Take advantage of the increased tax deductable pension contributions and start saving more
By Kerrie Mostert, Certified Financial Planner®, Sanlam
With the tabling of the 2019/2020 Namibian budget on 27 March 2019 many waited to see what it had in store for an economy that has been under strain for the better part of the last two and half years. Many observers, however, also knew that the Minister of Finance, Hon Calle Schlettwein had little room to manoeuvre thus he had an unenviable task.
One of his more exciting and long-overdue announcements was the proposal to increase the tax deduction benefit of retirement savings, which has been stuck on N$40,000 per annum for a considerable period. The new proposal puts forth that taxpayers can enjoy a deduction of 27.5% of income to the maximum of N$150,000 per annum as a taxable deduction for the contribution to retirement savings.
Not only does this provide investors with a greater incentive to save for their retirement, it also means that the investment industry in Namibia receives a boost through increased investment. The Minister should be commended for taking this step and one can only hope this will be the start of further amendments that will stimulate investment.
The national budget speech is an important event on the annual government calendar as it not only depicts the state of the finances of the country for the coming year and over the medium term, it also provides a glimpse of the government’s policy direction. However, each year the question many ask is; “has enough been done with the budget?” With so many stakeholders and participants in the economy, it is almost impossible to appease everyone and cater for all needs, especially given the constraints of the country’s resources.
Nevertheless, the budget is not the only instrument at the disposal of the government to assist in economic growth and prosperity. Policy making and execution is just as important as the actual spending of resources. A policy that seeks to encourage investment, create jobs and foster entrepreneurship creates the environment which let both public and private sector businesses either flourish or stagnate.
An environment that encourages and stimulates investment is conducive for economic growth. Sustainable economic growth should be the end goal, creating and enshrining lasting economic benefits rather than quick-fix solutions. The introduction of the limitation on LTV’s (Loan to Value) whereby the deposit is determined by the number of properties already being financed by the applicant, has been debated since its inception. The intention of this limitation was to attempt to discourage speculation with property and halt the bubble in property prices.
The recent troubles in the Namibian property market are well documented and one can argue that the LTV restriction played a role in this. Nevertheless, one should take a step back and rather look at the access to credit and what that credit is used for. Private Sector Credit Extension remains worryingly high and consumer credit remains one of the challenges we as financial advisers face when conducting business with our clients. Purchasing consumer items on credit as a rule should be discouraged.
This form of credit is expensive and often creates further financial difficulty when consumers overextend themselves. However, with that said, not all debt is bad, and if used correctly can form an important part of the client’s financial planning model. Purchasing of a property is an example of this where an asset can grow both in capital value and in income received through rentals. Debt that encourages further economic growth should be encouraged and should be based on the client’s ability to repay the debt (affordability) rather than a one-size limitation aimed at the entire market.
Access to credit in a developing economy remains a cornerstone to stimulate economic growth therefore credit providers should be empowered in this task rather than curtailed. The ever-changing global markets and the pace with which the global economy moves demand that Namibians should move at the same speed and agility if we want to remain relevant. Regulators play an important role and are tasked not only with protecting the consumer but also creating an environment in which the consumer has quality choices and the ability to grow their wealth further.
Financial service providers should encourage and assist policymakers in creating an environment in which the consumer is both free to grow but still well-protected. This is easier said than done but for now, the first step on this journey is to take advantage of the increased tax deduction in retirement savings so that one day you can sit back and enjoy your golden years.
Having said that, should you be so lucky, how will you cope if you live to 100? You are probably going to live longer than you expect and that is why you must make sure to live as well as you can for as long as you live. It is possible that many of us will see 80 or 90 plus or even 100 plus. One is never too old to learn and if you have the chance to learn from pensioners, they will advise you to start saving from an early age, that you have to start retirement planning at an even earlier age and save as much as possible.
It is advisable to revisit your financial plan frequently as it can save you from a poor retirement outcome. It is not the government’s responsibility to let you retire comfortably. The government provides some tools as mentioned to motivate you to save for retirement. Did you know that about 45% of pensioners have a monthly shortfall? This shortfall means they must cut back on non-essentials, dig into savings, or ask family or friends for help. They are even forced to keep working. Don’t make poor decisions, preserve your pension fund at resignation. Don’t fall into the trap of inadequate pension fund contributions.
In this regard, there are a few important lessons to take note of:
Lesson one: Investment is a long-term game. The eighth wonder of the world is compound interest, but you’ll never enjoy compound interest unless you give it time. You need to spend time in the market to enjoy the fruits of investing. It’s not about timing the market, it’s about time in the market.
Lesson two: Chopping and changing your investment portfolio on a regular basis doesn’t score points. It very seldom enhances your investment.
Lesson three: You should sit down with a financial adviser well ahead of your retirement date and agree on what I call a long-term, strategic asset allocation. This means to allocate your investment portfolio among the different asset classes like cash, property, equities as well as fixed-interest investments such as bonds. Investment planning or retirement planning is just one small part of your financial plan.
Talk often to your financial planner. Make sure you cover topics such as making provision for your family at your death, or in the event of you becoming disabled, or that you are adequately covered in case of a dread disease, and make sure that your will is drafted and signed. So, just like the government presents a budget and has policies in place which are revisited and have funds allocated to certain activities, so should you as an individual. This makes for good planning and peace of mind in the long run.