Today being Valentine's Day, it is probably fitting to refer to one of the main issues that cause problems in relationships: money (or, more correctly, the lack thereof).
It's amazing that people walk down the aisle having signed an antenuptial agreement, stating what belongs to who if the marriage fails, but very few have worked out what those assets are worth, let alone developed a financial plan for their marriage.
If Valentine's Day is step one towards walking down the aisle (figuratively or literally) and, more particularly, if you have already taken those steps, a financial plan should form a fundamental part of any long-term relationship.
That financial plan should include:
- Retirement plans for both partners.
- Savings plans. Will each of you have your own savings plans for specific targets?
- How you will make financial decisions.
- How much you want the other to know about your financial affairs.
- Ownership of assets, such as a home. This is not as simple as it seems. For example, if one partner is in business for themselves and is paying for the home but is exposed to the possibility of losing all his or her personal assets if the business goes belly up, could your home fall into the hands of creditors? You may have to put it into the other partner's name or into a trust.
- How you will conduct your own financial affairs? There are many different personal circumstances which can impact on this, including whether both partners are working.
- Payment of household bills.
- Estate planning. In effect what will happen when you die?
These questions are best answered for the first time when your relationship is serious enough for you to be living together.
It is also wise to find a good financial adviser who will help you with savings, retirement and investment plans, as well as life and health assurance and estate planning.
If you get these issues sorted out from then beginning, it should help remove one of the big obstacles to a love-forever-more scenario.
And here is a Valentine's gift from Personal Finance to our 591 000 readers.
You have 15 days left to take advantage of the Receiver of Revenue's "special offer" to reduce your taxes for the year - while at the same time improving the likelihood of retiring financially secure.
For some reason the tax year runs from March 1 to February 28 (February 29 this year). The latter is a red-letter day because: It is the deadline for the second payment of provisional tax; and it is the cut-off date if you want to reduce your tax liability for the year. In both cases, you have to do your tax sums before the end of the tax year.
The tax laws allow you to deduct limited amounts from your taxable income to fund your retirement. It is not that you do not pay tax on these deductions. You do - but only when you draw the money at retirement. And then you will get a favourable rate of tax on any lump sum you are entitled to take. And don't forget that you pay less tax if you are 65 or older.
By saving in a retirement vehicle, you are effectively deferring the payment of tax until you retire. The money you don't pay in tax is also earning investment returns until you withdraw it as a pension. So you get a double advantage.
If you are a member of a pension fund (contributions to a provident fund are not tax deductible) you can contribute 7.5 percent of your annual pensionable salary to a retirement fund. Many people contribute less than that. You can also include income from sources other than your salary when calculating the tax-deductible contribution to a retirement vehicle.
Very few retirement funds allow you to inject an additional amount of cash into the fund in the last days of February. However, there is an another tax-advantageous way of saving for your retirement, whether or not you are a member of a retirement fund. This is to take out a retirement annuity (or RA). These products are sold mainly by life assurance companies.
RAs were introduced many years ago as a way of enabling self-employed people to enjoy the same tax benefits when saving for retirement as do people who belong to retirement funds.
However, it is not only the self-employed who can use RAs to gain a tax advantage. If you belong to a pension fund, you can also contribute to an RA, but you will only enjoy a tax advantage on amounts up to the limits for tax deductions.
You are allowed to contribute a maximum of 15 percent of non-retirement funding taxable income to an RA.
Effectively, if you are paying the top marginal rate of tax and you contribute the full 15 percent to an RA, Finance Minister Trevor Manuel is making a 40 percent contribution to your retirement savings. This is a good deal, but time is running out if you want to take advantage of Manuel's "special offer".
Health warnings
- Take out a retirement annuity (RA) as early in your working life as possible, because the longer you have it, the greater the tax advantages, both in the build up to retirement and at retirement.
- An RA must only be used as a vehicle for retirement savings. You cannot draw any money from an RA before the age of 55 (the earliest retirement age recognised by the South African Revenue Service). At retirement, you will have to use a minimum of two-thirds of the RA to buy a monthly pension.
- Never take out an RA that matures after you turn 55, unless you are over the age of 50 - and then limit the maturity period to five years. The policy can be extended without incurring a penalty up until the age of 69, at which age you are obliged to mature your retirement savings.
- RAs offer a range of underlying investment options. However, be very wary of costs, particularly with products that use your R750 000 foreign investment allowance, because the costs can be prohibitive.