Smart money choices

2015-02-23 08:00

Whether it’s fees, a study loan or trying to access your savings, the financial decisions you make affect your financial health in the long term. City Press looks at a few of the issues facing readers this month

HOW MUCH WILL I PAY FOR FINANCIAL ADVICE?

Bongani writes:

I have been reading a few articles about retail distribution review, which I understand is related to new legislation in the pipeline. My understanding is that this will change the way my financial adviser charges me. Does this mean I will pay less or more for financial advice in future?

Phillip Kassel, an executive financial adviser at Liberty, replies:

It is more than likely you will pay less in the long run, but the way in which you are charged will change and this may make it feel as though you are paying more. For example, if you currently invest R1?000 a month and your adviser charges you a fee of 3%, this means R30 goes towards his fee every month and you only actually invest R970 a month. However, because it is a single debit order off your account, you may not realise how much you are paying.

Going forward, advisers’ fees or remuneration will be more transparent and separate from your investment. Fees have to be disclosed upfront when you make an investment and a number of advisers are likely to start charging you an upfront fee or hourly rate rather than simply charging you a percentage of your investment. Depending on the amount invested, the difference in fees going forward could be as much as 50% less.

You should think of your annual visit to your financial adviser as a necessary visit for your financial health. Just as you would visit the dentist once or twice a year and pay him a consultation fee, you will now have to pay your financial adviser a consultation fee.

ARE CASHBACK OFFERS TOO GOOD TO BE TRUE?

Nigel asks:

We are regularly warned in financial advice articles that “if it sounds too good to be true, it probably is”. This saying came to mind when I recently saw the following on OUTsurance’s website: “Receive all your paid life insurance premiums back in cash after 15 claim-free years.” How can OUTsurance afford to do this? Will we find out in 15 years’ time that OUTsurance’s promise was too good to be true?

City Press replies:

The retention rate of life assurance products is low. This means many people cancel their life policies within a few years of taking them out, either due to financial difficulty or because they find a better premium elsewhere. So the question is: How many people would reach this claim stage and are you paying an additional premium for this OUTbonus?

Ernst Gouws, CEO at OUTsurance, agreed that research indicated that life assurance was often the first expense households cut back on – but when a life assurance policy was cancelled prematurely, the client was the one who ended up losing, which was the reason they developed the 15-year OUTbonus on their life assurance product.

OUTsurance has always had an OUTbonus linked to its short-term insurance products. Their premiums are thus a little bit higher than it otherwise would be in order to fund the “kitty” for the OUTbonuses. People who don’t stick it out for the three years also end up subsidising those who do. In the same way, those who don’t have a car accident end up subsidising those who do.

Gouws says the same principles apply with life assurance, but the period for which you must keep your assurance cover in place is longer and the OUTbonus is higher due to the nature of longer-term cover.

“This means the additional portion a client needs to pay [on top of the normal premiums charged for life assurance cover] is bigger than on short-term insurance. That is why we made this Life OUTbonus optional – you can choose whether you only want the pure life assurance or want to pay an additional amount each month to have the OUTbonus benefit. The size of this additional premium varies, depending on the client’s risk profile, but is on average 30% of a client’s premium,” explains Gouws.

He recommends that potential clients get a quote including and excluding the additional premium for the OUTbonus, and compare this with other life-cover quotes. He believes that in some cases the OUTsurance quote, including the additional premium for the OUTbonus, would still be competitive against other policies – and then you would also have the opportunity to have all your premiums paid back after 15 years.

“If you believe you will keep your cover in place, then this is absolutely fantastic value for money. And yes, if you cancel your cover before then, the extra money you paid each month will end up subsidising some other client’s OUTbonus.”

FUNDING YOUR STUDIES

Happy writes:

I’m interested in studying at Boston City Campus and Business College, but my problem is the cost. I have applied for a student loan at a few banks, but these require monthly repayments. My mum earns R1?500 a month and cannot afford the repayments. How do I go about getting a loan that will allow me to start repayments after my studies?

City Press replies:

You have a few options available to you:

.?You could apply to the National Student Financial Aid Scheme (NSFAS), which is government’s student loan and bursary scheme. You can apply directly to the NSFAS on their website (www.nsfas.org.za), or through the financial aid office at a university or technikon of your choice.

.?You could work part time while studying to repay a loan. If you choose this option, you will need to earn R6?000 a month, be able to afford to service the loan and have a good credit record.

.?A third option is to find a company to sponsor you, or you could apply for a bursary, preferably with a company in the same field you are studying towards. Note that while some companies or trusts may offer you a “no-strings-attached” bursary, most will require you to work a year’s service for every year of paid tuition. This, however,

is ideal as it also provides you with job security once you graduate. To find a full list of bursaries available in the country, you can contact the Bursary Register at 011?672?6559 for a copy of their book The Bursary Register, which will cost you R180. Or you could visit the website at www.gostudy.mobi/bursaries/all/default.aspx.

.?A bank loan typically requires a parent to stand surety. The NSFAS also offers student loans at interest rates significantly lower than banks. Payments on an NSFAS loan start at 3% of your annual salary, increasing to a maximum of 8% when you earn an annual salary of R59?300 or more. This works out to a monthly repayment of R696. Depending on a student’s results, up to 40% of an NSFAS loan can be converted to a bursary.

ACCESSING YOUR PENSION FUND EARLY

Collins writes:

Is it possible to access some of the money from my pension fund while I am still working? I do not want to resign or retire, but I need to access this money urgently.

City Press replies:

No, it is not possible to access your retirement savings while you are still working, not even the funds saved in a retirement annuity. If you are struggling to make ends meet, it may be worth your while to consult a debt counsellor and reassess your budget. By making certain lifestyle changes and reorganising your budget, you may be able to make things work. Debt counselling firms such as Octogen and the National Debt Mediation Association can assist you.

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