IC Newsletter Issue 3 2023

Need

In this issue

Hello

In this edition we give you an update on the latest developments with the two-pot system that everyone is talking about. We introduce you to Annele Oosthuizen who provides an explanation on how co-payments and deductibles work in the medical aid industry.

We also have our regular conversation between Trevor and Thato - this one is all about fraudfollowed by an article that questions whether cash really is king. We conclude with an update on the markets for Q2, 2023.

Until next time, happy reading. Rita

The new two-pot system for retirement funds

You can only withdraw cash from these savings if you leave your employer or retire. Rules apply.

Your retirement savings up to 29 February 2024, and any investment growth on these savings, will not be affected by the new rules.

When will money be available

A small amount of your savings from your vested pot will be moved to your savings pot on 1 March next year. This amount is expected to be 10% of your savings. This first amount in your savings pot can’t be more than R25 000. You’ll be able to withdraw the money in your savings pot if it’s more than R2 000. You’ll pay tax on any cash you withdraw.

Thato & Trevor How to protect yourself from fraudsters

Trevor: Thato:

Hi Thato. I’m so upset – my phone was stolen yesterday.

Hi Trevor. I’m sorry to hear that. Our whole life is on our phone these days. What did you do?

I contacted my bank to report the theft and to delink my banking app. I found the bank number on my bank card.

I’ve seen you use your banking app with facial recognition. That, and the two-factor authentication, will protect your personal details and banking access.

I also notified my cell phone provider. They needed my phone’s IMEI number, which I had noted separately from my phone thank goodness! I also previously set my photo gallery up so that my memories are stored in the cloud. I’m so glad I didn’t lose them.

I’m very cautious about SIM swaps. If you suddenly stop getting calls or messages or struggle to get your OTP (One Time Pin), you should check with your cell provider that there wasn’t a SIM swap.

I got an sms recently where they pretended to be from my bank, asking me to click on a link. I hear this is called smishing. And vishing is when they call you and ask for your details. I never click on links if I don’t know what it is about or give a password or OTP or PIN to anyone, even if they work for the bank.

Luckily I know that Alexforbes will never send me a message like that. They have now started using WhatsApp as well. I always contact the service provider directly if I get a message like that.

Even when an email and a website look legitimate, I only provide the information I really must. My adviser sends me banking details separately from transactional documents if I make a deposit or password protects documents so that banking details can’t be intercepted and changed.

Trevor: Thato:

I used to worry that someone would be able to access all my money in my current account if they got hold of my card or app. A few months ago, I set up a unit trust account to prevent that. I had already made the R36 000 contribution to my tax-free savings account so now I transfer extra cash to my unit trust instead of keeping it in my account.

That’s a great idea. You can still access your money, although not quite as fast, but a stranger won’t be able to access all your funds. A unit trust is processed with extra layers of protection. You can still decide how you want to invest this money and you have a bigger range of investment options than just cash so you can use it for longer-term goals as well.

I have lowered my daily credit card and cash withdrawal limits as well. Hopefully it limits the amount that someone can take. Especially now that you can tap and go – a few of those small payments can add up to a lot of money.

I have insurance to replace my phone but in the future I’m going to be much more careful. Not only with my phone but also with my emails – I won’t click on links where I’m not completely sure that they are legitimate.

I’m going to set up the ‘Find my phone’ function on my phone and other devices right now so that I can wipe my phone while I wait for it to be blocked because it can take a few hours.

I hope everything gets back to normal for you soon!

How medical scheme co-payments and deductibles work

By Annele Oosthuizen

Consulting manager at Alexforbes Health

Joining a medical scheme doesn’t always mean you’re completely covered for all medical expenses. You may have to pay a co-payment, deductible, or both. This means paying an amount up front from your own pocket.

Here are some examples:

• If you don’t use a hospital within your medical scheme’s network, you may have to pay a deductible

• If you see a specialist, you may need to make a co-payment

• Some medications may also require co-payments

• Scopes and radiology scans often require upfront payments

How gap cover can help with co-payments

By taking out a separate insurance product called gap cover, you can help make up the difference, or gap, between what your medical scheme pays and what your medical expenses actually cost. With medical inflation rising every year, gap cover has become a cost-effective addition to cushion the shock of doctors charging more than the medical aid rate.

Gap cover typically covers the shortfall for hospitalisation involving surgery or medical treatment in a hospital, as well as certain outpatient procedures.

The number of Alexforbes corporate medical aid clients with gap cover increased by 5% between 2017 and 2022 – proof that more people are realising the benefit of gap cover.

Your medical scheme may have their own rates of reimbursement, which may not cover the full cost of your medical expenses. You can choose to settle the co-payment and then claim, or you can decide to wait for the gap cover benefit before you settle the shortfall with the benefit you received.

Keep in mind that these co-payments and deductibles can vary depending on the medical scheme you participate in.

The difference between a co-payment and a deductible

They are quite similar in that you have to pay an amount up front from your own pocket. However, a deductible usually requires you to settle the amount before treatment starts.

You can get gap cover for:

co-payments for procedures in and out of hospital along with more benefits

medical aid co-payments, deductibles, sub-limits and even cancer treatment shortfalls depending on your gap cover option

Is cash really king?

Outperforming inflation is key to your investment’s success

You grow your wealth by investing your savings, not from stashing your cash in a cupboard, under a mattress or burying it at the foot of a tree. Although this might seem like a good idea when markets are down and have had a negative impact on the value of your investment, it can destroy the value of your investment over time.

Time should determine where and how you invest. It is important to look at how the different types of investment classes have performed over time.

The chart below shows the value of R100 invested over 40 years in various asset classes (equities, bonds, cash). The reason a 40-year period is shown is that this is the typical working lifetime of an employee. Most people usually start working in their twenties and retire in their sixties.

You can see that the highest growth has been from equities, then cash and then bonds, which have just managed to outperform inflation.

Defensive asset classes, such as cash and bonds, achieved more stable returns (the line is flatter) relative to the growth asset class (equities). However, although cash and bonds came with more stable returns, cash and bonds beat inflation by only a small margin (the dark orange line).

Outperforming inflation is key to your investment’s success. This ensures your savings keep up with the cost of living. Equities consistently outperformed inflation by a huge margin, but it comes with a wider spread of returns.

If the risky nature of equities scares you, you need to consider a diversified investment that has a complementary mix of growth and defensive asset classes that aim to achieve more stable inflation-beating returns.

Take note

It is impossible for your portfolio to always perform optimally as asset classes behave differently over time and during different market cycles. It is important to structure a holistic and diversified investment strategy that aims to grow and protect your savings while converting them into wealth over time.

If you invested R100 in the different asset classes 40 years ago

Inflation reduces the value of your money over time

Some prices rise; some prices fall. Inflation occurs when there is a broad increase in the prices of goods and services, not just of individual items. It means, you can buy less for R100 today than you could yesterday. In other words, inflation reduces the purchasing power of your money over time. Inflation is probably the biggest single risk that a member faces when saving for retirement.

Example: 5% each year

If the inflation rate for a litre of milk is

Then milk prices will be

5% higher next year

This means that a litre of milk that costs R10.00 this year will cost R10.50 next year.

If your investment produces returns that are less than the rate of inflation, you will be faced with reduced purchasing power when you convert your investment back to cash. This means your investment is not keeping track of your cost of living and you may not be able to meet your needs and personal circumstances in the long term.

Retirement funds invest to grow the value of the money that belongs to people, so that they can retire comfortably. To achieve inflation-beating returns people need to be invested in growth asset classes, such shares, also known as ‘equities’, where you buy a share or part of a company. Historically, equities have been the go-to asset class to beat inflation and helping people to fight its destructive power. However, enjoying these inflation-beating returns can come with experiencing larger price swings in the value of your investment, as the value of shares can change often and quickly compared to other asset classes.

The amount invested in shares depends on whether the investment portfolio is a safe or risky portfolio. The safer the investment portfolio, the less money will be invested in shares. If your investment is for a short term goal, and you need to use the funds soon, you should not use risky portfolios to protect your money. However, if you are saving for a long term goal like retirement you can take more risk. Even if equities don’t perform well now and then, you have a long time before you need the funds.

Take note

It is important to have a well-thought-out investment plan so that your savings can grow over time. Speak to a financial adviser about an investment strategy that puts your money to work in a way that is right for the goal you want to achieve based on your age, your stage in life and your own circumstances.

The following table illustrates how different types of asset classes perform over time.

Table 1: Investment returns at 31 December 2022

Source: Alexander Forbes Investments

The higher the risk, the higher the reward

There are risks when investing. One risk is the negative effect that financial market shocks have on the value of your savings. A common saying in investing is “the higher the risk, the higher the potential reward”. But not everyone can stomach the risk of seeing the value of their retirement savings decrease.

It is important to remember that asset classes (equities, property, bonds, cash) behave differently. This is because each asset class has a different risk-return profile. For example, equities (which aim to provide growth in a portfolio) have the potential to offer higher investment returns but their value can change often and quickly. Cash is the opposite –its value is not expected to drop drastically and offers more stable returns, but you receive smaller returns for the stable or conservative nature. Some people prefer to avoid risk, especially during times of big market downturns. However, choosing safety over strong return potential can have a big impact on their savings over time.

The charts above reveal some interesting insights into our local financial markets over the past 40 years (to 31 December 2022).

Looking at Chart 1 above, at first glance, the wide range of investment returns (from positive to negative) from growth asset classes (equities and property) can be unsettling. But look at Chart 2 and you will see that these asset classes have delivered the best investment returns relative to bonds and cash (defensive asset classes) over the past 40 years. In fact, not only did growth asset classes deliver better average monthly investment returns relative to the other asset classes over this period, they also shared the highest percentage as the best performing asset class, even though they experienced the most negative-performing months (see Chart 3).

It is important to remember the distinction between saving your money and investing your money. When you are ‘saving’, you are protecting your existing money – putting it aside regularly to save for something specific when you need it, for example home repairs, a holiday or a deposit on a new home. When you are ‘investing’, you are looking to grow your money – creating additional wealth without working harder to earn more money, for example securing your financial future in retirement.

Chart 1: The bars show the maximum, minimum and average monthly returns experienced per local asset class over the past 40 years

Source: Alexander Forbes Investments

Chart 3: Percentage of time as the year’s best performing local asset class from 1982 - 2022

Chart 2: Negative and positive months experienced per local asset class over the past 40 years

Market updates

Resilient growth, easing inflation and an interest rate peak

Macro developments in South Africa

Global macro developments in advanced economies

Global financial markets performed well in July 2023 as the disinflation trend continued

Uneven China’s economic growth require more monetary and fiscal support

Prospects for the remainder of the year

Read the complete commentary here.

Disclaimer:

Please note that while care has been taken to ensure that the information provided in this article is correct, it represents an overview of the topic under discussion and as such does not constitute advice.

While Alexforbes has taken reasonable effort to ensure that the information contained herein is true and correct it will not be held liable in respect of any loss arising from any advice provided arising out of the contents of this circular.

We suggest that you contact your Legal department before taking any decisions based on the information herein.

The following businesses are licensed financial services providers:

Alexander Forbes Financial Planning Consultants (Pty) Ltd (FSP 31753 and registration number 1995/012764/07)

Alexander Forbes Investments Limited (FSP711 and registration number 1997/000595/06)