A foreign investment allowance is currently available for natural persons who are:

• taxpayers in good standing; and
• over the age of eighteen years

Each individual may invest an amount of up to R4 million offshore. Natural persons are regarded as South African residents if they are domiciled or registered in South Africa (for example if they were born in South Africa and lived in the country all their life) or if they have taken up permanent residency in South Africa (in the case of foreign nationals). South African residents are subject to exchange control restrictions and can therefore only invest in offshore assets such as foreign unit trusts within certain restrictions set by the South African Reserve Bank (SARB).

YES. You are required to apply for tax clearance by downloading the latest Tax Clearance Certificate (i.r.o. Foreign Investment Allowance for Individuals) application form and submitting the duly completed form to SARS. A ‘Tax Clearance Certificate’ is valid for a period of 3 months. Should the certificate expire unutilised or partially utilised, you will need to apply for a new certificate.

You can transfer a maximum of R4 million from South Africa.
You may, however, be able to invest more than the R4 million if you have other ‘legal’ funds offshore, for example:

• growth/income on previously transferred funds where such income was retained abroad;
• income earned abroad after 1 July 1997 and either retained abroad or remitted to South Africa;
• foreign inheritances;
• own foreign capital introduced into South Africa on or after 1 July 1997; or
• funds for which amnesty was granted in terms of the Exchange Control Amnesty and Amendment of Taxation Laws Act, 2003 (Act No. 12 of 2003), unless amnesty was granted on the basis that the funds had to be repatriated to South Africa.

NO, you can transfer in tranches, provided your ‘Tax Clearance Certificate’ has not expired. Please ensure that you retain your original certificate if the full R4 million is not utilised in one transaction. If you intend using the same bank for future transfers, you may request the bank to keep a copy of your ‘Tax Clearance Certificate’ on your behalf.

YES, provided there is no recourse to South Africa (e.g. guarantees or surety to an overseas lender from South African sources).

The SARB maintains a database of all transfers made by all individuals via all banks since the implementation of this allowance in 1996. You, the applicant (not the investment company, SARS, your bankers, advisors or the SARB) are however ultimately responsible for not exceeding the limit. You may be fined between 20% and 40% of the excess transfer amount if you exceed the limit. If you are uncertain regarding a proposed transfer resulting in a breach of your R4 million limit, carefully check your records. A last resort is to apply to the SARB to check your records.

• In the case of the disposal (or deemed disposal) of units, the difference between the proceeds (or deemed proceeds) on disposal and the seller’s base cost in the units, will be subject to CGT.
• Where the units are transferred between spouses, there will be no capital gain on the transfer, but the transferee spouse will effectively step into the shoes of the transferor spouse; with the result that the gain will be subject to CGT only at the time when the transferee spouse disposes of the units. Such roll-over relief will not apply where the transferee spouse is non-resident for tax purposes;
• On the death of the unit holder, the deceased will be deemed to have disposed of the units at market value, i.e. CGT will be triggered in such case. This rule does not apply where the units are bequeathed to the deceased’s spouse, in which case the roll-over relief referred to above applies.

As a general rule, any amount received by a shareholder that exceeds the amount of the capital invested is treated as a dividend. As noted above, all foreign dividends are taxable. If this general rule is applied, a dividend received by an investor in a foreign CIS will therefore generally be subject to income tax. However, the definition of ‘dividend’ in the Income Tax Act specifically excludes any amount distributed by way of the redemption of a participatory interest in a foreign CIS. Therefore, the gain on redemption will not be regarded as a taxable (foreign) dividend.

Not necessarily. In most instances a foreign will would not be required and a resident’s South African Will could apply to his/her worldwide assets. However, should you own significant and complex foreign assets it is recommended that you consult an attorney in the relevant foreign jurisdiction for legal advice and assistance, possibly an offshore Will and or Trust should be established.

Yes there is an option to use an asset swap through a life insurance company or CIS. Most companies have a specific allowance, so from time to time some funds could be closed to new contributions until the new tax year. An asset swap allows you to track your performance in Rands giving a real perspective. It is advised that 20% – 30% of investments are diversified into offshore asset swap funds.

South Africans are amongst the lowest savers in the world, and these statistics are getting even worse. The graph below illustrates that South African savings, as a percentage of the gross domestic product, have been in a steady decline since the early ‘90’s. Currently there is only about 14% of our GDP which is saved. The reason for this number is mostly due to government savings. The 2nd graph illustrates how households, corporate and government are saving.

Yes. Savings is money which someone keeps in cash, or in a bank account. These savings are usually utilised for short term savings and accumulation. Investments on the other hand are when you invest your savings into the market. There are various ways in which to do this, investing into ETF’s (Exchange Traded Funds), Unit Trusts, Endowments, Retirement Annuities, Pension and Provident Funds to name a few. The reason a person should invest their money instead of save it, is due to inflation (CPI). Inflation can be disastrous to savings, as money which is in a bank account, or kept in cash, does not appreciate above the inflation rate, which effectively reduces your buying power over the years. The rule of 72 can be used to calculate how long it will take for your money to halve or double. Calculate 72 ÷ inflation rate = how many years it will take for your buying power of your money to halve. Assuming an inflation rate of 7% - it will take 10 years for the value of your money to halve. The only way to get returns which exceed inflation and give you real growth after inflation has been deducted, is through investing into the market, using various asset classes such as equities, property, and bonds. Over a 10 year period Equities and Property will usually give you an average return of about 15%. If inflation remains at 7%, you will effectively make real growth of 8%. The graph below illustrates the relationship between saving and investing in South Africa. In the last 5 years – although savings has reduced investing has increased, which means we are on the right track.

Saving vs. investment (% of GDP)

Click on the image to see a bigger version

How much to save is the age old question. The average savings and investment for a person should be at least 10% - 15% per month of your income. However you should always try to save more. These savings will be able to provide emergency funds, which can be used if you are retrenched, if your health has taken a turn for the worse, or any other emergencies such as having to repair your car or house etc. A person should have between 3-6 months worth of income saved, or invested into an accessible and liquid plan, such as an ETF or Unit Trust. Once your savings starts to exceed this 6 month safety net, you need to start investing money for your short, medium and long term goals. Through setting yourself goals with time horizons, a financial advisor can assist you in working out a plan to achieve these goals, helping you to create wealth.

When someone gets an increase, they should not immediately think of where they can spend their extra money. The first thing you should do with an increase is increase your payments to high interest debts such as your credit card. Once debts have been settled, a person should then continue to save the monthly instalments that used to be paid to debts and invest these funds. By forcing yourself to put a debit order on your account for an investment at the beginning of the month, you will not be tempted to spend your spare cash.

There are a number of savings and investment options, and by setting yourself goals, an advisor will be able to set up the right plan for your needs. Short term savings could be invested into a fixed deposit or money market account, you could also utilise an ETF or unit trust as these investment options give you a wide variety of investment funds to invest in, as well as liquidity and access to your cash when you need it.

For medium term savings an endowment plan could be used if you have a marginal tax rate which is higher than 30%. The reason for this is that an endowment plan pays tax automatically in the portfolio at a 30% rate, so if your tax rate is 40%, you are effectively saving 10% tax. The proceeds of an endowment plan are also payable to you after a 5 year period tax free. Endowments can be used for medium and long term savings. Make sure that your initial term does not exceed 5-10 years, as the longer the term the more expensive the product is. Once the initial period has passed, you can then open end your endowment plan, having access to your funds as easily as a unit trust, and you could even use an endowment plan to subsidise your income pre and post retirement.

The last suggestion is that you start saving for retirement as soon as possible. Even if you can only afford a few hundred rand a month, start savings immediately, as the value of compound interest will allow even small savings started early to grow to almost equal large short term savings. Retirement Annuities, Pension and Provident Funds do not pay tax on the returns of the funds and various tax exemptions apply to each plan.

There are a number of different annuity options available in the market; however they can be broken down into 2 main types - Life Annuity and a Living Annuity. A Life Annuity is regarded as a traditional or guaranteed fixed interest annuity. Depending on the annuity rates at the date of exercising this option, a specified income level will be calculated according to your lumpsum investment, age, gender and life expectancy based on the prevailing annuity rates which are closely linked to interest rates. I.e. when interest rates are low, so are annuity rates and the inverse is also true. A Life Annuity is structured to provide a lifelong retirement income regardless of how long a person lives, the downside of this plan is that on death there is no capital amount or income which can be left to beneficiaries. There are a number of guaranteed life annuity options available:



Guaranteed Life Annuity Options

• Level – This option gives you the highest initial income, however this option will continue to pay the same income until death. This option does not take inflation into consideration, and therefore your buying power on this option diminishes. The nett effect is that your income halves every 10 years.
• Level increase / Escalating – This option offers a predetermined specified percentage increase each year. The higher the annual increase the lower the initial income will be. This is a better option than the level annuity, however if inflation is higher than your selected annual increase then you could also effectively lose buying power on your income.
• Inflation linked - This annuity option will initially give you a lower income than the level annuity, but it will increase annually at the core CPI (inflation) rate. This will allow your income to maintain buying power, effectively maintaining your standard of living.
• Enhanced - This option is offered by some companies, and takes into consideration your current health status in addition to your age. Should you have a serious health issue which could impact significantly on your life expectancy, then this option will take this into consideration, offering you a higher income level initially in comparison with the other options.

Additional options to the above mentioned annuities

• Joint and survivorship – This is a fantastic option for spouses who have joint retirement savings, and need to earn a household income rather than individual incomes. This plan will take both ages and life expectancy into consideration, and will continue to pay the full income or a percentage of the income – as selected - after death of the first spouse, to the surviving spouse until their death. As this is insuring two lives the initial income level is lower than a single life annuity.
• Guarantee – A guarantee of between 5 – 25 years can be selected. This means that even in the event of death of the annuitant/s, the income will continue to pay until the guarantee term is completed. The higher the guarantee term selected, the lower the initial income will be, as this option takes into consideration that the income will be payable for at least the guaranteed period.
• Capital Retainer - This is an option which has 3 parts:
  • Annuity providing an income – with all above mentioned options available.
  • Life assurance policy for the full or part of the lump sum investment. This policy is not underwritten, which means that regardless of your health the policy will be accepted. However on death instead of your family not receiving anything from the annuity portion, the life cover will be paid to your beneficiaries’ tax free.
  • The last portion of this option is a smaller additional annuity, which pays the monthly premium of your life assurance policy.
  It is important to only utilise this option when absolutely necessary, as your income is reduced to pay for the life assurance policy.

Investment Linked Living Annuity
These annuities need to be utilised with caution and a full understanding of the risks involved. The main features of this annuity are:

• Underlying investment choices - You have the choice of investing your capital lump sum into a wide range of investment portfolio’s, which means that this capital amount is dependent on market returns, which effectively can increase or reduce your income. This is suitable for someone who needs flexibility on income, and who could possibly need to increase their capital investment in retirement to offer a higher income. It is important to note that the risk is on the investor. Even if one takes a very conservative option, if returns do not keep up with inflation, your buying power is reduced. It is also important to note that if your full capital is depleted, your income stops.
• Drawdown rate - The income tax act limits the annual pension to between 2.5% and 17.5% annual income based on the residual capital in your annuity. This percentage income can be changed annually on the anniversary of your annuity. The lower the income level selected the more the underlying capital investment can grow, allowing your retirement income to last longer and increase with inflation. Try to keep your percentage income equal to or less than the actual returns delivered on your capital investment.
• Conversion option - A living annuity has the option to convert this plan into a guaranteed life annuity. Should the annuity rates be high, or should you need to guarantee your income for life, then this becomes a great option.
• Death - On your death the remaining capital in your fund can be left to beneficiaries as a lump sum, as an ongoing annuity income, or a combination of both. Due to the latest tax changes this value will not be included in your estate, saving you estate duty and executor’s fees.
• Life Expectancy - due to life expectancy increasing as a result of medical technology enhancements, it is important to ensure that your capital grows and your drawdown rate is kept to a minimum as you could run out of money.

With Profit Annuity
This is effectively a hybrid of a life and living annuity. This plan has all the same features as a guaranteed life annuity, however if the underlying investment increases due to market growth – so does your income.

• You do not have control over investment portfolio’s.
• In the event of death the annuity ceases (depending on selected guarantee term), and there is no capital payment to beneficiaries.
• Income level is guaranteed for life after each increase.

This would depend on your current age and life expectancy, as well as your capital investment and income needs. In a large number of cases South African’s have not saved enough for retirement, and generally need to continue growing their retirement nest egg in retirement.


People normally make the fatal mistake of switching their funds into conservative portfolio’s 5-10 years before they retire. The impact of this is that you can reduce your retirement income by 30%. The graph below shows that the growth phase of retirement planning has the largest impact before retirement, and a few years after retirement.


There are 3 main risks that need to be actively managed in retirement:

• Longevity Risk - due to medical technology enhancements, people are living longer and therefore run the risk of running out of money with a living annuity.
  
  
  
• Consumption Risk
• Market Volatility Risk
  The table below illustrates that the lower your draw down rate, the less risk you need to take on your capital investment to ensure that you do not run out of money in retirement.
  
  
  

An additional consideration to be managed is the cost of medical inflation. When factoring into your retirement what medical aid will cost you in retirement, you need to work on a 4%-6% over and above the core inflation rate to accurately calculate what medical aid cover will cost you in the future. Always try to stay on of the most comprehensive options your scheme has to offer, to avoid unnecessary additional medical costs in retirement which can hugely impact on your retirement savings.

Compulsory money is money where you were entitled to claim a tax deduction on the premium – effectively money invested before paying tax. Compulsory money includes Retirement Annuities, Pension and Provident funds and preservation plans. Income tax will be payable on full income from a compulsory annuity.


Voluntary money is money which did not yield a tax break, or tax has already been paid on the money. Once tax has been paid on a provident fund withdrawal or the 1/3 cash has been taxed from a retirement annuity or a pension fund, this money also becomes voluntary. Voluntary money can provide a largely tax free income.

Choosing a retirement product depends on a number of variables, but in most cases there is not just one solution and usually a number of various products are used in unison to achieve the most tax and cost effective structure. Each product type with a brief explanation has been included below:

• Pension Fund – This is an employee benefit set up by an employer. Contributions towards a pension fund are tax deductible to the employee up to a maximum of 7.5%. Depending on how the rules of the fund have been set up, part or full fund value can be transferred or withdrawn in the event of leaving the company. Proceeds taken from this fund will be taxed according to the tables shown below. On retirement a pension fund can be taken as follows – 1/3 of the fund value can be taken in cash subject to retirement tax tables. The remaining 2/3’s must be transferred into annuity plan which will provide a monthly income.
• Provident Fund – This is also an employee benefit, however there are a few differences between a pension and provident fund. A provident fund’s contributions are not tax deductible to the employee, only to the employer. However the proceeds from the fund, when cashed in, are taxed in the employees’ hand. The other main difference of a provident fund is that the full fund value is taken as a lump sum which is taxed, and the 1/3 – 2/3 rule which applied to pension funds does not apply to a provident fund.
  
  
  
  
  
• Preservation Fund – This is a plan which can be used to “preserve” pension and provident fund monies. When leaving a company which has a pension or provident fund, it is advisable not to withdraw the funds when leaving the company, but to rather transfer fund value to a preservation plan - tax free. A once off withdrawal is allowed from the fund before the age of 55, but is subject to tax. On retirement the fund is treated in the same way as a pension or provident fund – depending on whiere the funds came from.
  
  
  
  

It is important to note that any withdrawal from a pension, provident or preservation fund before retirement age, will be taxed as shown above, however in addition to this the total amount withdrawn will be deducted from your R300 000 tax free benefit at retirement.

• Retirement Annuity – these plans have been exposed to scrutiny over the last decade and radical changes have been made to make the plan more cost effective, which has greatly aided the consumer. A retirement annuity premium is tax deductible up to a maximum of 15% of non retirement funding income (NRFI – is income which does not form part of income used to calculate pension or provident fund contributions). The latest tax advantage is that even if the contributions are made by the employer, the employee will receive the tax deduction, which makes it a viable addition if not alternative to traditional pension and provident funds, especially in smaller companies as costs on RA’s is considerably cheaper than costs on a pension or provident fund for smaller companies. The advantage of a retirement annuity is that it cannot be attached by creditors. RA’s are treated the same as pension funds on retirement, and they now do not form part of your estate. The only restriction in terms of a retirement annuity is that funds cannot be withdrawn before the age of 55, unless the fund value is less than R7000. Another legislative change is that in the past you had to retire from an RA before the age of 70, but this restriction has now been completely removed.
  
  
  
  
  All of these products offer you tax breaks, and there is no tax on the growth of your money either. These funds are free of estate duty and dependents can take the lump sum or income from the plan in the event of death of the insured.
  
  
  
  

Once all of these tax deductions have been exhausted and additional savings is required for retirement, then products are utilised which do not offer tax deductions, however the proceeds are largely tax free.

• Endowment – this product can be used for short term or long term planning. Proceeds are tax free to the investor, however there is 30% tax levied on the growth of the funds within the portfolio. Another advantage of an endowment plan is that it can have specified beneficiaries and does not have to be included in the estate. This product usually has a 5 year term, however can be “open ended,” which means that after this term the plan can continue with no restrictions. It is also advantageous to extend these plans for a longer term as the cost structures become better after the initial 5 year term.
• Unit Trusts and ETF’s (exchange traded funds) - can be also be utilised, however it is important that discipline is exercised with these plans as the funds are fully accessible and this could cause you to use your retirement savings during a time of financial difficulty. These types of investments are subject to income tax on the growth based on your specific marginal tax rate, so people with a tax rate higher than 30% - endowments become a more attractive option. The proceeds are also subject to CGT (capital gains tax) on withdrawal. These products become effective if used in conjunction with endowment plans, and all tax exceptions for interest and CGT are utilised effectively.

Retirement may seem like a long way off, but if you hope to enjoy your golden years with gusto it takes careful planning now. The average person has only 420 pay cheques to provide for retirement, and with people living longer due to enhanced medical technology, you could be retired for as many years as you work. The table below gives you a guideline of what percentage of your income you need to be saving each month, in order to retire comfortably. Start saving immediately, as for every 10 years you delay saving, the contribution you will need to contribute to retire comfortably – doubles.

Over the past few years changes have been made with regard to how retirement funds can be treated on divorce. Currently, should a couple get divorced, spouses can now include retirement funds into the settlement. Previously funds could not be split according to the divorce agreement until retirement age was attained, however now there is immediate access to a spouses pension, provident, RA or preservation fund. According to the divorce decree a withdrawal will be allowed immediately and can be invested by the claiming spouse as they wish. Taxation still remains a contentious issue and should be specified in the divorce agreement which party will be liable for tax.

Debt does in fact come in 2 forms – Bad debt and Good debt. Bad debt is debt that you struggle to repay, it usually comes with a very high interest rate and the value of whatever it is that you bought depreciates over a period of time. Good debt on the other hand actually increases in asset value creating wealth for you. An example of good debt is your bond. The value of your home will increase in value over a longer period of time. It usually has a relatively low interest rate if you compare it to something like a credit card. Another example of good debt could be a loan that your company takes in order to expand. If careful planning has been done, you could effectively use the banks money to generate wealth and possibly even income over a period of time.

What you have heard is true. By saving as little as 10% per month of your income, you will be able to build up an emergency reserve in a short space of time. It’s not advisable to save this money in a bank account, as the interest that you are earning is very low, usually a mere 1 – 2 % per annum, which means your spending power is being reduces by inflation, which is marginally higher than the interest you will be earning. My suggestion would be to set up a monthly debit order of 10% of your income, to go into a flexible investment vehicle, which is liquid and easily accessible, such as a unit trust or exchange traded fund (ETF). You can secure these funds in a money market portfolio, which has no risk and yields a return of 7% per annum. Once your emergency fund has been established, continue to save the 10% of your income per month, as it is through saving that you create wealth.

Insolvency is your last resort, as there are high legal cost of around R18 000 and the sale of your assets has to cover these fees as well as raise 20% of your total outstanding debt. If you are liquidated you will lose everything. You will also have a legal public record, which will follow you for the rest of your life. You will have difficulty in being able to get life insurance in the future, as well as any additional credit, which could in turn financially cripple you and your family.

I would rather suggest that you speak to a debt counsellor who will work out a budget for you and set up a payment plan which will be agreed upon by your creditors and the magistrate of a court. A debt counsellor could refinance your total debt into one repayment package at a lower interest rate, but increasing the term, to make it more affordable. In the long run you will be paying a lot more, but with a sound financial plan to repay your debt you will be on the path to financial success.

A surety is as binding as if you had signed for the loan yourself. Unless you are prepared and can afford to repay the loan when the borrower defaults, you should never sign surety. If you do decide to sign surety for a person or your company, make sure that you have a written contract which will allow you to dispose of the asset in order to repay the loan. In addition to this you will need life, disability and possibly critical illness insurance on the person’s life you have signed surety for, as well as on your own life. This will ensure that the loan will be repaid in all eventualities; as if you pass away without cover, your estate is still liable for the suretyship, which could impact on your family and what they expect to receive from your estate. Similarly if you are a director of a company and sign a limited or unlimited suretyship, you are joint and severely liable, which means that you or your estate are liable for the full outstanding loan, regardless of how many directors signed the suretyship. So ensure that you have contingent liability in place, which is insurance that protects your estate from the suretyship.

A critical illness – also known as Dread Disease or Severe Illness- is an illness or disorder that significantly affects a person’s lifestyle. As a result Severe Illness products are designed to cover these diseases. Most life insurance companies have a list of Severe Illnesses that they cover, however it is also important to check that the company has a catch all benefit, as this ensures that any disease that severely impacts on an individual’s lifestyle will generate a claim even if the company does not explicitly list the disease. Examples of critical illness are heart attack, cancer, stroke and other related diseases.

Non-accelerated Dread Disease means that the dread disease benefit is not an accelerator of your life cover benefit. This means that a Dread Disease claim will not reduce the amount of life cover that you have after a claim payment is made. This could also be referred to as a standalone benefit which means that the premiums are not cross subsidised with the cheaper life cover premium and therefore can be quiet expensive.

Accelerated Dread Disease on the other hand means that the dread disease benefit is directly linked to the life cover benefit. This means that any Severe Illness claim will not only reduce the amount of the Severe Illness Cover, but will also reduce the amount of life cover on the same policy. Due to the cross subsidisation of this benefit with the life cover benefit, it is cheaper than a non accelerated or standalone benefit.

There are two different systems that Life Insurance companies use to pay Severe Illness claims and these are tiered and non-tiered payouts. Tiered payouts will pay an amount that is a reflection of the impact that the illness has had on your life i.e. the payout depends on how severe the illness is. On the other hand, a non-tiered product will pay the full amount regardless of the severity of the illness.

There are a number of advantages to tiered products. They help to ensure that you have cover when you need it and take note of the fact that medicine and medical technology have advanced, resulting in many people recovering completely from severe illnesses. Tiered products will also allow multiple claim payments which is advantageous should you suffer with more than one illness during your lifetime.

It is possible to have more than one claim under a Severe Illness benefit, this can be done if the benefit is non-accelerated, provides tiered payouts, or is defined as a percentage of life cover.
Being able to claim more than once is only a small aspect of multiple claims. It is important to determine how subsequent claims will be treated. Some companies will only pay the difference in severities for subsequent claims or may limit the amount that you are allowed to claim in any benefit category or for related claims.

Products that were taken out more than 10 years ago only covered between 4 and 10 actual diseases. Due to the change in medical technology an older policy does not take into consideration new treatment methods that have been established in the last few years. An example of this is a stent if a heart artery is blocked instead of open heart surgery which would have had a much longer time frame to recover from, causing you a greater financial loss.
There was an overwhelming need for cover to remain in place for future dread disease claims which older policies did not cover. Nowadays people can suffer from more than one illness as medical technology advancements mean that more people are surviving a dread disease. Newer products offer protection against this, and they also provide full body protection, cover for the whole family and allowing multiple claims.

Payments for HIV/AIDS are made at different stages depending on the insurance company. Most companies will make a payment for Advanced AIDS however some companies will also make payments for the accidental contraction of HIV.
• Examples of when a company will pay out for accidental HIV infection are:

• Accidental needlestick injury acquired while rendering professional duties as a doctor/dentist/paramedic/nurse
• A road traffic accident
• The transfusion of infected blood from a transfusion service
• Receiving an organ transplant where the organ was previously infected with HIV
• Rape or criminal assault or any other violent crime

The 2 main areas of disability cover are capital and income.
Capital disability pays out a lump sum in the event of a permanent disability. This can be used to cover debts and capital liabilities such as a bond, credit card, vehicles etc. The capital lump sum can also be invested into an income plan to subsidise income while suffering from a disability. Capital disability can be further broken down into occupational disability which is based on your ability to work long term, while impairment covers the functionality of various body systems due to the disability. As an example, if a person is a call centre agent, and is injured in a car accident causing them to become a paraplegic, occupational disability would not pay out as this person would most likely still be able to do their job answering phones and capturing information onto a computer. However if this person had impairment cover as well, they would receive a payment of between 50% – 100% due to the inability to function to their full capacity.Income disability replaces your income in the event of a sickness, or disability whether it be temporary or permanent. This benefit will pay a monthly income which is taxable while you are unable to work – short term or long term. Fortunately the premiums on this benefit are tax deductible making it more affordable.
Capital and income disability can be utilised in your portfolio either individually or together depending on your specific financial needs, and affordability.

This is a known as a catch all benefit. The criteria is based on an international scoring system that assesses the functional ability of a person in total, that is it takes into account the physical, social and interactive abilities of a person for example, in the assessment of strokes, neurological diseases and psychiatric diseases.

There are six main categories of ADLs:

• Self-care – examples are bathing, transferring, dressing, eating, eliminating and mobility
• Communication – examples are hearing, speaking, reading, writing, using a keyboard
• Physical activity – examples are standing, walking, stooping
• Sensory function – examples are hearing, seeing, tactile feeling, tasting, smelling
• Hand functions – examples are grasping, holding, pinching, percussive movements, and sensory discrimination
• Advanced functions – examples are travel, sexual function, memory, sleep pattern and stress adaptation.

Accelerated benefits mean that the benefit – in this case disability – is attached to a life cover policy, and that if either death or disability is paid out, the policy falls away after. This is the cheapest option as the life cover and disability premiums are cross subsidised by each other.
Non accelerated means that this benefit needs to be added to a life cover policy , but when a disability claim is paid out, the life cover remains the same as before the claim.
Stand Alone benefits means that you do not need life cover on the policy and that the disability benefit can be the only benefit on the policy. It also works similarly to non accelerated, as a claim on a stand alone benefit does not reduce any other benefits. This is a more expensive option, and not always necessary. Should a disability claim payment cover all your capital liabilities, you might not need the full life cover.

As an example:

No, insurance companies have a general exclusion on their policies that if you are acting outside the law, your claim can be declined. Recently companies have taken the decision that if you are killed in this situation they would pay out your life cover to your family as they do not feel that the family left behind need to be punished for your shortcomings. However if you become disabled in this event and it can be proven that your blood / alcohol level is above the legal limit they will repudiate your claim.

Occupation and location are 2 large determining factors which could affect disability claim payments on a policy. Firstly it is always important remember to notify your insurance company if your occupation changes, or if you are not going to be working in South Africa only. Should you travel for business or take a position (even if the same occupation) in a different country, the insurance company needs to be told so that they can access the new risk on your policy. Should your occupation change to one where there is an associated hazard such as a portion of manual labour, or additional travel, or even a security risk, this would cause you to be a higher risk and your policy will need to be updated to either include this at an additional cost, or to possibly exclude the hazard. Similarly by visiting or living in another country due to your occupation, your policy could be affected. Normally if you are going to a 1st world country there will be no change to your cover, but the insurance company still needs to be notified. Should you however be in a country which might be at war, or have civil unrest this could cause the insurance company to either load your premium according to the increased risk, or even exclude your cover while you are in that country.

When a policyholder chooses a level funding pattern, they are choosing to a pay the same premium throughout the term of their policy. When choosing a level premium pattern, one is prefunding one’s risk cost by overpaying in the earlier years and underpaying in the later years of one’s policy term. An age-rated pattern is one where the premium increases approximately in line with the risk cost of the policyholder and therefore the policyholder pays less in the beginning where their risk cost is lower and more later on where their risk cost increases. A policyholder would want to choose an age-rated pattern where affordability is an issue in the beginning and so the policyholder wants cheaper premiums upfront but does not mind the fact that premiums will increase in the future since they expect their income to increase as well. The Graph below illustrates the difference between level and age rated premiums.

A person needs life cover if he/she has debt or any dependants. Life cover will then be used to settle the debt as well as to provide financial support to his/her dependants. The amount of life cover depends on the amount of debt the person has, and the amount of financial support the dependants requires (the person’s income is usually taken as a guideline for this). A person needs to review his/her situation at least once a year with their financial advisor to determine whether there have been any changes to his debt or any other life changing event such as, marriage, divorce, change in income, buying a house, or having a child.

Most insurance companies offer a benefit, usually called “future cover”. This is a benefit which allows you to pay a small premium now, and gives you the option to increase your cover with no additional underwriting except for a possible HIV test , at various life changing events and annual intervals.

i. Life assured - A natural person whose life is assured under the policy.
ii.Owner - The person who takes out the policy on the life assured, and has full rights over the policy. This person or company will be paid the proceeds of a claim. Insurable interest will have to be established at underwriting stage, which means that the person owning the contract will suffer a financial loss if the life assured dies.
iii.Cessionary - There are 2 types of cessions namely:

Collateral cession – This means that the cessionary does not own the policy, but has full rights to the proceeds in the amount that is owing to them. For example when a person cedes their life policy to a bank for their homeloan, this is a collateral/security cession. Once the debt has been repaid, the life assured can get a letter from the cessionary (Bank) to cancel the cession and transfer the rights back to the original policy holder.

Absolute cession – This means that the cessionary does not own the policy, but has full rights to the proceeds in the amount that is owing to them. For example when a person cedes their life policy to a bank for their homeloan, this is a collateral/security cession. Once the debt has been repaid, the life assured can get a letter from the cessionary (Bank) to cancel the cession and transfer the rights back to the original policy holder.

iv. Absolute cession – The person who is paid the death benefit when the life assured dies if there is no owner or cessionary on the policy.
v. Absolute cession – The person who pays the contribution but does not have any rights on the policy.

Examples of general exclusions include:

1) suicide within 2 years of taking a new policy
2) willful participation in criminal activity
3) self-inflicted injuries
4) radioactive/nuclear explosion
5) active participation in war
6) active participation in civil commotion/riots
7) consumption of alcohol above legal limit
8) consumption of non-prescribed drugs

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Immediately. The longer you wait to start investing the more you need to invest to be able to arrive at the same amount. For example if you started saving R200 per month at age 20, at age 60 you would have R1 275 356 in today’s money assuming 10% pa growth. However if you only start investing the same R200 pm at age 30, when you turn 60 you will only have R455 865 using the same assumptions. You would have to increase your investment to R560pm in order to have the same amount at age 60 after waiting 10 years to start investing. Therefore keep in mind that you need to consider the age at which you would like to retire, as the later you start, the more money you will have to invest or the longer you will probably have to work. SARS offers a tax deduction on your premium based on your marginal tax rate, should you invest into a retirement annuity (RA). For example should you have a 30% tax rate, and you are investing R1 000 pm, you will be able to claim back R300 pm which you could utilise to increase your investment contribution. Please ask a financial advisor to calculate the maximum tax deduction available to you.

FNB is currently offering an interest rate of 4.7% per annum on this type of investment. However you must keep in mind that inflation (CPI) is currently ± 6%, which effectively means that you are losing 1.3% pa on your capital investment. This could cause you to halve the potential spending power of your money over 15 years. If you considered investing your R500 000 into a unit trust fund, in a money market portfolio, which is the safest investment option available, you could be getting an average return of in excess of 7% per annum, with no risk. This would give you a 1% pa real capital investment return, i.e. your investment would have a real growth (over and above inflation) of approximately R70 000. Depending on your current investment portfolio this return could be largely tax free due to your interest exemption of R22 300 if you are under the age of 65 or R32 000 if you are 65 or older. Unit trusts are ideal for the investor who does not want to commit to a long term investment, as it offers liquidity at any time. However if you are using your interest and Capital Gains Tax (CGT) exemptions, you could invest this amount, or a portion thereof, into an endowment plan which would give you a tax free return after 5 years.

Putting all your eggs into one basket is never a good idea. The key to successful investing is to diversify across the main asset classes, namely equities, bonds, property and cash. Markets usually have an inverse effect, meaning that when equities are down and interest rates are up, a cash or bond portfolio will give you a better return. Similarly when interest rates are lower, you could be better off in an equity or property portfolio in comparison to cash and bonds. Diversifying across different investment companies can also help to alleviate risk and volatility. A fund’s past performance is not an indication of future performance, however through diversification and a longer investment period, your risk can be minimised and your return maximised.

Reduction in Yield (RIY) is used by insurance companies and is quite similar, but not calculated in the same way as, Total Expense Ratio (TER), utilised by collective investment companies. Collective investments include Unit Trusts or Exchange Traded Funds (ETF). Without getting too technical, RIY is all the costs taken into consideration over your investment term. This gives you a percentage nett return. For example if your RIY is 2.6% pa, in order to get a 10% nett return, the fund will have to perform at 12.6%pa

Deemed mileage has been discontinued from 1 March 2010. A logbook must be kept showing personal and business mileage.(SARS logbook – please attach a hyperlink). Should business mileage be below 8000km per year, then a travel allowance cannot be claimed against tax.

In previous tax years SARS calculated PAYE on 60% of the travel allowance. From 1 March 2010, PAYE will be deducted at your marginal tax rate, from 80% of the travel allowance. Due to this change in upfront tax, your take home income could be reduced. Due to only actual mileage for business purposes being claimed, SARS expects lower claims against travel allowances. If the deduction for business travel at the end of the 2010/11 tax year is more than 20% of the travel allowance, and the claim is allowed by SARS, you will receive a tax refund – subject to you owing tax for any other reason.

Be aware that if you over estimate your travel allowance, and your claim for business travel is less than 20% of the travel allowance, you will owe SARS tax on your travel allowance.

If you don’t use your travel allowance, you will owe tax on the full 100%. SARS will calculate what rand amount you owe on the remaining 20%.

From 1 March 2010, all RA contributions paid or subsidised by an employer, will be tax deductible in the hands of the employee.

No changes were made this year to the amounts you can deduct from your taxable income for RA contributions. The amounts that can be deducted are up to the greater of:

• 15% of non retirement funding income (any taxable income which does not form part of your pension or provident fund contributions).
• R3 500 pa minus any current deductions to a pension fund, or
• R1 750 pa

Any amounts over and above the deduction can be carried forward to the next tax year, and then deducted subject to the limits for that year.

The beneficiary will have the choice to either continue receiving the regular payments, or they will be able to capitalise the lump sum payable. Any amount commuted in cash will be taxed in the hands of the new beneficiary on the same tax table that applies to lump sum on retirement or death. The amount will be aggregated with any lump sums already received or to be received.

Approved – means that the proceeds paid out on a risk benefit, for example group life cover, are taxable. Therefore fringe benefit tax is not payable on the premiums.

Unapproved – means that proceeds are paid out tax free, therefore fringe benefit tax is payable on the premiums.

Again there is no right or wrong answer.

1) Conforming
A conforming policy means that the premiums are tax deductible to the company, however the proceeds will then be taxable in the event of a claim.

2) Non-conforming
A non conforming policy means that the premiums are not deducted from tax, however in this case the proceeds of the policy in the event of a claim will be paid out tax free.

In both instances, if the Keyman policy has been correctly structured, implemented and paid, the proceeds of a keyman policy do not form part of the deceased estate, and therefore there will be no estate duty payable on the proceeds provided that absolutely no benefit goes to the deceased’s family. In the event that the business is regarded as a family business, then estate duty will always be payable, as the family is benefiting in some way.

In the 2010/11 tax year the tax threshold for individual tax payers below the age of 65 is R57 000.

The R30 000 you could previously deduct from your taxable income should you receive a retrenchment package - or a payment at retirement for untaken leave – will be falling away. It has not been updated for many years, and it has been decided to merge this benefit with the retirement fund lump sum benefit system, and the qualifying lump sums will be taxed by applying the tax table, which can be found in the budget pocket guide, for retirement fund lump sum benefits. This amount will be aggregated.