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Critical financial questions currently being asked

Should you can your medical aid, withdraw from your investments or stop contributions to your RA?

With more and more South Africans being financially affected by the lockdown, a common set of questions relating to personal finances is emerging. Here are answers to the five most current questions being asked at present:

Should I cancel my medical aid and/or gap cover?

Medical aid is expensive and for most people, it’s a big line item in their budget. If you’re strapped for cash, you may be tempted to cancel your medical aid – especially if you consider yourself to be fit, healthy and demographically less likely to suffer from severe Covid-19 symptoms. If you’re recently lost your job, any medical aid subsidy you benefited from as a result of your employment will have fallen away, and this will only serve to reduce the affordability of your medical aid premiums. If, like most South Africans, you are operating on a survival budget to tide you through this pandemic, prioritising your health and that of your loved ones should be your first priority. While statistics seem to show that those under the age of 60 with no pre-existing health conditions are less likely to suffer the full effects of the virus, the reality is that medical knowledge about the virus is less than six months old and there is not enough research to fully understand why and how it affects people in different ways. Now is not the time to compromise on your healthcare and cancelling your medical aid can have long-term financial repercussions.

Firstly, if you cancel your medical aid and are not a member of a registered South African medical aid for a period of longer than 90 days, you will be subjected to waiting periods on reapplying for membership later in life. These will include a three-month general waiting period as well as a 12-month condition-specific waiting period. Waiting periods are mechanisms used by medical aid schemes to protect the other members of the scheme against what is known as anti-selection – where a member joins a medical scheme, makes a large claim shortly after joining and then cancels their membership. In addition to the imposition of waiting periods, medical schemes can also apply late joiner penalties if you are over the age of 35 and have a break in your membership of longer than 90 days. Effectively this means that the medical aid can load your monthly premiums for the rest of your life, with this loading being calculated based on your age and the number of years that you did not have medical aid cover.

Before cancelling your medical aid, it is advisable to consider moving to a more affordable plan option bearing in mind that if you do so, you may only be able to upgrade your plan option in January 2021. Most open medical schemes offer cost-effective network options which provide hospital plans at a range of selected hospital networks. Downgrading your plan option will give you some financial breathing-room while not interrupting your membership.

Can I stop my retirement annuity contributions?

Your ability to put a hold of your RA contributions depends on what type of retirement annuity you have in place. If you are contributing to an RA which is housed on a unit trust platform, you can stop and start your premiums as you like with no fear of penalty or charges being levied. As with any other collective investment, you can contribute to your unit trust RA on a monthly, quarterly, annual or ad hoc basis with full premium flexibility.

To stop paying your monthly premiums, you simply need to issue an instruction to your investment house, and this is something that your financial advisor can assist you with. Once you are in a better position financially, you can issue an instruction to restart your contributions.

If you are contributing towards a retirement annuity policy with an insurance company, you will generally not be able to stop your premiums without some form of financial consequence, although it is best to speak to your insurer directly. In normal circumstances, stopping your premiums will have the effect of making your policy ‘paid-up’ which is the same as cancelling it. Depending on the terms of your policy, the insurer may be able to charge a penalty for early termination of your contract. Before cancelling your RA, you have the right to request this information from your insurer so that you can make informed decisions. 

Can I withdraw from my investments if I need cash to tide me over?

Whether or not you can draw from your investments depends on the type of investment you have in place. The legislation prohibits you from accessing funds held in provident and pension funds until the official retirement age of the fund. If you have a retirement annuity in place, you will not be able to access these funds until age 55. You can access funds held in your unit trust portfolio, money market fund and tax-free savings account, although it is important to understand the longer-term implications of making such withdrawals. For instance, any withdrawal from your unit trust portfolio may have capital gains tax implications, whereas withdrawals from your TFSA will affect your lifetime limit. Depending on the type of money market fund you are invested in, there may be a notice period before you can access the money. If you have not made a previous withdrawal from your preservation fund, you will be able to access this money, but bear in mind that you will be taxed. Whether or not you can make a withdrawal from your endowment depends whether you are in the policy’s restriction period or not.

Shall I take the payment holiday offered by my bank?

Most banks have announced financial relief measures for their customers to help tide them through this crisis. There are long-term financial consequences for taking a ‘payment holiday’ so it is important to first understand the terms and conditions being offered by your bank. If you can afford to continue making your monthly payments, bearing in mind the recent interest rate reduction, then this is naturally first prize. If, however, you cannot see your way to making your monthly re-payments, the first step is to determine whether you qualify for a payment holiday, with each banking institution’s qualifying criteria being different.

Taking a payment holiday will effectively allow you to pause your debt repayments for a period, for instance, three months, but bear in mind that this will result in you paying back more in the long term. However, if you require short-term financial relief then taking a payment holiday is a good option, especially where your banking is consolidated with one institution. If you choose to take a payment holiday, remember that your monthly instalment does not change, but rather the term of the loan is extended to take into account fees and interest that accrue during the pause period. Be assured that opting for a payment holiday will not affect your credit record. Finally, if you have been retrenched or placed on short time, be sure to check the terms of your credit life insurance as you may be covered as a result of your loss or reduction in income.

Do I need to update my will?

Most people will be surprised to discover how much their circumstances can change in a year. If you haven’t updated your will in the past 12 months, take it out and consider the following questions:

  • Have you recently been divorced, married or entered into a long-term relationship?
  • Are there any new beneficiaries that you would need to provide for in the event of your death, such as children (natural or adopted), grandchildren or special needs siblings?
  • Have you recently bought or sold property?
  • Have you recently received an inheritance?
  • Is the institution you have appointed to execute your will still in operation?
  • Do you know where the original version of your will is?
  • Is the person you have nominated as executor still the person you trust implicitly to wind up your affairs?
  • Is the guardian you have nominated for your minor children still the person you would trust to care for your children if you are no longer around?
  • Are the trustees nominated to your testamentary trust still alive? Are they still the people you trust to manage your children’s inheritance if you die?
  • Are you still comfortable with the proportions in which your assets will be distributed amongst your heirs?
  • Is there anyone you previously left out your will who you now feel you would like to include? And vice versa?
  • Does your will make provision for the residue of your estate?

Answers to these questions will determine whether you need to update your will or not. If you are satisfied that there have been no fundamental changes to your circumstances, then there is no need to do so.

ADVISOR PROFILE

Craig Torr

Crue Invest (Pty) Ltd

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