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

I share an office with my wife, who is a medical aid adviser and I regularly overhear this type of question. The answer differs for each person, depending on their particular circumstances. I therefore cannot tell you what you should do without having more information about your health and needs.What I can do is take you through the thought process that you would need to go through to make a decision.If you need to save money you have two options:

• You can cancel your gap cover; or
• You can downgrade your medical scheme.

Either option will result in you carrying some of the risk yourself.Gap coverFor those unfamiliar with gap cover, it’s a short-term insurance product that covers any deficits in payments from your medical scheme under certain circumstances.For example, should you go into hospital for an operation and your medical aid covers the anaesthetist for 200% of the scheme rate and she charges 300% of the scheme rate, then the gap cover would make up the difference. This can provide you with a lot of peace of mind for a relatively low premium.There are other benefits that the various gap cover providers offer. In essence, the main benefit of gap cover is that it covers all or part of the gap between what is charged by the medical supplier and what your medical scheme pays. If you cancel the gap cover, you will have to make up the shortfall from your personal savings.I always advise my clients to think carefully before cancelling any risk cover, be it life insurance or gap cover. There are often unintended consequences and you may not be able to reinstate the cover under the conditions you previously enjoyed.If you want to reinstate the gap cover at a later date, the provider may apply waiting periods or exclusions for pre-existing conditions. Some schemes may have maximum entry ages, so if you have second thoughts at a later date, you could run into problems.Downgrade and upgradeIf you downgrade your medical scheme, you will lose certain benefits. You need to understand what benefits you will be losing and what the financial implications will be should you fall ill and need those benefits.You also need to know which benefits on the lower scheme structure will be complemented by the gap cover.Once you have this information, you can decide whether to keep the gap cover and downgrade your scheme or ditch the gap cover and stay on the higher scheme.Another option is to look at other medical schemes. They may have a combination of benefits that are better suited to you.Many medical aid advisers have computer packages that allow you to compare the benefits of the different schemes. You can overlay the gap cover benefits on to these. This will enable you to get the right combination of benefits. It will also help you to understand the potential financial risks.Most medical schemes allow you to downgrade at any stage during the year but you can only upgrade to a better scheme at the end of the year.If you move to a scheme with lower benefits, then find this is not meeting your needs, you will only be able to upgrade again at the end of the year.If you go through this exercise, you may find that downgrading your medical aid and cancelling your gap cover is too risky and should not be done at all. You will then have to look at your monthly budget to see how these costs can be accommodated.There is no easy answer to your question. As you can see, there are a lot of moving parts to consider and calculations to be done. I would strongly recommend that you go through this process with someone who is familiar with the various medical schemes and what is covered on each of the plans before making a decision.