Con­tract worker

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IE­vans writes:

am 30 years old and work as a con­tract worker, which means my salary is not fixed and ranges from zero in some months to R8 000 a month. I cur­rently con­trib­ute R750 a month to­wards my re­tire­ment an­nu­ity and also con­trib­ute R500 a month to a tax-free sav­ings ac­count. I want to in­crease my sav­ings by R500 a month from next year, but I don’t know if I should in­crease my re­tire­ment an­nu­ity or my tax-free con­tri­bu­tion, or look for an­other fi­nan­cial prod­uct.

Boi­tumelo Mothoa­gae, head of cus­tomer re­la­tion­ship man­age­ment at Lib­erty, replies:

It is ex­cel­lent that you are al­ready sav­ing and would like to in­crease your sav­ings con­tri­bu­tion. This means you are one of the 25% of peo­ple in your age group who are sav­ing for re­tire­ment.

Be­fore mak­ing a de­ci­sion to in­crease your sav­ings, how­ever, you need to look at your over­all fi­nan­cial sit­u­a­tion.

You in­di­cated that your in­come is not fixed. Be­cause it is not fixed, you need to en­sure that what­ever fi­nan­cial needs you pay for each month are cov­ered. Un­less you have an emer­gency fund, this will make it very dif­fi­cult for you to main­tain a sav­ings plan or man­age your fi­nances well. For ex­am­ple, dur­ing the month when you earn no money, you may be un­able to pay for any of your liv­ing needs as well as your sav­ings. This means that the fol­low­ing month you may have to pay dou­ble – for the pre­vi­ous month that you missed and the cur­rent month.

If, in the fol­low­ing month, your in­come is not enough, you may again miss these pay­ments, mak­ing it very dif­fi­cult to pay triple the amount re­quired to bring your pay­ments up to date. An emer­gency fund that is the equiv­a­lent of at least three months (prefer­ably six to 12 months) of salary would help you dur­ing your months of low in­come, as you would still be able to pay for all your fi­nan­cial re­quire­ments.

You must firstly draw up a bud­get to de­ter­mine what your av­er­age in­come is in a 12-month pe­riod and what your ex­penses are in that pe­riod. Your in­come should then be split as fol­lows:

50% for your fi­nan­cial needs (such as rent/mort­gage, food, trans­port, etc).

15%-30% for your sav­ings (such as re­tire­ment plan­ning, emer­gency fund, risk cover, etc).

The rest can be used for any other fi­nan­cial re­quire­ments you may have (such as en­ter­tain­ment).

Try to en­sure that all your ex­penses are cov­ered by your av­er­age in­come and do not re­quire that you use your max­i­mum in­come (R8 000).

Once you have your bud­get set up, go and see a fi­nan­cial ad­viser, who will look at your over­all fi­nan­cial sit­u­a­tion. Based on your in­put, they will de­ter­mine what your fi­nan­cial re­quire­ments are and help you come up with a fi­nan­cial plan suited to your fi­nan­cial needs.

For ex­am­ple, you are al­ready con­tribut­ing 10% of your max­i­mum in­come to re­tire­ment, and, in to­tal, your sav­ings con­tri­bu­tion per month is 16% of your max­i­mum in­come of R8 000, so it might not be nec­es­sary to in­crease your re­tire­ment con­tri­bu­tion, as this per­cent­age may be higher for your av­er­age in­come. In ad­di­tion, be­cause your in­come is vari­able, you may want to put your ex­tra sav­ings into a ve­hi­cle where the money would be avail­able at short no­tice, and a re­tire­ment an­nu­ity will only be avail­able for ac­cess at age 55 if you are healthy.

Your ad­viser will be able to tell you which sav­ings ve­hi­cle is best suited to you. For ex­am­ple, be­cause your in­come is not that high, an en­dow­ment (which gets taxed at 30% dur­ing in­vest­ment) may not be the best ve­hi­cle for you, as the tax rate on it is higher than your mar­ginal tax rate.

As you in­di­cated above, you have the new tax-free sav­ings plan, where there is a max­i­mum con­tri­bu­tion amount (R30 000 an­nu­ally) that will re­main non­tax­able. Your cur­rent to­tal an­nual con­tri­bu­tion to this is R6 000, so you may add the in­crease to this sav­ings plan with­out breach­ing the R30 000 an­nual cap. How­ever, dis­cuss this with your fi­nan­cial ad­viser to de­ter­mine that this is your best op­tion. There are var­i­ous ben­e­fits to the tax-free sav­ings ve­hi­cle:

No cap­i­tal gains tax on a switch within this ac­count or on with­drawal.

No tax on div­i­dends – your ac­count will earn the gross div­i­dend, which will be rein­vested.

No tax on in­come – all in­ter­est and other in­come will be rein­vested tax-free.

No per­for­mance fees or ini­tial fees. How­ever, ad­vis­ers will be able to charge an ini­tial ad­viser fee, agreed with the client.

No ad­di­tional fees will be charged ex­cept the an­nual ser­vice fee of the fund se­lected. This may in­clude a trail fee to the ad­viser.

Even though the amount that can be con­trib­uted has a life­time limit of R500 000, there are no lim­its on how big this ac­count can get. There­fore, if in­vested in high-per­form­ing port­fo­lios, the in­vest­ment may grow to more than this.

Easy ac­cess to funds be­cause there is no lock-in pe­riod. Con­sult a fi­nan­cial ad­viser who will do a full fi­nan­cial needs anal­y­sis for you to set up a fi­nan­cial plan that will de­ter­mine whether you need to in­crease your sav­ings right now, and, if so, which area re­quires the big­gest in­crease. The ad­viser will also be able to de­ter­mine the best sav­ings ve­hi­cle and the tax im­pli­ca­tions spe­cific to you.

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