What financial planners should be doing around budget time

This is the first in a series of 5 written by Gareth Stokes for the Financial Planning Institute of Southern Africa (FPI). With thanks to Mark MacSymon CFP®, winner of the 2017 FPI Financial Planner of the Year competition and a wealth manager at Private Client Holdings.

On 21 February 2018 the finance minister will take to the podium to deliver South Africa’s Annual Budget. He will outline how government proposes to balance its income and expenditure for the 2018/19 financial year against a backdrop of poor economic growth, rising unemployment, mounting debt and significant shortfalls in tax revenue collection.

Economists and other financial services professionals have been speculating as to how government will make up its revenue shortfall this year. They say you can expect the usual hikes in ‘sin’ taxes on alcohol, tobacco and – new for this year – sugar. But other changes are more difficult to predict. There has been much speculation about a hike in the VAT rate, possibly via a tiered system through which luxury goods will attract a higher rate of up to 20%. Add to this the chance of increases in Capital Gains Tax (CGT), shifts in the individual income tax top marginal rate and the possible removal of the zero-VAT rating on fuel and you could have a tough time with your personal budget in the coming year.

A professional financial planner can assist you in preparing your personal finances for any budget surprises. Mark MacSymon, CERTIFIED FINANCAL PLANNER® professional and proud winner of the 2017 Financial Planning Institute’s Financial Planner of the Year award, says that the annual budget speech is a great ‘marker’ for a range of financial planning actions. “The budget speech coincides with the end of the tax year, making this the perfect time to remind clients to use any available mechanisms to save and invest tax-efficiently,” he says.

Such considerations include maximising your lump sum contributions to retirement annuities and tax-free savings accounts, while high net worth clients may also consider donations tax exemptions to facilitate the inter-generational transfer of wealth or reduce loans to trusts vis-à-vis section 7c of the Income Tax Act. Tax planning is another important task that requires attention pre-budget. “In order to plan and make effective decisions, financial planners and accountants must be on the same page regarding their client’s tax matters, especially those of a provisional nature,” says MacSymon.

The financial planner’s role is to ensure that you have a strategic financial plan in place which can be used to anchor your expectations and provide a platform for rational decision-making during times of uncertainty and change. The best course of action is therefore to consider the legislative changes announced during the budget and implement the necessary changes to the financial plan and portfolio in a considered manner over time.

There are some exceptions that demand swift action. “Financial planners should respond immediately to legislation changes which affect particular clients as there is a small window of opportunity to make the necessary adjustments to the financial plan” says MacSymon. For example, if the CGT inclusion rate for individual tax payers is increased, the disposal of certain assets might need to be accelerated before the financial year end. Any changes to the dividend withholding tax rate could require a similar response, depending on the effective date of increase.

Communication between you and your financial planner should take place on an ongoing basis. Your financial planner should contact you to schedule a meeting if they believe any changes should be implemented before the end of the financial year. You are also encouraged to contact your financial planner whenever you have concerns about the impact of budget changes to your personal financial position.

Financial planning and advice firms are active communicators around budget time. “We distribute an electronic newsletter to clients in late January informing them of contribution limits, timeframes and administration requirements and encouraging them to contact us if they need any assistance,” says MacSymon. Post-budget, you should expect a timely budget synopsis with a clear communication as to how or if the changes affect you. We also produce a pocket-size tax guide to inform its clients of the important points highlighted in the budget and any changes in legislation.

“A financial plan created around personal, well-considered wealth goals is a living document which will change not only as the client’s circumstances change but also when changes to legislation occur”, says MacSymon. The financial plan should respond to the needs and lifestyle goals of the individual or family within the rules sketched by National Treasury in the annual budget. It is unlikely that major changes will be required either pre- or post-budget; but rather calculated responses.

In conclusion, MacSymon observes that changes to legislation and the consequent implications are easily understood when you have a financial plan in place. He says that your financial planner has a responsibility to maintain the calm and stick to the plan and goals set. Your planner should manage your emotions and fears and assist you in making well-considered changes when they need to be made.