Comprehensive Financial Planning

On or after retirement, one normally consolidates your assets and you want to explore what options you have in getting the most out of your life savings. In other words, you want your money to “work” for you. Although it is a time when many clients consider downsizing, the majority wants to maintain their standard of living, and their independence, and definitely follow through on that special dream that was always postponed, like a trip abroad or spending more time doing community work. It is also a time when clients consider the maintenance and ultimate distribution of their wealth for the security of their loved ones.

The main risk that needs to be addressed during this stage is the preservation of your estate.

Clients often misunderstand estate planning as only consisting of the drawing up of a last will and testament for the winding up of your estate upon your, and/or your spouse’s death. With the right planning, however, plans can be put in motion with proper estate planning methodologies to not only preserve, but also create wealth in your estate during your living years.

Although there are some uncertainties regarding the future of certain elements of the trust tax regime, National Treasury announced in the first half of 2013 that the proposed changes to tax legislation regarding trusts will not take place immediately. The proposed amendments aim to eradicate income splitting opportunities afforded through this principle, but should have no effect on special trusts, created for the care of children or family members that need special care and treatment.

At present, the conduit principle operating in trust tax law, allows for income that accrues in a trust to be taxed in the hands of the beneficiary.

Your family is maturing, and your focus is now on preserving and growing your wealth. For many individuals, their careers are peaking and the energy and many hours that they have devoted to their careers, is rewarded with success in terms of position, and probably the highest level of income during their productive lives. Your focus at this stage should therefore be to firstly preserve your capital, but also to grow it in a properly diversified portfolio, across asset classes, and with the best of breed asset managers that actively manage your portfolio on a daily basis.

A maturing family often implies adult dependants with very expensive needs, for example tertiary education and their own membership of a medical aid. Many clients may also during this phase sell their companies, or receive “golden handshakes”, well before their normal retirement age. As a result they may consider new job opportunities, or even decide to start a new business. They may even consider accessing their retirement savings, in order to fund their new business. One of the major risks that need to be addressed at such a juncture is the opportunity cost of withdrawals from your current retirement savings, and the likelihood that you may lose that capital in the event that your new business fails.

When making a withdrawal from your retirement savings, the first significant consequence is that this will invariably result in a tax liability. A withdrawal is considered a distribution from the plan. This means that the necessary taxes need to be paid on the amount distributed. At the moment the following table will apply:

As we start our adult lives, after school or studies, we form relationships that over time are normally celebrated in a joyous occasion when two young people are joined together in marriage. The young married couple invariably aspire to create a home for them and their family, although they may be somewhat cash strapped. The reality of life is that, from that moment onwards, most of their income will be applied to the funding of their lifestyle and for providing a proper education for their children.

While you or your spouse may or may not have some experience and knowledge of financial products and financial planning per se, Pentagon Financial Solutions PTA (Pty) Ltd can guide you through your family’s changing financial requirements and needs. In most cases, a proper financial plan for a family is sometimes based on, for example, the implications of the financial agreement (i.e. the Ante Nuptial Contract) between you and your spouse entered into before you got married. At all times, the most pertinent risks during any particular life phase, i.e. income protection during unforeseen illness or disability, or high debt levels, or provision for the education of your children, needs to be provided for in a cost effective but coherent manner, taking into account all aspects considered relevant for the continued well-being of your family. In this process, the reality of the eroding nature of inflation also needs to be considered.

We can, therefore, provide a client with advice and the appropriate product solutions inclusive of inter alia Income Protection for both spouses to guard against extended period of illness, Life Cover for both spouses to provide for your family once you pass away and assisting in investing savings within a diversified portfolio according to a client’s individual risk profile. We can assist you in the drawing up of your last will and testament, and give guidance in the nomination of guardians or trustees with the right profile, to ensure that your remaining children are well taken care off.

You are independent with very few commitments. Your focus is on consumption, for example buying your first vehicle and going on holidays. You save very little and therefore your financial capital is either non-existent or low.

Do not forget that the most valuable asset you possess at the moment is your human capital. Human capital is an individual’s ability to generate future savings and wealth or in quantitative terms: the present value of a person’s future salary. It is increased through education and career decisions, and for most people it peaks early in their career and declines towards zero at retirement.

If you understand how precious this asset is, the need to convert it appropriately to wealth, i.e. the requirement to do financial planning, is clear.

The risks that need to be addressed during this phase could be the inability to repay debt, or unforeseen illness and/or disability that could prevent a person to continue to earn an income.

Pentagon Financial Solutions PTA (Pty) Ltd can provide a client with advice and the appropriate product solutions inclusive of inter alia medical aid and medical insurance and the structuring of an emergency fund for unexpected expenses. Income Protection to guard against extended periods of illness, or cover for temporary or permanent disability is of specific importance for young professionals at the start of their careers. Continuous advice and assistance in investing savings within a diversified portfolio, structured according to a client’s individual risk profile, within an appropriate time horizon, also forms part of our services.

Look at the following table as an example:

R300 with a contribution increase of 10% per year