Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

Your situation is common among many South Africans.

In the past, freelance work used to be the preserve of those in the entertainment industry. It has now gone mainstream, with many who were retrenched last year now contracting their services.

Most of us were in survival mode last year and future financial planning was not a priority.

Now that the dust has settled, it is time to draw a line in the sand and get your finances sorted.

There are five things I look at when it comes to putting together a financial plan.

1. Budget

The thing with money is that, unless you have financial discipline, you will always spend what you earn – and often a little bit more.

If you earn money that comes in sporadically, you do run the risk of spending too much in the good months and not keeping anything back for the bad months.

You need to know what it costs you to live each month. You need a budget.

Having a budget that itemises your basic living expenses will help you understand how much you need to earn each month. You can then move any additional money you earn in a month into a different account. This account would be used to supplement your income in the months when your earnings are low.

2. Income protection

If you are in a car accident and cannot work for six months, how will you and your family survive? What would happen if you cannot work again?

People who work for companies typically have some kind of income protector or disability insurance. Freelancers do not.

This is usually the first product I recommend to those of my clients who work for themselves.

You need to keep yourself on the same financial trajectory by protecting your ability to earn an income.

3. Medical aid

Look at getting a medical aid, even if it is just a hospital plan. There are two main reasons for this – time and money.

Time: State institutions deal with a lot of people and do not have the most efficient queuing systems. If you are working for yourself, time is money. These queues can affect your income.

Money: Many people do not join a medical aid when they are young because they believe they do not need the benefits. This may be true, but what is also true is that they will need the benefits when they get older.

If you only join a medical aid when you get older, you will pay a late-joiner penalty. Your premiums could be as much as 75% more than what you would have paid had you been on a basic scheme for your whole life. This is one of the reasons why many freelancers cannot afford medical cover when they join late in life – the premiums are simply unaffordable, especially when their income streams are drying up.

4. Emergency fund

I mentioned having a separate bank account in which you place all the excess money you earn in a month.

In addition to this, you need an investment such as a discretionary investment plan or a unit trust account in which you invest an amount of money each quarter. This would be your emergency fund that should eventually build up to six months’ worth of income. The fund would protect you from situations like that which we experienced last year.

5. Retirement fund

There will come a time when you will no longer be able to earn a sustainable living from what you do. This is when your retirement savings will provide you with an income.

You need to invest in a retirement annuity consistently. My recommendation is that in January each year you look at how much you earned over the past year and invest at least 10% of that amount in a retirement annuity.

What I have outlined above are a few principles you should follow. Each person’s circumstances are unique, so you really should chat to a financial adviser who can help you put the right structures in place.