24 Questions
What is the purpose of the National Credit Act?
To regulate all credit agreements
What is the main advantage of a pension fund?
Employee may deduct up to 7.5% of salary for tax purposes
Why is homeowner's insurance compulsory if you have a home loan?
Because it is a requirement for home loan
What is the key difference between a pension fund and a provident fund?
Employee's contributions are tax deductible in a pension fund, but not in a provident fund
What is the significance of the repo rate in relation to debt consolidation?
It is the rate at which SARB lends money to commercial banks
What is the purpose of diversification in investment portfolios?
To reduce risk by investing in 2 or more asset classes
How does a retirement annuity differ from a pension fund?
It is a one-man pension plan
What is the implication of tax efficiency on investment decisions?
It provides tax benefits attributed to the particular investment
What are the three categories of credit agreements regulated by the National Credit Act (NCA)?
Small (R0 - R15 000), intermediate (R15 001 - R250 000), and large (R250 001 and above)
What is the purpose of the more detailed application process introduced by the NCA?
To prevent reckless lending
What is the significance of the 5-day period in the NCA?
It allows consumers to consider a quote before it expires
How can you reduce your mortgage repayment term by half?
By paying 15% extra on your monthly repayment
What is the main characteristic of a preservation fund?
It can only accept transfers from other pension or provident funds
What is the key difference between a pension fund and a provident fund?
Pension funds require a guaranteed retirement benefit, while provident funds do not
What is the limit on the deduction an employee can claim for contributions made to a pension fund for tax purposes?
Up to 7.5%
What happens to the employer's contributions to a pension fund in the employee's hands?
It is taxed as a fringe benefit
What is the significance of the retrospective application of the NCA to all credit agreements?
It applies to all agreements from 1 June 2007, regardless of when the agreement was entered into
What is the maximum amount that can be taken as a cash lump sum at retirement from a pension fund?
1/3 of the fund value
What is the benefit of knowing who the Finance & Insurance Manager/Business Manager represents when assisting with a finance application?
It provides transparency and accountability in the finance application process
What is the primary difference between a pension fund and a provident fund at retirement?
A pension fund requires investment in an annuity fund, whereas a provident fund allows access to the entire fund value
Why is it not advisable to use an access bond to finance a car?
A car is not an investment, and it depreciates immediately, whereas a house is a valuable investment that increases in value
What is a potential long-term implication of using an access bond to buy a car?
Difficulty in trading the vehicle and replacing it with a new one, leading to a long-term debt burden
What is one of the primary reasons for buying a home, according to the passage?
It will ultimately increase in value, making it possible to upgrade to a better home
What is the context of debt consolidation in the passage?
It is mentioned as a popular motion, but not recommended for financing a car using an access bond
Study Notes
Pension Fund
- No limit on employer contributions from 1 March 2016.
- Employer contributions are taxed as fringe benefits in employee's hands.
- Employees can deduct up to 7.5% of salary for tax purposes.
- At retirement (between 55 and 69), up to 1/3 of fund value can be taken in cash as a lump sum, subject to tax.
- At least 2/3 of fund value must be invested in an annuity fund, which pays a taxable monthly, quarterly, or annual income.
Provident Fund
- No limit on employer contributions from 1 March 2016.
- Employee contributions are not tax deductible.
- At retirement (between 55 and 69), entire fund value can be accessed, subject to tax.
- Investor can use the funds as desired.
Debt Consolidation and Home Loans
- It's not wise to use an access bond to finance a car purchase.
- Cars depreciate quickly, while houses are valuable investments.
- Using a bond to buy a car can undermine the underlying investment and make it difficult to trade or replace the vehicle.
National Credit Act (NCA)
- Regulates all credit agreements, categorized into small, intermediate, and large.
- Requires a detailed application process to prevent reckless lending.
- Gives rights to consumers and obligations to credit providers.
- Applies retrospectively to all agreements from 1 June 2007.
- No early termination fees are payable on small and intermediate agreements.
- Provides a 5-day period to consider a quote.
- Clients have the right to receive documentation in their preferred format.
- Clients have the right to know why finance was declined.
- Fees and charges on credit agreements are prescribed and limited.
- Clients have the right to know who the Finance and Insurance Manager/Business Manager is and who they represent.
Mortgage Repayment
- Paying 15% extra on monthly repayment can reduce the mortgage repayment term by half.
Preservation Funds
- Registered in terms of the Pension Funds Act and Income Tax Act.
- No recurring contributions are allowed.
- Accepts transfers from other pension or provident funds in cases of resignation, dismissal, or winding up of the fund.
- One big advantage is that investors can make one taxable withdrawal before age 55.
Other Key Concepts
- Defined Contribution Fund: employee's share of the fund is determined by the fund value.
- Diversification: investing in 2 or more asset classes to reduce risk.
- Repo rate: the rate at which the South African Reserve Bank lends money to commercial banks.
- Risk tolerance: the amount of risk an investor is prepared to accept.
- Tax efficiency: tax benefits attributed to a particular investment.
- Tax-exempt yield: the percentage of total investment that's tax exempt.
- Volatile investments: risky investments with high potential exposure to losses and gains.
This quiz covers the rules and regulations regarding pension fund contributions, tax deductions, and withdrawals in South Africa.
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