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PERSONAL FINANCE
Issue 22 Nov 2012
Magazine
UNIT TRUST OR RETIREMENT ANNUITY which is a better investment?
GO GLOBAL OR GO HOME expectations are good for investing internationally CYBER RISK is your business protected? private wealth management
“The best way of preparing for the future is to take good care of the present, because we know that if the present is made up of the past, then the future will be made up of the present. Only the present is within our reach. To care for the present is to care for the future.� - Buddha
private wealth management
Providing quality retirement, investment and risk planning advice since 1985. fortune favours the well-advised contact one of NFB's private wealth managers: East London tel no: (043) 735-2000 or e-mail: nfb@nfbel.co.za Port Elizabeth tel no: (041) 582-3990 or email: nfb@nfbpe.co.za Johannesburg tel no: (011) 895-8000 or email: nfb@nfb.co.za Web: www.nfbec.co.za NFB is an authorised Financial Services Provider
sensible finance
ED’SLETTER
editor Brendan Connellan bconnellan@nfbel.co.za
Contributors Marc Schroeder (NFB East London), Michelle Wolmarans (NFB Insurance Brokers), Grant Berndt (Abdo & Abdo), Andrew Brotchie
a sensible read
(Glacier International), Jeremy Diviani (NFB Gauteng), Robyne Moore (NFB East London), Shaun Murphy & Wade Young (Klinkradt & Assoc.), Max King (Investec Asset Management), Eugene Birch (Birch Bruce), Julie McDonald (NFB East London), Robert McIntyre (NVest Securities), Travis McClure (NFB East London).
Advertising Robyne Moore rmoore@nfbel.co.za
layout and design Jacky Horn TA Willow Design jacky@e-mailer.co.za
Address NFB Private Wealth Management East London Office NFB House, 42 Beach Road Nahoon, East London, 5241 Tel: (043) 735-2000 Fax: (043) 735-2001 E-mail: nfb@nfbel.co.za Web: www.nfbec.co.za
Photos used in this magazine - 123rf.com
The views expressed in articles by external columnists are the views of the relevant authors and do not necessarily reflect the views of the editor or the NFB Private Wealth Management. Š2012 All Rights Reserved. No part of this publication may be reproduced in any form or medium without prior written consent from the Editor.
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uch research has been done about the recent Marikana Massacre to properly understand what led to the tragedy, but what is particularly interesting, is the theory linking the event to the extent to which the miners are indebted to credit providers and micro lenders. There is certainly a place for responsible micro lending. And I don't only refer to the micro lenders' responsibility, but that of borrowers too. Unfortunately, besides irresponsible lenders, we also have an endemic problem of irresponsible borrowing and a lack of understanding of the potential dangers of debt. Just to briefly highlight how expensive borrowing can become - in terms of national credit regulations, a maximum of R1,257.50 in interest and fees can be charged on a short-term loan of R1 000; that equates to more than 25% a month, or 300% if annualised! Micro lending is still a relatively new concept and the original idea behind the concept, developed by Nobel Peace Prize winner Muhammed Yunus, was simply that if affordable debt was made available to very poor, yet entrepreneurial people, the funding could help them escape from their poverty cycles. Naturally though, this model is not the one that we see today and people often use micro loans and credit for unnecessary purposes and for expenditure that isn't going to generate income, but will rather, in the long term, deteriorate living standards further. Marikana is in Rustenburg, a town which has 33 micro loan offices just belonging to the country's top 3 micro lenders alone, and it would seem that the strike is not only about what the miners are actually being paid, but also about how little miners get out each month after debt repayments. And to a desperate miner riddled with debt, the only solution may be to make high wage demands and it is easy to forget the personal responsibility that we also have, as individuals, to manage our own finances and not live beyond our means, even when things do seem desperate. So, with Christmas around the corner, don't get pressured into spending money that you don't have to buy things that you don't really even need. Have a wonderful end of year break and please drive safely. Please feel free to drop us a line to let us know your thoughts and ideas about our magazine. Brendan Connellan - Editor and Director of NFB Email your full name to nfb@nfbel.co.za to subscribe to NFB's free economic electronic newsletters. another aspect of our comprehensive service
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SENSIBLE CONTENTS
nfb sensible finance
November 2012
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4 CYBER RISK Is your business protected? By Michelle Wolmarans, Manager - NFB Insurance Brokers (Border).
6 VALIDITY OF INDEMNITY CLAUSES Changes brought about by the Consumer Protection Act. By Grandt Berndt - Abdo & Abdo.
8 CASH, INFLATION AND GROWTH ASSETS What to do in a low interest rate and low inflation environment. By Jeremy Diviani, Private Wealth Manager - NFB Gauteng.
9 CHECKED YOUR LIFE INSURANCE RECENTLY? Find out why you should. Source: www.polity.org.za
10 GO GLOBAL OR GO HOME Investigating the argument for investing offshore. By Andrew Brotchie, head of product & investment at Glacier International.
11 JOLLY, HOLLY HOLIDAY Some interesting activities and excursions to explore over the Festive Season. By Robyne Moore - NFB East London.
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12 UNIT TRUST OR RETIREMENT ANNUITY? Not as easy as comparing apples with apples. By Marc Schroeder, Private Wealth Manger - NFB East London.
14 STRUCTURING SALARIES A look at basic salary structured packages. By Shaun Murphy & Wade Young Klinkradt & Associates.
18 TIME TO BUY EQUITIES?
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Excellent returns currently to be gained. By Max King, Investment Asset Management.
19 PLANNING FOR RETIREMENT Retirement years come sooner than expected; start saving now! By Eugene Birch Birch Bruce Chartered Accountants.
23 Q &A You ask. We answer. Advice column answering your investment, personal finance, life and/or risk insurance questions with Travis McClure, Private Wealth Manager NFB East London.
24 STEINHOFF Discussing another core holding in NVest's General Equity portfolios. By Rob McIntyre, Portfolio Manager - NVest Securities.
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SENSIBLE STRATEGY
Is your business protected? By Michelle Wolmarans, Manager - NFB Insurance Brokers (Border).
CYBER RISK
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obody can argue that advancements in technology have made our lives easier and increased the efficiency and speed at which we work. However, the use of technology has increased companies' exposures and can actually make life more difficult if used in the wrong way or abused. Generally, any company with a website or online presence increases their potential liability risk. The internet which has birthed worldwide communication has also “spun” a new web of liability exposures. Anyone that has a website now has the legal liabilities of a publisher which include copyright infringement and defamation. New legislation continues to create potential liabilities particularly in the areas of user privacy and domain name infringement. Statistics reveal that every day more than 1 million people and organizations fall victim to cyber attacks. The 2011 attack on Sony's Play Station network is estimated to have cost the company $171 million, compromised 100 million customer accounts and knocked the company off line for 24 days. The complexity of the on-line environment makes it difficult for most businesses to address these risks. A cyber attack could be devasting to almost any business resulting in network downtime, loss of important data and loss of credibility
when customer information is compromised, and the cost of litigation if a hacker uses the customer information to access bank accounts or “steals” customers' identities. Liability risks may arise as a result of the inadvertent transmission of a computer virus, sending an e-mail that crashes another party's network, failure to prevent unauthorized access to computer systems by a third party or unauthorized employee, employees selling customers' information on the black market or a laptop containing sensitive client information being stolen. Traditional liability policies do not address internet exposures and do not provide cover against economic losses. Insurance companies have responded to this gap in cover by creating policies designed for our digital age. These policies can provide the following protection from cyber attacks and other technological exposures: = Costs associated with any security breach or privacy breach, including costs of notifying consumers when their personal information is compromised, paying for credit monitoring services, identity theft insurance or any customer service required specifically for those affected. = Damages arising from multimedia liability from a business website or online and/or print media. = Covers loss of income arising out of computer network down-time. = Cost of recovering lost data. = Expenses arising from “cyber extortion” such as threats. Given the potentially huge losses that may result from a “cyber” incident and the fact that nearly all companies now rely heavily on technology and electronic information it is important that companies are proactive and that insurance is used as part of a multi-pronged risk strategy against all the potential risks that are associated with the ever-evolving cyber world.
insurance brokers (border)(pty)ltd.
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SENSIBLY LEGAL
VALIDITY OF
INDEMNITY CLAUSES Changes brought about by the Consumer Protection Act. By Grandt Berndt - Abdo & Abdo.
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he Consumer Protection Act came into effect on 1 April 2011 and with it brought in many changes to various areas of law. The one we will deal with in this article is the so called indemnity or exclusionary or waiver clauses. One is often requested, for example, when being admitted to hospital, to sign an indemnity against any loss of whatsoever nature, including consequential and special damages arising from any direct or indirect loss or injury. Such clauses have generally been upheld by our Courts, which have held them to be the norm of sound business practice and not contrary to public policy. The Consumer Protection Act appears to have changed this. In terms of Section 48 of the Act which deals with unfair, unreasonable or unjust contract terms, a supplier of goods or services cannot offer or supply goods or services on terms that are unfair, unreasonable or unjust. Such terms include terms excessively one sided in favor of any person other than the consumer; terms so adverse to the consumer as to be inequitable, and the consumer relying on false, misleading or deceptive representations. Further, Section 51 states that a supplier must not make an agreement or transaction subject to any term or condition if the general purpose is to defeat the purpose of the Consumer Protection Act, deprive a consumer of his rights, avoid a supplier's obligation or duty, override a provision of the Act, or which limits a supplier's liability for any
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loss attributable to the gross negligence of the supplier. Any such purported transaction or agreement or term is invalid to the extent that it contravenes the Act. Section 54 gives the consumer the right to demand quality service in a manner and quality that persons are generally entitled to expect having regard to the circumstances of the supply and any specific conditions agreed between the supplier and the consumer before or during the performance of these services. Most indemnity clauses would contravene these provisions, in that they look to protect the supplier from their duty in terms of the Act. The Act also states that in interpreting its provisions, consideration must be given to foreign law and conventions. The extent of consumer protection in the United States of America is well known, with the European Union countries following suit. Thus, one would conclude that if any such indemnity clauses were challenged, that our Courts will take into account judgments in countries such as the United States and the European Union. Not all indemnity clauses will be invalid, but particularly those in fields such as the medical field, will in all likelihood now be invalid, as the admission room of a hospital does not allow for any debate on the terms of the contract being entered into.
SENSIBLE RETURNS What can investors do in this low interest rate and low inflation environment to give their portfolios a reasonable chance to enjoy real returns? By Jeremy Diviani, NFB Gauteng, Private Wealth Manager
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e find ourselves in an interesting investment environment: the local JSE is at an all-time high; global investors remain nervous around Europe; the US with economic data indicates a stalling economy that is still trying to find its feet; and lastly, most central banks are ready to hit the printing press button and push more capital into their economies as further easing seems to be the order of the day. In this environment investors typically turn to safe havens like gold, cash and money market. Historically cash-like investments have given South Africans real returns, but no longer as we find ourselves with a zero or negative real rate of return. Most central banks have indicated that low interest rates will be around for extended periods of time and thus this is a problem not in a hurry to leave.
CASH, INFLATION AND GROWTH ASSETS
marginally positive. We have used CPI as a proxy for inflation, however, some may argue that this is below actual inflation with food, medical aid, and electricity costs all rising substantially in excess of CPI.
What is a real rate of return? This is when you are in an investment and your net return is above that of the inflation rate. The danger of a negative real return is that you lose purchasing power and even with a capital increase you cannot buy the same amount of goods next year as you did this year. Some investors have remained in cash or money market funds waiting for signs of a recovery and an opportune time to switch into growth assets. This may not come for the next 3, 5, 7 years or longer so it is important to illustrate current investment options. The first graph indicates that currently the real return from a money market fund (money market funds typically have a return in excess of cash) is
Source: I-Net Bridge As an aside, inflation is not at its high currently being around 4.9%. With the South African economy struggling, and with inflation in its target range, the Reserve Bank may cut rates further and in so doing, reduce this real return. A second thought is to consider the following situation where someone is retired and drawing an income of say 5% of the portfolio: his or her real return is -5% (assuming a return of 5% and inflation of 5%). In a situation like this we sometimes get asked if the capital is going backwards, however, in reality the capital value would remain flat, but the purchasing power is being eroded almost like a continued on page 20...
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SENSIBLE PLANNING
CHECKED YOUR LIFE INSURANCE RECENTLY? Find out why you should. Contributed by Seugnet Moggee. Source: www.polity.org.za
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eremy is recently divorced and has just started dating again. This has gotten him thinking about his future and the care of his minor daughter, Hannah, who is under the age of 18 years. Jeremy is reminded that his ex-wife is still the beneficiary of his life insurance policy and makes a mental note to contact his insurance broker to revoke his ex-wife and nominate Hannah as his beneficiary in the event of his death to ensure that the proceeds of his policy are paid out to Hannah. But what will happen if Jeremy passes away before he has the opportunity to change the beneficiary on his life insurance policy? Will the proceeds of Jeremy's policy be paid to his ex-wife and will his minor daughter, Hannah, be left without any rights to the proceeds of this policy? The reality is that circumstances like these often occur in practice and in many cases result in unforeseen and even unfortunate consequences. In this case, the proceeds of Jeremy's policy would have been paid to his ex-wife and not to Hannah. But let's say Jeremy did get the chance to revoke his ex-wife and nominate his daughter as beneficiary on his insurance policy so that she would receive the benefit upon his death. The question now is, as a minor, would she be entitled to receive the proceeds? The general position in South African law is that benefits accruing to a minor would be paid over to the Master to be retained in the Guardian's Fund until the minor reaches an age of majority. Life insurance policies, however, differ in that the insurer will pay the proceeds directly to the minor regardless of his/her age. In reality, this means that the minor's legal guardian will generally administer the money on their behalf, unless the guardian is illiterate, in which event the insurer could decide to rather pay the proceeds to the Guardian's Fund. Accordingly, in Jeremy's case, Hannah's legal guardian would thus be entitled to administer the proceeds of the insurance policy on behalf of Hannah, and where the guardian is the natural mother, it could mean that Jeremy's ex-wife again has control over the proceeds, even though she is no longer a beneficiary of his policy.
A trust can be a useful tool for Jeremy to solve this conundrum. A testamentary trust, created in Jeremy's will or even
a family trust established by Jeremy during his life, can be nominated as the beneficiary of his insurance policy. The insurer will then pay the proceeds to the trust and not a specific person, to be administered by the trustees of the trust for the benefit of the beneficiaries of the trust. In his will or family trust, Jeremy can then nominate Hannah as the beneficiary of the trust as well as determine who the trustees of this trust should be. Another aspect Jeremy should be aware of when reviewing his life insurance policy, is the
difference between revocable and irrevocable beneficiary nominations. In the case of a revocable beneficiary nomination, the beneficiary of a policy can be revoked without the consent of the beneficiary being required. In the instance where Jeremy's ex-wife's nomination in his policy is revocable, he can revoke her as a beneficiary without her consent being required. However, with irrevocable beneficiary nominations you can only change or revoke a benefit with the express consent of the beneficiaries. The reason being, these beneficiaries have aquired rights the moment they accepted their nomination in writing, and accordingly these rights cannot be changed unless they expressly consent thereto, unless the policy expressly stipulates otherwise. Lastly, Jeremy should note that if he fails to
nominate a beneficiary, the proceeds of his insurance policy will be regarded as an asset in his estate upon his death and will be paid to his estate for division according to his will or the rules of intestate succession if he has left no will. When we are confronted with all the possible implications flowing from Jeremy's example, it is clear how important the decision as to beneficiaries in your insurance policy is as well as how important it is to regularly review your policy and beneficiaries. What is also clear is that with proper estate planning you could also limit
some of the risk of changing circumstances and it also remains important to consult an experienced estate planner when planning for the future.
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SENSIBLE PORTFOLIO
GO GLOBAL OR GO HOME Investigating the argument for investing offshore. By Andrew Brotchie, head of product & investment at Glacier International.
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any industry experts agree that now is a good time to invest internationally. Relative returns from global investments over the past 10 years have typically not been good, but expectations are that the next decade will see a reversal of this trend. Valuations are currently generally more attractive overseas than they are locally and we believe there is value to be found in international investments. Europe, as a region in the spotlight at the moment, still has many challenges to overcome. Political uncertainty generally does not have a positive effect on growth assets such as equities. However, the prevailing political situation has little bearing on how asset managers assess their portfolios over the long term. If the markets have priced in the uncertainty – and the consensus is that the European market has – then there is typically value to be found in well-managed, quality companies. In addition, many European-based companies have diversified to the extent that most of their earnings are derived from activities outside of Europe anyway. How well a company is managed matters more than where it is listed. Buying and holding good quality companies offers inflation protection and the chance to grow your capital over the long term. Diversification always has been, and remains, a key reason to invest offshore. It opens up access to many more top fund managers and a much wider universe of investment options, geographic regions and sectors from which to choose. Another key reason favouring offshore investments at the moment is the fact that the rand is generally considered to be overvalued currently, providing an opportunity to seek out international opportunities at a favourable price. Investors are often uncertain regarding the ideal percentage of the portfolio to invest offshore. The answer is simply that it depends on the investor's individual circumstances. For example, are you planning to retire to a foreign country or do you have children studying overseas? If this is the
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case, then you would probably have a higher allocation to offshore assets than an investor who was simply looking to diversify a portion of his assets offshore. The debate around whether to invest in developed or emerging markets remains an interesting one and there are widely differing viewpoints on the topic. It's important to remember though, that one can still obtain emerging market exposure via a company listed in a developed market that receives some of its earnings from emerging market countries. For investors who are daunted by the many choices available, Glacier International – a division of Glacier by Sanlam – has launched
“Navigate by Glacier International”, a range of carefully selected funds across different investor risk profiles. After completing a risk-profiling exercise, investors are placed in one of three risk profiles (cautious, moderate or aggressive), each of which has a list of five or six funds from which to choose. All are daily traded, actively managed funds which simplifies choice, administration, and ensures liquidity. The Navigate range of funds is offered as an investment option within the Global Life Plan, thereby giving investors all the associated benefits of investing within a life plan. Due to the structure of the investment, no tax is incurred within the plan for any income (interest or dividends) or capital gains. There are estate planning advantages too. By investing via an offshore life plan issued by a South African life company, investors ensure that the investment forms part of their South African estate, thereby avoiding the complications of having part of their estate located offshore. When it comes to investing offshore, the standard investment principles should apply – review your portfolio regularly and ensure you understand what you're investing in, even if it's in a foreign country.
SENSIBLE EXPLORING
JOLLY HOLLY HOLIDAY Some interesting activities and excursions to explore over the Festive Season. By Robyne Moore - NFB East London.
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ith petrol having increased again during the first week of October (approximately the 8th time this year), holidaymakers are going to be hardpressed to keep that heady summer holiday feeling through until January next year. As we all know, households have had a tough 2012 so far, and with a higher petrol price having a ripple effect on food and transport costs (not to mention the electricity and rates increases), budgets are going to have to get even tighter – and all this just before Christmas. With this in mind, we have done some brainstorming and come up with some interesting activities and excursions for your family to explore without breaking the bank this season – all within our own Eastern Cape borders. Here are some day trips and a few one or two-nighters to consider.
Areena Riverside Resort - www.areena.co.za Approximately 20 minutes outside of East London on the East Coast Resorts Road, Areena offer what they call “Mild to Wild” adventure activities, including the following: a zip-line skywalk, quadbiking, archery, paint-ball, abseiling and canoeing. For the not-so-energetic, a relaxing and peaceful river cruise will be just right on a still and balmy summer day. Beachcomber Horse Trails www.beachcomberhorsetrails.co.za Based in Kenton-on-Sea, Beachcomber offers horse trails on either the beach or through the breathtaking Sibuya Game Reserve. They cater to all riding levels and accommodate anyone from 7 years and up. Rides start at R200 for 1½ hours; discounts are offered on bigger groups. Fish River Sun www.suninternational.comApproximately 1 hour drive from East London, even if you don't stay overnight, the Fish River Sun is great for a day visit. They offer many activities including the following:
championship 18-hole golf course, mini-golf, fishing, dune-boarding, skim-boarding, nature trails, a beach shuttle down to the Castaways Beach Bar, and Kamp Kwena which offers activities exclusively for children.
Kragga Kamma Game Park www.kraggakamma.com Situated on the outskirts of Port Elizabeth, the Kragga Kamma Game Park is good value for money if game-viewing features on your to-do list. For the self-drive, the entrance fees are as follow: adults – R50; scholars – R20; children under 6 years of age are free. Among the different game which can be seen are many different buck species, giraffe, cape buffalo, ostrich, warthog and rhino. Interaction with their tame cheetah is also possible.
Fynboshoek - “rated as one of the best places to eat on the Garden Route”. For somewhere different to eat, off the N2 Highway across from Tsitsikamma Lodge, along scenic, forested countryside, you will find the treasure which is Fynboshoek Farm. You will be greeted and hosted by award-winning cheesemaker, Alje van Deemter (a qualified microbiologist), who will treat you to delicious lunches of his home-made cheeses, just-picked, freshly-grown greens and piping hot breads. Languish on the deck overlooking the dam and enjoy the peace....over a glass of chilled wine and platters of delectable farm fare. PS – call ahead for bookings and directions: 042 – 280 3879 And pushing the border of the Eastern Cape, Plettenburg Bay offers the following:
Plett Puzzle Park - www.plettpuzzlepark.co.za For something different try their 3-D maze (the first in SA) or puzzling forest walk. This is an awesome activity for the family to try together and will keep continued on page 22... sensible finance nov12
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Image credit: 123RF Stock Photo
UNIT TRUST OR RETIREMENT ANNUITY? I was recently asked, which is a better investment: a unit trust or a retirement annuity? This type of question is at least, a pain in the neck and, at most, an opportunity to help a layman investor better understand the pecking order in the world of investments. By Marc Schroeder, NFB East London, Private Wealth Manager
The Unit Trust
= Offshore fixed interest: distributions fully taxable.
In the world of investments, you get building blocks or base elements that all structures comprise of; these are the typical asset classes, i.e shares, bonds, cash, property, commodities. Probably the biggest revolution in the investment world was the creation of what is known as the unit trust. The unit trust is not a base element, but rather is a connection of base elements; as such it can be considered on the same level as the base elements. The unit trust did to the investment world, what Apple did for the world of technology. Where before it was difficult to buy a government bond, a stake in Warren Buffet's company, a nugget of gold and a section of a viable commercial property without some serious ammo, time and research, now you can change the volume on your hi-fi, using your iphone, while on the loo as you skype call your mom in Australia.
A unit trust is taxed according the base elements it comprises of.
The base elements have different tax consequences, as follows: = Cash: taxed at marginal rate, exemptions apply. = Property: rentals taxed at marginal rate, CGT applicable on gains. = Local Equities: dividends now taxed in your hands at 15%, CGT applicable on gains. = Offshore Equities: dividends taxed at marginal rate, small exemption available. CGT applicable on gains.
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The Retirement Annuity The next major development that I wish to highlight, although not as much of an extreme innovation as the unit trust, is what we know today as the retirement annuity. The retirement annuity by itself is just a structure; it is made up of nothing but tax legislation. It is a parking bay, in which we can place assets, the most popular 'parker' in the bay being the unit trust. The most significant attraction to the retirement annuity is that allows the assets (unit trusts) parked within it to flourish untaxed. The two cannot be compared, just as a Ferrari being compared to a garage just doesn't make any sense. However, we can argue where the Ferrari is better off: out tearing up the highway, or being polished up in its show room. As long as the Ferrari on the highway is being compared with a similar or identical car as in the garage, there are grounds for comparison. This brings me to my major talking point in this article, which is better: a unit trust housed within, or outside of a retirement annuity? Putting your foot down on the pedal, or keeping her preserved for a later purpose. If you haven't picked up already, the Ferrari is a
*Note that while you will not have access to the full amount invested within the RA, on your death the full amount can be accessed by your beneficiaries subject to retirement tax tables.
metaphor for an investment. For my article the investment I am going to analyse is what is referred to as the balanced blend in the graph that follows, courtesy of I-Net Money Mate (Please see graph 1 below). The balanced blend comprises of some of the longest standing balanced, asset allocation type unit trust funds in South Africa, the breakdown is as follows: = 40% Investec Opportunity = 30% Allan Gray Balanced = 30% Coronation Balanced Plus The portfolio is illustrated by the red line. The JSE is in Blue, the sector average is in yellow and inflation in green. The returns have been remarkable: the portfolio has averaged 17% per annum since January 2001, a vast outperformance over the equity market (avg 14% per annum), but with significantly less risk. So, which is better? Holding the investment directly, or within the RA? I trust all understand now the difference here between asking this question and 'which is better, a unit trust or a retirement annuity?' It's a subjective call, but here are how the stats stack up assuming a R100,000 lump sum investment on the 01.01.2001, assuming a marginal rate of tax of 35%, for purposes of the CGT calculation. Direct Holding RA Holding R 610, 200 R 610, 200 marginal retirement tax, rate now at 0% Dividends withholding tax yes - 15% not applicable CGT Yes No Net CGT R 550, 736 R 610, 200 Access Full Partial* Estate Duty Included Not Included Protected from Creditors No Yes Protected from scorned ex wife No No
Current Value Tax on income
We can see that from a purely rands and cents perspective, there is no more tax-efficient savings structure than the retirement annuity; no investment will outperform its twin if the twin is housed within the retirement annuity, even more so now considering that dividends are received tax-free into retirement funds. So why not put all your money into the RA? The problem is that South Africa is one seriously volatile investment destination, with our currency sailing in the wind like a kite, and with the political outlook as stable as Shaik's latest medical report, it would be foolish to relinquish total access to your funds. The ANC have made suggestions that pension funds should start investing in 'government developmental projects'; how serious this is to be considered, only time will reveal. It seems the drive is for government to be encouraging people to invest for their retirements, not dissuade them, evidenced by retirement fund's tax being reduced to 0% and tax deductions permitted on contributions. For this reason, I would advise anyone to maximise the tax-efficiencies offered by retirement annuities and pension funds. Over and above that, investing directly into well managed unit trust funds is probably the safest, surest and cheapest way of generating wealth over the medium to longer-term. Considering the quality managed unit trust solutions out there, whether you are the park and polish investor, or love screaming over the highways, there is no reason why your 'car' shouldn't be a Ferrari. So, next time instead of asking, “Which is better? A unit trust or a retirement annuity?” Rather ask, “How long is a piece of a string?”
Graph 1
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SENSIBLY LEGAL
STRUCTURING SALARIES A look at basic salary structured packages. By Shaun Murphy & Wade Young - Klinkradt & Associates.
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very common question posed to us in practice is: “how can I reduce my monthly taxation or improve my salary structure to become more tax efficient?” Well, this is one place that in my opinion Oupa Maqashula (Commissioner of SARS) and SARS have been very CLEVER in their approach to allowable deductions to the salary earner. Basic salary structured packages in today's world encompass basic salaries, travel allowances, motor vehicle and medical aid fringe benefits and then some sort of company and employee contribution to pension and/or provident funds. It is important to note that there is a difference in the treatment for tax purposes of the pension fund and provident fund contributions. For pension fund contributions: Current pension fund contributions by the employee may be deducted to the greater of 7,5% of remuneration from retirement funding employment, or R1 750. - Any excess may not be carried forward to the following year of assessment. - A maximum of R1 800 per annum may be deducted as arrear pension fund contributions by the employee. For the provident fund contributions: None of the current or arrear contributions are tax deductible for the employee. There are indications that provident funds might disappear in the future. The reason is that the main attraction of a provident fund, namely to be able to make a 100% lump sum withdrawal at retirement, will no longer be available to investors. All future contributions will be subject to a maximum withdrawal of one-third, as is the case with pension funds and retirement annuities.
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Travel allowances have been clamped down on by SARS. When claiming a travel allowance only a detailed log book will be accepted for the travel deduction. I think it is important to highlight what a detailed log book entails: it is effectively a reconciliation of daily mileage split between business and private travels. Private travels include traveling from home to work and back again. Just in case you were wondering how SARS checks up on this, they have been requesting your last vehicle service record or copy of your service log to correspond to the mileage per the log book in the month in which the vehicle was serviced. So please be careful when compiling your log books as they need to be accurate! It is also important to mention that the medical aid deduction has now been replaced by a “tax credit” regime that will be effective from 1 March 2012. Basically the employee who is on a medical aid will no longer be able to claim the deduction (limited to the capping amount), but a tax credit will be given which will act in a similar way as the primary and secondary tax rebates. Tax credits are not refundable, which means that you will only qualify for tax credits to the extent to which you pay tax. In short, there is very little that is afforded to straight salary earners that wish to have elaborate schemes in place to reduce and/or postpone the taxation that is levied in terms of the PAYE tables. Cellphone, entertainment and subsistence allowances are all best left off as no deduction is permitted against these allowances anymore; it is far more advisable to have the above on a reimbursive basis, which is generally speaking nontaxable. In the next issue I will touch on commission earners who have a far better platform to play with.
SENSIBLE TIMING
TIME TO BUY EQUITIES? Excellent returns currently to be gained. By Max King, Investment Asset Management.
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he recent stimulatory actions of the European Central Bank (ECB) and American Federal Reserve caused equity markets to rally, even after critics pointed out that similar actions have not necessarily had sustainable positive effects in the past. Similarly, equities have rallied following positive economic data and while they might suffer short-term setbacks, they always seem to bounce back. This increasing perkiness of equity markets perhaps suggests a simple truth – that equity markets want to go up. To those who have a consistently pessimistic view about the future direction of the markets and economy, this is anathema. Economic data around the world has been disappointing, suggesting that the global economy has turned down. Even emerging economies are faltering and the euro-zone is in deep and irredeemable crisis. Forecasts for corporate earnings have been sliding remorselessly. There is no shortage of long-term equity bulls, but – almost without exception – they do not expect an improvement in markets for several months, and most are looking for another sell-off, probably triggered by a flare-up in the euro-zone crisis, to provide a buying opportunity. The only factor holding back the long-term bulls is a fear of short-term downside, but should that downside materialise, then it is likely to be fleeting. There are just too many buyers into weakness and not enough nervous current holders who are liable to be panicked into selling. The evidence points to increasing investor resilience. In Spring 2012, markets dropped only 10% before recovering. The increased resilience of markets, and consequent fall in volatility, reduces the risk of investment – and that makes investors willing to pay higher prices. The result is a self-perpetuating confidence loop that pushes prices steadily higher, reinforced every time that a short-term setback is recovered. Sooner or later, an even more powerful factor will kick in: the realisation that equities represent an each-way bet. If the economic outlook improves and earnings forecasts pick up, the current valuation of the
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market will appear cheap. If estimates for corporate earnings in 2013 start to rise, there will be no holding the market back. On the other hand, if the economic news continues to be disappointing or the euro-zone starts to unravel, there can be little doubt that central banks around the world will inject liquidity into the global economy Whether this works in economic terms depends on how it is done. Purchases of government bonds by central banks has provided little economic benefit as the money created sits on bank balance sheets without being transmitted into the broader economy, but central banks are becoming more imaginative. The Fed has encountered some success with 'Operation Twist' and markets were encouraged by its decision on an open-ended purchase of mortgage-backed securities, while the Bank of England's 'Funding for Lending' scheme is promising. One of the oldest common wisdoms on Wall Street is 'don't fight the Fed' – in other words, buy equities when monetary policy is being eased; sell when it is being tightened. The adage has been forgotten in the current obsession with macroeconomic data. We believe that the
time to buy equities is now, while monetary policy is extremely loose. In all probability, a significant rerating of equity markets without a strongly visible improvement in the economic or corporate outlook will be regarded with astonishment and derision by the sceptics, but before long, the fundamentals will improve. As growth picks up and corporate earnings catch up with the market, the sceptics will, at last, turn positive. However, with a tightening of
monetary policy then looming, it will be time to turn cautious. Until that point is reached, there are some excellent returns to be gained. www.investecassetmanagement.com
SENSIBLE RETIREMENT
PLANNING FOR RETIREMENT Retirement years come sooner than expected; start saving now! By Eugene Birch - Birch Bruce Chartered Accountants.
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would like to tell you a true story about Sam. It is something that I experienced personally and I would like to warn other employees, in particular, self-employed individuals, in order for them to make adequate provision for their retirement years. Sam was initially employed, but later became a very successful self-employed businessman who was happily married with a thriving business. Life treated him well as he enjoyed the luxuries of cars, elaborate homes and found plenty of time for vacations. His responsibilities grew after a few years of creating a family. Thoughts of retirement were far from his mind and very little planning was pursued in preparation for old age. Every time that Sam changed employment, pension policies were merely cashed in to buy a new motor car or house or put towards an overseas trip. Retirement was years away in his mind and he decided that retirement planning would be done at a later stage. Sam continued to move from one workplace to the next and continued to cash in his pension policies until the time that he became selfemployed, when no pension monies remained. His years of self-employment is what I like to call the “danger years�: dangerous, because soon enough a couple of years have passed while trying to build up a business, and retirement planning has not been given a second thought. Now the years are rolling by quickly and Sam's marriage comes to an end. He remarries and before long he is into his third marriage, bringing with it more offspring. Once again, no thought has gone into his retirement planning, due to the expenses of providing for a family. Sam's business folds at this point in time and he is declared insolvent, consequently losing all assets. Fortunately for Sam, his third wife is able to look after him until he passes away.
The retirement years come sooner than expected, and if Sam had not neglected putting money away in preparation for these years, he would have been financially comfortable to a far greater extent. Retirement Annuity contributions have the following attributes: 1. They are tax deductible up to 15% of taxable income (subject to certain conditions). 2. Any unclaimed contributions can be carried forward to subsequent tax years and claimed. 3. Upon retirement, the taxpayer enjoys certain tax free benefits. Sam experienced divorce, married three times, had more children than expected and lost his business and assets. These are expensive experiences, thus the temptation arises to draw on pension policies and not contribute towards RA policies. However, if Sam had contributed to an RA policy, he would not have been able to cash money in before the age of 55, which is a beneficial form of protection. The most important attribute of RA policies is that the investment is protected from creditors. In Sam's case, where he became insolvent, creditors would not have been allowed to touch this money. This fact alone makes an RA policy necessary in any employee or self-employed person's retirement planning.
Physical Address: 80 Frere Road, Vincent Postal: P O Box 13602, Vincent, 5217 Tel: 043 – 721 0441
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SENSIBLE RETURNS ...continued from page 8
CASH, INFLATION AND GROWTH ASSETS
Source: I-Net Bridge
“silent assassin�. One solution is to have saved more than necessary in your build up to retirement, so you do not have to worry about these matters. However, there are not too many who can afford this luxury and it is thus important to understand what one can do to rectify this. If someone is retired then they can try to reduce their costs and thus portfolio drawings, and for those in the pre-retirement phase of life it is important to save more to ensure a sustainable retirement. In both scenarios it is necessary to take on a certain amount of growth assets in a portfolio that should, over time, provide an inflation hedge. A third consideration is that although money in the bank is referred to as a risk-free asset, recent events have shown there is still the risk of capital loss in the form of default by the issuer (bank or government). So what can investors do in this low interest rate and low inflation environment to give their portfolios a reasonable chance to enjoy real returns? NFB focuses on long term sustainable investing and it is with this in mind that the balance of this article continues.
What are growth assets? They are assets that display capital volatility and often provide a yield by way of a dividend or interest income. For my illustration I have not included offshore asset classes and so examples of assets further up the risk spectrum are bonds, listed property and shares.
The above graph shows the investment profiles if you were to hold these riskier assets described above over the last 10 years. It is evident that an investor would have been rewarded for holding bonds, listed property and equities as they have cumulatively and substantially outperformed cash represented by the green line. The previous graph illustrated cumulative returns so let us now look at the year on year returns and include inflation for benchmarking purposes.
Source: I-Net Bridge The chart above more clearly indicates the volatility of the various asset classes. We can see that over the last 8 years listed property or equities have outperformed CPI and cash 63% of the time. The merits of being in these perceived riskier assets is evident, but what is the risk versus return trade off? The following scatter plot taken over the last 10 years illustrates the risk and reward profile of the four typically available asset classes as well as inflation linked bonds (another instrument to hedge against inflation). continued on page 22...
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SENSIBLE RETURNS
CASH, INFLATION AND GROWTH ASSETS
Source: Morningstar Cash is shown as the blue dot; the All Share Index is the blue triangle and the Listed Property Index as
...continued from page 20
the red triangle. The All Bond Index has been included as well as inflation linked bonds (green square). Inflation linked bonds have been included as they give an indication of the risk versus return profile of inflation. They typically trade at a premium above inflation. Once again we can see that listed property and equities have significant volatility (risk is shown on the x axis and returns on the y axis) when compared to cash, but over the long term have rewarded investors with inflation beating returns. The main concern an investor has investing in these growth assets is the possibility of capital loss, however, this can be mitigated through active management of the various asset classes and within the different asset classes themselves. A unit trust manager has various different instruments that he or she can invest in for example; in an equity fund the manager can rotate between financials, resources and industrials; and in a bond fund the manager can choose between corporate bonds, sovereign debt or inflation linked bonds. The combination of the various asset classes should match ones time horizon and risk profile and it is essential that you speak to your financial advisor to ensure your asset allocation is tailored to your specific investment needs.
SENSIBLE ACTIVITIES
JOLLY HOLLY HOLIDAY ...continued from page 11 everyone on their toes. Each activity for adults costs R60 (both is R110) and for children under 12 it is R50 (both is R90).
Radical Raptors - www.radicalraptors.co.za This is a bird of prey rehabilitation centre just outside of Plettenburg Bay. Their aim is to generate awareness of these regal birds; they rescue, rehabilitate, and where possible, release them into the wild. Radical Raptors offer flying displays (three shows a day), using a number of trained, nonreleasable birds which are flown around and to you, giving you an opportunity to interact with the birds. The costs are R80 for adults and R60 for 12year olds and under. Interesting fact: hand -raised raptors are classified as human imprints as they have identified themselves as humans. These birds will not breed
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naturally and therefore are not released into the wild. We hope that at least some of the above will be great ideas to engender excitement during the festive season. And for those of you that still manage to have some funds left over at the end of the holidays, please keep NFB's charity of choice, the Loaves and Fishes Network, in mind – you can donate to this worthy charity that cares for the youngest of our province using your credit card on their website (www.lafn.co.za) or by registering online for a small debit order deduction each month. NFB – always looking out for your best financial interests – in all things and at all times during the year.
SENSIBLE Q&A
Travis McClure
“Sensible Finance - Questions and Answers� is an advice column that will allow our readers the opportunity to write to a professional and experienced financial advisor for advice regarding investments, personal finance, life and/or risk cover. Travis McClure will be answering any questions that you may have.
Q: What sort of percentage should one have invested offshore as part of ones portfolio? Are there any restrictions to this allocation with regards to Retirement Funds?
A:
The amount that should be invested offshore as part of an Investor's portfolio will more often than not come down to his/her risk portfolio, financial needs and current market conditions. Investing offshore is often tricky as you not only have to deal with offshore markets, but also with the volatility that our Rand often presents. It is important to remember, that despite all our natural resources, South Africa only makes up less than 1% of the world economy. It is important, therefore, to have some global diversification. In the late 90's it was considered normal to have around 60% of your portfolio invested offshore. Over the last 10 years, however, our Rand strengthened considerably and Emerging Markets such as SA were in favour. This meant that the average foreign exposure was probably less than 20%. We live in a Global Economy and we are starting to see more value offshore again. Our Rand has shown some weakness of late and global companies are at compelling valuations. At current levels, an offshore allocation of between 20% and 40% is probably suitable, depending on the individual client's needs and risk. There are certain restrictions regarding the amount of offshore exposure one can have in retirement funds. This is known as Regulation 28. It limits the extent to which retirement funds can invest in particular assets or asset classes. The purpose of this regulation is to protect investors in retirement funds from the effects of poorly diversified investment portfolios, overexposure to higher-risk asset classes, as well as
complex financial instruments and portfolios. Regulation 28 applies to retirement annuities, pension and provident funds and preservation funds, but excludes post retirement products such as living annuities. Broadly speaking, compliance with Regulation 28 involves, inter alia, a maximum exposure of 75% to Equities, 25% to Property, and 25% to Foreign Assets. Compliance with Regulation 28 is now required at retirement fund and member level (whereas it was previously only required at retirement fund level). Individual investors are, therefore, required to ensure that the asset category exposure of their investments is compliant with the limits prescribed by Regulation 28. Most Cautious and Balanced Unit Trust Funds are already Reg 28 compliant. They will have it written in their investment mandates so accessing these types of portfolios already ensure that you do not have to worry about being compliant. It is interesting to note that most of the Fund Managers in the Balanced and Cautious space have maximised their allowable exposure offshore in their respective portfolios. This, therefore, gives a good indication as to where these asset managers are currently seeing value. If they could break the rules, they would, and more than likely have more offshore exposure. It is important to understand the risk of offshore investments and it would be best to chat to your Financial Advisor to ensure that your offshore allocation fits in with your financial needs and risk profile.
Please address all Questions to: Travis McClure, NFB Sensible Finance Q&A, Box 8132, Nahoon, 5210 or email: nfb@nfbel.co.za
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SENSIBLE PORTFOLIO
STEINHOFF Discussing another core holding in NVest's General Equity portfolios. By Rob McIntyre, Portfolio Manager - NVest Securities.
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oday we discuss another core holding in our managed general equity portfolios, namely Steinhoff International Holdings Limited (SHF). We included Steinhoff into our portfolios about 18 months ago once the first effects of the group restructurings became clearer. Steinhoff is a multinational group that is listed on the JSE. It began its life many years ago as a furniture manufacturer established by Bruno Steinhoff. Markus Jooste was brought in as Chief Executive by Bruno to take the business forward. Over the past few years he has expanded the group dramatically by making many bolt on acquisitions, as well as bringing in several significant deals such as the Conforama acquisition in Europe. Today Steinhoff is a Top 40 constituent on the JSE with a market capitalisation of R48 billion. It is the controlling company in a diversified group that controls JD Group, KAP International, and has a 20% stake in PSG Group (all listed on the JSE), as well as controlling the unlisted Steinhoff Europe (the Conforama acquisition). The group has a policy of owning its own trading outlets, which means that it has a large property portfolio. This policy should prove quite positive in Europe over time as the group is able to lock in occupancy costs by acquiring properties at currently depressed prices. Whilst this may seem like an unfocussed conglomerate, it is actually a vertically integrated operation that owns chip board manufacturers, transport logistics, property outlets and retail and wholesale businesses throughout the furniture retail chain. Steinhoff already has a credit arm in its various businesses and its strategic stake in PSG could well signal closer alignment with Capitec for credit and insurance products. Steinhoff is now the second largest furniture group in Europe after IKEA. Like IKEA, it has a value-focussed offering, which has seen it gain traction in recession focussed Europe. Notwithstanding the belt-tightening in Europe, Steinhoff is strongest in Germany, France and Eastern Europe; areas of Europe that have performed relatively the strongest. Steinhoff has made impressive strategic progress in tidying up the group structure, both in South Africa and in Europe, where it has bought out minority interests and by monetising its retail
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participation interests in Eastern Europe and by purchasing its retail footprint. Steinhoff recently released its annual results to 30 June 2012. Given the large scale corporate activity, these were exceptionally complicated to interpret, however, it is clear that the underlying quality of Steinhoff's earnings continues to improve with strong operating cash flows. Group revenue was R80 billion and Avior Research estimates the 12 month forward diluted headline earnings per share to be 304 cents, and the annual dividend for 2013 to be 85 cents. At the current ruling price (3 October 2012) of R26.55, this places the share at a forward Price Earnings (PE) ratio of 8.7 times and a forward dividend yield of 3.2%. Group policy is to pay a distribution once per year. Aside from the mining companies, this PE ratio is about the lowest in the Top 40 index. We believe that, notwithstanding the headwinds that the group may face in Europe, that it trades at an attractive rating and we would accumulate Steinhoff to between 5% – 7.5% of a general equity portfolio. It is our view that investors will continue to value Steinhoff more conservatively that would otherwise be the case until the pace of corporate activity subsides or a European Initial Public Offering (IPO) of its international retail operations allows for a more accurate sum of the parts valuation basis. The group has a stated aim of listing on a European exchange once market conditions allow. It will, however, only do such a deal if it is positive for the group. This should raise its profile in the major markets in which it operates as well as allow it to restructure its funding profile, including removing convertible bonds that currently have a dilutive impact on earnings. Steinhoff continues to make major investments not only in intangible assets, but also in physical property as the group expands and improves the quality of its retail businesses in Europe. During the current financial year, the evolving group structure should provide investors with improved transparency and sharper strategic focus within the different group entities. We expect share price outperformance predominantly from a re-rating of the group as investors in general gain a deeper appreciation of the value contained within the different group entities.
The Eastern Cape's first home-grown
STOCK BROKERAGE
NVest Securities (Pty) Ltd NFB House, 42 Beach Road, Nahoon East London 5241 PO Box 8041, Nahoon 5210 Tel: (043) 735-1270, Fax: (043) 735-1337 Email: nvest@nvestsecurities.co.za
www.nvestsecurities.co.za
NFB have a STRONG, REPUTABLE TEAM OF ADVISORS with a WEALTH OF EXPERIENCE between them: Anthony Godwin (RFP™, MIFM) - Managing Director and Private Wealth Manager, 23 years experience; Gavin Ramsay (BCom, MIFM) - Executive Director and Private Wealth Manager, 18 years experience; Andrew Kent (MIFM) - Executive Director and Share Portfolio Manager, 16 years experience; Walter Lowrie - Private Wealth Manager, 26 years experience; Robert Masters (AFP™, MIFM) - Private Wealth Manager, 26 years experience; Bryan Lones (AFP™, MIFM) - Private Wealth Manager, 20 years experience; Travis McClure (BCom, CFP®) - Private Wealth Manager, 12 years experience; Marc Schroeder (BCom Hons(Ecos), CFP®) Private Wealth Manager, 7 years experience;
Phillip Bartlett (BA LLB, CFP®) - Private Wealth Manager, 9 years experience; Gordon Brown (CFP®) - Regional Manager – PE, 6 years experience; Mikayla Collins (BCom (Hons), CFP®) - Private Wealth Manager, 2 years experience; Glen Wattrus (B.Juris LL.B CFP®) – Private Wealth Manager, 14 years experience; Leona Trollip (RFP™) - Employee Benefits Divisional Manager and Advisor, 35 years experience; Leonie Schoeman (RFP™) - Healthcare Divisional Manager and Advisor, 14 years experience; NFB has a separate specialist Short Term Insurance Division, as well as now offering specialist group companies in the fields of stock broking, wills and the administration of deceased estates.
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