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Fear of dying

As human beings, emotions often dictate our behaviour. One of our dominating emotions (if we are honest with ourselves) is fear. Fear of loss, fear of being hurt, fear of being poor, fear of missing out, fear of being sick, fear of clowns, fear of needles…and probably most significantly, for most of us; the fear of dying too soon.

One of the “problems” of dying too soon is that we are often unprepared for the event which means that those left behind could be left up the creek without a boat (never mind the paddle) if our affairs are not in order.

A good starting point to prevent this happening is to make sure that you have a valid will in place and that someone else knows where the original is kept. Drawing up a will is a relatively simple (and completely painless) process – no needles will be used.

But this is where our emotions get in the way – we have the mistaken belief that somehow if we draw up a will we are increasing the likelihood of our demise. The truth is that we are all going to die one day – drawing up a will is a responsible and thoughtful thing to do – it does NOT increase the chance of you dying! If you have dependents and don’t have a will then you are being incredibly stupid and very selfish too.

Stop putting it off – get it done today!

 

 

 

Executors fees

Not sure what happened this past weekend but I received 2 emailed questions (from unconnected clients) about executors fees this morning. Seems the discussion has been around the quantum of the fee and how much the traditional executors (banks, trust companies and attorneys) charge.  The maximum fee in law is 3.5%+VAT plus 6% on interest and income earned by the estate during the winding up process, and they have all tended to charge the maximum fee with little room for negotiation and discounts. That’s the problem when you are dead – you cant challenge them and your loved ones are not negotiating from a position of strength either; the executor has been appointed by your will and it is too late to make changes. So what can you do to mitigate against this?

One suggestion (which was asked by both clients) is to negotiate the fee while you are still alive and commit this to writing (usually as part of the will). While this might appear to make some sense, there are a few problems with it.

For example, let’s imagine your estate is currently worth R5 million and you negotiate a fee of 2% (excl VAT). This would equate to R100k in executor’s fees and might be a reasonable fee for the work to be done. But what happens if you die years later without having amended the fee agreement and the estate has now doubled to R10m? The fee would now be R200k and it might be “way too much” for the work that needs to be done?

Or what if your estate decreases in value and falls from R5m to R2million (it happens) and now the 2% fee equates to R40k and the nominated executor declines to accept their appointment because the fee is insufficient to cover the costs?

I think there are better ways to address this issue.
The first would be to appoint your spouse/partner as executor with the power of substitution (and all the other necessary stuff). In practice they will probably not do the winding up of the estate but will be in a position to approach a few different people and then negotiate the fee with them based on the size and complexity of the estate.

Alternately (and possibly a better option) is to appoint your spouse/partner and your trusted financial planner as the joint executors. It is unlikely that the financial planner will do the work and it is also unlikely that the surviving spouse/partner will be in a position to negotiate the fees (they are grieving, after all) but it does mean that your financial planner can negotiate on your behalf and will need your spouse/partners consent to sign off on the appointment.
Where we are appointed as the executor/co-executor on most of our clients’ wills we have given them an undertaking that we will negotiate an executors fee that is consistent with the amount of work and effort required to wind up the estate in a speedy and efficient manner. That’s just one of the value-adds that you should expect from your financial planner.

SARS speaking with forked tongue (again)

SARS speaking with forked tongue (again)

Filing season for the 2015 tax year opens today and SARS have been sending out plenty of emails about this. One of them is titled “BE TAX SMART – Check if you need to submit an income tax return!” which implies that some people might not need to submit an annual return.  We followed the link on the email and this is what we found:

“Taxpayers earning less than R350 000 a year may not have to submit a tax return this year…this Tax Season the annual income threshold for submitting a tax return has been raised from R250 000 to R350 000.

This means that any taxpayer earning R350 000 or less during a tax year (1 March to the end February the next year) may not need to submit an income tax return as long as they also meet all the requirements listed below:

  • You earn a salary from only one employer (i.e. you get only one IRP5 or IT3A certificate).
  • You don’t have any other form of income (e.g. interest or rental income).
  • You don’t want to claim any tax related deductions (e.g. medical expenses, retirement annuity contributions or business travel expenses).”

All good and well and how very progressive of them, however, in our experience from previous years, tax payers who have not submitted returns (and who met the criteria for not submitting returns) are in for a nasty surprise when they die – or at least their executor is in for a nasty surprise. At your death, it seems to be SARS practice to insist that all the years’ outstanding returns are submitted – even though you were not required to submit a return.

So my advice is that until SARS sought out their systems and the estates department speaks to other departments, is that even though you might be exempt (in terms of their own criteria) submit a return. It will be a whole lot easier (for everyone) if all your returns are filed while you are still alive…it’s not always easy to get the required information when you are no longer around (and can certainly increase the costs of winding up your estate too).

Happy Filing Season 2015!

The role of the financial planner…

Have been busy with a death claim on a retirement annuity and have managed to get an extra 50% added to the payout value…read on for the details that once again highlight the value that a financial planner can add to a client’s portfolio.

About a month before our client died we sat with him and his wife to work through all his insurances (he had been diagnosed with terminal cancer). We did not do a lot of his old policies but managed to get a printout on his policies from the insurance company which showed that there was a death value of R233000 on one of the RA’s (the fund value was less as it still had a few years to run).

After his death we submitted the claim on behalf of his wife and received a recognition of transfer for an amount of R164000. We queried this with the company and were given the usual nonsense about the actuaries having calculated the values etc. We were not happy with this an insisted on a detailed explanation for the discrepancy in the values (this was in the form of at least 5 phone calls as well as 3 written requests).

Good news is that we have just received a revised recognition of transfer with a new amount of R247000 – that’s 50% more than the first one!

Still no explanation of how the value was calculated and no apology. I think we will take the money and run and then follow up later with a further request for a detailed explanation.

Now, imagine that this was a direct client with no advisor fighting for her – the insurance company concerned would probably just pocketed the extra money and the client would have been none the wiser!

 

Interesting

Was at a workshop hosted by Investec Asset Management this am and heard these rather interesting stats…

  • 23% of US homeowners are in negative equity (they owe more on their house than their house is worth)
  • At the current growth rate, India will have more people than China by 2030
  • 99% of the world’s fastest growing cities are in Asia
  • There are 65 Chinese cities with more than 1million people (only 2 in SA apparently)
  • 30% of the world’s children live in India
  • More than 1.6 billion Cokes are consumed each day!

And then from the SA Savings Institute-  72 percent of working South Africans earn less than R12 500 a month

Moving forward…

I was chatting with a friend of mine last night who was relating a phone call he had received from his bank who were encouraging him to “move forward” to their prestige banking account and all that comes with it for just R199 per month…55 “free” transactions, help with forex, 12 free cheques (does any one still use these?) blah, blah, blah,etc, etc, etc…

What amazes me is how easily people buy the marketing nonsense and how “loyal” people appear to be to their bank. The reality is that the bank does not care about your loyalty – they are relying on you continuing to believe that changing bank accounts is about the most difficult thing that you could do…and in some respect, thanks to Isaac Newton’s observation that a body will continue in its state or rest or motion unless acted on by an unbalaced external force, it is.

So here I am – that unbalanced external force telling you to get off your butt and stop wasting money. By changing bank accounts I have saved over R1560 in the past year…that is more than R15000 over a 10 year period…that’s a year of school fees at most primary schools…

You need to decide on the new bank (see below for a comparison) and then print out your most recent bank statement and make a list of all of the debit orders that come off. Then you need to write a standard letter that you can send to them all and cut and paste the relevent info for each company…and voila – it is done!

I kept my old account open for 1 month just to make sure that it all worked and guess what? It did! The only thing I missed was an annual debit – but it was not serious and was easily fixed.

You could also use the exercise as an opportunity to go over all your debit orders to make sure that you really still need them all – you could well be wasting more money than you think. And as they say in the classics…”look after the cents and the rands will take care of themselves…”

I’ve know that I have moved forward…just hope I dont need to move too soon again!

Basic banking fee comparison (this is for a fixed-fee offering on a current account and is based on information currently on the bank website):

  • Capitec – R4.50 but you pay per transaction after that – very competitive!
  • Nedbank Savvy account – R69 (have not paid a cent more than this each month for the past 12 months).
  • FNB – Smart Cheque – R69
  • ABSA – Silver Cheque account – R99
  • Std Bank Classic current account – R95
  • The last 3 accounts do not appear to be “unlimited” transactions and you could pay more – read the fine print and ask questions.

RSA Retail Bonds

Much was made about the RSA Retail Bond when it was launched and about how it would provide a safe and cheap investment with a reasonable returns to the “man-in-the-street”.

Well, I have been trying to buy some of these for a “man-in-the-street” using the RSA Retail Bond website – what a nightmare. There is an application form online but no details where to submit it or how to pay the funds into an account.

So I sent an email to the address on the site – 4 days later and still no reply. So I tried calling the telephone number (which is the number investors are supposed to use if they want values) and it just rings and rings and rings until it goes dead…

I know that you can also buy these at Pick n Pay or via the Post Office but if that is the only way to do it then why have forms on the website? And if no-one is going to reply to emails or answer the phone, why have an email address or telephone number on the site? And if you are not going to reply, how do you expect investors to get information or communicate with you?

This is my first experience of using this investment vehicle for a client and so far, I am not impressed.

I have written to the communications manager at National Treasury – let’s see if we get a reply.

What’s worse?

When you finally get to retire from your pension fund or retirement annuity you are faced with a significant (and very important) choice about what kind of annuity you will purchase (with the compulsory portion of your fund).

Simply put, there are 2 choices: a conventional life annuity (through an insurance company) or a “newer” Living Annuity (usually through a unit trust company). The differences are explained below…

Life Annuity: you purchase an annuity from an insurance company and they guarantee to pay you the annuity until your death when the capital “disappears” i.e. it dies with you. You have the following life annuity choices:

  1. A single life annuity where the capital dies with you.
  2. An assured annuity where an insurance policy is purchased to pay out the capital on your death.
  3. A joint life annuity (with your spouse) where the annuity would cease on the death of the second annuitant (and the capital as well). This form of annuity is often structured so that annuity decreases by a third on the death of the first person (this allows for a greater initial income).
  4. Annuity rates change on a weekly basis (according to the prevailing interest rates) and quotes would have to be obtained at the time of purchase.

Note: Most quotes do not automatically show an escalating income and it is essential that there is an escalation on the income taken – you do not want to have the same income in 10+ year’s time!

Living Annuity: you purchase an annuity from a (linked product/UT) company and have to draw an income of at least 2.5% (huge.96.482469max 17.5%) from the capital. You take the risk in that the annuity is a function of the capital amount and if the capital is badly invested, or the income draw too high, you could erode your capital. The theory (and practice in my experience) is that as long as you have growth at a greater rate than the income drawn, you will get an ever increasing income. On your death, any remaining capital passes on to your beneficiaries who must use it to provide an income for themselves.

  • You can move from a living annuity to a life annuity if you ever change your mind, but you can’t move from a life annuity to a living annuity.

Over the years, Living Annuities have received a lot of bad press (sometimes rightly so) usually because the proverbial little old lady has “lost all her money” because the money was inappropriately invested – i.e. it was put into the “wrong” unit trust funds and/or she was taking much too much income and now the capital has been eroded…

To try to combat this, ASISA (Association of Savings and Investments in South Africa) has recently introduced a standard of good practise for Living Annuities. While this might go some way to try to improve the sale and management of living annuities, what amazes me is that they have still not done anything about life insurance companies that continue to sell/market the traditional life annuities that don’t have any inflation linked escalations on the income. In other words, with this kind of life annuity, if you live for 30 years after retiring, you will still be getting the same income as when you first retired. (* see note below)

6a00d8341c500653ef00e54f0f05ac8833-800wiMy question to ASISA (and the FSB) is this: what is worse, a badly invested living annuity or a traditional life annuity without any escalation on the income? Are they not essentially the same thing as in both cases, the investor is much worse off over time? And if so, why has there not been a move to stop the sale of non-escalating life annuities?

Note: *The (only) reason that I can see that companies do this is because the initial income looks so good, especially when compared to an annuity with an escalation on the income. For example on R400000, the fixed annuity rate is ±R3700 pm compared to a±R2200 pm on an escalating annuity. You will be better off on the escalating annuity after 10 years (infl @6%pa).

Dilbert on Finance

The Dilbert cartoonist, Scott Adams, earned a MBA from Berkeley, worked at a bank (got held up twice at gunpoint), and is worth millions. So we presume he knows a thing or two about money. In an interview with the Akron Beacon Journal, Adams says he read about a dozen personal finance books and began working on one himself. However, he found it all boiled down to these nine points and he “couldn’t figure out how to fluff it up.”

1. Make a will.

2. Pay off your credit cards.

3. Get term life insurance if you have a family to support.

4. Fund your 401(k) to the maximum.

5. Fund your IRA to the maximum.

6. Buy a house if you want to live in a house and can afford it.

7. Put six months expenses in a money market account.

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.”

If we adapt these to South Africa they might  read something like this:

1. Make a will (you are going to die one day and the consequences of not having one if you have beneficiaries is too great to contemplate).

2. Pay off your debt including your credit cards and home loan.

3. Get life insurance if there is financial risk at your death (i.e. you have a family to support or debts that need to be paid including estate duty).

4. Fund your pension fund to the maximum (that the company allows).

5. Fund your Retirement Annuity to the maximum (if you dont have a pension fund).

6. Buy a house if you want to live in a house and can afford it. I guess the same logic would apply to buying a car – if you can afford it.

7. Put six months expenses in a money market account (once you have paid off your debt).

8. Take whatever money is left over and invest 70% in an equity based unit trust or exchange traded fund (etf) and 30% in a bond fund or 100% into a balanced unit trust fund and never touch it until retirement. As South Africans, probably at least 20-30% of this should be offshore (i.e. out of SA).

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.”

The Financial Planning Profession

I attended a refresher workshop for CFP® Professionals hosted by the Centre for Financial Planning Law (UOFS) on Friday. This is part of the continuing education that Certified Financial Planners are required to do in order to maintain their CFP® status. 20080930 CFPLogo_Blue&Black - FPA-1

One of the interesting things from the workshop was to learn that Financial Planning only started as a career in 1969 when 12 people got together to establish the profession in the USA. 4 years later there were 42 graduates through the CFP® programme. SA joined the CFP® board in 1997 when the old Institute of Life and Pensions Advisors (ILPA) were amalgamated into the Financial Planning Institute and the first CFP’s graduated in SA in 1999.

The FPI is the custodian of the CFP® mark in South Africa and there are about 3500 CFP’s in SA (out of more than 100000 financial “advisors”). Wfpi-logoe are also one of 24 member countries of the Financial Planning Standards Board – the international body that oversees and sets financial planning standards. There are also more than 125000 CFP’s worldwide and Financial Planning is currently the 2nd fastest growing profession (although I’m not sure what puts us into 2nd place).

So when you engage with a CFP® remember that you are dealing with someone who is part of a global standards body and that all CFP’s need to have and maintain appropriate levels of skills and ethics.