2015/07/01 THE ACADEMY OF FINANCIAL MARKETS WELCOME TO THE PRESENTATION! THOUGHT FOR THE SESSION Trust in the Lord with all your heart and lean not on your own understanding… Prov 3 : 5 Module: Insurance and retirement fundamentals � Planning for retirement and financial risk: – Why plan? – How to plan: Risk vs. lifestyle approach – Maslow’s hierarchy of human needs – Important vs. urgent – Steps in the plan 1
2015/07/01 Module: Insurance and retirement fundamentals � Personal financial planning: – Basic steps: � Set objectives (needs & risk analyses) � Analyse current situation � Prepare budget and allocations of monies (including products, ensure all needs levels covered) – Overall consideration: RISK ROFILE Module: Insurance and retirement fundamentals � Planning for retirement and financial risk: – The personal financial position: Assets (excluding lifestyle assets) – liabilities – Financial plan should cover all areas (See Excel) � E.g. risk insurance Module: Insurance and retirement fundamentals � The legislation landscape � Pre-retirement planning: – Simple calculation of amount needed to retire � Example 1 and 2 – Calculations taking inflation and growth into account – See Excel examples � Example 3 2
2015/07/01 Module: Insurance and retirement fundamentals � Pre-retirement planning: – Calculations taking inflation and growth into account � Assumptions and their effect � Example 4, 5 – The budget challenge Module: Insurance and retirement fundamentals � Risk & risk profiles: – Classification – Investment composition – Risk inventory: Current situation regarding � Age � Income � Health � Financial status � Other Module: Insurance and retirement fundamentals � Risk insurance and products – Risk & insurance matrix p 12 – Short-term insurance – Life assurance: � What, how much, etc.? � Types and liquidity – Medical aid & Health insurance – Insurer selection 3
2015/07/01 Module: Insurance and retirement fundamentals � Retirement products – Pension and provident funds � Basic working � Defined benefit vs. defined contribution funds � Taxation � Difference between the two Module: Insurance and retirement fundamentals � Retirement products – Preservation funds: � Functioning and use � Taxation – Retirement Annuities � Functioning and use � Features and taxation – Other investments available Module: Insurance and retirement fundamentals � Other investments available – Unit Trusts, direct shares, offshore, structured products, etc. – Advantages and disadvantages – Volatility and risk – Diversification and derivatives – Managing market risk – The power of compounding interest 4
2015/07/01 Module: Insurance and retirement fundamentals � Retirement fund tax (pre 2016): – Pension fund contributions: � Highest of R 1750; or � 7,5% of Retirement-funding income – RA contributions: � 15% of non-retirement funding income; or � R 3 500 – pension fund allowances; or � R 1 750 – Provident fund: � No deductions, but can take full amount at retirement. – From 2016 – 27.5% Module: Insurance and retirement fundamentals – Example: Mr. Worth is employed at Nedbank and on weekends he puts in kitchen cupboards. He has the following income for the year: � Salary R 400 000 � Profit from own business R 320 000 He contributes R 2 200 per month to a pension fund, R 5 000 per month to an RA and R 1000 per month to a provident fund. How much will his deductions for tax purposes be? Module: Insurance and retirement fundamentals � Post-Retirement products – Retirement funds available and use: � 1/3 rd Lump sum – Taxation see below � 2/3 rd in compulsory purchased annuity: – Traditional annuity – Living annuity � New provisions: – Withdrawal of full amount if amount is less than R75000 – New lump sum tax free portions: Lump sum: Tax rate: 0 - R315 000 0% 315k – 630k 18% 630k – 945k R 56 000 + 27% of amount above R 630 000 above 945k R 141 750 + 36% 5
2015/07/01 Module: Insurance and retirement fundamentals � Post-Retirement products – Life annuities and their types � Example 6 � Example 7 � Advantages and disadvantages � Example 8 – Living annuities � Characteristics, advantages and disadvanatges – Voluntary purchased annuities � Exercise: – John is a young CA (age 26) who earns a monthly salary after tax and deduction for medical aid and pension of R 16 000. He also gets an annual performance bonus. – His health is good and he has no dependants although he wants to marry one day and have 3 children. – He owns a car which is fully paid for and rents a garden cottage at R 2 300 per month. His short-term insurance is R 700/m and is adequate. – He belongs to a medical aid (R 600/m) and a pension fund (R 1 500/m) and payments are deducted from his salary by his employer. – Other monthly costs amount to R 7 000 – He has no debt, no other investments, no life insurance or other retirement products and no holiday savings. – You must: Calculate and evaluate his monthly budget and suggest some products to address possible shortfalls. He wants to invest at least R 2 000 per month (surplus) � Exercise: – Ebie is 45 years old and has his own business: a 2 nd hand car dealership. He has a B Comm. degree. – The profit of the business after tax is between R 150 000 and –R20 000 per month and about R 850 000 per year. He draws no fixed salary. – He owns 2 cars and 4 properties which is paid off. The market value of the properties is 4m and he earns R 180 000 rental per year on them. His short-term insurance is adequate. – He is married with 3 children ages: 3, 5 and 7. – His medical aid costs him R 2 100 per month and he has RA’s costing R 2 200 per month. He has life cover of R 750 000 costing R 800 per month. Included in this is disability cover of R 12 000 per month. – Other monthly costs amounts to R 20 000 per month. – He has no debt, no other investments, no other retirement products and no holiday savings. – You must: Calculate and evaluate his annual budget and suggest some products to address possible shortfalls. He wants to invest in shares as well 6
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