Email your queries to perfin@inl.co.za or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.
Credit or TFSA to pay for wedding?
I’ve been saving into a tax-free savings account (TFSA) for three years. I am getting married, and I want to use these savings to cover the costs. Is this a good idea? I may need to use credit to fund my wedding instead, because I have only about R5 000 saved in a unit trust account, separate to my taxfree savings.
Name withheld
Jaanre Muller, a financial adviser from PSG Wealth Hermanus Portfolio Management and Stockbroking, responds: A TFSA allows you to invest a maximum of R36 000 per tax year, or
R500 000 over your lifetime, irrespective of any withdrawals that you make. This means you cannot replace funds that you withdraw from the tax-free savings account. Therefore, investors should aim to keep withdrawals from this type of investment to a minimum, to reap the maximum tax benefit over the long term.
You may be tempted to increase your debt, as interest rates are very low. However, remember that short-term, unsecured loans are usually quite expensive. The interest rate at which you will have to repay a loan will probably be much higher than the interest rate that you will earn in your TFSA if you are invested in interest-bearing instruments.
You can consider first to use the funds invested in your unit trust, because you will not incur any penalties, nor will there be any tax implications. Any balance can be withdrawn from your TFSA. It is a good idea to continue investing funds and aim to make up what you have withdrawn in the same disciplined manner as if you are repaying a loan.
Balance voluntary, compulsory savings
I have been contributing to my company pension fund since I joined 10 years ago (there is about R1 million accumulated, although I haven’t looked recently), but it is my only retirement savings. I am 35 years old. I am not sure what I need to do next. I don’t really have much other savings, except R30 000 in a money market account. I try to keep that at around that level for emergencies, and I do add to it occasionally. What should I do first? Add more to my pension or maybe open a tax-free savings account (TFSA)?
Name withheld
Pierre Puren, a financial adviser from PSG Jeffrey’s Bay, responds: Excluding your emergency fund provision, your portfolio seems to lack balance and accessibility to voluntary funds. Therefore, starting a tax-free savings account (TFSA) would be a prudent decision.
Although additional contributions to your company pension fund may result in greater short-term tax benefits, you could gain an advantage by diversifying your investment portfolio between compulsory (pension) and voluntary (TFSA) funds at retirement.
Assuming your existing company pension fund contributions are compulsory, it is advisable that you consider building an investment portfolio outside the constraints imposed on your company fund by Regulation 28 of the Pension Funds Act.
You may contribute R3 000 a month (R36 000 a year) to a TFSA, so if your budget allows for this saving, seek investment options that do not duplicate the strategy followed by your company pension fund mandate. of the Pension Funds Act allows you to transfer your RA from one provider to another, and you are also able to access the entire value of your RA, provided you are not a South African tax resident for at least three years. Subject to fund rules, you can also access your funds if you are unable to work due to ill health or disability.
Catching up on retirement savings
I’m 45 and behind on my retirement savings. Is all hope lost?
Name withheld
Nirdev Desai, the head of sales at PSG Wealth, responds: At age 45 it is expected that you should have saved about four times your annual salary, but many of us don’t even have that much when we retire. All is not lost if you are behind, but it will take a serious commitment to catch up. Think about the retirement lifestyle for which you planned when you were in your 20s and 30s. If your expectation of your future lifestyle has changed fundamentally, you will have to adjust your retirement plan urgently to meet these new requirements. You may need to be more realistic about what you can achieve, but you can also step up your game to change the outcome. I suggest urgently meeting with a financial adviser to craft a plan to help you catch up and get on track.
PERSONAL FINANCE