A reader asks:
I’ve read an article on the M&G Online that says having a gold card is all for show. I tend to agree with that. I went in to my bank recently, and asked if I really needed my “elite cheque account” with a gold cheque card. The adviser’s answer was, that this will count in my favour when applying for a home loan or vehicle finance, as apposed to having say a classic cheque account. I’m still not so sure about this.
A Gavin Muller of Virgin Money replies:
Although it is not stated which bank gave the advice, in my experience it does not sound plausible that having a particular type of product would stand you a better chance of being approved for other credit products. Logically, any credit product applied for would have to go through a credit assessment pro-cess that ensures that you as an individual can (a) afford the repayments and (b) prove you are credit worthy by interfacing to a credit bureau.
To argue that “elite” customers are less risky than “entry level” customers is a dangerous game. There is risk associated with any form of lending and although there may be slightly different risk profiles associated with income bands, banks would be placing themselves at both financial and regulatory risk should they not test affordability on every credit application.
Status in most financial institutions is directly correlated to your level of earnings and should clearly not be used as a means of determining affordability for other credit products. The bottom line is that there is a competitive landscape out there with most of the instalment-based products becoming more and more commoditised. Consumers should do their homework, scan the playing fields and choose products that offer value relative to their needs. Status often ends up costing you a fortune with little to no additional benefit.
A reader asks:
I resigned from my employer a week ago after receiving a very good offer from another company. I’m going to be working until the end of June. I’ve been given a form to complete, indicating how I want the fund value of my pension fund dealt with. What are my options? Is one option better than another?
A Riette Brune of Metropolitan Odyssey replies:
In the modern workplace, this dilemma is encountered more and more. Employees seldom stay with one employer for their entire career and, on resignation, one is always faced with the retirement fund question. Of course, not all options are equally suitable to everyone and regard must always be had for a person’s particular circumstances.
Cash: The option to take your accumulated benefit in cash is always a tempting one, but should be considered with caution.
Any lump sum received from a pension fund is part of your gross income for income tax purposes for that year of assessment — thus subject to income tax. An exemption is provided for in the Income Tax Act, with the first R1 800 of the benefit usually being tax-free.
If no other provision has yet been made for retirement, going the cash route might severely jeopardise your position at retirement.
Transfer to a pension fund: If the new employer has a pension fund in place for its employees, a transfer to the new pension fund is a good option. Such transfer will be free of tax and will maintain the retirement provision already built up.
Transfer to a retirement annuity fund: Another option is a transfer of the pension benefit to a retirement annuity fund. Again, the fund value is maintained and the transfer is free of tax. The reader must be aware that a retirement annuity benefit cannot be accessed until age 55 earliest (unless the member dies or becomes disabled), at which time only one third may be taken in the form of a cash lump sum, while the balance must be used to purchase an income.
Transfer to a preservation fund: If the reader’s current employer is a participating member of a preservation fund/s, transfer of the benefit to this preservation fund would be a further option. The preservation fund is essentially a “parking bay” for the accumulated benefit. No further contributions are allowed, but the fund value will continue to grow until accessed at retirement, with the member being allowed to make only one withdrawal from the fund prior to retirement. Such a withdrawal will be taxed in the same way as a cash withdrawal discussed above.
Splitting of benefit: Should the option form allow, the benefit may be split, for example: a portion in cash and the balance transferred tax-free to a retirement annuity or a pension fund. When choosing a preservation fund, the full benefit must be transferred, unless a portion is being transferred to a retirement annuity. The preservation fund option cannot be combined with the cash or pension fund option.
The member will thus have to critically evaluate all the options. Since the vast majority of South Africans do not make sufficient provision for their retirement, causing a drop in the standard of living in retirement years, you should strongly consider transferring your benefit to another savings vehicle, rather than accessing the cash (and paying tax on the benefit).
If you have any questions, you can send them to [email protected]
Savings tip: the store card trap
I have always been a big fan of store cards, simply because they offer six months interest-free credit. But I have discovered that what sounds like a good deal is really a spending trap. I discovered this when I finally paid off my last store card and found that I now had several hundred rand to spare at the end of the month. This is money I can now start adding to my savings fund.
The reason I decided to stop using store cards was because I was continually surprised by how high my balance was. Did I really spend all that money? What did I buy?
The truth is that easy credit becomes easy spending. The buy now, pay later rationale means we buy things we don’t really need and carry on paying for them long after the thrill of purchase has passed.
M&G Money, in conjunction with Metropolitan Odyssey, is running a competition for the best savings tip of the month. Savings start not with putting money away, but finding ingenious ways to cut expenses. The reader who sends in the best tip for next month will win a wireless mouse to the value of R250. Please submit tips to [email protected] fax to 088 011 883Â 9496. Alternatively write to PO Box 91667, Auckland Park 2006. — Maya Fisher-French