Often people need to make changes in their lives, but the best way to ensure the changes you make are a success is to incorporate careful planning.
Consider the case of 50-year-old Nomusa who had planned to resign from the Department of Education at the end of the year. She is a single parent to two kids still at primary school.
Her main expenses are: school fees, bond repayments, car instalments and a personal loan.
She has a pension benefit worth R1-million and plans to use her pension payout to settle her debts and renovate her house.
Nomusa is very active and has big ideas about what to do after her resignation. She is heavily involved in her local community and plans to start a daycare centre with some of her pension money.
Reduced cash
Nomusa isn’t aware of the options she has and is only thinking about resigning and taking the cash. But, if she opts to have the cash resignation benefit paid into her account, she will be taxed heavily and this will reduce the amount that is paid out.
When her fund’s administrator processes her R1-million withdrawal, it will deduct tax of R207 000 to pay over to the South African Revenue Service and will only deposit R793 000 into her account.
Taking advice
Nomusa should, however, get some advice as there may be a better way for her to reach her goals, including keeping her retirement savings for her retirement and paying less tax.
A financial adviser or wealth manager can help her develop a workable financial plan that documents her financial goals and serves as the starting point for making decisions that will suit her circumstances.
Preserving her benefit
Nomusa could consider transferring her pension benefit to an approved pension preservation fund.
A benefit of this option is that she will not pay any tax. In Nomusa’s specific case, after transferring to this fund, she has the option to withdraw up to one-third of her pension benefit in cash. The balance of the funds must remain in the fund until she reaches retirement age.
A financial adviser will assist her in determining how much money is required to pay off all her outstanding debt and for her living expenses. A budget will let her know how much money can be put towards the goals defined in her financial plan.
Less taxing
It is important to make sure that her retirement planning does not just suit her financial needs, but her tax situation too. An adviser can make her resignation as tax-efficient as possible by considering all of her tax allowances together. In fact, with some careful planning she could end up paying no tax.
Review investments and policies
As her life changes, Nomusa may need to consider whether her investments, funeral and life cover are still appropriate to her changing needs. She may need to start drawing an income from her investments, consolidate her funeral cover and cancel loss-making investments.
Plan for education
The gift of education is the best thing Nomusa can offer her two children. It will prepare them for life and will give them a great start. With the cost of education rising, she will need to budget carefully to be able to comfortably afford her children’s school fees.
As with any investment plan, the sooner she starts putting money aside, the longer her money will work for her.
Evaluate medical needs
It is essential that the medical aid plan Nomusa selects can meet her unique needs and those of her loved ones.
An adviser can do a quick personal healthcare needs analysis to determine the level of cover she needs for herself and her dependents.
An emergency fund
An important part of a solid financial plan is an emergency fund and a good adviser will encourage Nomusa to set up such a fund. An emergency fund is designed to cover a financial shortfall when an unexpected event happens.
The money you save in an emergency account should be available immediately.
Last wishes
If Nomusa dies without a will, she will have no control over who will receive the benefit of her estate.
A will will ensure her wishes are taken care of. She can also nominate a legal guardian for her minor children.
A financial adviser will offer her family professional assistance to wind up her estate.
• Nkomo is chief executive of Inkunzi Wealth Group.