I recently got a permanent job and I’m 29. My salary is around the 36% tax bracket. Currently the only deductions on my payslip are PAYE and UIF, but I have to decide this month about joining the company’s medical aid and retirement plan (but there are no employer contributions for either; in other words, no fringe benefits, just my contributions).
The company uses Discovery. I have no medical aid, retirement plan or savings.
Here are my questions:
1. Is it advisable to just join the company plans?
2. I like to be in charge of my personal finance but I don’t know where to start. If I don’t join the company medical scheme, which medical aid company do I choose? Can I incorporate tax-free savings in retirement [savings] as well? Which company do I use for that? I don’t trust financial advisors because I think they’re biased when choosing the right product for you – for example, recommending Company X because it gives them the highest commission and I have to pay fees to them and X Company X.
My company deducts 15% of our gross salary towards retirement, but I want to track it (make sure the returns are above inflation and so on). I am currently renting and want to start saving for a house, but obviously like any other human being I have debts to pay. The aim is to be free of small debt (clothing accounts and so on) within the next six months or less.
Should you join your company medical aid plan? Since your employer won’t be making contributions and you are not obliged to, I would advise that you shop around. You can join any medical aid fund as a direct-paying member. One of several benefits of doing this is that you can stay with the medical fund you choose even if you leave your current employer – and won’t need to worry about not being covered during the usual three-month waiting period that applies whenever you join a new medical aid. Another advantage is that you will be free to find the most competitively priced option for your preferences and budget.
Start with one medical aid company and look at its benefits table (to see what you will get in terms of cover and other benefits) as well as its contribution table (to see what you will need to pay in to be a member). Consider the level of benefits you want, such as private hospitalisation or not, and which plan you would be most comfortable paying for. Most medical aids have five or more plans ranging from cheapest to most expensive. Once you have a feel for which plan you would choose from the first company, you will find it easier to assess the plans and contributions of other medical aid companies. But only somewhat easier – medical funds are all different and you won’t be able to make direct comparisons.
Now, should you join the company retirement plan? Again, since your employer won’t be making contributions, I would advise that you shop around.
The first point to note is that you can choose to invest in a retirement fund or a retirement annuity (RA).
As your company won’t be making a co-payment to its retirement fund, personally I would not choose to invest in this fund.
An RA is more flexible, cost transparent and easy to manage given your relatively young age.
The only drawback is that your funds are locked in until 55 years in an RA, whereas with a group retirement fund if you leave and need the funds, you can make a withdrawal (which will be subjected to tax).
As an independent financial advisor for 27 years, where would I put my money if I was in your position? Personally I use a unit trust-linked RA where I choose the underlying funds, giving me choice on risk, asset allocation and what I pay. In your case, every rand you put into your chosen RA is tax-deductible and, given your marginal 36% rate, you are effectively saving this tax and building a retirement nest egg.
Most people don’t know where to start with financial planning. Our ‘education’ system fails to assist us with the basics like the importance of savings, debt management, managing a budget and so on. People spend and seldom save, so the majority of people work for money – instead of money working for them.
The financial services industry, like all sectors, has a good and bad side and it’s difficult for both a novice investor like yourself and even a sophisticated investor to ‘filter’ through all the financial jargon, small print and media ‘indoctrination’.
I was once where you are as a graduate student and also experienced the product-push sales person at a bank and got an expensive product rather than independent advice. So I relate to your sentiment and congratulate you for asking these questions.
Unless you want access to your retirement funds when you leave your company, a unit trust-linked RA will give you choice, control and the freedom to invest in local and offshore funds not necessarily limited to a few funds as is the case with your company’s retirement fund scheme. You can monitor your funds online and any changes can be done simply and cost effectively.
For example, if your brought a typical unit trust fund-linked to an RA, the costs per R1 000 are around 1-1.5%. That translates to R15 a month, so I think that’s excellent value.
The big picture
If you engage with a professional independent advisor they will advise and assist you with the following:
- Compare and select the most appropriate and cost-effective RA and unit trust funds
- Develop a financial plan for your future
- Provide ongoing advice and service
- Ensure you have income protection in the event that you become permanently injured or ill (protect you and your salary)
- Compare and analyse various medical aids and find the best options.
Financial planning and investment is now a specialised profession. Get professional and independent advice that is well-researched with comparisons. A good start is going to the South African Independent Financial Advisor Association, a professional independent non-profit body of highly experienced independent advisors.
If you decide to engage an independent advisor to assist you with your choices, make sure that they give you references, qualifications and details of their work experience, and can show you where they invest their own money.
See an example of an RA here. I’ve obviously left out my investment selection. In your case this will be determined by your age, risk profile and personal preferences when you develop a financial plan for the future.
Investing in an RA at 15% of your gross salary is a good start, with you being only 29 years old and when factoring in compound growth over your working career. Although you can also invest in tax-free investments as mentioned in your question, first pay off debts and remember that tax-free savings plans are not tax-deductible like an RA. However, if you have surplus funds, using a tax-free savings plan could be a good way to save separately and the funds could be used as a house deposit.
Good luck, and wishing you well over the festive season.