Sunday 17th October, 2004


Inflows, outflows, managing cash

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Money Matters with
Raziah Ahmed

It is said that the average worker changes jobs about ten times in his life. Each time it is usually because a higher salary promises a better cash flow position. Today we continue to focus on cash flow and astute management.

One significant deduction from the payslip is the pension contribution. Public servants traditionally have non-contributory pension plans, so no deduction for pension comes out from their incomes. There are still others who have no pension plan whatever, who depend on NIS for a pension.

Current tax laws allow the taxpayer to claim a maximum pension contribution of $12,000 as non-taxable income. Employed persons should take advantage of this provision. Money so contributed, are monies saved “before taxes.”

Suppose you wish to save $500 per month or $6,000 per year. If you save in a pension or individual annuity, you take money out of your income before taxes are charged to the income. If you saved in a savings account, you will have paid tax on the $6,000 before you put it into the savings account. Assuming you pay tax at 25 per cent, you will not have all of $6,000 tax-free. Instead, you will have paid 25 per cent of $6,000 as tax, with the remainder of $4,500 to put into a savings account.

So, an important first rule is to take maximum claim for pension and annuity. There is a 50 per cent probability that you will live long.

Incidentally, the word annuity refers to a “stream of income” and consists of a stream of inflows of cash (savings), followed by periodic outflows of cash.

Another common deduction from the payslip is the insurance premium for Group Life and Health coverage. This insurance plan can be fully employer sponsored or can be contributory, where the employee pays a portion of the premium.

It is interesting to note that employees by themselves seldom put such plans into effect. More commonly trade unions, and employee benefits personnel are likely to seek the implementation of such plans.

Health plans are very often misunderstood. The premium that is deducted to cover the employee and his family provides one-year term coverage. It has to be renewed every year, and the premiums can increase every year if the claims experience is high.

In addition, health plans often carry a co-insurance provision. Co-insurance means that the employee remains responsible for a percentage of the medical bills. Co-insurance can be 20-80 or 30-70 commonly. Here the employee will take up the first 20 per cent or 30 per cent of the bill, and the insurance company will take up the balance. Importantly, bills for medical expenses are always subject to what are called “reasonable and customary” limits.

To illustrate: assume you go to a surgeon to have a hernia repaired. Assume that the normal cost for this surgical procedure is $4,000, but because somebody knows that insurance is paying the bill, the fee that is charged is $8,000. The health plan benefit will be matched to what is a reasonable and customary cost for the procedure. It will pay either 80 per cent or 70 per cent of $4,000, and ignore the inflated billing.

This co-insurance factor, is an indictor for those with health plans, to begin to set aside money to pay for major medical expenses, not covered by the Insurer. You can thus put into effect personal major medical insurances that will compliment your Group plan, so that you can pay the 20 per cent or 30 per cent when necessary.

What is especially significant is that group insurance plans belong to the employer, and if you leave the job, you leave the insurance behind.

• Raziah Ahmed is a registered financial consultant.

©2003-2004 Trinidad Publishing Company Limited

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