Finance Minister Enoch Godongwana’s 2024 Budget will do little to provide personal tax relief for consumers, who will have to continue to battle the cost-of-living crisis in the short term.
Lizl Budhram, the head of advice at Old Mutual Personal Finance, says that while personal income tax and the fuel levy remain unchanged, this does not equate to any significant savings for consumers.
“Because the minister did not adjust income tax tables for inflation or the medical tax credits, consumers will effectively be taxed through inflation,” says Budhram. “Effectively, consumers will be paying around 5% to 6% more in income tax, amounting to an additional burden of R18 billion.”
She added that with Godongwana increasing excise taxes from 4.7% to 7.2%, driving up the cost of alcohol and tobacco products, consumers’ disposable income will continue to face pressure. This pressure on consumers provides an ideal opportunity for financial advisers to guide their customers on the negative and positive impact the Budget will have on their disposable income.
“In times of economic hardship, it is important that consumers are prepared for higher expenses and know how to manage the knock-on effect of rising costs on their personal finances without compromising their long-term financial wellness,” Budhram says.
Re-evaluating personal budgets is imperative to ensure customers live within their means. She encourages advisers to help determine how their clients’ expenses can be adjusted.
Be careful of cancelling insurance cover
Customers may consider cancelling their life- or short-term insurance covers to ease financial pressures.
Budhram emphasises that financial advisers must make clear that cutting back on such expenses can have a dramatic impact on their customers.
“Life cover cancellations may result in major premium increases because the customer may be older or have new health conditions when they apply for life cover again in the future.”
It is worthwhile looking at policies that offer an option to pause premiums or see whether a premium can be reduced instead of cancelled because customers often do not realise that they have these options.
Don’t slack on investing for retirement
Only 33% of respondents ranked securing their investments as a top financial priority, according to the 2023 Old Mutual Savings and Investment Survey (OMSIM).
Financial advisers should remind their clients why contributing to a retirement fund is highly beneficial; it is a tax-effective tool and ensures a sustainable retirement. Budhram points out that by maximising retirement contributions before the tax year-end, individuals can reduce their taxable income, thereby decreasing the amount of tax owed.
Godongwana confirmed that the two-pot retirement system will take effect on 1 September 2024. Under the new system, a savings component will receive a maximum of one-third of all retirement savings and will be accessible before retirement age. A retirement component will receive a minimum of two-thirds of all retirement savings and will be accessible only at retirement.
Budhram says it’s important that advisers inform clients that the savings component should be accessed only in an absolute emergency because early access will have significant tax implications and negatively affect their income growth for retirement.
Avoid cutting back on discretionary savings
The OMSIM results also indicate that only 34% of respondents prioritise creating emergency savings funds.
The low percentage of respondents heeding the importance of saving for emergencies becomes more of a risk when further financial pressure increases and covering basic expenses becomes more challenging.
Financial advisers should emphasise why having money for unforeseen expenses is invaluable because it helps avoid going into debt to cover these expenses, which worsens financial difficulties later.
Focus on solutions
Although it is important to warn customers what not to do, providing creative solutions to create a more cost-effective budget is essential.
Advisers should provide clients with money-saving ideas they may not have considered. For example, they can cancel streaming or app subscriptions, see how they can benefit from discounts offered in their loyalty programme, sell goods they no longer use, and refinance debt for more affordable premiums.
SMEs also can benefit from advice
Budhram says financial advisers should also focus on small business owners, who could use their experience in their personal and business capacities. Budhram indicated that the minister made several concessions to SMEs in his Budget, and advisers are ideally placed to help business owners take full advantage of the offerings.
Reasons to be positive
Budhram emphasises that advisers and their customers must remain optimistic about the economic outlook. She points out that South Africa is currently at the top of the interest rate cycle and can expect significant relief towards the end of 2024.
“Looking at the bigger picture, we can see the interest rates coming down in the latter part of the year, and an easing off the cost-of-living crisis. This shift should lead to an increase in disposable income so that consumers can improve their debt situation and breathe again,” Budhram says.
