IOL Personal Finance - 3rd Quarter 2022

LETTING AGENTS

WHAT THEY DO AND CHARGE

FINANCIAL PLANNING SELECTED CASE STUDIES

REGULATION 28 AMENDMENTS EXPLAINED

The Future of Banking. Now.

Trends in the property market – a guide for investors

MARTIN HESSE

LETTING GO

Buying to let is not as attractive as it used to be, if you are after a steady, inflation-linked income from an investment. Costs have multiplied and regulation has made it more difficult to evict bad tenants. It’s therefore vital that landlords find good, reliable tenants, which is easier said than done if you are inexperienced at vetting people. A way out is to use a letting agent, who will take on the responsibility of finding tenants and ensuring all legal requirements are complied with. However, the peace of mind this brings comes at a cost.

In our cover story on page 8, Roz Wrottesley, who writes from personal experience of the buy-to-let market, reports on the current state of the market, and delves into exactly what it is that letting agents offer, and what they charge for their services.

For readers invested in retirement funds and unit trusts that comply with Regulation 28 under the Pension Funds Act, which governs exposure to different types of assets, Sanlam’s Annelise de Mellon Muller unpacks the implications of recent amendments to the regulation (page 16).

And from advisory firm BDO, we publish four accounts from financial planners on how clients have benefited from professional advice, but also where they have ignored advice, to their detriment (page 11).

That’s just a small sample of the content lined up in this edition, always with the aim of improving your financial knowledge and enabling you to grow your wealth.

Enjoy the read.

VOLUME 92

3rd QUARTER 2022

An Independent Media (Pty) Ltd publication

Editor

ANA Publishing CEO

ANA Publishing CFO

Head of Production

Head of Design Designer

Martin Hesse martin.hesse@inl.co.za

Vasantha Angamuthu Sooren Ramdenee

Mugamad Jacobs

Matthew Naudé Thabang Boshielo

ADVERTISING

Tony Malek tony.malek@anapublishing.com

SUBSCRIPTIONS subscriptions@anapublishing.com

OFFICE MANAGER

Caryn Wessels caryn.wessels@inl.co.za

IMAGERY

Freepik.com and AP

INDEPENDENT MEDIA BOARD OF DIRECTORS

Dr. Mohammed Iqbal Survé, Takudzwa T. Hove, Aziza B. Amod, Ismet Amod, Yuexing Wang, Jinghua Dong

EDITORIAL ENQUIRIES

Tel: 021 488 4187

Physical address: Fourth floor, Newspaper House, 122 St George’s Mall, Cape Town, 8001 Postal address: PO Box 56, Cape Town, 8000

Personal Finance magazine (ISSN 1562-3750) is published by the proprietors, Independent Media (Pty) Ltd, Star Building, 47 Sauer Street, Johannesburg, 2001

All products appearing in Personal Finance are available and all prices are correct at time of print, subject to change.

To 100 and Beyond

– How to make your money last as long as you do

Author: Wynand Gouws

Publisher: Zebra Press

Retail price: R250

Wynand Gouws is a Certified Financial Planner at Gradidge Mahura Investments in Johannesburg. With more than 30 years’ experience in the advisory industry, and an MBA and post-graduate diploma in Future Studies under his belt, he is well qualified to tackle one of the major challenges facing retirees and their advisers today: increased longevity.

Our parents’ generation could reasonably be safe if they planned for a retirement of 25 years. But people retiring today need to plan for life beyond 90 years of age, and before long this will have stretched to 100 and older. This means that, if you retire at age 65, you need to survive on your savings for 35 years – almost as long as the time you spent working.

Gouws’s book provides sound advice – supplemented by practical examples – on how to be financially secure for a longer retirement, including how to invest wisely, generate alternative income streams, handle your tax affairs and plan your estate. It also warns against get-richquick schemes and scams, to which retirees are particularly vulnerable.

How to Get a SARS Refund for Retirees

Author: Daniel Baines

Publisher: Penguin

Retail price: R150

After the success of his book How to Get a SARS Refund, attorney and tax specialist Daniel Baines focused on people in retirement who, after all, need this advice more than anybody.

The author explains how tax works in relation to retirement so that you can make informed decisions about your retirement planning, especially when you have to decide how to split your accumulated savings between taking a lump sum and buying a pension.

The book then provides guidance on methods available to retirees to reduce their tax liability, taking advantage of the generous concessions available only to people over 65, ensuring more money stays in their back pocket. (Note that this is all perfectly legal and within what is permitted by SARS, falling within the category of tax efficiency, unlike tax evasion, which is illegal.)

Baines explains how any supplementary income, such as rental income and dividends, is taxed. Finally, he guides you through the practicalities of filing your tax return and claiming a refund.

Plan B – How South Africans can invest in UK property remotely

Author: Sean Thomson

Publisher: Hands-On Books

Retail price: R200

Sean Thomson has made a career, first out of successfully investing in the UK property market and, second, out of telling other people how to do it. Though his company WealthTrek, he has trained and mentored more than 7 000 people around the world, specifically on UK property strategies, and has had speaking engagements alongside the likes of Robert Kiyosaki. It was Kiyosaki’s book Rich Dad, Poor Dad that sparked Thomson’s interest in property investing where, unlike share investing, you can take full advantage of leveraging: investing using borrowed money in the form of a mortgage bond.

Buying to let in the UK may sound daunting, but with the right support and expertise it is quite doable, providing you with a secure, growing financial resource outside South Africa.

Plan B gives valuable practical advice on working with and finding contractors and project managers, and offers insights into the workings of the English property market.

Giveaway

Hands-On Books is giving away 10 copies of Plan B to Personal Finance readers. To enter, answer the following question: What is the country in which Plan B offers guidance on property investment? Submit your answers, with “Plan B” in the subject line, to martin.hesse@inl.co.za, closing date September 30, 2022.

YOUR LETTERS

WHERE CAN I PARK R1 MILLION FOR A YEAR?

I have recently sold my house. After all debts are paid, I will have R1 million in hand. I intend to use it after a year as I am currently very busy with another project. Please advise me on keeping it in a low-risk investment vehicle for the short term, while still earning a reasonable return. Name withheld

Chrisley Botha, Wealth Adviser at PSG Wealth, Stellenbosch, replies:

There are several things to consider when looking for a low-risk investment for your money, especially one that will provide short-term returns. The most important factors to consider are:

• Inflation risk: the possibility that an investment’s value may decrease over time due to inflation.

• Interest rate risk: the possibility that an investment’s value may decrease due to changes in interest rates.

• Capital protection: the ability of an investment to provide some degree of “insurance” against losses.

• Liquidity: the ease with which an asset can be converted into cash without affecting its value. The safest investments for you are those that offer capital protection. Because these investments tend to be more conservative, they may not offer very high returns. However, given your short investment horizon this shouldn't be an issue, as long as there's some sort of return on your investment and protection of capital. With that said, I think you'll benefit from investing in a fixed-income type of fund. Fixed income is an investment approach focused on preservation of capital and income and plays a pivotal role in the investment world, especially in volatile times. Choose a fund that is an interest-bearing short-term fund which aims to beat cash or a short-term bank deposit, with full liquidity at short notice. These fixed-income funds are specifically designed for investors seeking returns higher than those offered by money market funds, with no capital loss over the short term.

THE BENEFITS OF A LETTER OF WISHES

In the case of my will and testament, what are the most important points for me to focus on to leave clear instructions to my loved ones to avoid any confusion or drama? Name withheld

Richus Nel, PSG Wealth, Old Oak, replies: A letter of wishes can be added under separate cover to a final will and testament or trust deed. Drafting a

letter of wishes conveys the principal wishes of the author, to future estate or trust custodians.

This conveyance of personal wishes, while not legally binding, can provide guidance to custodians in their decision-making regarding the preservation of family benefits, relationships, family beliefs/values, religion, and sentiment. It is against this distinct “framework” that key management and money decisions should be considered.

Typical information included in a letter of wishes added as a separate document to a will:

• Funeral arrangements (guests to invite, burial/cremation/organ donation, type of service, location of the scattering of ashes).

• Distribution of personal items of only sentimental value (perfumes, clothing, photos, music, books, self-made items, tools, sports gear).

• Guidance for guardians of children (in religion/relationships/education/money matters).

Typical information included in a letter of wishes added to a testamentary or inter-vivos trust:

• Wider description of the objective of the trust than what is provided in the trust deed.

• Specific privileges/benefits to certain individuals (such as special-care needs).

• The exclusion of certain benefits/privileges/ individuals.

Finally, a “letter of instruction” can also be included in a will to assist the surviving spouse and children in the aftermath of your passing. This letter contains a list of instructions on what needs to happen with the necessary confidential information – for example, people to notify (financial adviser), security codes/ keys, bank/investment accounts, property deeds, vehicle/fire-arm registration documents, and tax details.

A letter of wishes/instruction always remains confidential – only seen by executors or trustees. The private nature of this document will therefore not be compromised, even in a legal dispute or grant of legal representation.

Note: These letters are selected from “Your Questions Answered”, a monthly feature in Personal Finance in the Saturday newspapers, sponsored by PSG Wealth.

TRENDS IN THE RENTAL MARKET A GUIDE FOR PROPERTY INVESTORS

A few years ago, finding a tenant for a property was easy, and property values and rents had a habit of increasing steadily. A flagging economy and a pandemic have changed all that, and landlords have to be more cautious than ever in their searches for tenants.

By Roz Wrottesley

Having a property to let – or more than one – used to be the holy grail of financial security and a symbol of success. Costs are tax deductible, bricks and mortar are satisfyingly solid and visible, and residential areas with a reliable record of providing a good return on investment are not difficult to identify. So what could possibly go wrong?

Of course a lot of things, given our unpredictable world and South Africa’s ailing economy, but the disruptive effects of the global pandemic on lives and livelihoods added a whole new dimension. In November 2020, after six months of Covid restrictions and lockdowns, TPN Credit Bureau, which specialises in vetting tenants for rental properties and publishes the TPN Rental Monitor every year,

reported that more and more tenants were defaulting on their rent – stark evidence of the struggle consumers were having to make ends meet. According to TPN’s figures, the percentage of tenants in good standing with their landlords fell from a decade high of 85.95% in the third quarter

of 2014 to 73.5% after the severe secondquarter lockdown in 2020.

At the same time, rents were falling. In November 2020 the property management company PayProp, which publishes an annual rental index, recorded the first negative growth in the average rent in

South Africa since the index began in 2012: 0.3% lower than the average in November 2019. Over the year, the average increase in rent fell from 3.2% in Q1 of 2020 to just 0.2% in Q4. That translated into an average rent increase of R10 over the 12-month period, from R7 844 in at the end of 2019 to

R7 854 at the end of 2020.

But the resilience of the market is on display again in the latest TPN Rental Monitor, published at the end of last year. By December 2021, the number of tenants in good standing had risen to 81.4%, meaning that 8 out of 10 residential tenants were up to date with their rental payments. Tenants having the greatest struggle to get back on track were in rental bands below R4 500 per month, while the R7 000 to R12 000 per month bracket had the best payment record, with 87.29% in good standing by the end of the year. This rental bracket also had the lowest vacancy rate, with only 1 in 10 properties reported vacant.

Catastrophic as the Covid crisis was, the rental market was tightening significantly before it came long. Landlords who were clinging to the once-reasonable expectation of being able to increase rents by 10% every year were being hastily corrected by letting agents. As long ago as December 2014, Andrew Schaefer, managing director of property company Trafalgar, recorded in his year-end review that rents had grown by an average of 6% – or approximately the rate of inflation – in the previous 12 months, compared with about 8% in 2013.

PayProp’s head of data analytics, Johette Smuts, recalls rental growth rates of more than 7% as recently as 2017, but she says “growth trended downward and then sideways” after that and was stuck between 3% and 4% for most of 2018 and 2019.

While she predicts that rental growth will continue to be “muted” for the next few years, the signs are positive for demand, according to TPN’s Tenant Wishlist Survey conducted in 2020. The survey concluded that 45% of South African tenants were planning to carry on renting for the foreseeable future. Of that group, 45% could not afford to buy, 15% wanted the flexibility of renting, and 14% had a poor credit record. Other reasons for renting instead of buying were avoiding debt, the intention to emigrate, fear of political

instability and simply the perception that renting is cheaper than buying.

Half the respondents were hoping to buy a home of their own in a year or two, and the rest were equally divided between aiming to buy in around five years’ time and renting indefinitely. Unsurprisingly, all those looking to rent properties long-term said they would always choose well-maintained properties and give preference to sectional title townhouses and homes in complexes.

If you are thinking of becoming a landlord, TPN’s Managing Director, Michelle Dickens, points out that the more expensive the rental property, the lower the return you can expect on your investment. She says more than half (56%) of the rental population is in the R3 000 to R7 000 a month price bracket, while R12 000 is the upper limit of what is considered a good buy-to-let prospect. Properties rented out for between R4 500 and R7 000 a month provide the best return.

Finding a tenant

When you do become a landlord – whether for investment purposes, or just because you have an unoccupied property you are not ready to sell – you have just one mission: to find a “good” tenant. Tenant reliability should take priority over maximising rent, as should having your property occupied instead of standing empty. Every prospective tenant should be carefully vetted – no matter how unnecessary it may seem – and here letting agents can be a big help: they have resources at their disposal that landlords don’t have and are not squeamish about checking references and credit records.

Then you need a lease to spell out the landlord/tenant relationship, and many look to the letting agent for that too, although there is no reason why a landlord can’t draw one up, outlining carefully and fairly all the responsibilities and expectations of both parties.

As long as it is signed off by both parties, it is valid in a court or the Rental Housing Tribunal.

Another important attraction of letting agents is the perception of the agency’s experience, professionalism, ability to attract tenants and inspire confidence. However, when rents are in the doldrums and property expenses (rates, maintenance costs, bond repayments and levies) are rising, the landlord’s profit margin is at risk of being perilously narrow, and the commissions and fees charged by agents for what they call “procurement” of a tenant take on new significance. Certainly, all the costs of letting and maintaining a property are tax deductible, but rental income requires landlords to be provisional taxpayers, so you have to be able to carry those costs for between 12 and 24 months.

You have two choices when you decide to appoint an agent: you can go for tenant procurement only, or procurement plus management, which means that the agent manages the tenancy for the duration of the lease on your behalf: collecting the rent, paying the bills, keeping records, responding to maintenance issues, inspecting the property when necessary, and liaising between tenant and landlord. All the agents offer both options – and don’t be surprised if they don’t press you to take up the full-maintenance package. In fact, procurement-only can and often does provide an income stream long after the tenant has been installed, with very little further involvement on the part of the agent, whereas managing a tenancy can be hard, time-consuming, frustrating work for the agent.

Before you do sign up, do make sure you ask searching questions; agents do not always declare every cost upfront. Procurement-only mandates cover these services:

• Helping you to decide what rent to charge;

• Taking photographs (using a mobile phone);

• Placing the pictures and description on a property news website, on the agency’s website and perhaps in a window display;

• Receiving enquiries and showing the

property to prospective tenants where appropriate;

• Checking the credit record and financial standing of a prospective tenant;

• Recommending a suitable tenant;

• Supplying a standard lease agreement and getting both parties to sign it;

• Taking the deposit of between one month and two months’ rent;

• Passing the deposit on to the landlord once the first month’s rent has been collected. The deposit belongs to the tenant and must be kept in an interestbearing account until the end of the tenancy;

• Performing ingoing and outgoing inspections (in many cases);

• Coordinating the handover of the property from landlord to tenant; and

• Taking the relevant commission (+ VAT)

repairs and maintenance to be carried out, liaising with owner and tenant when necessary; and

• Liaising with landlord and tenant on renewal of the lease two to three months before expiry.

The price of procurement

You would expect the big-name agencies to charge a premium for their services – and they do, but not in ways that are immediately obvious. The five cost breakdowns below represent a crosssection of the market, but there is always the chance of fees being discounted or amended, so do your homework before signing a mandate. (And note that you can give the property to more than one agent at a time – mandates are not exclusive.)

You’ll see that all five of these wellknown agents ask the same basic fee for procurement – 8% (+ VAT) of the rent payable over the full term of the lease – but there are other cost traps for the landlord, so delve deeper. Take Pam Golding Properties as an example:

PGP charges 8% + VAT, so a tenancy lasting 12 months at a rent of R10 000 will cost 8% of R120 000 = R9 600 + VAT (R1 400) = R11 000.

from the first month’s rent. If that doesn’t cover it, invoicing the landlord to make up the balance, or taking it off the second month’s rent.

Management services include:

• Holding the deposit in a secure, interestbearing trust account for the duration of the tenancy;

• Collecting the rent and paying the monthly bills (levies if any, utility bills, rates, etc.) and any additional maintenance costs;

• Providing a monthly financial statement to the landlord;

• Inspecting the property at the start and end of a tenancy and doing additional inspections on behalf of the landlord at an extra cost;

• Being on call for after-hours maintenance issues or emergencies and arranging for

Since the commission is more than the first month’s rent, Pam Golding Properties can take the balance from the second month’s rent or bill the landlord.

For the less obvious costs, read the lease carefully. Renewal fees are one of them: meaning that you pay commission again each time a lease is extended. The tasks performed for the renewal fee are:

• Contacting the landlord two months before expiry of the current lease;

• Advising the landlord on any possible rent increase; and

• Updating the dates and rent on the lease and sending both parties the amended pages for signature.

1. Pam Golding Properties charges 8% + VAT for the first renewal and then 4% + VAT for each additional term after that. So, in the example above, finding/vetting/

Gross yields are good on affordable properties, and two-bedroom sectional title units are performing better than full-title properties, says Dickens.

installing a tenant would cost at least R22 000 in total for the first two years – and more if the rent increases in the second year. If the tenancy were to last five years, it would cost twice R22 000 + three times R400 (R1 200) = R23 200 over the period, supposing there were no rent increases at all in that time.

Another fee that is often not mentioned on cost breakdowns supplied by agents at the start of the letting process is sales commission. This comes into play when a landlord agrees to sell the property to the tenant, on the grounds that the letting agent introduced the parties to

the sale. Such sales are not particularly common, but it does happen, and if you have negotiated a good price with the tenant and expect the sale to be free of agent’s fees, it can be very upsetting to find out that you still have an obligation to the letting agent, however distant the introduction and regardless of the fees paid for services in the meantime. Most letting agents are unspecific on the percentage of the commission, which suggests that it is negotiable.

2. Seeff. Seeff’s cost structure is similar to Pam Golding’s: 8% + VAT for the procurement of a tenant, to be paid

upfront from the rental income, followed by 7% + VAT in the second year, 6% in the third year, and 5% in subsequent years. “When renewals take place we complete a legal document for signature, do a walk-through inspection, and provide the landlord with the update,” says rental agent Samantha Heuvel.

Seeff also charges sales commission if a tenancy ends in the property being sold to the tenant by the landlord, regardless of the nature of the contract between the landlord and the agent, or the length of time between procurement and the sale.

3. Just Property charges commission of

8% + VAT on the first year’s lease (taken from the first two rent payments, which are collected by the agent and the balance paid to the landlord), plus a finder’s fee of R2 500 or 2% + VAT of the annual lease, whichever is the greater. A renewal fee of 2.5% + VAT is charged for each renewal of the lease.

Just Property expects sales commission “in the event that the tenant or any co-occupant in terms of the lease agreement purchases the premises during the duration of the initial lease, any renewal period thereof, or during a 12-month period after the termination of any lease,” says intern agent Lee-Ann Graer.

4. Remax , too, takes a commission of 8% + VAT on the total fixed period of the first lease agreement, although the agency did discount that by 2% while Covid was shutting us all down. If the tenancy is renewed for six months or more, the commission is calculated at the same rate, but for any other renewal, commission is capped at 4% + VAT. Remax also offers to invest the deposit on the landlord’s behalf as an extra service.

If the tenant buys the property, “we are deemed as the introducing party, so therefore we will claim commission”, says agent Olga Potgieter.

5. Rawson. The upfront commission for procurement only is 8% +VAT and the first renewal triggers a fee of around 6% + VAT (negotiable) on the total rent for the new lease period. Thereafter, there is no continuing relationship between landlord and agent unless there is a clause in the lease stipulating that commission is due on the sale of the property to the tenant. That clause is part of Rawson’s standard lease agreement, but sales and rental partner Michael Oosthuizen says it can be removed on request and he says many landlords do take advantage of that.

An outgoing inspection of the property when the tenant leaves is not part of the deal, but can be arranged at an extra cost of R500.

Management costs

If you don’t live close to the property, or you haven’t got time for all the admin and trouble-shooting that goes with renting a property, you may have no choice but

to hand over the management of the tenancy to an agent. Tenants should have one contact person for emergencies and maintenance issues and they are far more likely to become long-term tenants and accept reasonable rent increases if they get good service from the landlord or agent.

But don’t expect an agent to pay as much attention to your property as you would; they often have large portfolios of clients and have to juggle an assortment of unpredictable tenants, some of them demanding, inevitably. Routine inspections are not part of the deal and are done on request, for an additional fee. With so much on their plates, they can be slow to respond to tenants’ queries or complaints, and

management services are provided for 6% (+ VAT) of each month’s rent. The company points out that it has specialists dealing with the different aspects of managing tenancies, so it is not all down to the agent. A dedicated rentals administrator liaises with clients, a maintenance co-ordinator deals with all the maintenance issues and an inspections specialist conducts ingoing and outgoing inspections.

3. Just Property offers procurement and management for a commission of 10% + VAT of the total rent over the period of the lease, with payment taken in monthly instalments. A finder’s fee of 2% + VAT of the total amount or R2 500, whichever is the greater, is deducted from the first month’s rent. Renewal of the lease triggers a fee equivalent to 2% + VAT of the whole lease period.

4. Remax provides “full administrative services”, including paying the monthly bills (municipal, utilities, levies, etc.) for a fee of 12% + VAT of the monthly rent, or, if the landlord chooses, the first month’s rent plus 5% + VAT of the monthly rent from the second month. For leases of six to eight months, the fee is 15% + VAT.

landlords should take part in inspections and/or have some contact with the tenant to make sure things are going well. Some agents charge the upfront procurement fee plus a smaller percentage of the monthly rent for managing the tenancy; others combine the procurement and management fees and charge a higher monthly rate of commission. The latter has the advantage of giving the landlord a monthly income from the very first month.

1. Pam Golding Properties applies the usual procurement fee of 8% + VAT upfront and takes a monthly management fee of 4% + VAT off the monthly rent. The landlord can choose whether to pay the procurement fee upfront or have it deducted monthly in addition to the monthly management fee.

2. Seeff charges a little more: the procurement fee is the same, but

5. Rawson quotes a commission of 10% + VAT for finding a tenant and managing the tenancy (last year, 2021, it was 12% + VAT). Managed properties that are sold to the tenant are subject to sales commission, but renewal fees don’t apply unless the new lease agreement dispenses with the monthly management fee.

Finally, bear in mind that sales and letting agents have a certain amount of discretion to adjust their fees according to the circumstances of the client. So don’t hesitate to ask. In today’s competitive market, landlords are as much in demand to letting agents as tenants are to landlords.

Resources

• A Landlord’s Guide to Rental Housing in South Africa, published by the Centre for Urbanism and Built Environment Studies at the University of the Witwatersrand.

• TPN Residential Rental Monitor 2021.

• PayProp Rental Index – Annual Market Report 2021

The commission payable will be charged at 6% + VAT of the gross selling price and is payable by the landlord on transfer of ownership of the premises, she says.

REAL PEOPLE . REAL STORIES

Financial planning isn’t about numbers and formulae, it’s about people and relationships. The folk at BDO tell us about some of the times their clients did – and didn’t – follow their advice. These are their stories…

Iam not really a “car person”. I’ve always struggled to reconcile spending a large sum of money on a depreciating asset.

I remember being very impressed by a young client who’d done detailed spreadsheets illustrating how much more cost-effective it was to travel by Uber than to tie up capital in a fancy car. He sold his car and decided to use Uber as his primary mode of transport.

Of course, most people won’t go to these lengths – especially folks who take great pleasure in driving. My challenge as an adviser has always been to listen to these aspirations and try to help my clients take the emotion out of vehicle purchases so they can make a sound choice.

The car that shouldn’t have been

My client Susan dearly wanted to treat herself to a German luxury vehicle in her retirement. She didn’t drive long distances, but she felt she deserved some luxury. Her children encouraged the decision as they felt their mom deserved this treat in her retirement. Susan didn’t take any financial advice. She just cleared out most of her money market reserve fund and purchased the vehicle. She felt good about driving her sparkling new car.

A few years later, Susan stopped driving, and as the car had low resale value, one of her kids started driving it. Susan needed extra care and moved into a retirement home, which increased her monthly costs. She had to dip into

A TALE OF THREE CARS

Allan Heynen CFP, director and financial planner

her remaining cash reserves to fund her monthly expenses, and before long, these ran out too. Susan became a financial burden to her children.

The car that never was

One day, my friend James showed me a brochure of his dream car: a limitedrelease Ford Mustang. He’d already received a quote from the dealership and approached me to help determine how to fund the vehicle. James was on track to meet his long-term retirement goals, and this splurge didn’t form part of the plan. We worked through various models to assess the impact of purchasing the vehicle on his cash flow. One scenario showed that the vehicle purchase was feasible if James was willing to work two years longer than planned. James reflected on the options and decided that his planned retirement date was more important to him than a fancy car. He decided not to buy the Mustang.

The perfect car

Marie phoned me feeling nervous about having to replace her vehicle. Her car had given up the ghost after many years of good service, and she’d fallen in love with an SUV that was perfect for her lifestyle. But she was concerned about the long-term implications of redirecting her

monthly savings into a new vehicle. So, we ran the numbers. Looking at various scenarios, Marie realised she could cut some other costs and draw on surplus savings that didn’t form part of her retirement plan. She could quite easily replace her car without affecting her retirement plan objectives, so she went ahead and bought her dream car.

The bottom line

Over the years, I’ve come to realise that there can be a place in a financial plan for an asset that doesn’t have potential for growth. Splash out on a car if you like – but be sure you understand the implications before you do.

Two years ago, Paul was retrenched from the company where he’d worked for 35 years. I was put in contact with him to help develop a financial plan for his retrenchment and pending retirement. According to the agreement, he’d get a severance package and still have access to his retirement fund, which had built up nicely over the years.

Off to a good start

Paul was very confused about how his severance package and retirement fund would work and, importantly, how they would be taxed. I took the time to carefully explain his options and the tax consequences. His after-tax severance package was enough to provide him with an income for the next year or two, and he also intended to find part-time work to give him some income.

He therefore decided to preserve the full value of his provident fund until he needed to start drawing an income. It was rewarding to have Paul tell me that if I hadn’t explained the tax consequences, he would have cashed out his provident fund in full and taken a hit on taxes.

Based on his objectives, and taking his risk tolerance and other factors into account, I recommended that Paul invest his provident fund in a multi-asset moderate fund. Everything was going well until Covid-19 sent the local and global markets spinning. Paul called me in a panic in March 2020. I told him to stay calm, sit tight and keep his investment strategy in

THE HIGH PRICE OF PANIC

Talya Snowball CFP, financial planner

mind. He agreed to wait and see how things went.

Panic sets in

I received another call the following month. Paul was extremely worried, as his investment had dropped by almost 15%, which meant a significant “loss” of over R 600 000. He was fearful that things wouldn’t get better and said he’d prefer to move to a less risky portfolio. I explained that changing tack at that point would lock in his losses. I advised him not to panic and explained that we were going through a volatile period and that changes to his portfolio would be detrimental to his plan. He was hesitant but agreed to leave his investment as is.

From bad to worse

A few weeks later, I received an email from the investment product provider to say that Paul had reached out directly and asked to have his portfolio changed to a money market fund. I called Paul to find out what was going on and advised him not to switch to cash. He was adamant that things were only going to get worse, and he didn’t want to lose more money. Based on his financial plan, he didn’t require the funds for at least the next year, and I told him to sit tight for a few more months and committed to keeping him informed of any investment changes.

I did further cash flow projections to show him the different scenarios and the effect the switch would have on his

situation. I also reassured him that the markets would turn in time and if he wasn’t invested when they did, he would miss out on the performance and returns. He wasn’t convinced and opted to switch to cash despite my advice. I felt discouraged as an adviser because he trusted me when things were going well but not when the markets were volatile. I also knew I’d tried my best to guide and advise him. Ironically, the markets did start recovering over the next couple of months and Paul was unable to enjoy the growth. He noticed this and called me in November 2020 to admit that he’d made a huge mistake and that he should have listened to me. He said he’d panicked and based his decisions on what he was seeing in the media. He subsequently asked to switch back into the portfolio he was originally invested in and promised to follow my guidance in the future. I explained that by switching back, he would never fully recover the losses but he went ahead anyway.

Moral of the story

If it hurts to look, then maybe you shouldn’t. No one likes to lose money, but constantly monitoring your investments and bombarding yourself with financial news during times of volatility can cause unnecessary stress and anxiety which may push you to make the wrong decisions. It’s important to look at the bigger picture and remember your investment strategy. A good financial adviser is there to walk with you through good and bad times.

Almost 30 years ago, I met Emily. She was working as an administrator at a small family-owned business. Her husband had died when he was 50 and she was left almost destitute after his passing. All she received was an R1 800 monthly pension from her husband’s union fund. You can imagine her financial stress. She’d lost both her husband and her financial security.

She asked me to help her decide what to do with her husband’s pension.

After meeting Emily, I found out she was 45 and not saving towards retirement at all. She was, however, working. Back then (in 1995), her employer only provided its group scheme cover to men. After consulting with her employer, they entrusted BDO to look after their employee benefits arrangements for all staff. The rules were amended to cover all permanent staff, including women, and Emily started contributing to the retirement and risk fund at the age of 45.

Not only for rich people

Over the next decade, she accumulated about R200 000 in retirement savings. She was quite disheartened, as she knew this would not be enough to retire on. I explained to her that “money makes money” and I’ll never forget her response: “That’s only for rich people.”

I took her through an exercise to demonstrate the compounding effect of

A LITTLE REALLY DOES GO A LONG WAY

Cindy Frantzeskos director of BDO Employee Benefits

money making more money. Compound interest really is one of the wonders of the financial world. I encouraged her to continue working longer to save towards her retirement.

When Emily eventually retired at 65, her retirement savings had tripled in value and she was able to enjoy some financial freedom. What’s more, her husband’s pension had escalated to about R6,000 per month by this time.

Her retirement was looking much more appealing than when we’d spoken about

the wonders of compound interest 16 years earlier.

Good things come to those who wait

Now in her 70s, Emily continues to draw a modest monthly income from her retirement savings. Retirement can be a case of “hit or miss” if you don’t take time to plan.

Asking for help was Emily’s saving grace. Making relatively small adjustments almost 30 years ago fundamentally changed her future.

John was a happily single, self-employed man, who worked as and when he chose. He believed that he had no need for insurance or, for that matter, any real savings. He smoked heavily but was quite active, so he believed that he would never retire. In his late 40s he met Sally, a client of mine. They bought a house together, took out a bond and shared living costs. Neither of them could have done this on their own.

Against his better judgement

John was reluctant to get any insurance, but Sally insisted that they at least get life cover for the bond, so she called me to meet with them. The bond was in both their names, so they were jointly and severally responsible for it. If one of them died, the bond would be payable in full, unless the surviving partner could afford the remaining bond amount. The initial bond was R1 700 000. Their shared monthly costs were about R10 000 each.

After much discussion and hearing my advice, John acknowledged that he didn’t want Sally to be under financial pressure if he died. She had a good job, but couldn’t afford to run the house on her own.

Reluctantly, John took out a life insurance policy. On several occasions he complained to me that he thought it was all a bit much. I advised him that the premium was reasonable and that he could stop paying it once the bond was paid off and Sally was

THE ULTIMATE GRUDGE PURCHASE

Sue Cogswell CFP, financial planner

free of the potential financial burden. She was right all along In 2018 John and Sally went away on holiday to the bush. On the way home, John started to feel unwell. He got worse as they travelled, so much so that Sally decided to go straight to the nearest hospital, where John sadly passed away from a heart attack. A tragic experience for Sally.

Thankfully, the life cover that John had reluctantly taken out paid for the bond, covered all the costs that he’d left unpaid,

and allowed Sally to invest money for her retirement and be able to afford her ongoing monthly living and lifestyle costs.

Despite the tragedy of losing her husband, she had the peace of mind that her financial needs were covered and she would be okay. I often hear people say,

“I don’t want to be worth more dead than alive.”

But if you love your family, surely you don’t want them to suffer unnecessarily if you’re dead? Losing you is hard enough –why make them struggle financially too?

SHEDDING LIGHT ON THE REGULATION 28 AMENDMENTS

The regulation governing retirement funds’ exposure to higher-risk assets has undergone substantial amendments in the past year or so. Annalise de Meillon Muller unpacks what they mean for investors, fund trustees and fund members.

Amendments to Regulation 28 of the Pension Funds Act have gone through a lengthy process since February 2021. These amendments were gazetted on 1 July 2022 and National Treasury published another media statement on the matter on 5 July 2022. It is important to remember that the increase in foreign exposure for institutional investors has been allowed since 23 February 2022. The other long-awaited amendments to Regulation 28 that were gazetted in July will only be effective as from 3 January 2023.

THE PURPOSE OF REGULATION 28

Simply stated, the intent of the regulation is to protect the savings of retirement fund members against a lack of investment diversification by prescribing exposure limits to particular asset classes. The Pension Funds Act provides that the Minister of Finance may determine these limitations and currently they are provided for in Regulation 28.

The changes to this regulation (outside of the increased foreign exposure) that have recently been made law will only be effective 3 January 2023, but the industry will be preparing for implementation until that date. These changes relate to the asset classes and exposure percentages. A prescribed percentage means that a retirement fund may only invest up to a stated percentage of the aggregated fair value of the total assets of such a fund.

FOREIGN EXPOSURE

Regulation 28 stipulates that the aggregate exposure to foreign assets is limited to a percentage, or amount, as prescribed by the South African Reserve Bank (SARB).

During the February budget speech, the Minister of Finance confirmed that this exposure will be increased for institutional investors (retirement funds, long-term insurers and collective investment scheme managers) from the respective 30% and 40% to a single limit of 45%. Therefore, the limit of 45% in aggregate applies to all applicable investments outside of South Africa. It is no longer necessary to distinguish between foreign as opposed to Africa. This increase came into effect on 23 February based on the publication date of the SARB’s Exchange Control Circular. The Financial Sector Conduct Authority (FSCA) also confirmed this increase in March with the publication of a formal FSCA Communication.

Practically this means that retirement fund members may invest a maximum of 45% of their investment portfolios offshore. In the context of life insurance policies (such as endowments and sinking funds) as well as living annuities, the increase translates to life companies being able to possibly offer more foreign exposure as they may invest a maximum of 45% of their retail assets offshore.

THE NEW AMENDMENTS Infrastructure

The purpose of this change is to enable longer-term investment into infrastructure to assist economic development. The first point of importance is to understand that the amendments did not categorise infrastructure as a separate or new asset class. The main asset classes in the regulation remain cash, debt instruments, equities, immovable property, commodities, hedge funds and private equities. In addition, there are also limitations on housing loans in a

pension fund, investing in the business of a participating employer and exposure to ‘other’ assets (excluded from the said categories).

“Infrastructure is simply now recognised for the purposes of limitation and reporting, within the existing asset classes of Regulation 28” says PG Marais, legal adviser at Sanlam Corporate. Retirement funds will be required to measure the apportionment to infrastructure per asset class and report thereon. Strict reporting requirements in this regard are made provision for with the addition of a second table in the regulation. Fortunately for the industry the final amendments only prescribe the reporting via the new table for the top 20 holdings in infrastructure as opposed to all, as initially proposed. A retirement fund will have to indicate the percentage and rand value allocation to infrastructure per each asset class.

What exactly infrastructure means is of obvious importance. Investopedia defines infrastructure as the physical systems of a business, region or nation that are vital for economic development and prosperity. Examples according to this definition include transportation systems, communication networks, sewage, water and electricity systems. These projects are normally funded publicly, privately or via a partnership.

The definition for infrastructure in the regulation has gone through various changes. Initially the definition referred to only installations, structures, facilities, systems and services or processes relating to the national infrastructure plan, which in turn refers to the development of public infrastructure. Private sector projects, as well as developments in the rest of Africa, were not included.

In a second attempt at the definition there was reference to assets constructed for the provision of social and economic utilities or the benefit of the public. At the time it was explained that the reference to social benefit will allow for incorporating impact investments, which are merely investments that aim to generate positive and measurable social and environmental impact alongside that of financial return. The word social was removed from the final definition.

Now infrastructure refers to assets with (or operating with) a primary objective of developing, constructing or maintaining physical assets and technology structures (and systems) for a specific purpose. The purpose must be to provide utilities, services or facilities to the benefit of the economy, businesses or the public. “Infrastructure therefore now includes the private sector and the definition is quite wide” says PG Marais.

The industry might be requesting guiding principles on the interpretation of this definition. Retirement funds need to report on the percentage apportionment to infrastructure per asset class and also confirm the percentage infrastructure investment that relates to the rest of Africa. Guiding principles will be welcome, as the wide definition could result in unintended consequences. The reference to a primary objective for the asset could also be one that is open to wide interpretation.

There has been some industry opinion that, due to the wide scope, the maximum allowable exposure to infrastructure should be even higher than the final gazetted limit of 45% to direct infrastructure investment per fund. It is important to note that with the overall limit to infrastructure across all asset classes, there are specific instruments excluded from the asset classes in this context. The excluded instruments are debt instruments issued by the government, loans to the government and debt or loans guaranteed by the government.

Hedge funds and private equity

Regulation 28 previously defined hedge

funds, private equity and other excluded assets as one combined asset class with a collective limit of 15%. Separately, a maximum allocation to hedge funds of 10%, private equity of 10% and other excluded assets of 2.5% was allowed, as long as the collective exposure was not above 15%.

These three asset classes have now been separated. There is no overall collective limit any more. Private equity exposure is up from 10% to 15% while hedge funds remain at 10% and excluded assets at 2.5%. Again, this is only effective from 3 January 2023.

The amended definition of a hedge fund means that retirement funds, as an example, may only invest in hedge funds approved in terms of the Collective Investment Schemes Control Act.

The amendments now clarify that any direct or indirect exposure to a hedge fund or to private equity must, in fact, be reported as an investment into one of these asset classes. A look-through is not required other than for the requirement to check and report on the percentage infrastructure investment in these asset allocations.

Look-through principles

The look-through principle in this context could be explained as the requirement to assess and include for reporting purposes, the composition of underlying investment instruments used in a particular investment structure or investment portfolio. Regulation 28 explains the look-through principle as a rule that states an investor may not circumvent the exposure limits by ignoring the make-up of an underlying asset and must include and disclose the exposure to which the underlying assets relate.

With the amendments, the lookthrough principle now applies to collective investment schemes and insurance policies, for example, in all circumstances, even if an audit certificate was issued. This addition will strengthen the understanding of the authorities around underlying exposure to enable proactive supervision.

Housing loans

This rule does not apply to retirement annuity funds or preservation funds. The asset allocation to housing loans granted to pension fund members is down from 95% to 65% for new loans granted after 3 January 2023. This specific rule in the regulation applies to the limit on total exposure via the loan book of a pension fund in the context of “investing” in housing via members and the loans granted to them. Explained differently, it means that a specific pension fund could previously have an investment allocation of up to 95% into housing loans for members but may, as from 3 January 2023, only have a maximum of 65% invested into these loans. According to the media statement the reason for the decrease in exposure is to curb the abuse of housing loan schemes by fund members. Treasury did promise to continuously monitor whether this limit truly enables the intent, as they do recognise the importance of home ownership in wealth creation and retirement provision.

Marais explains that section 19(5) of the Pension Funds Act also regulates this type of investment for pension funds and that an amendment to this section of the Act may also be required to give effect to Treasury’s intention of curbing abuse of housing loans by fund members. Although section 19(5) has not been amended, he argues that limiting the value of housing loans to members to only 65% of the member’s fund value would be in line with Treasury’s intention.

Cryptocurrencies

The amendments now clearly prohibit the investment into crypto currencies because of volatility and a lack of regulation. There is also a rule that these types of assets may not be added under the grouping of “other excluded assets not included”. One must be reminded of the fiduciary duties of retirement fund trustees towards their members. Investopedia explains “fiduciary duty” as being bound legally and ethically to act in the best interest of another.

Excluded assets

There is a list of assets which may be excluded when applying the limits of Regulation 28 on a retirement fund level. This list includes participation in collective investment schemes and long-term insurance policies, as long as the underlying assets in these structures separately comply with the limits. The amendments now read that, as from 3 January 2023, this list of assets may no longer be excluded for the purposes of complying on a retirement fund level. The look-through principle should therefore apply to the underlying instruments used in these assets and the use of the

assets will count towards the limits set in Regulation 28 on a retirement fund level as well.

Exposure to a single entity

The 25% limitation on exposure to any one particular entity or company has been amended as well. Currently this limitation only applies to certain sub-categories of asset classes but as from 3 January 2023 it will apply to all asset classes.

It means that no retirement fund may invest more than 25% across all asset classes in any one particular entity or company. Again, the only exception to the rule is for debt instruments issued by

the government, loans to the government and debt or loans guaranteed by the government.

CONCLUSION

The above amendments are only effective as from 3 January 2023. The FSCA confirmed that they are finalising the standard on reporting requirements that will be aligned with the revised Regulation 28 and this standard will be issued for public comment soon.

Annalise de Meillon Muller is Manager: Distribution & Sales Support at Glacier by Sanlam.

RISING FOOD PRICES HIT POOR PEOPLE THE HARDEST

A CLOSE LOOK AT INFLATION IN SOUTH AFRICA

Concerns about rising food prices are making the headlines across the world as pressures mount in the wake of Russia’s invasion of Ukraine. The war has driven up prices of commodities, including wheat, which is a staple food in many countries.

Food inflation has recently been attracting a lot of media attention in South Africa too as concerns grow about people’s ability to afford basic foodstuffs.

Food price inflation attracts considerable attention because we must all eat. And periods of high food inflation affect poor households the most. This is because they spend a higher percentage of their income on food.

When it comes to price rises of general products, households can simply refrain from buying non-essentials. But this isn’t true when it comes to

food. The only choice for households is to substitute expensive food with cheaper alternatives or to buy less, and reduce the amount of food that’s put on the table. Governments, central bankers, academics and businesses consider and assess inflation in detail. But we should all be interested because high inflation, and high food inflation in particular, can result in considerable hardship.

How inflation is calculated

South Africa’s overall rate of inflation in March 2022 (compared with March 2021) was 5.9%. The rate of increase in the prices of food and non-alcoholic beverages was higher – at 6.2% over the same period.

This difference was even more pronounced in February 2022 (compared to February 2021), when overall inflation was 5.7%, but food inflation was 6.7%.

The implication of this is that food prices are increasing faster than overall inflation. This impacts heavily on poor households. High food price inflation makes poor people even poorer.

According to Trading Economics,

South Africa’s average food price inflation was 6.07% per year between 2009 and 2022, reaching for this period its highest level of increase of 15.6% in February 2009 (compared to February 2008).

South Africa’s inflation calculations are based on the rate of change in the Consumer Price Index (CPI). Both the CPI and the rate of inflation are calculated by Statistics SA (Stats SA).

It calculates inflation rates for the country’s nine provinces, for different income groups and for different demographic groups – for instance, pensioners. These differentiated calculations are necessary because household spending patterns differ by region as well as by income and demography.

These different rates have various uses. For instance, the inflation rates per income decile give an indication of price changes affecting different income groups. The rate of inflation calculated for pensioners is sometimes used as a basis for pension adjustments.

The inflation rate per province is used by

Jannie Rossouw spells out the dangers of high inflation in a country like ours, where a large percentage of the population lives below the poverty line.

businesses with a national footprint to assess financial performance and cost pressures of operations in different provinces.

For the purpose of public communication, policy decisions and international comparison, one rate of inflation is calculated and published for the country. This single rate is what gets media attention.

StatsSA calculates this overall rate based on the rate of change in the headline CPI for all urban areas. This figure is used for international inflation comparisons between countries. It’s also used internally for policy decisions made by the South African Reserve Bank. The central bank has an inflation target with the aim of keeping headline inflation between 3% and 6% per year.

The headline rate of inflation also often serves as the base for wage adjustment negotiations.

Other than Stats SA, there are also other civil society initiatives focusing on calculations of South African price increases. The best-known in the area of food price increases is the Economic Justice and Dignity Group in Pietermaritzburg. Every month it publishes the prices of a “food basket” and calculates the rate of increase in the items included in this basket.

The rates of increase in food prices calculated by Stats SA and by the justice group differ because they include different items and different spending weights per item in their respective “food baskets”.

StatsSA includes in its “food basket” bread and cereals, meat, fish, milk, eggs and cheese, oils and fats, fruit, vegetables, sugar, sweets, and desserts.

The last change in and recomposition of this basket was in January 2022.

Differences

The spending patterns of South African households differ according to the 10 income deciles identified by Stats SA. Households in the lowest decile have an annual income below R20 140, while the highest decile covers households with an annual income above R312 247.

Given this large income differential, there are considerable differences in the percentage of income that households in the different deciles spend on food.

In the headline CPI, food has a spending weight of 15.30 out of 100. However, food price increases in the CPI are normally reported in the media together with increases in non-alcoholic beverages (1.84/100 weight), with a combined weight of 17.14 in the headline CPI.

The spending basket of South African households at retail outlets includes a lot of other items too, such as personal care products with a weight of 2.1 out of 100 in the headline CPI, cleaning materials and maintenance products (0.35), alcoholic beverages (4.29) and tobacco (1.97).

Not all households consume all the items included in the index. The headline CPI therefore simply reflects “average expenditure”.

On the same basis of “average” expenditure, the weight of household expenditure on food and non-alcoholic beverages differs considerably from the 17.14 used in the headline inflation. In the top income decile, the weight for these items is 10.62 out of 100, compared with a weight of 50.31 in the

lowest income decile.

This vast difference in expenditure between low- and high-income earners confirms that food price increases affect various income groups differently.

Why curbing inflation matters

At the moment, inflation is a problem beyond emerging-market economies such as South Africa. Inflation has also accelerated sharply in recent months in developed countries. For instance, the US inflation rate was around 3% per year for many years but accelerated to above 8% per year.

Central banks are concerned about inflation because it distorts the economy and erodes the buying power of money. During periods of high inflation, people on fixed incomes such as pensioners, get poorer over time. With high inflation, borrowers enjoy an advantage over savers because the capital value of savings is eroded, while the real burden of borrowing declines.

For these reasons central banks –including South Africa’s – are constantly on the alert to accelerating inflation. Inevitably, this implies setting interest rates at an appropriate real level above the rate of inflation. Lower overall inflation benefits households all over the income spectrum. But containing food price inflation most of all helps poor households.

Jannie Rossouw is Visiting Professor at the Business School, University of the Witwatersrand. This article is republished from The Conversation under a Creative Commons license. Read the original article at https://theconversation.com

NATURAL CATASTROPHE PUTTING SOUTH AFRICAN INSURERS TO THE TEST

The devastating floods that affected large parts of the KwaZulu-Natal coastline on 11-12 April have brought climate change and the consequent increase in frequency and severity of natural catastrophe events into clear focus. The flooding and landslides that followed a period of unnaturally high rainfall left thousands of businesses and citizens counting the economic and social costs: by early May, the KZN premier had confirmed over 450 deaths while the country’s nonlife insurers had received claims totalling billions of rand.

“This tragic event is shaping up to be the largest catastrophe in South Africa’s history, with industry-wide insured estimates putting losses in the range of R15 billion,” said Michael Cheng, chief risk and underwriting officer at Hollard Insure. His assessment was supported by other large insurers, with Santam’s internal modelling flagging the KZN floods as a one-in-25-

year event and by far the largest natural catastrophe in the insurer’s history. Each of the insurers we approached confirmed that they had received hundreds of claims from both business and personal lines policyholders following the catastrophe.

Santam offered up its June operational update to illustrate the financial impact of the event, estimating its gross exposure to the KZN floods at R3.2 billion. The insurer’s reinsurance programme provided effective protection against the natural catastrophe, limiting its net exposure, including reinsurance reinstatement premiums, to about R500 million.

Discovery Insure said that it received over 1 800 claims across its commercial and personal lines categories, with a total claims value exceeding R200 million. “Most of these claims were for buildings and contents, but we did receive claims for motor vehicles as well,” said Precious Nduli, head of marketing and technical marketing

at Discovery Insure. Hollard, meanwhile, said that it had received over 3 000 claims following the disaster, adding that its reinsurance partners had been responsive to the KZN Floods and that its treaties had provided adequate cover. Claims, though significant, would not adversely impact the insurer’s balance sheet.

Garth Napier, managing director of Old Mutual Insure, said that the insurer assisted more than 2 200 customers who had been affected by the catastrophe. “Our portion of the gross claims will have an estimated net impact on the Old Mutual Insure financials of between R100 million and R150 million,” he said. “We are well capitalised, and all valid claims received on our policies have been settled or are in process of being settled”. The insurer said it had several reinsurance agreements in place, which helped to reduce its total exposure to the loss event.

Another large insurer, Bryte, noted that

This year's floods in KwaZulu-Natal put the South African insurance industry under severe strain, but they’ve come through with lessons learned, writes Gareth Stokes.

it had received almost 500 personal lines claims, and nearly 900 commercial claims, almost all of which had been settled by early July.

First responders

The economic value offered by insurers in reinstating policyholders following a loss event is clear, but few people appreciate the role the industry plays as first responder to serious catastrophe events. The KZN floods were no different, with large insurers implementing a range of measures as soon as the scale of the damage became apparent.

Arie De Ridder, head of claims at Hollard Insure, said that Hollard immediately implemented its catastrophe management plan, which aimed to support customers and brokers onsite in the most efficient way, especially with notifying claims.

Deploying additional personnel to disaster areas turns out to be common

practice among leading insurers. “Almost immediately, Discovery Insure flew a team of building and content assessors down from other parts of the country to assist on the ground, allowing us to assess over a third of all claims within the first week,” said Nduli. The insurer went as far as to hire a helicopter to rescue a stranded client. Santam also provided on-the-ground support to its clients with the deployment of a claims team in KZN immediately after the event. The insurer provided or paid for alternate accommodation for policyholders whose properties were uninhabitable or in imminent danger of collapsing, and deployed assessors and contractors to attend to quantification of losses and urgent repairs as soon as possible after the floods.

Old Mutual’s immediate response included deploying additional resources to register, assess and settle claims as speedily as possible as well as mobilising

its service providers to prioritise affected customers. The insurer also took steps to assist the broader community, whether insured or uninsured. “We partnered with Gift of the Givers and donated R300 000 to provide communities with immediate relief; we also mobilised the Old Mutual Foundation, with R2 million allocated to provide food and dignity packs as well as assisting to rebuild houses alongside the Collen Mashawana Foundation and the Nelson Mandela Foundation,” said Napier.

It is standard practice for non-life insurers to expedite claims assessments and relief payments following catastrophe events. Santam said it made immediate cash payment of R50 000 to those who suffered a total loss of their contents, while Hollard made quick authorisations of up to R100 000 for emergency repairs.

Discovery Insure took similar steps. “We made immediate interim payments for a portion of certain business claim amounts

in cases where the client needed the financial assistance urgently,” said Nduli. “These interim payments were made before the total claim amount was fully quantified, with the balance paid subsequently”.

Old Mutual Insure implemented an immediate intermediary mandate of up to R15 000 for emergency repair authorisations, and prioritised cash payouts to assist customers in need.

Long-term implications

The consequences of global warming are evident worldwide. At the time of writing, many areas across Europe were in the grips of multi-day heatwaves, with temperatures soaring above 40 degrees Celsius at many stations.

“The impetus to tackle climate change risks and transition towards a low-carbon economy is growing,” noted John Melville, executive head: underwriting, reinsurance and international at Santam, adding that climate change was a complex issue. What has become clear, is that insurers are experiencing the increased frequency and severity of extreme weather events financially and operationally.

The volume and quantum of claims arising from the 2022 KZN Floods will have far reaching implications for both clients and insurers. Insurers will lead the response, by addressing the significant sustainability risks presented by climate change on two fronts. First, they will reconsider the level of risk they wish to take on for each insured. And second, they will demand more from policyholders, both businesses and individuals, in mitigating weather-related risks.

“It is standard practice to underwrite and price each risk on its own merits and provide appropriate risk management advice to each client,” said Nduli. “Even before the floods, business insurance clients may have received specific underwriting restrictions on their policies (or limits to cover or higher excesses) based on how much risk they presented.” Personal lines clients are not subject to similar conditions or restrictions, but would be risk-rated via appropriate premium. In plain English, your premium is likely adjusted for the flood risk

associated with your geographic location.

“We value our role as risk advisers in the insurance value chain and believe that, as we move into an increasingly uncertain risk future, risk tools and early detection mechanisms that enable risk prevention will differentiate our value as an insurer,” said Santam’s Melville. “We also regularly compile useful advice and tips to help clients activate disaster preparedness and prevent the loss of life and property during the fire, hail and flood seasons”.

Insurers and reinsurers do a lot of work to determine the evolving risks they face. One such initiative, according to De Ridder at Hollard, is to improve the modelling and simulation of potential flood events for operational and financial impacts and risk concentration.

Bryte, meanwhile, felt it appropriate to focus on products. “We are continuing to find ways to enhance our product offering by leveraging essential resources and data to design tailor-made cover and provide practical advice for customers,” said Cloud Saungweme, chief claims officer at the insurer. The insurer focuses on proactive safeguards, including regular sum-insured assessments, policy reviews to ensure that the right cover is in place and clearly understood, and cover limit reviews, to avoid the persisting challenge of underinsurance, among others.

Be prepared

There are also many practical steps that policyholders can take to mitigate loss, and such steps are strongly encouraged by insurers and insurance brokers alike. “It is important to adapt to evolving risks by working with clients to improve their resilience, particularly with clients in areas more prone to flooding,” said De Ridder, adding that policyholders had to be aware of the slope and elevation of their properties and proximity to rivers. “You should ensure that retaining walls are maintained and in good condition; ensure that water channels to your property are in place to deflect water; and ensure that there is efficient drainage and that the drainage is clear and functioning,” he said.

According to Santam, the first step in

preparing for catastrophe is to know what you are covered for. “Most short-term insurance contracts will provide cover for weather-related incidents, which includes flooding; it is, however, vital that clients check with their intermediary or insurer what they are covered for and what the exclusions, terms and conditions are,” said Melville. For example, most policies require that clients take all reasonable precautions and care to prevent or minimise loss and damage. Care should also be taken to insure buildings and contents at the correct replacement value too, because underinsurance remains the biggest reasons for partial payouts of claims. If the replacement value of household contents is R600 000 but the client is insured for only R300 000, then industry practice is that only 50% of the claim will be paid out.

There were plenty of lessons learned during the KZN floods. “Our claims assessors found that not maintaining and clearing storm water drainage systems had led to many of the claims that we received; this is something that clients and municipal authorities can address, by among others, inspecting existing flood prevention systems to ensure that they are free from debris,” said Nduli. Clients who are able to, should consider augmenting stormwater systems by installing grid drains, blanket drains, French drains or storm water diversion trenches and berm drains on their properties, depending on the severity of the storm and the nature of infrastructure that one is aiming to protect.

According to Bryte, climate change will continue to be a risk for businesses and society. As such, policyholders will need to proactively engage with their brokers and insurers to effectively assess their risk based on current weather patterns.

“Commercial insurers will need to enhance their focus on educating and assisting policyholders in mitigating against a range of likely risks, as well as those that may be unexpected,” said Saungweme. “There is a growing need for collaboration that helps build more robust risk identification and management plans to equip clients better to navigate future threats promptly”.

WHY POLITICS IS POISON IN A PORTFOLIO

In 2020, the South African Reserve Bank (SARB) published commentary unintentionally implying that institutional investors – the custodians of retirement funds – were suddenly allowed to place all their assets offshore, from a prior limit of 30%. Very swiftly, a chorus of negative comments appeared in various media saying that South Africa was a failed state and recommending that investors take all their assets offshore.

This type of story resonates with many South Africans disenchanted with local politics. The negative publicity also adversely affects the local economy and the reputation of the country within the global investment community. The narrative spun by these “influencers” at the time was that the freedom to invest offshore in a much greater universe of potential options and instruments would liberate South African long-term investors whose nest eggs could be compromised by holding domestic assets.

This created a wave of FOMO – the fear of missing out – as many “panic-stricken” investors quickly transferred funds offshore. It was, unfortunately, driven by market commentators who are generally trusted for their knowledge, insight and judgement.

“However, the actual returns in domestic and international markets since then –fortunately for us, but unfortunately for the ‘influencers’ – reflect a different story. Two years later, if we had followed the noise, we would have lost money,” says Clive Eggers, head of multi-managed portfolios at wealth and financial advisory business GTC.

To illustrate, Eggers cites the return of the Capped SWIX (the capped, shareholder-weighted JSE All-Share Index)

for local equity markets, which returned 20.4% for the one-year period ending March 2022, versus the MSCI All Countries World Index, which returned 5.8% in rand terms.

“This means that anyone who disinvested R100 000 from the local equity market at that time, to invest offshore, would have lost R14 600. That’s a costly mistake by any standards,” he says.

from the SARB nearly two years ago, the error was corrected. The Reserve Bank clarified that the prevailing prudential limits still applied. However, in the most recent National Budget Speech, exchange controls were relaxed, allowing South African investors to take up to 45% of their assets offshore. Again, the debate to consider offshore investment opportunities hangs over local investors, but the question here is whether exchange control really is an issue for South Africa-based investors.

“Our team’s investment modelling indicates that offshore asset holdings should be somewhere between 30% and 40% of a portfolio, making the government limit of 45% superfluous. We welcome the allowance of greater flexibility, but believe there is still good value in domestic assets going forward. Increasing exposure to the full 45% would only ever be prudent based on a considered valuation perspective and never as a result of an emotional sentiment or market-noise perspective,” Eggers says.

Even in today’s world, with a wealth of information and investment advice immediately available to us via the Internet, our emotional nature can override discipline and introduce bias into our routine investment decisions.

“The kicker is that this was not a onceoff. Over the past 20 years, in rand terms, international equities have performed at about 8.6% per year, versus South African equity returns of 13.9%,” adds Eggers. “For any investor planning for retirement, a difference of 5% per year is significant.”

Eggers cautions that making a decision to invest offshore based purely on perceptions of a weak rand has frequently proved catastrophic.

“Shortly after the announcement

Eggers reminds investors that markets are cyclical – they seldom head in one direction. “Extreme statements like ‘South Africa is headed only one way’ or that it is a ‘failed state’ are overly simplistic and incorrect from various perspectives. The domestic investment market is not necessarily a coincidental reflection of the political environment. It is not only South African investors who forget this principle and overreact, contributing to the creation of market cycles around the world. We continue to advise that investors base their allocation decisions on a considered view of long-term objectives and avoid impulsive changes to policy based on emotion, fear or headlines,” he says. –

Supplied by GTC

The domestic investment market is not necessarily a coincidental reflection of the political environment, says an investment professional.

ACTIVE OWNERSHIP

HOW CAN INVESTORS DRIVE CHANGE?

What does active ownership really mean in practice?

Experts from the sustainable investment team at Schroders explain.

Active ownership is one of the most important devices in a sustainable investor’s toolkit.

Kimberley Lewis, head of active ownership at London-based global asset manager Schroders, says: “Where we have taken the decision to invest in a company on behalf of clients, we believe we can

protect and enhance the value of that investment by being active owners and engaging with that company. This is central to our investment philosophy.”

But what is active ownership? What does it look like in practice? How can investors push for change with companies’ management?

Lewis and Hannah Simons, the company’s head of sustainability strategy, answer these and other common questions.

What is active ownership?

KL: Active ownership involves engaging with companies to influence corporate behaviour around long-term sustainability

issues. Through ongoing dialogue we get to know companies better and, where necessary, ask companies to change their practices. Once a year we also get the opportunity to vote at a company’s AGM.

What do we mean by “engagement” when we talk about active ownership?

HS: When the industry talks about “engagement”, this is really a word to describe interactions with companies in which we have invested our clients’ money. These interactions are crucial in our assessment of what makes a good investment. This is why it is not only our sustainable investment team driving these activities but also portfolio managers and financial analysts.

Why is actively engaging with companies important?

KL: Because by engaging with companies we can understand them better and we can also make our expectations clear. Ultimately, this connection and shared understanding is crucial when the dialogue is about effecting change that, in our view, is needed to safeguard and even increase the value of investments for which we are responsible.

How does it work in practice?

KL: An engagement generally begins with setting the basis for this common understanding and helping the company understand our position on a topic. Methods include one-on-one meetings with company representatives such as members of the board or managers of specialist areas, phone calls or written correspondence with company advisers and stakeholders, and collaborative engagements with other companies, for example on reporting frameworks.

What issues do active-owner investors engage on?

HS: At Schroders we focus on issues that, following a thorough assessment, we think are material to the long-term value of our holdings. We do so by considering a company’s connection and impact across its main stakeholders: employees, customers, communities, the environment, suppliers and regulators. The governance structure and management quality that oversee these stakeholder relationships are also a key focus for engagement discussions.

What makes for a successful engagement?

KL: We believe that four attributes are critical to successful active ownership and engagement: knowledge, relationships, impact and incentives. As well as drawing on the sustainable investment team expertise, we leverage the perspectives of our portfolio managers, analysts, external

partners and clients to really understand which sustainability issues matter to long-term performance. Schroders has built strong, long-standing relationships with many of the companies in which it invests, with our engagement history dating back to the year 2000. The insight gained through engagement can directly influence the investment case. Ultimately, we have the power to reduce or even sell out of a holding if engagement is unsuccessful, or the option to avoid investing at all. In the case of listed equities, we exercise our voting rights.

How do you report on progress?

KL: We report on all aspects of our engagement activity on a quarterly basis. To facilitate this, we keep an ongoing record of all of our engagement activity and review progress against the objectives we had set. But having a robust mechanism to assess progress is not only important for reporting. For us it is also a learning opportunity, a way of seeing what approach has a better chance of success and under what circumstances.”

HS: Reporting on progress is something that our clients often ask us about. Being open about the process is also crucial for others to hold us, as investors, to account.

How do you see the future of active ownership?

KL: Schroders has a long history of engagement and active ownership. We appointed our first governance resource in 1998 and have recorded and monitored ESG engagements spanning more than 20 years. Our fast-growing active ownership team is building further on that foundation and has set out its vision in a recently published Engagement Blueprint, which can be found on our website. This focus on our future active ownership effort is rooted in the longterm outcomes we want to see across our holdings and we will use it as a compass for our future engagements. –

Supplied by Schroders

THE AGED USUFRUCTUARY

Valuing a usufruct for estate duty purposes may incur a greater tax liability than disposing of it while the usufructuary is alive and paying donations tax, transfer duty and CGT, writes

Duncan McAllister.

When a usufruct ceases, it can have serious estate duty consequences for a deceased usufructuary. For this reason, among others, most planners nowadays shun the usufruct and use an inter vivos trust for estate planning. This article explores one of the options open to an aged usufructuary staring down the barrel of the estate duty gun. At the heart of the problem is section 5(1)(b) of the Estate Duty Act

45 of 1955. It states that a usufruct ceasing on a person’s death should be valued by capitalising the right of enjoyment at 12% a year over the life of the person who becomes entitled to the right of enjoyment or, if the right is for a lesser period, over that lesser period. Under section 5(2), the Commissioner of SARS can approve a rate lower than 12% if satisfied that the property cannot reasonably be expected to produce a yield of 12%.

Typically, the bare dominium holder (the owner of the usufruct asset) will be a family trust, which is deemed to have a life expectancy of 50 years. The annual right of enjoyment of property with a market value of R100 at 12% is R12. The value of a usufruct over 50 years is then determined by multiplying the annual right of enjoyment by the factor provided in a table by SARS, which is 8.3045 = R99.65.

What is a usufruct?

In effect, the inclusion for estate duty purposes is virtually equal to the full market value of the property.

Estate duty is payable at the rate of 20% of the dutiable amount of the estate that does not exceed R30 million and 25% on any amount exceeding that figure (for persons dying on or after 1 March 2018).

To avoid this outcome, the usufructuary could sell or donate the usufruct to the bare dominium holder during his or her lifetime. This option will have donations tax, capital gains tax and transfer duty (assuming a usufruct over immoveable property) implications, which would not have arisen on death. On death there would be no:

• Donations tax, since the deceased has not disposed of property;

• Transfer duty, since nothing is acquired by the bare dominium holder; nor

• Capital gains tax, because the expiry of the usufruct would not give rise to any proceeds.

A comparison therefore needs to be made between the estate duty that would become payable and the aggregate of any donations tax, transfer duty and capital gains tax. If the aggregate of the three taxes is less than the estate duty, the usufructuary should consider disposing of the usufruct to the bare dominium holder, either for consideration or as a donation. Whether the usufruct should be sold or donated would depend on a number of factors, such as the relative rates of donations tax and estate

duty and the availability of the donations tax exemption when used in connection with an interest-free loan (section 7C of the Income Tax Act).

Donations tax

Since a usufruct is a highly personal right, it may not be disposed of to anyone other than the bare dominium holder. If sold for consideration on an interest-free or low-interest loan account, there could be continuing donations tax implications under section 7C in relation to the failure to charge interest at less than the official rate as long as the loan remains outstanding. The balance of the loan still outstanding at the time of death would be included in the person’s estate for estate duty purposes. Should the usufruct be donated, the donation could attract donations tax. In this regard, section 62(1)(a) provides that the donation must be valued by capitalising at 12% the annual right of enjoyment over the donor’s life expectancy, or if held for a lesser period, over that period. Under section 62(2) the Commissioner can accept a lower yield, if satisfied that the property cannot reasonably be expected to produce a yield of 12%. The life expectancy tables used for estate duty purposes are also used for donations tax purposes. Thus, if the property had a market value of R100, the annual right of enjoyment at 12% would be equal to R12. If the usufructuary was aged 90 or above, his or her life expectancy

would be 4.3 years with a present value factor of 3.21438. Thus, R12 × 3.21438 = R38.57.

This value is substantially lower than the value determined for estate duty purposes. In addition, the donor would be able to use the annual donations tax exemption of R100 000.

The rate of donations tax is 20% on the cumulative value since 1 March 2018 of all taxable donations up to R30 million, and above that amount at 25%.

Transfer duty

Assuming the usufructuary is not a VAT vendor, the bare dominium holder will be subject to transfer duty. Under section 2 of the Transfer Duty Act, transfer duty is payable on the value of any property acquired by any person by way of a transaction or in any other manner, or on the amount by which the value of any property is enhanced by the renunciation, on or after the said date, of an interest in or restriction upon the use or disposal of that property.

So what must be determined is the value by which the bare dominium held by the bare dominium holder will be enhanced as a result of the acquisition of the usufruct. The enhancement relates to the estimated remaining period that the usufructuary would have enjoyed the usufruct, if he or she had not donated it to the bare dominium holder.

A usufruct is a legal right accorded to a person or party that confers the temporary right to use or derive income or other benefit from someone else's property. - Investopedia

Transfer duty is based on the fair market value of the property. Under section 5(7) of the Transfer Duty Act, the fair value must take into account the period for which the right is likely to be enjoyed. According to the SARS Transfer Duty Guide, the same tables used for estate duty purposes must be used for transfer duty purposes. The guide indicates that the rate of 12% will be used if the rental value is unknown. On a property valued at R100, the transfer duty will be based on R38.57 for a usufructuary aged 90 or older, assuming a yield of 12%.

Under section 2 of the Transfer Duty Act, transfer duty is payable on a sliding scale, ranging between 0% on the first R1 million and 13% on property with a value exceeding R11 million.

Capital gains tax

The sale or donation of the remaining usufruct triggers a disposal under paragraph 11(1)(a) of the Income Tax Act. Since the usufructuary and the bare dominium holder are likely to be connected persons, the proceeds will be equal to the market value of the remaining usufruct under paragraph 38. That market value is

determined under paragraph 31(1)(d) by capitalising the right of enjoyment at 12% a year “over the expectation of life of the person to whom that interest was granted”.

The wording of paragraph 31(1)(d) was probably designed with a full title holder in mind who grants a usufruct. To determine what the full title holder was disposing of, it would be necessary to look at the life expectancy of the usufructuary, because that is the value that the full title holder is disposing of. The wording also covers the situation in which the usufructuary disposes of the remaining right of enjoyment to the bare dominium holder, since the usufructuary is the person to whom the right of enjoyment was granted.

When the usufructuary disposes of the remaining usufruct, this represents the relinquishment of the usufruct, not the granting of the usufruct to the bare dominium holder. It would not make sense to base the market value on the life expectancy of the bare dominium holder, since that does not represent the value of what the usufructuary owns at the time of disposal.

As with donations tax, the Commissioner

can approve a yield of less than 12%.

If the usufruct was acquired before 1 October 2001 (valuation date), the valuation date value of the usufruct could potentially be determined using market value, time-apportionment or 20% of proceeds.

For a usufruct acquired on or after 1 October 2001, the base cost is likely to have been determined under paragraph 38, or if earlier, by using barter or exchange principles.

A portion of the donations tax payable may qualify to be added to the base cost of the usufruct under paragraph 20(1)(c) (vii), using the formula in paragraph 22. The qualifying portion of donations tax will increase the base cost of a pre-valuation date asset when the market value or 20% of proceeds method is used to determine the valuation date value. However, when the time-apportionment method is used, it will result in a lower base cost because the qualifying portion of donations tax comprises post-CGT expenditure, which triggers the proceeds formula in paragraph 30(2). Thus, the higher the post-CGT expenditure, the greater the portion of the overall gain or loss that will comprise a capital gain or loss. It is unfortunate that the fiscus did not treat the donations tax as a selling expense under paragraph 30(5), which would have prevented this problem.

Conclusion

The dutiable value for estate duty purposes of a ceasing usufruct is based on the life expectancy of the person who takes over the right of enjoyment of the property, which can result in a large estate duty liability. By contrast, the method of valuing a usufruct for donations tax, transfer duty and CGT purposes is based on the life expectancy of the usufructuary. It may be more tax efficient to pay donations tax, transfer duty and CGT during the usufructuary’s lifetime than to pay estate duty on a ceasing usufruct on death.

Duncan McAllister is a consultant at Webber Wentzel.

I QUIT! … OR DO I?

Apart from a potentially awkward situation around the water cooler, a recent case before the Labour Court found that, once an employee formally hands in his or her resignation, it is final, even if they have a change of heart.

On 18 March this year, the Labour Court ruled on the case Mohlwaadibona v Dr JS Moroka Municipality.

At the beginning of April 2021, Monareng Jeffrey Mohlwaadibona resigned from the employ of the Dr JS Moroka Municipality in Mpumalanga due to ill-health. A couple of weeks later, on 15 April, he attempted to withdraw his resignation and indicated that he was prepared to resume his duties four days later.

As the municipality had been under administration since January 2020, the appointed administrator, BM Mhlanga, dealt with the matter. He informed Mohlwaadibona that the municipality did not accept the withdrawal, but Mohlwaadibona claimed that he received this communication only on 23 April 2021, after having reported for duty on 19 April, by which time he had already received his April salary.

Despite Mhlanga’s earlier communication to Mohlwaadibona, on 10 May 2021, MF Monkoe, who was the acting municipal manager, advised Mohlwaadibona that he had accepted the withdrawal of his resignation.

The questions before the Labour Court were three-fold:

1. What is the effect of a resignation on the employment relationship?

2. When does a resignation actually take effect?

3. Can a resignation be unilaterally withdrawn and, if not, what would be required to revive the employment relationship?

The court held that resignation is, by definition, a voluntary and unilateral act that puts an end to the employment relationship. Moreover, it takes effect the moment it is communicated to the employer, and it is incapable of being withdrawn unless the employer consents to it. That is true even where an employee is contractually obliged to serve a notice period and fails to honour that obligation.

When he communicated his intention to withdraw the resignation on 15 April, he was, in effect, seeking re-employment. Mhlanga’s communication on 15 April was a sufficient rejection of the applicant’s withdrawal and neither the latter’s decision to report for duty on 19 April nor the payment of his salary on 25 April altered that fact. What is more, because the acting municipal manager had no authority to effect re-employment, the court found his later acceptance of the applicant’s withdrawal to be invalid and of no force and effect.

In essence, the court gave credence to the fact that when an employee voluntarily elects to communicate their intention to terminate the employment relationship, that election cannot be unilaterally withdrawn once it has been communicated to the employer.

Where the employee was bound to serve a notice period, their failure to serve that period will not negate the effect of the resignation, as the employment contract will still have reached an end.

The court indicated that once the resignation has taken effect, the employer’s consent to withdraw it is equivalent to a re-employment or a rehiring of the employee, but it is not tantamount to a reinstatement.

The court maintained that since the applicant had communicated his resignation to his employer on 1 April 2021, the resignation took effect immediately.

The only way to revive the contract of employment would be through a fresh offer and acceptance – which amounts to rehiring or re-employment. This can occur if the employer opts to consent to the withdrawal of a resignation, but the employer’s representative who consents to the withdrawal must be a person authorised to rehire or re-employ; anything to the contrary would be invalid and of no force or effect.

Fiona Leppan is a director, Kgodish Phase an associate and Liso Zenani a candidate attorney at the employment law practice at Cliffe Dekker Hofmeyr.

A recent court case has cleared up whether you can change your mind after quitting your job. This report by Fiona Leppan, Kgodish Phase

and

Liso Zenani.

LESSONS LEARNED FROM RENOVATING MY HOME

Ican still remember the first time I saw the apartment that would eventually become my home. It was cluttered with old furniture that was badly arranged to such an extent that even the rental agent showing me the place didn’t try that hard to sell it as appealing. But I was fresh out of university and didn’t have the luxury of taking my time to find somewhere to live before starting my first job. And so, after viewing a few other places that turned out to be even worse, I took the plunge and signed a lease.

Thirteen years later and I was still living in the same spot, albeit now as an owner and not as a tenant, having purchased the property when the price was reasonable enough for me to do so. By now I’d come to

realise that perhaps it was time to move on and start a new chapter in my life. And so, while I was planning my move to Spain on a one-year residence visa, I was also making plans to renovate the apartment during my absence.

Here are some of the key lessons I learned from the process that you can apply to your own construction project or other aspect of your personal and financial life.

1 .H ire the right person

When I first started searching for contractors to handle the job, I sent out emails to several different interior designers and architectural firms. Many didn’t bother to respond or else insisted that I pay a hefty fee before they’d even hear me out.

But I found something different from one Cape Town-based company that handles corporate, retail, and residential property. Not only were they happy to meet me and put together a detailed renovation plan without charging me upfront, but they were also patient enough to handle what eventually turned into a delay of a few years before the timing made sense to proceed. Indeed, the realisation that you should only work with experts who have your best interests at heart applies to all aspects of your financial planning too, from insurance to investments and beyond.

2 .K now your goal

Initially, my intention was to renovate the apartment in such a way that it would go

Eugene Yiga reflects on how the principles he followed when renovating his apartment apply to managing our finances, among other things.

from being an open-plan studio apartment into a one-bedroom flat that I would move back into. That’s why many of our initial decisions focused on what specific aspects I would find most appealing and how best to design the space in a way that I would be happy to call it my home. But then I realised that it made more sense for me to convert the space into a rental property that would become a home for someone else.

Changing my focus in this way meant that the goal was now to create the kind of place that didn’t have specific design elements that would appeal to me personally but would instead appeal to a broader audience of potential tenants.

It also made me realise how important it is to consider your specific objectives when it comes to making financial decisions. It’s easy to assume that you can simply stick to standard “off the shelf” products that will meet all your financial needs, but it’s much

more effective to be clear about what those needs are in the first place. The last thing you want is to find yourself choosing things that don’t make sense for your life.

3 .R elinquish control

Given that I was going to be on the other side of the world while the renovation was happening, it was clear that I was going to have to delegate. Fortunately, the design company acted as my single point of contact and took care of all the logistical aspects, including dealing with the subcontractors, movers, and the like. They were also happy to handle specific decisions when it came to things like appliances and finishes, simply because those weren’t a priority for me. Of course, if the renovation had been for the original purpose of creating a place that I would later call home, I would have micromanaged to the nth degree and certainly wouldn’t have tried to manage

the project from another country. But since this was about creating an apartment for someone else, I was happy to let the experts do their thing.

Again, this is something that applies to financial planning (and to life in general). Depending on your personality type, it might be hard to give other people the space and freedom to get on with their work. Indeed, you might be the kind of person (yes, I’m pointing a finger at myself) who likes to specify things in the most intricate detail in the forms of spreadsheets, emails, and more. But at some point you just have to trust that other people know what they’re doing and are capable of handling things for you so that you can focus on the things that matter to you. Sure, it’s possible that things won’t go 100% according to plan, but that doesn’t mean that they can’t still work out better than you expected. You just have to take the plunge and see.

Pictures kindly supplied by Urban Spaces Interior Design, Cape Town

WHAT PARENTS SHOULD KNOW ABOUT TESTAMENTARY TRUSTS

Quite often parents with minor dependents bequeath their assets at death to a trust drafted in their last will and testament, known as a testamentary trust. Several advantages make a very compelling argument to justify this concept, among them the following:

• The trust is only registered at the office of the Master of the High Court after the date of death which means the testator doesn't initially incur any registration cost as in the case of inter vivos trusts. The only fee payable before the date of death is for the drafting of the will.

• With the trust only being registered after death, no ongoing accounting, banking and independent trustee fees are incurred.

However, the current environment has brought about some risks that you need to be aware of if this is an instrument that you have or are considering using in your will.

The principle is sound, although the practical execution may leave your dependents high and dry during a time when they may be most vulnerable. To give context, it is important to first understand the process.

An executor is nominated in the will of the deceased to act at the time of death. This executor then approaches the office of the Master of the High Court to be formally

appointed. This appointment process in the current environment can take anywhere between one and six months.

Once the executor is appointed and the will is accepted by the Master, a certified copy of that will is then used to register the testamentary trust. The will is noted as the deed of the testamentary trust. The Master then issues a Letter of Authority formally appointing the trustees to manage the trust for the benefit of the beneficiaries. This process could take a further four months. The process is also dependent on all the relevant parties being available to provide the necessary information to facilitate this registration.

Only after the trustees have been authorised (and the liquidation and distribution account in the deceased estate is approved by the Master for distribution) can any transfers to the trustees of the testamentary trust take place to be used for the benefit of the beneficiaries. If any policies or living annuities are bequeathed to the testamentary trust, then the dependents will surely be left to their own financial means while this process is concluded.

Other important factors that are often missed are clauses that allow for testamentary trusts to be amended, as

well as clauses that exempt trustees from having to furnish security to act as such. Both could have adverse impacts on the trustees’ ability to act as trustees and to manage the trust for the benefit of the beneficiaries.

Even so, in many cases the use of a testamentary trust may still make sense. I would encourage you to consult a professional to consider the above, and if using a testamentary trust still makes sense to you, to make sure enough capital or life cover is available to provide for your financial dependents while the structure is being put in place.

An option to consider instead of a testamentary trust is to create an inter vivos trust and to bequeath assets to this trust to be used exclusively according to your wishes in your will. This may have more of an upfront cost, with a minimal annual fee if structured correctly – a small price to pay for more control and an estate much easier and faster to wind up.

Theoniel

McDonald

points out that your children could be in for a long wait for benefits if they are dependent on the establishment of a testamentary trust on your death.

Theoniel McDonald is a Certified Financial Planner who is managing director of Wealth Associates Central, strategic marketing director of Wealth Associates South Africa, and vice-president of the Financial Intermediary Association (FIA).

COURTS PROVIDE CLARITY ON FICA

A recent Supreme Court ruling has clarified the duties of an accountable institution under the Financial Intelligence Centre Act in a case of a bank customer wishing to close its account, report Kent Davis Lerato Lamola-Oguntoye and Simphiwe Magazi

The Supreme Court of Appeal (SCA) recently handed down a decision on the interpretation of the Financial Intelligence Centre Act (FICA), in the case Nedbank Limited v Houtbosplaas (Pty) Ltd and Another (19 May 2022) on the right of a bank customer to summarily terminate its customer and banker contractual relationship and close its account.

The SCA interpreted section 21 of FICA and the now-deleted regulation 7 of the Money Laundering and Terrorist Financing Control Regulations.

A brief summary of the facts are that Houtbosplaas and TBS Alpha, both limited liability private companies, were clients of Nedbank. Retired Judge Kees van Dijkhorst is and has been the sole director of Houtbosplaas and TBS Alpha since their incorporation. Van Dijkhorst holds one preference share in each of

the companies. In addition, four trusts each hold one preference share and ordinary shares in the two companies. Van Dijkhorst is the sole trustee of the four trusts and represents them – and himself – at shareholders' meetings of the companies.

In 2016 Nedbank requested Van Dijkhorst to provide certain information about the companies, ostensibly pursuant to the provisions of FICA. Nedbank requested copies of the trust deeds of the four trusts, together with copies of the letters issued by the Master of the High Court appointing Van Dijkhorst as the sole trustee of the four trusts. Nedbank was provided with three of the four trust deeds. Van Dijkhorst declined to provide a copy of the outstanding trust deed, asserting that Nedbank's request constituted an unjustifiable intrusion into the trusts' right to privacy.

Nedbank based its request on its opinion that each of the four trusts held 25% of the issued shares in the two companies. It said the companies were obliged under FICA to provide the requested documentation. However, the two companies insisted that each one of the trusts held less than 25% of the issued shares in the two companies and, more specifically, each held 22% of the issued shares. The trusts said they were not Nedbank's clients and were consequently under no statutory obligation to provide the trust documents required by Nedbank.

There was an impasse. On 20 January 2017, Van Dijkhorst, acting on behalf of the companies, gave written notice to Nedbank to close the companies' bank accounts and transfer all funds held in those accounts to Absa Bank to be credited to various accounts. On 8 February 2017, Nedbank responded that it would not comply with the request to close the accounts and transfer the funds to Absa Bank because the companies had failed to comply with Nedbank's request. As a result, the accounts were restricted in accordance with FICA.

On 7 June 2017, the trustee provided the final outstanding trust deed for the fourth trust to Nedbank. On the same day Nedbank finally closed the companies' accounts and transferred all the funds held in those accounts to Absa Bank.

In October 2017 the companies instituted motion proceedings against Nedbank for mora interest (interest owing when a payment is not made timeously).

The two companies were granted relief in the High Court. The High Court held that Nedbank was not justified in law to require a copy of the outstanding trust deed because none of the trusts, including the outstanding trust in particular, exercised 25% of the voting rights at the companies' general meetings. Further, the High Court held that nowhere does FICA require bank clients to provide verification documents to a bank when requested to do so.

Nedbank’s appeal

Nedbank's basis for appeal was based on two arguments. Its first argument was that the four trusts would be able to exercise

25% of the voting rights. It argued that the High Court erred because it overlooked the terms of the memoranda of incorporation (MOI) of the companies concerned. The MOI stated that preference shareholders were not eligible to vote in relation to certain matters at general meetings of the companies. The second argument was that the High Court was guided by the amended version of section 21(2) of FICA that was not applicable, ignoring the preamended version that was in operation at the relevant time.

The SCA examined an accountable institution’s obligations under FICA and the associated regulations. In particular, it examined Regulation 7, which details the information that should be submitted by companies to accountable institutions. Regulation 7 reads: “An accountable institution must obtain from the natural person acting or purporting to act on behalf of a close corporation or South African company with which it is establishing a business relationship or concluding a single transaction in the case of a company, the full names, date of birth and identity number concerning the manager of the company; and each natural person who purports to be authorised to establish a business relationship or to enter into a transaction with the accountable institution on behalf of the company; and the full names, date of birth, identity number concerning the natural or legal person, partnership or trust holding 25% or more of the voting rights at a general meeting of the company concerned.”

The SCA noted that an accountable institution is authorised and obliged to obtain certain information from the natural person acting or purporting to act, inter alia, on behalf of a South African company – in this instance Houtbosplaas and TBS Alpha – with which the accountable institution is establishing a business relationship or concluding a single transaction. It was common cause between the parties that the the trusts were not Nedbank clients as they did not have bank accounts with Nedbank.

Regulation 7(f)(ii) sets out the information that should be submitted by a company. For the provisions of regulation

7(f)(ii) to be triggered, the trust involved must “hold 25% or more of the voting rights at a general meeting of the company concerned, but not otherwise”.

The SCA found that section 21(2) of FICA presents no controversy. It is clear and unambiguous. Section 21(2) of FICA, before it was amended, read as follows: “If an accountable institution had established a business relationship with a client before the Act took effect, the accountable institution may not conclude a transaction in the course of that business relationship, unless the accountable institution has taken the prescribed steps to establish and verify the identity of the client.”

The SCA noted two elements in section 21(2) were relevant. First, it applies to current bank clients who had already formed a business relationship with the accountable institution, such as the two businesses in this case. Second, an accountable institution “may not finalise a transaction in the course of that business relationship … unless the institution has taken procedures ... to establish and verify the identification of the customer,” among other things.

The SCA held that the most important requirement of section 21(2) relates to the conclusion of a transaction with a client – whether it is a single transaction or one that occurs during the course of a business relationship between an accountable institution and a client.

The SCA noted that Nedbank is required to comply with FICA's requirements at the beginning of the relationship before concluding any future transaction. There would be no need for Nedbank to verify the companies in respect of every transaction to be completed within the parties' existing business relationship once this had occurred. Therefore, on the facts of this case, section 21(2), properly construed in line with its apparent objective, did not apply when Nedbank attempted to invoke it.

Petse DP ruled that the provisions of the relevant sub-paragraph of the MOI of the two companies were clear and unambiguous. It stated that preference shareholders have every right to vote at general meetings of the companies

concerned – just like ordinary shareholders – on any matters within the normal scope of the powers of the companies. The SCA found that the voting rights of the trusts fell below the prescribed threshold and in actual fact constituted 22%. Therefore, regulation 7(f)(ii) was not triggered.

The first part of Regulation 7 states that it only applies when an accountable institution is “forming a business relationship or concluding a single transaction”. It is undeniable that when FICA was implemented on February 1, 2002, both corporations had long since established business agreements with Nedbank. Consequently, regulation 7(f)(ii) is not applicable where (as in this case) a business relationship existed prior to the implementation of FICA. The SCA found Nedbank's reliance on Regulation 7(f)(ii) to be erroneous.

In light of the SCA's conclusion regarding the interpretation of the MOI and the text of Regulation 7, it declined to consider the issue of whether closing a bank account constitutes “a single transaction” as contemplated in section 21(1) of FICA.

The SCA found that Nedbank was not legally justified in restricting access to the bank accounts and refusing to give effect to its client’s instructions to close the relevant bank accounts.

The SCA dismissed the appeal with costs. It should be noted that the regulations promulgated under FICA were amended in 2017 by Government Notice R1595 in Government Gazette 24176. The current version of the regulations does not contain Regulation 7. Regulation 7 was deleted in its entirety. According to the amended regulations, if an accountable institution cannot obtain information on beneficial ownership of a client who is a juristic entity, this does not necessarily entitle the accountable institution to terminate the business relationship. FICA obligates accountable institutions to adopt a riskbased approach when complying with its obligations under the legislation.

Kent Davis is a partner, Lerato LamolaOguntoye a consultant, and Simphiwe Magazi a candidate attorney at Webber Wentzel

ARE WE PAYING TOO MUCH FOR GROUP INSURANCE?

Viresh Maharaj, executive for strategy and customer experience at Alexforbes, argues that now that the dangers posed by Covid-19 have essentially passed, insurers should review their group risk premiums – downwards.

The Covid-19 pandemic caused substantial social, personal and economic struggles across South Africa, with the long-term effects of the loss of lives and livelihoods still being felt. In the desperate times of the cascading waves of Covid-19, South Africa’s life insurers, and especially group insurers of employeebased schemes, played a critical role in ensuring financial inclusivity by providing

insurance coverage to claimants. Such group policies provided financial assistance to thousands of families who suffered the loss of their loved ones during the pandemic. Group insurers mobilised to remain operational without any substantial disruption as they switched to serving clients under work-from-home constraints. Record levels of claims were processed and claims were paid. South Africa must

recognise the role that these insurers played in ensuring financial resilience and stability through the pandemic for the funds, employers and members they serve. But, there have been unintended consequences.

Premiums increased dramatically

Group insurers rapidly adjusted their pricing formulae to allow for the incredible

uncertainty delivered by the anticipated and experienced record levels of claims. Insurance prices increased with most (if not all) group schemes now paying substantially more for their cover than they did before the pandemic … some are paying more than double!

This made sense when the likely future experience was unknown and claims were escalating at never-seen-before rates. Benefit consultants such as Alexforbes –and the industry at large – understood the need for the increases and supported their implementation to protect the interests of the millions of members who depend on the group insurers for protection.

Death claims have now declined

The Association for Savings and Investment South Africa released a media statement on 28 July indicating that the claims levels under the fourth wave have reduced to near pre-pandemic levels. Weekly death statistics from the Medical Research Council also show that the mortality rate in South Africa during the fifth wave during 2022 was close to the “normal” range. For individuals younger than 60 years (the vast majority of members covered by group insurance), mortality was in the “normal” range even during the fourth wave at the end of 2021. Yet, group insurers have been reluctant to review their pricing, despite the:

• Higher certainty on the impact of the pandemic;

• Widespread availability of effective vaccines; and

• Substantially reduced lockdown requirements that signal a return to normal.

Covid-level pricing no longer justified

There remains necessary conservatism on potential future mutations of the virus that require mitigation through pricing. However, prices remain seemingly excessively elevated, as they reflect pandemic expectations of death claims to

surface, but the actual claims have greatly reduced. Group insurance is typically renewable annually, so prices are set primarily with a one-year horizon in mind.

Interestingly, insurers have not adjusted pricing for annuity rates when providing longevity protection, with the general view that the mortality experience will return to the “normal” long-term trajectory. And annuity rates apply to the age group that are most at risk in respect of Covid. So why has the same approach not been taken for group risk rates?

Insurers also seem to be applying substantial weighting to the elevated pandemic claims experience to price cover for the year ahead, which may unduly prejudice paying customers by being unnecessarily cautious. If so, the insurers will benefit from massively increased profits as a result of Covid-level pricing that may no longer be relevant to the detriment of their paying customers.

This matters because, for most members, every rand spent on group insurance is a rand less invested for their long-term retirement aspirations. Therefore it is absolutely critical that group insurance be priced both sustainably and competitively so that members can receive fairly priced insurance coverage and optimise their retirement savings.

Most umbrella funds have insurers as sponsors

Standalone retirement funds have rapidly consolidated into commercial umbrella funds for most of the past decade. Four of the five largest commercial umbrella funds have insurers as sponsors. They can apply substantial influence at board level to drive business towards their own insurance companies either by limiting the number of insurers available through their umbrella funds or implementing structures to dissuade placement at other insurers.

Consequently, employers and members in such commercial umbrella funds may find limited appetite and ability for these

umbrella funds to lower group prices. This is exacerbated when in-house benefit consultants are the primary engagement for employers in these funds. While often positioned as independent, in-house consultants invariably place most of their clients' group insurance benefits with their parent insurance company, creating an additional barrier to the remediation of prices. There are also other forms of lockins with other providers, where insurance premiums and benefits are linked to rewards programmes.

The importance of being independent

Funds and employers should be proactively reviewing their premiums across the broadest range of insurers to ensure that the pricing is fair, competitive and sustainable.

Alexforbes is the most significant benefit consultant in South Africa, serving funds, employers and members. It is also the only large commercial umbrella fund not beholden to an insurance company as its sponsor.

As we are independent of all insurers, we have the mandate and ability to act exclusively in the interests of our clients to ensure that their needs are met. We actively review all insurance policies held by our clients, test the market regularly to drive down the costs of insurance and partner with insurers who share our view that pricing needs to be sensible. Our scale means we can deliver real impact to the lives of members by working with insurers to reduce their prices.

We supported the need for the extraordinary increases applied by insurers over the past 18 months and assured our clients that insurers were pricing based on the expected mortality experience into the future. However, there is sufficient information and experience now for insurers once again to act in an extraordinary manner, this time by implementing extraordinary decreases for the members of retirement funds.

Financial freedom can have a different meaning for everyone. It may seem like a destination; instead, it can be integrated into your lifestyle as a daily process. For me, it gives me confidence knowing that I am taking ownership of my financial affairs and, even more importantly, my life.

This freedom allows me to do what matters most, when I want, how I want and with whom I want, and as much as I want. It puts you in a position of being financially secure so that you can live and enjoy your life without constantly worrying about financial matters. You may consider financial freedom to be a salary paying career that excites you when you wake up, or paying off all your debt, or an annual trip overseas, or to retire as early as possible.

To achieve financial freedom, you do not have to be wealthy in possessions or have high net worth. However, you do need to determine what your ideal lifestyle is and to match your financial affairs accordingly.

MILLENNIAL VIEW IS FINANCIAL FREEDOM IMPORTANT TO YOU?

Although achieving financial freedom can be a roller coaster ride, it should not be set up to be a struggle. Despite believing that they can achieve this freedom, most people are not always willing to do the “work”. If you truly desire financial freedom, then taking the necessary steps to achieve this will be easier than you might think. Once you have the foundation in place, all that is left is to maintain the structure going forward without it feeling overwhelming.

Entry-level steps toward achieving financial freedom:

1. Determine what lifestyle you see for yourself and your family. This is a foundational step to knowing what your goals are, because without goals, you cannot maintain direction.

2. Determine the optimal amount to achieve this desired lifestyle. Make sure you consider the costs of

living, emergency funds for unforeseen circumstances and goals. Once you have this number, consider the cash flow that would enable you to achieve this desired lifestyle.

3. Prepare an action plan to get from where you are to where you want to be. This step does not need to be done independently. You can seek counsel on this, whether it’s someone who you see is in this position or a financial coach or planner. You may even consider this being your first step, as a conversation with someone you trust can give you the cues you need to put your plan into motion.

4. Educate yourself on the components that make up your plan. Understanding even just the general outline of your plan will allow you to feel confident and empowered along your journey. Without this, you may feel that you are sitting in the dark and may get anxious and look at your finances too frequently.

5. Review this action plan regularly to maintain the course. If there are four words you should embrace after creating that financial plan, you should look to “save, invest and forget”. “Forgetting” does not mean not reviewing your plan, but rather setting up or even automating the process (such as having debit orders to investment accounts) so that you keep the momentum and stay the course. “Regularly” does not specifically mean daily, monthly, or yearly. It means you should look to review your plan at consistent intervals and, more importantly, at inflection points in your life (such as marriage, having children, changing jobs).

Financial freedom is the result of years of persistence and sensible money management. You can work toward your dream financial future one day at a time by setting financial goals and reinforcing robust spending and saving habits. Put a plan in place to achieve your financial goals, and you will be on the road to financial freedom.

OMBUD CASE FILE

Prescribed debt: ombud warns banks

The law forbidding creditors from collecting on prescribed debts, which falls under the National Credit Act is wellknown, established and adhered to – or so everyone would think. But despite the legal requirements and the protection they offer consumers, Reana Steyn, the Ombudsman for Banking Services, says her office is still receiving complaints from bank customers relating to prescribed debts.

“Unfortunately, in many instances, the protection afforded by the law is beneficial only to consumers who know about the legal principle and know about the ombud’s office. The majority of the public is left paying for debts that have prescribed and are therefore legally no longer collectable by creditors,” says Steyn.

The Prescription Act, read with Section 126B of the National Credit Act, stipulates that a debtor’s liability to pay a specific debt to a creditor is extinguished as a result of the passing of a prescribed time period. “Generally, contractual and civil debts will be extinguished if not paid or acknowledged as being owed to the creditor by the debtor for a period of three years from the date when the payment was due,” says Steyn.

There are exceptions, where the prescription period is longer. A claim for debt based on a court judgment, as well

as claims for debts secured by mortgage bonds, only prescribe after 30 years, not three years.

The running of prescription is interrupted if, during the three years, the following happened:

•The debtor admitted, verbally or in writing, to owing the debt;

•The debtor made a payment towards the debt; or

•The creditor issued and served a summons on the debtor.

The law prohibits creditors from collecting or selling a debt that has prescribed. “Therefore, debtors do not have to be aware of this law and they do not have to raise the defence of prescription in order to be absolved from paying these debts,” says Steyn.

She says that, between January 2021 and July 2022, her office received and investigated 193 complaints relating to allegations of collections on prescribed debts by banks. More than R1 million was written off or repaid to complainants.

In 2021, the office received 118 complaints. In about 33% of these cases, the banks in question were found to have been unlawfully collecting or attempting to collect on prescribed debts. In 2022 the office had received 75 complaints by July. In 29% of these cases, banks were again found to have transgressed the law.

Personal loan

Mr X obtained a personal loan with his bank for the amount of R74 687. The funds were paid into his account on 8 December 2016. Sporadic payments were received by the bank until 4 January 2019 when the last payment was received.

In March 2022, Mr X lodged a complaint with the OBS alleging that the account in question had prescribed, as he had not made payments for more than three years. He had not acknowledged the debt nor had he received a summons from the bank.

In a response dated May 2022, the bank submitted that the debt had not prescribed, as the payment made on 4 January 2019 had interrupted the prescription. Further, the bank advised that, in a call made to Mr X by its collection attorneys, Mr X acknowledged the debt. The bank also advised that a summons had been issued and served on Mr X on 4 February 2022.

On investigation, the ombud found that the outstanding balance was R112 495. The ombud studied the loan account statements, the summons, and listened to the call recording. The office

The following case studies demonstrate the typical prescription disputes successfully resolved by the Ombudsman for Banking Services.

found that the debt in question had legally prescribed since the last payment on 4 January 2019 – no other payments had been received. The summons served on Mr X on 4 February 2022 fell outside the three-year prescription period. Lastly, on listening to the call recording, it was clear to the ombud that Mr X had not acknowledged the debt.

The ombud recommended that the bank write off the entire debt and the bank agreed. Mr X was issued with a paidup letter and his credit profile updated accordingly.

Revolving credit

In 2013 Mrs J obtained a revolving credit account from a major bank to the value of R110 000. Payments were received by the bank until Mrs J became unemployed in 2014 and could no longer make payments. Mrs J advised that, for seven years, she had been receiving communication from the bank’s lawyers requesting her to pay the debt.

Mrs J complained to the ombud that the bank had, for all these years, kept the account open and that the outstanding balance had increased to over R500 000. It was her submission that the bank was guilty of reckless lending and requested the ombud to assist her.

In response to Mrs J’s allegations, the

bank said the revolving credit account was issued to the complainant subject to the affordability requirements as set out in the National Credit Act. The bank submitted that, at the time the credit was given to Mrs J, she could afford to make the required contractual repayments. Regarding the outstanding balance, and out of its own accord, the bank noticed that there was an issue. An account reconciliation was conducted by the bank, which resulted in the amount of R318 664 being written off by the bank. This reduced the outstanding balance from R542 067 to R223 403 The bank considered this fair given Mrs J’s circumstances.

However, on investigation, it was noted that Mrs J had, in fact, made her last payment on 30 June 2014. The investigation further concluded that, between 30 June 2014 and 29 May 2017, Mrs J had never acknowledged owing the debt to the bank, nor did she receive a summons, which would have interrupted prescription. The ombud concluded that the R223 403 debt demanded by the bank had prescribed and successfully recommended that the bank write off the debt and update Mrs J’s credit profile.

Credit card account

In May 2016, Mr D opened a credit card

account with a bank. He received a credit limit of R25 000. He transacted with the card and the transactions amounted to R26 305. Sporadic payments were received by the bank. Due to defaults, the bank handed the account over to its attorneys for collection. In November 2016, Mr D signed a Section 58 Consent to Judgment. The last payment on the account was received by the bank in August 2017.

On 1 March 2021, the Consent to Judgment was made an order of the court for an amount of R29 222. From August 2021, Mr D resumed making payments.

On investigating, the ombud found that the Consent to Judgment that was signed by Mr D in November 2016 –together with the payment that was received in August 2017 – constituted an acknowledgment by Mr D. However, since Mr D had not made payments, nor verbally in writing acknowledged the debt, the ombud found that the debt had prescribed in August 2020.

A recommendation was made that the bank apply to rescind the court judgment obtained in March 2021 as well as refund all the payments Mr D made after August 2020. The bank agreed. Over R26 000 was written off, and the bank refunded a further R3 000 to Mr D.

GRYPHON FLEXIBLE FUND

Gryphon Asset Management is a boutique manager based in Bellville, Western Cape. It offers six unit trust funds, including its Flexible Fund in the South African multi-asset flexible category. This fund was the top performer in its category over five years to the end of June 2022, delivering an annualised 11.10% a year, at far lower risk than its peers, which averaged 6.36%, according to ProfileData. It returned a healthy 5.37% in the 2nd quarter 2022, while its peer group delivered minus 5.37%.

Personal Finance put the following questions to the fund’s managers, Abrie du Plessis and Reuben Beelders:

The fund currently has no exposure to equities, nor to bonds, but is fully exposed to offshore and local cash. Can you explain your philosophy for the fund regarding asset allocation?

The Gryphon investment philosophy purports that, in an efficient market like ours, as well as in large portfolios, it is easier, more reliable and more consistent to add value through asset allocation than by stock selection.

Historically, equities has been the asset class of choice, the class most likely to deliver inflation-beating returns. That said, there is a time to protect capital, to be out of equities, either in cash or other safehaven assets, until it is time to get back into the market. We are agnostic as to a preferred asset class and believe that there is a time for each. This is a major: contributing factor to our respectable

risk-adjusted returns.

Our asset allocation is informed by a series of historic, data-based indicators that identify the various economic, business and investment cycles. Distinction is made between primary and secondary cycles; we’ve learned that it is possible to call the primary market cycles reasonably consistently. Although it may also be possible to read the secondary market cycles, we have not yet been able to identify reliable factors that consistently predict secondary cycles accurately; they tend to be driven by shorter-term sentimental factors.

We believe in committing fully to whichever asset class offers most relative value; this means we will either be 100% exposed to equities or hold no equities at all. When our indicators signal value in the market (in other words, a bull market), we will be 100% invested in equities. If, however, our indicators signal a need for caution, we protect investors’ capital and hold zero equities.

Can you give some details as to the nature of the cash instruments you hold and how you expect them to hold up against rising inflation?

Investing in cash is not a passive, anaemic abdication of investment responsibility; it is a position held with consciousness and constant vigilance and must be secure and liquid. Our cash is held in reputable money market unit trust funds that are constantly monitored by our credit committee.

Cash provides investors with capital protection. We remain mindful that cash

returns are vulnerable to inflation and where inflation exceeds yields on cash, investors are not preserving their real net asset value. However, in our experience, drawdowns in risk-assets are generally more destructive than high inflation and tend to occur over short periods of time.

Since moving out of equities in August 2018, our funds have delivered a compound annual average growth rate of 10%, which exceeds the return of any underlying local asset class and inflation.

Cash is, therefore, the point of departure. If, for example, cash is yielding 6%, the question we ask is, “Will bonds deliver more than 6% or will equities deliver more than 6% on a risk-adjusted basis?” Both bonds

Reuben Beelders

Abrie du Plessis

PERFORMANCE SINCE INCEPTION TO JUNE 30, 2022

 A - Grvphon - Flexible B TR in ZA 11 09.34 %1

 B - All Bond GTR in ZA (183.91 %)

 C - FTSE/JSE All Share GTR in ZA (179.05%)

 D - SA Ml South African Multi Asset Flexible TR in ZA (150.51 %)

and equities are what we consider “risk-assets” in that they can experience drawdowns. Given current prices and uncertainties, these “risk-assets” are more likely to suffer drawdowns than cash and, as mentioned previously, these drawdowns will be more damaging than inflation.

While investing in international cash has not earned investors much yield over the recent past, it has allowed them to benefit from a decline in the value of the rand. We do not see the rand as a “one-way bet” and believe its performance correlates to the global commodity cycle. As such, when we see strength in this cycle, our exposure will generally be to local equities; weakness in the global commodity cycle provides the opportunity to maximise our offshore cash exposure. While in the past our offshore cash exposure has predominantly been to US dollars, the significant quantitative easing embarked upon by the US Federal Reserve inspired the decision to diversify this exposure and to include Swiss Francs.

The equity markets have seen fairly spectacular drops/corrections over the last quarter. Is there an argument for now turning to equities (or bonds?) that are starting to show good value? If not now, what would provide the signal for you to make the switch?

Simply speaking, currently our indicators still predominantly point to “risk-off”. It looks like global growth is under pressure and indications are that a global recession is very likely. If that is indeed the case, it’s likely that growth will disappoint to the downside and risk assets will remain under pressure.

The “spectacular” declines observed over the past quarter have generally been in the technology sector of the market. We do not believe that these stocks offer compelling value even at current prices. Similarly, non-technology stocks have not yet corrected to the levels that offer sustainably attractive returns to investors.

Since the Great Financial Crisis of 2008, global central bankers have flooded global markets with cash (through quantitative easing) as a means of preventing the

collapse of the financial system. This cash has found its way into the prices of financial assets: stocks and bonds.

Quantitative easing also resulted in bond yields declining to unprecedented levels. This had two very positive impacts on company valuations:

1. Interest costs reduced, as companies could borrow at far lower rates of interest, and

2. Investors could discount future cash flows at lower “costs of capital”, allowing valuations to rise far above trend and underlying economic growth.

Quantitative easing has now resulted in inflation, which historically has not been a good thing for the valuation of financial assets. A number of secular developments, such as de-globalisation and onshoring, are likely to result in higher levels of inflation into the future.

While we do not know how these developments will pan out, we are confident that our indicators will signal a return to risk-assets when values are more likely to provide investors with suitable, risk-adjusted returns.

ON THE CONTRARY

MANAGING INVESTMENT RISK DURING A (POLY)CRISIS

Three years ago, most South Africans associated the term “pandemic” with dystopian Hollywood movies. It has since become a household term, and while we are still shrugging off its devastating effects, we have had to learn a new word: polycrisis. Of course it has something to do with several major crises hitting at once. According to the Cascade Institute, you need three or more systemic risks that somehow relate to each other, and which have an irreversible effect on our prospects. That may sound overdramatic, because human nature has a way of rebuilding against all odds. It is too soon to tell whether the impacts of war, a pandemic, rising inflation, a potential recession and global supply issues are permanent, but technicalities aside, it certainly feels like we are in a polycrisis.

Polycrises display a causal synchronisation of risks – the crises start behaving like a system. This is evident now with the impact of the war in Ukraine on inflation, particularly food prices, but affecting wood and other resources too. The conflict-induced supply issues came on top of an already stretched supply situation with many firms having underinvested in capacity for years.

Unfortunately, while markets often over-react during crises, creating attractive opportunities, we cannot see beyond today as we face a very scary immediate future. A long-term approach is inconceivable and we default to believing the future will look the same as yesterday. For a while, we are correct. In 2020, the market started its steep decline in mid-February. One month later it had plummeted by 30%, fueling the recency bias. However, the indices surpassed the pre-March highs before year end.

Much has been written about staying invested for those few recovery days that make such a difference, yet investor behaviour still frequently sabotages well-constructed plans at a time when there are big opportunities for investors who can take a longer-term view.

If investors struggle to stay calm and rational

when dealing with one crisis, it is understandable that the combination of recession fears, inflation, rising interest rates, a war, political uncertainty, an energy crisis and global warming can lead to very poor decision making. However, every crisis brings its opportunity. The optimist says that with a polycrisis you really want to sharpen your efforts to look for these, as irrational price behaviour will be even more prevalent than ever.

Looking at a multi-asset portfolio as an example of how to benefit from both the earnings potential and the valuations currently to be found, there are some opportunities which could assist in putting together an attractive portfolio from a South African viewpoint:

Within the equity portfolio, poor sentiment and recession fears are bound to provide some “quality on sale” – those shares you have wanted to own for a while, but their valuation seemed too expensive. This goes for well-known global names as well as a number of SA Inc shares. Several South African shares are potentially wallowing in troughs as far as sentiment, turnover, margins, earnings and valuations are concerned. Pullbacks can provide even greater entry points.

Real assets (selected resource shares, energy, agriculture, property) can benefit from the cocktail of inflation and supply issues, but we have already seen some strong price moves, so discernment is important here.

Within fixed-income assets, despite rising inflation, South African long bond rates still provide a good buffer above inflation and a buy-and-hold position can provide a great portfolio building block.

The common thread in these opportunities is the entry price or yield. Overpaying for assets is, in our view, one of the greatest risks investors face. That is where crises can provide the prospect of lowering your investment risk in what feels like a high-risk environment by taking advantage of market reaction and volatility to buy at attractive long-term levels.

ANET AHERN

Anet Ahern is the CEO of PSG Asset Management.

DATABANK

WHERE TO GET HELP

With BANKING problems:

The Ombudsman for Banking Services is Reana Steyn.

ShareCall: 0860 800 900 or Telephone: 011 712 1800

Fax: 011 483 3212

Post: PO Box 87056, Houghton, 2041

Email: info@obssa.co.za

Website: www.obssa.co.za

With COMMUNITY-SCHEME-RELATED problems: The Community Schemes Ombud Service is a statutory dispute-resolution service for owners and residents of community schemes, including sectional-title schemes share-block companies, homeowners’ associations and schemes for retired persons. The Chief Ombud is Advocate Boyce Mkhize.

Telephone: 010 593 0533

Fax: 010 590 6154

Post: 63 Wierda Road East, Wierda Valley, Sandton, 2196

Email: info@csos.org.za

Website: www.csos.org.za

With CONSUMER-RELATED problems: The National Consumer Commissioner is Ebrahim Mohamed.

Toll-free: 0860 003 600

Telephone: (complaints) 012 428 7000 or (switchboard) 012 428 7726

Fax: 086 758 4990

Post: PO Box 36628, Menlo Park, 0102

Email: complaints@thencc.org.za

Website: www.thencc.gov.za

The Consumer Goods and Services Ombud is Magauta Mphahlele. This is a voluntary dispute-resolution scheme that only has jurisdiction over retailers, wholesalers and manufacturers that subscribe to the Consumer Goods and Services Industry Code of Conduct.

ShareCall: 0860 000 272

Fax: 086 206 1999

Post: PO Box 3815, Randburg, 2125

Email: info@cgso.org.za

Website: www.cgso.org.za

With CREDIT TRANSACTION problems: The Credit Ombud is Howard Gabriels.

MaxiCall: 0861 662 837

Telephone: 011 781 6431

Fax: 086 674 7414

Post: PO Box 805, Pinegowrie, 2123

Email: ombud@creditombud.org.za

Website: www.creditombud.org.za

With DEBT COUNSELLING problems: The National Credit Regulator also deals with disputes that are not resolved by the Credit Ombud. The Chief Executive Officer is Nomsa Motshegare.

ShareCall: 0860 627 627

Telephone: 011 554 2600

Fax: 011 554 2871

Post: PO Box 209, Halfway House, 1685

Email: complaints@ncr.org.za or (debt counselling complaints) dccomplaints@ncr.org.za

Website: www.ncr.org.za

With FIDUCIARY problems: The Fiduciary Institute of Southern Africa (FISA) is a selfregulating body in fiduciary matters such as wills, trusts and estate planning.

Telephone: 082 449 2569

Post: PO Box 67027, Bryanston, 2021

Email: secretariat@fisa.net.za

Website: www.fisa.net.za

With FINANCIAL ADVICE problems:

The Ombud for Financial Services Providers is Nonku Tshombe.

Telephone: 012 470 9080 or 012 762 5000

Fax: 086 764 1422, 012 348 3447 or 012 470 9097

Post: PO Box 74571, Lynnwood Ridge, 0040

Email: info@faisombud.co.za

Website: www.faisombud.co.za

With INVESTMENT problems:

The Financial Sector Conduct Authority, which is headed by Dube Tshidi, regulates the financial services industry.

ShareCall: 0800 110 443 or 0800 202 087

Telephone: 012 428 8000

Fax: 012 346 6941

Post: PO Box 35655, Menlo Park, 0102

Email: info@fsb.co.za

Website: www.fsb.co.za

With LIFE ASSURANCE problems:

The Ombudsman for Long-term Insurance is Judge Ron McLaren.

ShareCall: 0860 103 236 or Telephone: 021 657 5000

Fax: 021 674 0951

Post: Private Bag X45, Claremont, 7735

Email: info@ombud.co.za

Website: www.ombud.co.za

With MEDICAL SCHEME problems:

The Council for Medical Schemes is a statutory body that supervises medical schemes. The Registrar of Medical Schemes is Dr Sipho Kabane.

MaxiCall: 0861 123 267

Fax: (enquiries) 012 430 7644 or (complaints) 086 673 2466

Post: Private Bag X34, Hatfield, 0028

Email: complaints@medicalschemes.com or information@medicalschemes.com

Website: www.medicalschemes.com

With MOTOR VEHICLE problems:

The Motor Industry Ombudsman of South Africa is an independent institution that resolves disputes between the motor and related industries and their customers. The Ombudsman is Johan van Vreden.

MaxiCall: 0861 164 672

Fax: 086 630 6141

Post: Suite 156, Private Bag X025, Lynnwood Ridge, 0040

Email: info@miosa.co.za

Website: www.miosa.co.za

With RETIREMENT FUND problems:

The Pension Funds Adjudicator is Muvhango Lukhaimane.

ShareCall: 0860 662 837

Telephone: 012 748 4000 or 012 346 1738

Fax: 086 693 7472

Post: PO Box 580. Menlyn, 0063

Email: enquiries@pfa.org.za

Website: www.pfa.org.za

With SHORT-TERM INSURANCE problems: The Ombudsman for Short-term Insurance is Judge Ron McLaren.

ShareCall: 0860 726 890 or Telephone: 011 726 8900

Fax: 011 726 5501

Post: PO Box 32334, Braamfontein, 2017

Email: info@osti.co.za

Website: www.osti.co.za

With TAX problems: The Tax Ombud is Judge Bernard Ngoepe.

ShareCall: 0800 662 837 or Telephone: 012 431 9105

Fax: 012 452 5013

Post: PO Box 12314, Hatfield, 0028

Email: complaints@taxombud.gov.za

Website: www.taxombud.gov.za

PLEXCROWN RANKING OF MANAGEMENT COMPANIES

PERFORMANCE OF DOMESTIC SUB-CATEGORIES TO 30 JUNE 2022

WHAT DO THE PLEXCROWN

The last column in the collective investment scheme performance tables on pages 50 to 61 shows the PlexCrown rating of a fund if it qualifies for a rating. The PlexCrown Fund Ratings system encompasses the different quantitative measures used in calculating investment performances in one number and makes it easy for investors to evaluate fund managers on the basis of their long-term risk-adjusted returns.

The PlexCrown Fund Ratings enable investors to know at a glance how a unit trust fund has fared over time on a risk-adjusted return basis, compared with the other funds in its Association for Savings & Investment SA subcategory. Therefore, the ratings assist investors in determining whether or not a fund manager is adding value to their unit trust investments, given the manager’s mandate and the amount of risk he or she is taking.

The PlexCrown Fund Ratings are unbiased and objective because they are based on quantitative measures; no

•

PERFORMANCE OF OFFSHORE SUB-CATEGORIES TO 30 JUNE 2022

PERFORMANCE OF DOMESTIC FUNDS TO 30 JUNE 2022

FUND RATINGS

subjectivity is brought into the research methodology.

In calculating risk-adjusted returns, the methodology accepts that various quantitative formulae each have their unique drawbacks. In order to overcome this, up to five different risk measures are used:

•

• Total risk (Sharpe Ratio);

• Downside risk (Sortino Ratio and Omega Risk/Reward Measure); and

•

• Manager’s skill (Jensen’s Alpha and Treynor).

The research method ensures that the unit trust funds under evaluation are exposed to similar risks; therefore, the subcategories for unclassified funds and money market funds are excluded.

The PlexCrown rating system is a measure of consistency because ratings are done over three and five years and are time weighted, with the emphasis on the longer period of measurement. Funds within a unit trust subcategory are ranked only if there are at least five funds in that subcategory with a

TELL YOU?

track record of at least five years. To qualify for a rating, a fund must have an official track record of at least five years.

Each qualifying unit trust fund is awarded a certain number of PlexCrowns ranging from one to five, with the top-performing funds allocated the highest rating of five.

The PlexCrown ratings distinguish between poor performers and excellent performers, but are based on historical data and should be used only as a first step in the construction of a unit trust portfolio. It remains the responsibility of investors together with their financial advisers, to make sure that the funds they choose suit their risk profiles and that their investment plans include an appropriate level of diversification.

Visit www.plexcrown.com for a full description of the PlexCrown Fund Ratings system.

Information in the above tables was provided by PlexCrown Fund Ratings and ProfileData

COLLECTIVE INVESTMENT SCHEME PERFORMANCE TO 30 JUNE 2022

ABOUT THE LISTINGS

• Results are based on the performance of a lump-sum investment over four periods that ended on 30 JUNE, 2022. In each of the periods, there is a percentage (to two decimal places) by which an investment would have grown or shrunk, and the fund’s position or rank relative to other funds.

• Returns for the three- and five-year periods are annualised (that is, the percentage represents the average performance in a year). As unit trust funds are medium- to long-term investments, the most important performance periods are those of three years or longer.

• INITIAL COSTS have not been taken into account and can have an effect on returns.

• ANNUAL MANAGEMENT FEES are included in the returns.

• DIVIDENDS have been reinvested on the ex-dividend date (the day after they are declared) at the price at which the units are sold to you.

• INDICES normally supplied as benchmarks reflect percentage changes and take into account dividends and interest. In the case of new indices, a history is not yet available.

• The PLEXCROWN RATING indicates how a fund has fared over time compared with the other funds in its subcategory on a risk-adjusted return basis. Turn to page 57 for more information about the ratings.

WHAT DOES THE * INDICATE?

The asterisk (*) before a fund’s name indicates that the fund complies with the investment requirements of Regulation 28 of the Pension Funds Act. Funds suitable for retirement savings must comply with Regulation 28, which lays down guidelines about Inv. in different categories of assets. To reduce the risk and volatility of a fund, the Act restricts exposure to equities to a maximum of 75 percent of the fund and its exposure to property to 25 percent.

HOW FUNDS ARE CLASSIFIED

The Association for Savings & Investment SA’s classification system categorises unit trust funds according to their investment universe: where they invest, what they invest in and their main investment focus.

The first tier of the classification system categorises funds as South African, global, worldwide or regional.

South African funds must invest at least 70 percent of their assets in South African investment markets at all times. They may invest a maximum of 25 percent in foreign markets and a maximum of five percent in African (excluding South African) markets.

Global funds must invest a minimum of 80 percent of their assets outside SA. Worldwide funds do not have any restrictions on where they may invest but they typically allocate between South African and foreign markets in line with the manager’s outlook for local versus foreign assets.

Regional funds must invest at least 80 percent of their assets in a specific geographic region, such as Asia or Africa, excluding South Africa, or a country such as the United States. Regional funds may invest a maximum of 20 percent of their assets in South Africa.

The second tier of the classification system categorises funds according to the asset class in which they predominantly invest. At this level, funds are categorised as equity funds, interest-bearing funds, real estate funds or multi-asset funds.

Equity funds must invest at least 80 percent of the net asset value of a fund.

Interest-bearing funds invest in bonds, fixed interest and money-market instruments.

Real estate funds must invest at least 80 percent of their assets in shares in the real estate sector of the JSE or a similar sector of an international stock exchange. A fund may invest a maximum of 10 percent in property shares that are not classified in the real estate sector.

Multi-asset funds save you the trouble of deciding how to allocate your assets between shares, bonds, property or cash. The managers of multi-asset funds decide, for you, which asset classes they believe will produce the best returns and then, within those classes, which securities will perform the best. Some funds have a fixed allocation to the different asset classes whereas others change the mix of asset classes in line with their views of how the different classes or securities will perform.

MONEY MARKET YIELDS

The third tier of the classification system categorises funds according to their main investment focus.

WHAT DOES THE ‘R’ OR ‘A’ MEAN?

These indicate the annual management fees a unit trust company can charge and depend partly on the class of units you buy.

Before June 1998, the fees charged on funds were regulated with a maximum annual management fee of one percent a year plus VAT. Funds launched before this date have the letter “R” behind the fund name and can only change their fees after a ballot of all unit trust holders. Many unit trust companies have closed their “R” class funds to new investments and launched new fund classes.

Funds and fund classes launched after June 1998 can charge any fees. Typically, fees range from 0.25 percent to 2 percent, excluding VAT. Funds with unregulated fees can be “A”, “B”, “C” or “D” class funds.

Typically, “A” class funds are offered to retail investors while cheaper “B” class funds are for institutional investors who invest in bulk. Only the institutional funds available to you through a linked-investment services provider (Lisp) are published here.

The different classes of a single fund are managed collectively and the difference in performance between them is purely a result of the difference in management fees.

Most recently what are known as all-in-fee classes (“C” or “D” classes) have been introduced. These funds charge a single fee covering the management fee, the broker fee and the administration (or Lisp) fee.

Performance figures supplied by ProfileData

Telephone: 011 728 5510

Email: unittrust@profile.co.za

Website: www.fundsdata.co.za

Disclaimer: Although all reasonable efforts have been made to publish the correct data, neither ProfileData nor Personal Finance can guarantee the accuracy of the information on the unit trust fund performance pages.

WORLDWIDE EQUITY

GLOBAL EQUITY

TAXES AND DEDUCTIONS FOR THE 2022/23 TAX YEAR

INCOME TAX RATES FOR INDIVIDUALS AND SPECIAL TRUSTS*

for the benefit of disabled people and testamentary trusts established for the benefit of minor children. All other trusts pay income tax at a flat rate of 45%.

DEDUCTIONS FOR RETIREMENT FUND CONTRIBUTIONS

Amounts contributed to pension, provident and retirement annuity (RA) funds are deductible by fund members. Amounts contributed by employers and taxed as fringe benefits are treated as contributions by the individual employee. The deduction is limited to 27.5% of the greater of remuneration for PAYE purposes or taxable income (both excluding retirement fund lump sums and severance benefits). The deduction is further limited to the lower of R350 000 or 27.5% of taxable income before the inclusion of a taxable capital gain. Any contributions that exceed the limits are carried forward to the next tax year and deemed to be contributed in that year. The amounts carried forward are reduced by contributions set off when determining taxable retirement fund lump sums or RAs.

DEDUCTIONS FOR MEDICAL AND DISABILITY EXPENSES

All taxpayers: If you contribute to a medical scheme, you are entitled to a tax rebate (referred to as a medical scheme contributions tax credit) of up to R347 each for the individual who paid the contributions and the first dependant on the medical scheme and up to R234 a month for each additional dependant.

Additional tax credit for taxpayers under 65 years: You are entitled to a tax credit of 25% of an amount equal to your qualifying medical expenses plus an amount by which your medical scheme contributions exceed four times the medical scheme contribution tax credit for the tax year, limited to the amount that exceeds 7.5% of taxable income (excluding severance or retirement fund lump sums).

Additional tax credit for taxpayers with a disability and/or with a disabled family member or taxpayers over 65 years: You are entitled to a tax credit of 33.3% of your qualifying medical expenses plus 33.3% of the amount by which your medical scheme contributions exceed three times the medical scheme contribution tax credit for the tax year.

TAX ON LOCAL AND FOREIGN DIVIDENDS

Dividends received by individuals from South African companies are generally exempt from income tax, but dividends tax at a rate of 20% is withheld by the entities paying the dividends to individuals. Dividends received by resident individuals from real estate investment trusts (Reits) are subject to income tax. Non-residents in receipt of those dividends are subject only to dividends tax. Most foreign dividends received by individuals from foreign companies (a shareholding of less than 10% in the foreign company) are taxable at a maximum effective rate of 20%.

CALCULATE REAL AFTER-TAX RETURNS ON INTEREST-BEARING INVESTMENTS

CPI INFLATION RATE: 7.4% IN JUNE 2022

PROVISIONAL TAX

A provisional taxpayer is any person who earns income by way of remuneration from an unregistered employer income that is not remuneration or an allowance or an advance payable by his or her employer. You are exempt from the payment of provisional tax if you do not carry on any business and your taxable income:

• Will not exceed the tax threshold for the tax year; or

• From interest, dividends, foreign dividends and the rental of fixed property and remuneration from an unregistered employer will be R30 000 or less for the tax year.

Deceased estates are not provisional taxpayers.

CAPITAL GAINS TAX

INCLUSION RATES

• Individuals special trusts and individual policyholder funds: 40% • Other taxpayers: 80%

MAXIMUM EFFECTIVE RATES

• Individuals and special trusts: 18%

• Other trusts: 36% • Companies: 22.4%

SOME OF THE EXCLUSIONS

• R2 million gain/loss on disposal of primary residence

• Annual exclusion of R40 000 to individuals and special trusts

• R300 000 in the year of death (instead of the annual exclusion)

• Retirement benefits

• Most personal use assets

• Payments in respect of original long-term insurance policies

• R1.8 million for individuals (at least 55 years of age) when a small business with a market value that does not exceed R10 million is disposed of.

ESTATE DUTY

Rate: 20% on the first R30m; 25% on estates above R30m. Amounts in an estate up to R3.5m are not taxed. For the second-dying spouse, amounts up to R7m less the exemption used by the first-dying spouse are not taxed.

TAX-FREE SAVINGS ACCOUNTS

No income tax on interest, dividends withholding tax or capital gains tax. Contributions are limited to R36 000 a year, up to R500 000 over your lifetime. Contributions that exceed the limits will be taxed at 40%.

DONATIONS TAX

• Donations tax payable by the donor is levied at a rate of 20% on property donated with a value up to R30 million. The rate on property with a value of more than R30 million is 25%.

• The first R100 000 of property donated in each year to a natural person is exempt from donations tax.

The real rate of return on money you invest is affected not only by inflation, but also by the rate at which you are taxed. The lower the inflation rate, the better your real rate of interest is likely to be. To calculate your real return, first work out what your after-tax return will be and then subtract the inflation rate. The table provides the marginal tax brackets and the interest rates at which you will start to receive a real (after-tax) rate of return on your money if it is taxed at that rate. The calculations ignore the fact that in the 2020/21 tax year, the first R23 800 (R34 500 if you are over 65 years of age) you earn in interest is tax-free. Any interest you receive above the exempt amount is taxed at your marginal tax rate.

• Donations between spouses are exempt from donations tax.

• Tax deductions on donations to approved public benefit organisations are limited to 10% of taxable income before deducting medical expenses (excluding retirement fund lump sums and severance benefits).

RETIREMENT FUND LUMP-SUM WITHDRAWAL BENEFITS

LUMP SUM RATE OF TAX

R0 to R25 000 0% of taxable income

R25 001 to R660 000 18% of taxable income above R25 000 R660 001 to R990 000 R114 300 plus 27% of taxable income above R660 000 R990 001 and above R203 400 plus 36% of taxable income above R990 000

Retirement fund lump-sum withdrawal benefits consist of lump sums from a pension, pension preservation provident, provident preservation or retirement annuity fund on withdrawal (including assignment in terms of a divorce order).

The tax on a retirement fund lump-sum withdrawal benefit (X) is equal to:

• The tax determined by applying the tax table to the aggregate of lump sum X plus all other retirement fund lump-sum withdrawal benefits accruing from March 2009, all retirement fund lump-sum benefits accruing from October 2007 and all severance benefits accruing from March 2011; less

• The tax determined by applying the tax table to the aggregate of all retirement fund lump-sum withdrawal benefits accruing before lump-sum X from March 2009, all retirement fund lump-sum benefits accruing from October 2007 and all severance benefits accruing from March 2011.

RETIREMENT FUND LUMP-SUM BENEFITS OR SEVERANCE BENEFITS

LUMP

SUM

R500

R500 001 to R700 000 18% of taxable income above R500 000 R700 001 to R1 050 000 R36 000 plus 27% of taxable income above R700 000 R1 050 001 plus R130 500 plus 36% of taxable income above R1 050 000

Retirement fund lump-sum benefits consist of lump sums from a pension, pension preservation, provident, provident preservation or retirement annuity fund on death retirement or termination of employment due to attaining the age of 55 sickness accident injury incapacity redundancy or termination of the employer’s trade.

Severance benefits consist of lump sums from or by arrangement with an employer due to relinquishment, termination, loss, repudiation, cancellation or variation of a person’s office or employment.

Tax on a retirement fund lump-sum benefit or a severance benefit (Y) is equal to:

• The tax determined by applying the tax table to the aggregate of lump-sum or severance benefit Y plus all other retirement fund lump-sum benefits accruing from October 2007 and all retirement fund lump-sum withdrawal benefits accruing from March 2009 and all other severance benefits accruing from March 2011; less

• The tax determined by applying the tax table to the aggregate of all retirement fund lumpsum benefits accruing before lump-sum Y from October 2007 and all retirement fund lump-sum withdrawal benefits accruing from March 2009 and all severance benefits accruing before severance benefit Y from March 2011.

TRANSFER DUTY RATES

SARS INTEREST RATES

RATES OF INTEREST FROM 1 FEBRUARY 2022:

Fringe benefits - interest-free or low-interest loan (official rate): 5% a year

RATES OF INTEREST FROM 1 MARCH 2022:

Late or underpayment of tax: 7.25% a year

Refund of overpayment of provisional tax: 3.25% a year

Refund of tax on successful appeal or where the appeal was conceded by SARS: 7.25% a year.

Refund of VAT or late payment of VAT: 7.25%

WHO DOES NOT HAVE TO SUBMIT A TAX RETURN?

You do not have to submit a return if: your total pre-tax earnings from one employer were less than R500 000 for the tax year, you have no other sources of income (for example rental or interest) and there are no deductions that you want to claim.

TRAVELLING ALLOWANCES

Rates per kilometre, which may be used in determining the allowable deduction for business travel against an allowance or advance where actual costs are not claimed, are determined by using the following table:

VALUE OF THE VEHICLE FIXED COST FUEL COST MAINTENANCE

Note:

• 80% of the travelling allowance must be included in the employee’s remuneration for the purposes of calculating PAYE. The percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the motor vehicle for the tax year will be for business purposes.

• No fuel cost may be claimed if the employee has not borne the full cost of fuel used in the vehicle and no maintenance cost may be claimed if the employee has not borne the full cost of maintaining the vehicle (for example the vehicle is covered by a maintenance plan).

• The fixed cost must be reduced on a pro-rata basis if the vehicle is used for business purposes for less than a full year.

• The actual distance travelled during a tax year and the distance travelled for business purposes substantiated by a logbook are used to determine the costs that may be claimed against a travelling allowance.

Alternative simplified method:

Where an allowance or advance is based on the actual distance travelled by the employee for business purposes no tax is payable on an allowance by an employer to an employee up to the rate of 418 cents per kilometre regardless of the value of the vehicle. However, this alternative is not available if other compensation in the form of an allowance or reimbursement (other than for parking or toll fees) is received from the employer in respect of the vehicle.

FRINGE BENEFITS: EMPLOYER-OWNED VEHICLES

• The taxable value is 3.5% of the determined value (the cash value including VAT) a month of each vehicle. Where the vehicle is:

– The subject of a maintenance plan when the employer acquired the vehicle, the taxable value is 3.25% of the determined value; or

– Acquired by the employer under an operating lease, the taxable value is the cost incurred by the employer under the operating lease plus the cost of fuel.

• 80% of the fringe benefit must be included in the employee’s remuneration for the purpose of calculating PAYE. The percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the vehicle for the tax year is for business purposes.

• On assessment the fringe benefit for the tax year is reduced by the ratio of the distance travelled for business purposes (substantiated by a logbook) divided by the actual distance travelled during the tax year.

• On assessment further relief is available for the cost of the licence, insurance, maintenance and fuel for private travel if the employee has borne the full cost thereof and if the distance travelled for private purposes is substantiated by a logbook.

SUBSISTENCE ALLOWANCES AND ADVANCES

If you are obliged to spend at least one night away from your usual place of residence on business and you receive an allowance or advance for accommodation in South Africa, which is to pay for:

• Meals and incidental costs: R493 a day is deemed to have been spent; or

• Incidental costs only: R152 for each day is deemed to have been spent.

Where the allowance or advance is for accommodation outside South Africa, a specific amount per country is deemed to have been spent. Refer to www.sars.gov.za > Legal counsel > Secondary legislation > Income tax notices > 2022.

TURNOVER TAX FOR MICRO BUSINESSES

ANNUITY RATES

Rates valid for August 1, 2022. Information supplied by the relevant life assurance companies.

COMPULSORY ANNUITIES

ABOUT THE TABLES

These tables show initial monthly pensions guaranteed for 10 years and then for life if, at the ages listed, you buy a life annuity (see definition below) with R1 million. In these tables. the amount escalates at a rate of 6 percent a year.

WHAT IS AN ANNUITY?

An annuity is a payment you receive annually. The life assurance industry has adapted the word to mean any amount you receive regularly (normally monthly) from an investment, usually in the form of a pension, when you retire.

COMPULSORY PURCHASE ANNUITY

VOLUNTARY ANNUITIES

VOLUNTARY

This must be bought with at least two-thirds of the benefits you receive from your pension fund or retirement annuity when you retire (provident funds are excluded from this requirement). If you are a member of a defined-benefit pension fund, the annuity is normally provided to you without any choice.

VOLUNTARY ANNUITY

This is an investment you choose to make with a lump sum from any source. With voluntary annuities, you can invest for a fixed period. For example, for 10 years – or for life. Note that compulsory and voluntary annuities are taxed differently, both on the investment itself and on your income from it. This is because you buy a compulsory annuity with pre-tax savings whereas you buy a voluntary annuity with after-tax savings.

TRADITIONAL (LIFE) ANNUITY

You buy this type of annuity from a life assurance company. You are guaranteed a fixed income for life, which may or may not escalate annually at a certain rate, depending on whether you have a level or escalating annuity. In the initial years, you will receive less from an escalating annuity than from a level annuity but the level annuity will be eroded over the years by inflation. Because the life assurance company takes on your longevity risk, your investment normally dies with you. You can, however, buy an annuity “guaranteed for X years and then for life”, which means your nominated heir will receive the income if you die before the X years are up. After X years, the annuity dies with you. Joint life annuities are based on a pension being paid to the surviving spouse after the death of his or her partner.

LIVING (INVESTMENT-LINKED) ANNUITY

You buy this type of annuity from an asset manager and can choose the underlying Inv. You must decide each year how much of your investment you want to draw down as a pension with a minimum of 2.5 percent and a maximum of 17.5 percent. When you die, what is left of your investment is passed on to your heirs. However, you take the risk of outliving your capital.

OFFSHORE ALLOWANCES

HOW

MUCH YOU CAN TAKE OUT OF SOUTH AFRICA

Offshore investment allowance: R10 million each year

Discretionary allowance for adults: R1 million each year

Travel allowance for children under 18: R200 000 each year

The tax on international air travel is R190 per passenger or R100 for flights to Southern African Customs Union countries.

To do things the right way requires a personal commitment. A considered approach. That’s why we use decades of expertise and market knowledge combined with fundamental research to guide all our investment decisions.

Because when it comes to managing your wealth, it’s not just a job, to us: it’s personal.

We care for our clients’ assets like our own because we never forget who they really belong to. If you’re an individual, family, charity, trust or corporate looking for a global investment manager with diversified investment solutions, choose the one that is personally committed to your future. The one who does things the right way. The Melville Douglas way.

www.melvilledouglas.co.za

If it’s personal to you, it’s personal to us.