Monthly Archives: August 2017

The gift that keeps on giving

This time of year sees both children and adults preparing their wish-lists for the upcoming festive season. But as many South Africans continue to grapple with rising debt, now is a good time to shift the focus from giving material items to providing future financial well-being.

Giving a child an investment as a gift will not only promote a culture of saving from a young age, but will also show them how you can make money grow.

There’s a powerful story of one customer’s commitment to leave a legacy for his family, and the value of sound financial advice. In November 1968, a customer made an initial deposit of  R400 into the Old Mutual Investors’ Fund and 48 years later, his investment is today worth over R600 000.

More precious than the value of his money, however, was the culture of saving and the legacy that he passed on to his children and grandchildren. On special occasions such as Christmas and birthdays, he invested a set amount of money on his children’s or grandchildren’s behalf. With this investment, his daughter was able to provide for her daughter’s schooling.

If South Africa is to develop a generation of financially savvy adults, it is crucial to not just talk about it, but actually practise good money habits. It is important to teach your children about money, and the festive season – with the spirit of giving – is a good time of the year for parents to set a good example. Teach your children about the importance of giving within your means, as well as showing them the value of relaxing with family and rewinding after a long, hard year, while respecting the value of hard-earned money.

Families should consider starting a financial tradition of their own. Set a reasonable budget for gift giving this festive season, and instead of spending all your money on gifts that are likely to fade, go missing or be forgotten, speak to your financial adviser about starting an investment in the name of your children.

When children become old enough to understand more about money management, parents should involve them in the process. Teach them the principle of compound interest and explain why putting money away today means they will have more money tomorrow. Help them set a budget for the money they’ll receive over the festive season, encouraging them to spend a smaller percentage today, and investing the rest for the future.

Here are various ways you can give a gift that keeps on giving long after the hype of the festive period has subsided:

  1. Start saving for your children’s education: A hotly debated topic this year, the cost of education is something that needs to be saved towards and planned for. Opening an account and allocating money to it each month can help you fund your children’s future education.
  1. Life-starter fund: Every parent dreams of having the power to provide their children with the necessities in life, but in reality, this isn’t always possible. Setting up an investment and adding to it each year, even just a small contribution of R500, will enable you to provide your children with a lump sum that they can use as a deposit for their first car or deposit on a house.
  1. Set up a tax-free savings account for your children: A tax-free savings account can enable you to save towards your children’s long-term dreams and financial goals, but is also flexible enough to be accessed at any time should it be required. Also, by investing in a tax-free savings account, you won’t get taxed on the growth earned from the investment.

Paying too much in bank charges

In South Africa’s somewhat peculiar banking system, monthly charges for transactional accounts are a given. But is the few hundred rand you’re paying per month (if you’re lucky!) the best possible deal?

The first question you need to answer is whether you value having a ‘platinum’ or ‘private clients’ account with all the “value-adds” these offer?

Things like lounge access, bundled credit cards and a ‘personal’ banker are must-haves for some in the upper middle market. On the other end of the scale are basic, no-frills bank accounts (like Capitec’s Global One (and the clones from the other major banks)), but the truth is that most people need something a little more comprehensive than that. There’s likely a home loan, almost certainly vehicle finance and definitely a credit card.

So, do you need a ‘platinum’ (Premier/Prestige/Savvy Bundle)-type account? Do you actually use or need those value-adds? Or, do you enjoy the ‘status’ of having a platinum or black credit card? (Here, emotion – and ego – comes into the equation….)

This is an important question to answer, because the difference in bank charges between a more vanilla bundle account and ‘platinum’ is easily 50%!

While banks try to shoehorn you into product categories based on your salary or profession, there’s nothing stopping you from moving to another product (or refusing those ‘upgrades’). From a personal perspective, the only reason I have an FNB Premier (i.e. platinum) account (not gold) is because I do actually make use of the ‘free’, albeit diminishing, Slow Lounge access. And, the eBucks rewards I earn on this account are the most lucrative of the lot, based on the products I use, my transaction habits and spending patterns. (‘Upgrading’ to Private Clients is a mugs game because the thresholds for ‘earning’ rewards are significantly higher, to match one’s status and earnings, of course!)

Once you’ve answered this question – which is more important than most people realise – the next step is to figure out whether a bundled account or pay-as-you-transact one makes the most sense. Most of us enjoy not having to ‘worry’, so we readily sign up for the all-in-one package without actually understanding the differences in pricing.

In this example (loosely based on my transaction history), the bundled option makes the most sense. But, you’ll find that this is not always the answer. It is worth dissecting what does and what doesn’t form part of the bundled options from your bank. In all cases (at the higher end, i.e. platinum), debit orders and electronic transactions are ‘free’ and some transactions like cash withdrawals are free up to a certain number per month. But there are some variances that will attract fees over and above the flat monthly rate.

Once you’ve done this exercise – which you need only do once a year (June for FNB customers and December for Absa/Nedbank/Standard Bank ones), you’ll know exactly which account type suits you best. If you’re on pay-as-you-transact and you’re spending more than ±R200 a month consistently, you should change to bundled. If you’re on bundled and do a handful of transactions a month (and don’t have too many (any) external debit orders), then pay-as-you-transact will save you money. You’re not looking at hundreds of rands a month year, but across a year your savings would easily add up to over R1000.

A separate will for your offshore assets

While a clear, well-written will is always essential to avoid potential family disputes, South Africans with offshore assets in particular should seek professional assistance to determine if they are exposed to a foreign tax and if it may be necessary to draft a second or offshore will.

To determine whether an offshore will is required, practitioners will usually consider the type of offshore assets the testator owns and where these assets are located. If the testator’s only offshore asset is a bank or investment account, generally, one will that deals with all worldwide assets will suffice. In such cases, the offshore bank or financial institution would normally recognise the South African will, provided it covers all worldwide assets.

“One will promotes simplicity and certainty in a client’s estate planning. One worldwide will can also reduce the risk of accidental revocation, which can occasionally happen when a client has more than one will,” says Oliver Phipps, partner at Lester Aldridge in the UK and member of the Fiduciary Institute of Southern Africa (FISA).

Accidental revocation often occurs when an individual who only has South African assets drafts a will applicable to all worldwide assets and only acquires an offshore bank account at a later stage, for example in the UK. If an UK advisor drafts a will for these assets without knowing that the individual also has South African assets, the advisor could unintentionally revoke the South African will by not explicitly stating that the new will only relates to UK assets. Since the beneficiaries of the wills may not be the same, accidental revocation could have far-reaching consequences.

If an individual is domiciled in South Africa and has a bank account registered in England as his only offshore asset, the person drafting the will should consider what the formalities would be to administer the bank account in England should the testator pass away, Phipps says.

“Each bank in England has their own threshold in which they will release the funds without wishing to see an English court authority and, on average, this is approximately £15 000. If the funds exceed the bank’s threshold, an English court authority will be required. In these circumstances, there is a fast track procedure called ‘resealing’ whereby the English court could formally recognise and give effect to the South African letters of executorship,” Phipps says.

While preparing one worldwide will will likely be appropriate in this instance, there are potential disadvantages.

The South African and English administration cannot be conducted at the same time and before letters of executorship can be resealed, court sealed and certified copies of the letters of executorship will have to be obtained, which may delay the process considerably, he adds.

But where a South African jointly owns an offshore bank or investment account, care should be taken when drafting the will. If a husband jointly owns a bank account in England with his wife, he should not bequeath his share of the account to someone other than his wife, as it could result in a dispute, Phipps cautions.