed. You can also draw this money out at any time if you have a need for it, so it has the benefit of being an ’emergency fund’ for added security.

The idea is that whenever you get a little extra, take that amount and make it work even more for you, and so improve your position over time. You are thinking along the right path but a two year term doesn’t give you too many options without substantial risk. If you can think longer term, you would be surprised at how much more those dividends can do for you.

The diagnosed and the undiagnosed

A friend was on holiday in a small town when her baby’s scheduled immunisation was due. After being directed to the local clinic who had the stock of the required vaccination, she duly fell in line with other patients to open a new clinic file. Although it seemed that many patients waiting in the queue could read, the clinic assistant in charge was adamant on reading the questions and completing the forms on their behalf.

“Do you have disabilities?” It would thunder through the room, and so forth. By the time it was my friend’s turn, she insisted on reading the questions herself. And to her surprise, the “disabilities” everybody was questioned about, turned out to be “diabetes”. None of those in front of her had disabilities, but should they have been questioned correctly, they could have confirmed their diabetic status.

Among the top five most prevalent chronic conditions

Diabetes is one of the world’s fastest growing lifestyle diseases. In 2015 South Africa had 2.28 million cases of diabetes according to the International Diabetes Federation (IDF). The problem is that for every diagnosed adult, there is an estimated one undiagnosed adult. The number of undiagnosed cases in South Africa is projected at around 1.39 million.

Both diabetes mellitus types 1 and 2 rank among the top five most prevalent chronic conditions under medical scheme members.

Although it is one of the most prevalent conditions and the coverage ratio for medical scheme members with Diabetes mellitus Type 2 is slowly increasing, the coverage still seems to be low.

The proportion of Diabetes mellitus type 2 patients claiming for chronic disease medicine was a mere 28.8{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} in 2015, the Council of Medical Schemes Annual Report shows.

The coverage of monitoring tests, such as the creatinine test was 33{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} in 2015 and coverage for the HbA1c test was 26.2{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}. It was at similar levels the previous years.

This is despite Diabetes insipidus and Diabetes mellitus types 1 and 2 being covered as chronic conditions under prescribed minimum benefits (PMBs). This means that medical schemes must cover costs of all members who suffers from diabetes, regardless of their benefit option.

Use your medical scheme benefits

Schemes usually have screening benefits to diagnose diabetes as well as wellness and chronic illness treatment programmes for affected members.

Plans for chronic conditions typically involve consultations with doctors, blood tests, treatments and medication.

“Diabetes treatment programmes generally include two GP consultations, which are often used to renew prescriptions for the next six months; 2 specialist consultations; and blood tests,” says Deon Heydenrych of Stapleford Insurance Brokers.

Even though an illness is a PMB, medical schemes can have their own cost-effective measures, such as lists of medication and designated service provider consultations which are covered without any excess.

This is where confusion about cover often kicks in. It means that if the scheme member decides to use a different service provider or medicine, the cost will only be covered up to a limit and the member will be responsible for the rest.

Heydenrych says it is also crucial that members register their chronic illness with the scheme. Only if you are registered as a chronic illness sufferer you will be able to receive all the benefits.

“If you need more than the provided two consultations or blood tests, your doctor can motivate a request that the scheme will cover the costs of those.”

To ensure that you don’t end up paying unnecessarily, it is also important that doctors provide the correct ICD-10 codes and procedure codes on accounts. These codes indicate which health conditions have been treated. If these are incorrect the fund may refuse to pay and the member will have to cover the costs out of their day to day benefits or own pocket.

Furry news on the diabetes front

Enter Honey, the first officially certified Medical Alert Dog to be trained in South Africa.

Medic Alert Dogs for diabetics are specifically trained to alert diabetic handlers in advance of low or high blood sugar events, before a dangerous situation can occur. In fact, by using their incredible sense of smell, these dogs can sniff out any changes in their owner’s glucose level up to 30 minutes before a blood glucose monitor.

Honey belongs to twelve-year-old Duncan Smuts, who was diagnosed with Type 1 diabetes when he was 3 years old. She has already woken him up due to a drop in his sugar levels.

With more training, her ability to detect the smell of a hypoglycaemic episode will become stronger and more reliable, says her trainer, Lucy Breytenbach, a behaviour practitioner with a BSc (Hons) degree in Animal Science, Behaviour and Welfare.

Data burning a deeper hole in the pockets of South Africans

In the wake of the DataMustFall campaign, it seems that the data revolution might have a valid and legitimate plea. The campaign founders made a presentation before the Parliamentary Communications and Postal Committee on September 21 on the costs of data in the country. According to the soon-to-be launched findings of the FinScope South Africa 2016 consumer survey, the results show that the average South African spends about 9{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of their purse on airtime and data recharge, cellphone contracts, telephone lines and internet payments. The average person spends approximately R700 a month for communication-related expenses.

Parallel to the #DataMustFall campaign, which is gaining traction, is the #FeesMustFall (reloaded) campaign, which is also resurfacing in light of the announcement of an up to 8{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} fee increase made by the Higher Education Minister Blade Nzimande. While university students would like to see a 0{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} increase, universities are requesting increases to sustain operations and fund research.

Therefore, in light of these developments and expenses, how does the purse of the South African consumer fair? The preliminary results of the FinScope 2016 survey shows that South Africans spend R688 per month on average on education.

The FinScope findings further show that South Africa’s total personal monthly consumption (PMC) expenditure in 2016 is estimated at R220 billion (monthly). On a monthly basis, the average individual spent approximately R5 400 during the period of conducting the FinScope 2016 survey. The results show that the main components of expenditure are on food (21{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}), transport (11{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}), utilities (11{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}) and communication, which amount to 9{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of the spending purse.

Overall, individuals’ spending on education is 6{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of their purse (estimated monthly spend of R12.2 billion). Further demographic analysis of the data per race showed that black communities still bear the greatest brunt of the education costs. For the average black South African, education expenses constitute 7{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of their purse – this is higher compared to other races for which the purse composition for coloured, Asian, Indian and whites are at an average of 4.3{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of their purse.

Furthermore, as one analyses the data further, it shows that nearly 12 million black South Africans spend more than 10{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of their purse on education-related expenses. This is further exacerbated when noting that the average income per month is R4 723, R6 294, R12 265 and R17 123 for black, coloured, Indian and white South Africans respectively. As such, the cost of education places a heavier burden on black South Africans.

Finance will be more competent than my white counterpart

Luthuli Capital was founded and structured as a Pan-African multi specialist company that offers a global approach to wealth management portfolios. The company offers investment advisory services to local and foreign individuals and multinationals, among others. I’m joined in the studio by one of the co-founders, Mduduzi Luthuli. Thank you so much for your time.

MDUDUZI LUTHULI:  Thank you for the invitation. Glad to be here.

NASTASSIA ARENDSE:  Let’s take it back to the beginning and start off with how Luthuli Capital came together.

MDUDUZI LUTHULI:  I think if you are going to start a company it’s always something that’s there. It’s just a matter of acquiring the skills for you to be confident to run the company and wait for the circumstances to be there.

I’ve been in the corporate sector now – from banking into the financial advisory industry – for about seven years. My previous employer gave me a great opportunity in management and it’s really there where I got to cut my teeth and get to the point where I realised I think it’s time for me to go out there and do this on my own.

We’ve got two offices here in Sandton and one in Durban. It really was the Durban office that was also the big motivator because we’ve got a project going on down there which involves the internship, and that also just got to that point where, if ever you are going to do this, this is the time.

NASTASSIA ARENDSE:  And I know that you work with Trudy as well. How did the two of you decide that it’s our synergies and both our characteristics and everything we’ve learned from our own sort of corporate size that can work together – and let’s do this?

MDUDUZI LUTHULI:  We both come from the same industry. So from a product knowledge side, services, the competency was there. I think really where the synergy comes from is they say I’m the driving force, I’m the bully, I’m the hard-core one. My real talent is bringing the clients into the business, going out there and selling the dream and convincing them that this is something you should back.

And Trudy, as head of client services, is the mother of the business, if I can put it that way. And really her strength is in client retention. You play a fine balance between finding new clients and also looking after your existing clients. And that’s really where we work with each other’s strengths and work very well together, because she heads up the client retention. I bring them and she looks after them.

NASTASSIA ARENDSE:  How competitive is the industry that you are in right now?

MDUDUZI LUTHULI:  It’s extremely competitive. I don’t think I have the words to truly describe how competitive an industry it is. One of the fantastic things and one of the shining lights about South Africa is that we have a very good financial system. Or let me say that the governance and the legislation here is very good and that really translates into the financial advisory system with the initiatives that the FSB puts out there – the financial planning institution, to make sure that as financial advisors or wealth managers we move away from a culture of just selling for the sake of selling, and seeing ourselves and conducting ourselves as professionals and as a professional field.

So now you are working in an industry where you have exceptional professionals, people giving advice. And really you have to convince the client as to say why you. And I would even say you have very established players, your Allan Gray, your Stanlibs of the world, your Old Mutual, your Liberty. So as a new company going after clients and acquiring big clients, there’s already someone existing there, giving them advice; there is really an existing relationship. Now you have to convince them to say: what am I bringing to the party that will convince them? It’s very competitive.

NASTASSIA ARENDSE:  Before we get to the internship programme – and we were talking about the financial industry – there is a lot of talk. You have Absa talking about it, you get a lot of industry professionals talking about transformation in the financial services industry. Some argue it from the point of we need more women to come on board and be fund managers, portfolio managers, etc. Others say we are all competing for the same pie, a little bit more, etc. What are your thoughts on transformation in the financial industry?

MDUDUZI LUTHULI:  It’s definitely something that needs to be looked at. I would challenge anyone to go to any investment seminar, whether it’s held by the FSB, the Financial Planning Institute or the big players, and the reality is the room will be dominated by white Afrikaans males over the age of 45.

The nice thing about going into our business is that it also allows you to do proper succession planning, estate planning. And all that means is if I start my company and I run it well, I now have the opportunity to pass it on to my children – to say, listen, I’ve started Luthuli Capital, it’s been going for 30 years. Don’t go and study law or art or whatever. Take over the company. So you have these established players and they are now bringing in the second, third generation.

The reality of the country is we might have political freedom, but we certainly don’t have economic freedom. If you look at the mass population, where is the money still sitting? So it’s a matter of me not just coming in and saying look, I’m competent, I know how to do this, but it’s how do you then infiltrate this private club. Or the other way to look at it is how we get money to flow out of a few hands to the mass population – and thus that gives me a new market to work with.

Meet the challenges of financial inclusion

Relative to its peers in the SADC region, South Africa has a high percentage of people with formal bank accounts. While 94{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of the adult population in the Seychelles has a bank account, and 85{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} do so in Mauritius, South Africa’s banked adult population stands at 77{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}.

This contrasts starkly with the likes of Madagascar or the Democratic Republic of Congo, where only 12{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of adults have bank accounts. In Angola, the ratio is 20{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}.

These are figures produced by the Finmark Trust, an organisation set up more than a decade ago to promote financial inclusion. And at face value, they may appear to suggest that South Africa is measuring up reasonably well.

However, the Trusts’s Dr Prega Ramsamy says that there is a lot more to financial inclusion than whether or not someone has a bank account.

“It’s a multi-dimensional problem,” he told the Actuarial Society 2016 Convention in Cape Town. “There is an element of access, but there is also an element of affordability, an element of proximity, and most importantly an element of quality. We might have huge access in terms of people having bank accounts, but it doesn’t necessarily mean that they are financially included because the quality of such access might not be there.”

He pointed out that often products are inappropriate or inaccessible.

“At the moment there are about 20.9 million people in South Africa with access to insurance,” he pointed out, “and of those, 18.9 million have funeral cover. So funeral insurance completely dominates the sector.”

He acknowledged that there is a cultural aspect to why this is such a popular product, but he questioned why so many people are able to afford funeral policies but don’t have any other long term risk cover or savings.

Ramsamy pointed out that ten years ago, about one million South Africans had multiple cover, in that they held more than one funeral policy. That number has grown to five million. Yet the penetration of other risk products has remained very low.

“We sit in an office and think we can provide insurance, but we don’t really know if this kind of insurance fits the needs of the people we are selling it to,” he argued. “Agents are also just interested in selling numbers for commissions, but don’t ask if what they’re selling is the type of insurance or product that their customers need.”

Speaking at the same event, Ruth Benjamin Swales of the Asisa Foundation acknowledged that there is a real challenge for financial services companies to design more relevant offerings.

“For instance we have many people in South Africa who work intermittently,” Swales said. “But most savings and investment or insurance products require monthly contributions. Just that minimum requirement excludes many people from being able to access relevant products that could improve their financial well-being.”

It is obvious that product providers need to find different models, both in terms of the products they are offering and how they are distributed. For instance, if funeral cover has such wide reach, might it not be possible to attach other products to these policies, such as savings accounts or retirement annuities.

Mobile technology also offers extensive opportunities. In East Africa, where mobile money has been hugely successful, companies are also offering micro-loans and micro-insurance on mobile platforms.

The best deal on your personal cheque account

The latest report by the Solidarity Research Institute shows that increased competition among the nation’s banks appears to be driving fees down. But increased financial pressure on consumers means charges, albeit lower, can still be a significant burden.

So, how do you get the best possible deal on your personal cheque account?

Negotiate your bank charges

There is no law or code regulating the negotiation of bank charges. But Advocate Clive Pillay, the Ombudsman for Banking Services, says the charges levied on ordinary cheque accounts can be fully negotiated.

“In the case of a ‘big account’ with much activity and a reasonable balance, a bank would be more likely to negotiate a reduced rate, to retain the customer, than it would in the case of ‘a small account’, with little activity, such as a salary deposit each month and a number of withdrawals during the course of the month with a very low balance,” he told Moneyweb.

However, it is important to note that the bank can refuse to negotiate lower rates by “exercising their commercial discretion,” says Pillay. In which cases, customers can do little but switch banks, provided the new bank offers lower rates.

If that fails, there are other relatively simple ways to save money on bank charges.

Make sure your account suits your needs

Some banks offer two types of basic cheque accounts: bundles and pay-as you-transact accounts. Depending on the amount of activity on your account, one option may prove more cost-effective than the other.

Bundles, offered by the big four banks, comprise fixed monthly fees for a package of transactions including finite cash deposits and withdrawals, and oftentimes unlimited electronic transactions and notifications. Any transactions which breach the bundle limits are typically charged on as pay-as-you-transact (PAYT) basis.

The PAYT charges – offered by Absa and Standard Bank – include a minimum monthly service and additional fees per transaction. Capitec’s sole account option, the Global One Account is a PAYT account.

* Capitec’s fee structure is due to change from March 2017, fees quoted are based on the 2016/2017 pricing guide.

* FNB’s fee structure is due to change from July 2017, fees quoted are based on the 2016/2017 pricing guide.

Maintaining a bank’s prescribed minimum account balance can also reduce or, in some cases, negate transaction fees.

Ditch ATM withdrawals

Multiple ATM withdrawals, especially those over and above bundle limits can, significantly increase your bank charges. Instead opt to withdraw cash at a point of sale (POS) from a participating retailer, such as a major supermarket. If you really must get cash from an ATM, ensure you use your own bank’s machine as a cash withdrawal at another bank’s ATM, a Saswitch withdrawal, is considerably more expensive.

Reduce the costs in an estate

The death of a spouse, friend or relative is often an emotional time even before estate matters are addressed.

And truth be told, death can be an expensive and cumbersome affair, particularly if estate planning was neglected, the claims against the estate start accumulating and there isn’t sufficient cash to settle outstanding debts.

People generally underestimate the costs related to death, says Ronel Williams, chairperson of the Fiduciary Institute of Southern African (Fisa). Most individuals have a fairly good grasp of significant expenses like a mortgage bond that would have to be settled, but the smaller fees can also add up.

To avoid a situation where valuable assets have to be sold to settle outstanding debts, it is important to do proper planning and take out life and/or bond insurance to ensure sufficient cash is available, she notes.

Costs

The costs involved in an estate can broadly be classified as administration costs and claims against the estate. The administration costs are incurred after death as a result of the death. Claims against the estate are those the deceased was liable for at the time of death, the notable exception being tax, Williams explains.

Administration costs as well as most claims against the estate will generally need to be paid in cash, although there are exceptions, for example the bond on the property. If the bank that holds the bond is satisfied and the heir to the property agrees to it, the bank may replace the heir as the new debtor.

Williams says quite often estates are solvent, but there is insufficient cash to settle administration costs and claims against the estate. In the event of a cash shortfall the executor will approach the heirs to the balance of the estate to see if they would be willing to pay the required cash into the estate to avoid the sale of assets.

If the heirs are not willing to do this, the executor may have no choice but to sell estate assets to raise the necessary cash.

“This is far from ideal as the executor may be forced to sell a valuable asset to generate a small amount of cash.”

If there is a bond on the property and not sufficient cash in the estate, it is not a good idea to leave the property to someone specific as the costs of the estate would have to be settled from the residue. Where a particular item is bequeathed to a beneficiary, the person would normally receive it free from any liabilities. This could result in a situation where the beneficiaries of the residue of the estate may be asked to pay cash into the estate even though they wouldn’t receive any benefit from the property, Williams says.

The most significant administration costs are generally the executor’s and conveyancing fees.

If the will does not explicitly specify the executor’s remuneration, it will be calculated according to a prescribed tariff, currently 3.5{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of the gross value of the assets subject to a minimum remuneration of R350. The executor is also entitled to a fee on all income earned after the date of death, currently 6{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}. If the executor is a VAT vendor, another 14{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} must be added.

Assuming an estate value of R2 million comprising of a fixed property of R1 million, shares, furniture, vehicles and cash, the executor’s fee at a tariff of 3.5{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} would amount to R70 000 (plus VAT if the executor is a VAT vendor). Conveyancing fees will be an estimated R18 000 plus VAT. Depending on the situation, funeral costs may be another R20 000, while other fees (Master’s Office fees, advertising costs, mortgage bond cancellation and tax fees) can easily add another R10 000. By law advertisements have to be placed in a local newspaper and the Government Gazette, with estimated costs of between R400 and R700 and R40 respectively. Master’s fees are payable to the South African Revenue Service (Sars) in all estates where an executor is appointed with a gross value of R15 000 or more. The maximum fee is R600.

Where applicable mortgage bond cancellation costs, appraisement costs, costs of realisation of assets, transfer costs of fixed property or shares, bank charges, maintenance of assets and tax fees will also have to be paid. The executor is also allowed to claim an amount for postage and sundry costs, while funeral expenses, short-term insurance, maintenance of assets and the cost of a duplicate motor vehicle registration certificate may also have to be taken into account.

Spring clean your finances

With all the twists, shifts and turns the economy has taken this year, it certainly hasn’t been easy-going for cash-strapped South Africans. Now that we’ve kissed the winter blues goodbye, it’s time to welcome the warmer season with open arms and there’s no better way to do it than with a spring clean… of your finances!

“Take this opportunity to get organised. The more organised you are, the more in control you are. You want to be in control of your finances – not the other way around,” says John Manyike, head of Financial Education at Old Mutual.

While it sounds easy in theory, in practice there are often unexpected curveballs that can throw even the most prudent of budgeters off the straight and narrow.

“Changes in both the economy and your personal life affect your budget, which is why it should be revisited on a regular basis,” says Budget Insurance’s Susan Steward.

In September, petrol prices are expected to rise by 59 cents a litre and diesel by 56 cents a litre. Electricity tariffs are expected to increase by more than 20{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}. And as August stats indicate, South African consumers remain under tremendous pressure to clear debt.

Here are a few guidelines from the experts on how to balance our budgets between September’s petrol hikes and increasing consumer debt and living costs.

1.First things first: get rid of debt

Make sure to pay off the most expensive debt first. “This is the debt that carries the highest interest rate and is costing you the most. For example, if you have a bond at a 10{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} interest rate and a personal loan at a 20{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} interest rate, consider paying off the loan first,” says Manyike.

Winter shopping splurges on credit may have accumulated, but if you received an annual increase in July, you may have a little more in your bank account and – as much as it can be tough – use it smartly by paying off outstanding debt, Steward advises, or strategise a smart budget plan to make the necessary payments.

2. Cut costs

This isn’t about scrutinising every cent you spend but rather establishing spending patterns to identify possible areas for saving. A good way to do this is to look at your monthly bank statement and see where most of money is going. You may be surprised at just how much you’re spending in certain areas and how by making small changes you could keep your spending in check.

3. Less is more

Examine your monthly budget and if your expenses exceed your income, cut out things you can do without. Just like cleaning out your closet or selling old equipment that is taking up unnecessary space, try to eliminate all expenses and purchases that are not essential. Be very clear on the difference between needs and wants.

4. Remember your saving goals

If you didn’t stick to your New Year’s resolution to save more money this year, it’s not too late to start now. Make a plan to set up a monthly debit order to an investment account or open a tax-free savings account, increase your pension fund contribution and request the 13th cheque option from your employer, if available to you.

5. Save for the unexpected

The amount you save towards an emergency fund depends on your personal circumstances. Ideally an emergency fund should cover three to six months’ living expenses, says Steward, adding that while this might seem like an insurmountable amount to save, just by putting aside R250 a week, for example, you have yourself R1 000 at the end of each month.

“If you don’t have savings, you aren’t getting ready for the day when you must pay out more money than you have. This day can come in the form of an unexpected medical bill, or family emergency, and it is at times like these that your savings can save you,” Manyike points out.

6. Track your spending

Try establish where unnecessary spending goes and how you can reduce it by making small changes to save big. Keep track of expenses in your statements and find a pattern to re-strategise saving methods.

7. Outdated fees must be phased out

You could be paying subscription fees for magazines you don’t read, a gym you don’t go to or paying for a bank account you no longer use. End subscriptions and use the money in more efficient places.

How government is collecting more tax revenues by stealth

Over the last few years government has collected a significant amount of tax revenue by not fully adjusting the personal income tax tables for inflationary increases in earnings, thereby increasing the effective tax rate of individuals.

A middle-class individual earning a taxable income of R400 000 per annum in the 2016 year of assessment, would have seen her after-tax income increase by only 5.42{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} and 5.05{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} in the 2017 and 2018 tax years respectively, even if her taxable income increased by 6{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} every year.

During his most recent budget speech, finance minister Pravin Gordhan collected more than R12 billion of the R28 billion in additional taxes he needed from the personal income tax system in this way.

In a similar fashion, taxpayers may now become liable for capital gains tax (CGT) purely because three of the exclusions have not been adjusted for the effects of inflation since March 1 2012.

1. The primary residence exclusion

When taxpayers sell their primary residence and realise a capital gain on the transaction, an exclusion of R2 million applies.

Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa (Fisa), says if the exclusion was adjusted for inflation over the past five years, it would have increased to around R2.6 million over the period.

For someone who bought an upper middle-class house in Cape Town for R650 000 in 2002 and who wants to sell it now, this has significant implications.

Van Vuren says today the house would be worth roughly R3 million. If it were sold, the capital gain realised would amount to R2.35 million (assuming no capital improvements and a base cost of R650 000). Due to the primary residence exclusion, R2 million would be disregarded, and 40{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} (the inclusion rate for individuals) of the capital gain of R310 000 (after deduction of the R40 000 annual exclusion) would have to be included in the individual’s taxable income.

At an assumed marginal income tax rate of 41{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}, the individual would have to pay R50 840 in CGT, purely because the primary residence exclusion hasn’t been adapted for inflation, he adds.

2. The year of death exclusion

Apart from the primary residence exclusion, the South African Revenue Service allows for a capital gain exclusion of R300 000 on all other assets in the year of an individual’s death (instead of the normal R40 000 annual exclusion). Personal use assets like artwork, jewellery and vehicles do not attract capital gains tax.

Van Vuren says if someone had invested R250 000 on the JSE in March 2009 in the wake of the financial crisis and it kept track with the performance of the All Share Index, the investment would have grown to roughly R700 000.

Since the individual would be deemed to have disposed of the investment upon death, the capital gain would amount to R450 000, which would reduce to R150 000 after the R300 000 exclusion had been deducted.

Van Vuren says if the exclusion kept track with inflation it would have been around R400 000 today and the gain would be only R50 000 (R700 000 minus R250 000 minus R400 000).

At an inclusion rate of 40{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b}, the R100 000 “additional gain” that had been realised will add R40 000 to the individual’s taxable income, which, at a marginal tax rate of 41{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} would lead to R16 400 in CGT, purely due to inflation.

3. Special exclusion for small business owners

Van Vuren says because the retirement provision of small business owners are often locked up in the value of their companies, it would be quite harsh to levy capital gains tax in the normal way when they dispose of their interest in the business upon retirement.

As a result, small business owners receive a special capital gains exclusion of R1.8 million upon retirement (minimum age 55 years) or death, subject to certain conditions (and over and above the R40 000 annual exclusion):

  • The individual must own at least 10{915f2fd5aca4c3a34c5cb69d7973bd97975047c315a8e3a00cfb3db88c0fb71b} of the business;
  • The total business assets of all businesses the person is involved in must not exceed R10 million;
  • The individual must have been actively involved in the business for at least five years;
  • If at retirement, the disposals must all happen within a 24-month period.

If the exclusion had been adjusted for inflation, it would have been roughly R2.3 million by now, Van Vuren says.