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MIND THE GAP

Staying in the pink of financial health

It's time to take stock of your personal finances as the end of the year approaches. Here's a checklist to ensure they're in good shape

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The end of the year is an opportune time to re-examine your personal finances, particularly if your circumstances have changed.

THE end of the year is an opportune time to re-examine your personal finances, particularly if your circumstances have changed.

Here is a checklist of items to ensure your finances stay in good shape.

  • Review your life protection plan

Protection is a building block of wealth, and helps to hedge against circumstances beyond your control. A review is warranted if there are life changes - a new baby, for example. If your children are financially independent, and you have fewer liabilities, you may not need as much life insurance as when you were younger.

The good news is that pure protection plans - with a death benefit but no savings component - are relatively affordable. You could also enjoy greater savings if you opt for a reducing term plan, where the death benefit dials down with time along with lower premiums. This will help you save on premiums, compared to a plan where the death benefit and premiums are level or constant throughout the plan.

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Here is an idea of the cost of a reducing term plan: Based on quotes from Comparefirst.sg, the annual premium for an Income reducing term plan (for a 45-year-old) for S$500,000 sum assured for a 30-year term is S$1,210. The total premiums over the life of the plan will come to S$33,873. Income's level term plan for 30 years costs S$1,933, with total premiums coming to S$56,652.

  • Review your health insurance

A hospitalisation plan under the Shield scheme is a must. There have been a number of changes to Integrated Shield (IP) plans. Earlier this year insurers were required to offer new riders which call for a co-payment of 5 per cent. This is to encourage policyholders to take an active role in maintaining their health and to ensure insurers' plans remain sustainable in the long run. Under the new riders, the co-payment is capped at S$3,000 per policy year.

The big question you will need to ask yourself is whether, for your choice of base IP, premiums are affordable at older ages when you cease work. IncomeShield's plan for Class A ward (Enhanced Income-shield Advantage for restructured hospitals) costs $2,519 a year at ages 74-75, and its private hospital plan (IncomeShield Preferred) costs $4,528.

Downgrading a plan is relatively simple. If you plan to change your insurer, however, be careful not to cancel your current plan until the new insurer has underwritten you in case you have developed pre-existing conditions that may be excluded from a new plan.

  • Enhance your retirement savings, and save on taxes too

Topping up your CPF Retirement Account or your family member's Special Account will help to enhance your (and their) retirement savings which, under the CPF umbrella, earn a higher interest rate of up to 6 per cent.

You enjoy a tax relief or deduction for the top-up into your own RA, equivalent to the amount of top-up of up to S$7,000 a year. Topping up the accounts of loved ones will give an additional tax relief of up to S$7,000. Based on the CPF website, topping up in January rather than December could earn 20 per cent more interest over 10 years.

Investing through the Supplementary Retirement Scheme will also earn a tax relief as it enhances your retirement kitty. For Singaporeans and PRs, contributions to SRS are capped at S$15,300 a year, and for foreigners S$35,700. The tax relief is also subject to the cap on personal income tax relief of S$80,000.

Funds can be withdrawn penalty-free from the SRS at the retirement age, if they are spread out over 10 years.

Since the SRS is for retirement, it is of course important to make the funds work for you. Leaving the savings in cash isn't the answer as interest rates are low and do not keep pace with inflation. One option is retirement income products from insurance companies, invested via a single premium. The products are designed to pay an income at retirement which may be at 62. The expected payouts have a mix of guaranteed and non-guaranteed portions. You could also invest in a portfolio of Reits or diversified multi-asset unit trusts.

Or you could opt for a portfolio of funds via a low-cost adviser such as Endowus, where the all-in access fee is a flat 0.4 per cent a year for CPF and SRS funds. Endowus portfolios are invested in the institutional share classes of managers such as Pimco and Dimensional Fund Advisers, where annual management fees are low. This goes a long way to enhance returns in the long run.

As at December 2018, the SRS has over 156,000 account holders who have put in just over S$9 billion. Of this about 30 per cent was kept in cash; a combined 36 per cent in unit trusts and insurance; and 30 per cent in shares, Reits and ETFs.

  • Review your portfolio

It is important to review your portfolio once or twice a year for a few reasons. One is that market developments could distort your portfolio weights and you could end up taking more - or less - risk than you had planned.

Two is that if you are older and near retirement you may want to adjust the asset allocation for the time when you cease to work. But it is important not to be too conservative. As we live longer lives - as long as 30 years in retirement - growth assets are still needed to help make sure you don't outlive your savings.

In working out how much you need, you need to ascertain the desired income level and the withdrawal rate from the portfolio. Your calculations should include your payouts from CPF Life, which forms a base, as well as payouts from insurance funds that are maturing or set to generate income payouts.

As always, watch the costs. How markets behave is out of our control, but we can choose to avoid high-cost vehicles that result in lower net returns.

  • Revisit your estate plans

Fortunately, estate planning is relatively simple in Singapore. Estate tax was abolished for deaths after Feb 15, 2008. But you still need to plan to avoid conflicts among your heirs. For wealthy families, estate planning is likely to be complex especially if there are family members who take on other citizenship, and who are domiciled overseas. Offshore assets may also be subject to varying tax rules. US assets, for instance, are taxed on a global basis even if you are not a US citizen and don't live in the US.

For those with substantial assets, a trust structure is useful to help minimise tax, ringfence assets against creditors, and make clear your wishes in terms of the distribution of assets.

  • Develop your intangible assets

The prospect of living well past your 90s and even to 100 may sound intimidating from a physical and financial standpoint. But this need not be so, as the best-selling book The 100-Year Life by Lynda Gratton and Andrew Scott argues. One of the book's most meaningful - and useful - insights is its holistic approach to the management of your assets. It urges you to take care of not just your financial assets, but also your personal attributes. This approach is essential if we are to develop resilience, and parlay our talents to generate an income well beyond a conventional job.

There are three types of assets, according to this approach. One is productive assets which are our skills, peer network and reputation, for instance. Second is "vitality'' assets which refer to our physical, mental and psychological well being. Third is "transformational'' assets which refer to self knowledge and the openness to new experiences.