NFB
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Eastern Cape's Community... issue 16 November 2010
PERSONAL FINANCE Magazine
RETIREMENT ANNUITIES… THE TRUTH OF THE MATTER a powerful investment structure ESTATE PLANNING FOR FARMERS
useful techniques to overcome the challenges
NFB'S HEALTHCARE ADVISORY SERVICE
what we can offer you
WIN A TWO NIGHT STAY AT THE ROYAL GUEST HOUSE IN PORT ALFRED see inside for details 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
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private wealth management
Providing quality retirement, investment and risk planning advice for 25 years. 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), Travis McClure (NFB East London), Philip Bartlett (NFB East London), Chris Lemmon (NVest
a sensible read
Securities), Shaun Murphy (Klinkradt & Assoc.), Grant Berndt (Abdo & Abdo), Nadia Muller (Glacier by Sanlam), Debi Godwin (IE&T), Brendan Connellan (NFB East London), Robyne Moore (NFB East London), Leonie Schoeman (NFB East London).
Advertising Robyne Moore rmoore@nfbel.co.za
layout and design Jacky Horn 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.nfb.co.za
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. Š2010 All Rights Reserved.
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was fortunate enough to spend two weeks in Athens and the Greek Islands recently. I envisioned idyllic islands, beautiful tavernas lining the sea, delicious authentic Greek cuisine, beautiful clean countryside and first world systems and service. I managed to get a part of that, but I was very surprised by the overall experience which was not totally in line with my expectations. The Greek economy is essentially bankrupt, idyllic beaches were often pebbly and small (though the beautiful clear warm water was great) and beaches and countryside walks were often strewn with litter. Service was poor relative to other more tourist focussed destinations, food and drink was mediocre and very expensive, accommodation was not up to our local standards, buildings were often in ruin (and I am not referring to the Acropolis), pavements and some roads neglected, driving was often death defying and we saw countless neglected animals. On the other hand though, I met some wonderful, honest and very genuine people, saw beautiful scenery, learned a lot and marvelled at the historic monuments. I love travelling. You can put me almost anywhere from deepest Congo to a pub in London and I will enjoy the experience, as I did this one I might add. But what the trip did do, was remind me that although we may have our problems in South Africa, we also have a lot to be positive about having one of the most incredible countries in the world, with exceedingly high standards in many respects, good value for money, breathtaking landscapes and some of the friendliest people in the world. What we as South Africans just need to do is start to see that and realise it, stop criticising from our armchairs and start building and getting involved! So as the year comes to a close and Christmas cheer takes over, remember how lucky you are to live where you do; take a moment to help someone who needs a hand and give some thought to how you can make a positive difference. Wishing you all a happy, peaceful and blessed Festive Season! Brendan Connellan - Editor and Director of NFB
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Email your full name to nfb@nfbel.co.za to subscribe to NFB's free economic electronic newsletters.
reproduced in any form or
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medium without prior written consent from the Editor. sensible finance Nov10
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SENSIBLE CONTENTS
nfb sensible finance
November 2010
4 CAPITAL GAINS TAX IMPLICATIONS FOR THE INDIVIDUAL PART 2 Capital gains on the disposal of your primary residence. By Shaun Murphy, CA (SA), Partner - Klinkradt & Associates.
6 STANDARD CONTRACT CONDITIONS As a customer, ensure that the goods or services to be supplied are specified in the contract. By Grandt Berndt - Abdo & Abdo.
8 ESTATE PLANNING CHALLENGES FOR FARMERS A brief overview of some estate planning techniques. By Nadia Muller, Estate Planner - Glacier by Sanlam.
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9 A BREAK FROM TRADITION
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SA will benefit from the move into emerging market debt and equity. Source: Stephen Cranston – Financial Mail.
10 RETIREMENT ANNUITIES…THE TRUTH OF THE MATTER Significant changes made to legislation have made RA's a powerful investment structure. By Marc Schroeder, Private Wealth Manager - NFB East London.
13 ARE YOU SURE YOUR HEIRS ARE GOING TO RECEIVE THEIR INHERITANCE? A look at the Guardian's Fund and the necessity for every individuals to have a well drafted Will. By Debi Godwin, Director - Independent Executor & Trust.
14 BEING ACTIVE IS GOOD FOR YOUR RETIREMENT One needs to actively assess the world around us, and adapt accordingly. By Philip Bartlett, Private Wealth Manager - NFB East London.
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17 NFB'S HEALTHCARE ADVISORY SERVICES Here's what we can offer you. By Leonie Schoeman, Divisional Manager of Healthcare Advisory Services - NFB East London.
18 QE II Like the original QE2 the effects of this voyage of money will be global, crossing the world from New York to Sydney, filtering into assets and markets on all continents. By Chris Lemmon, Director/Portfolio Manager – NVest.
19 THE CHRISTMAS SONG QUIZ You know the songs so well you can sing them in your sleep. But can you? By Robyne Moore - NFB East London.
20 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.
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21 WIN A TWO NIGHT STAY AT THE ROYAL GUEST HOUSE IN PORT ALFRED Stand in line to win a two night stay for two, compliments of the House of Travel, East London.
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SENSIBLE SENSIBLESOLUTIONS INVESTOR
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SENSIBLE ADVICE
CAPITAL GAINS TAX IMPLICATIONS FOR THE INDIVIDUAL Part 2
Following from the last edition's article on Capital Gains Tax for the individual, the response from the readers has been somewhat surprising. Having scribed articles from inception, not one article of mine has engendered as much interest from the readers as this. Accordingly, I deemed it fit to elaborate further on the subject in a part 2. By Shaun Murphy, CA (SA) Partner - Klinkradt & Associates
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In the last edition we covered the basic calculation and focused primarily on property transactions, as to when and how the Capital Gain was derived and what constituted a disposal. We further delved into what one was allowed to include in the base cost of a property. A question that has been posed by many individuals that have called and emailed regarding the article, is the disposal of their primary residence (the home you live in). With the property market boom experienced in East London and the rest of South Africa over the last few years, some homes have been disposed of for substantial gains and clients are often very concerned regarding the tax implications thereof. Firstly the most important thing to remember is that SARS allows a “primary residence� exclusion, which at present is as follows: = A residence owned by a natural person or special trust, used for domestic residential purposes, where proceeds do not exceed R2 million are not subject to capital gains tax. If the gross selling price is less than R2 million, then Capital Gains Tax is not applicable. = Where the proceeds exceed R2 million, the exclusion is R1,5 million of the calculated capital gain. If the property is sold for more than R2 million,
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then the first R1,5 million of the profit made (proceeds less original cost and capital improvements) is not subject to capital gains tax. What is critical to remember is that this exclusion only applies to the house in which you live and not additional investment properties. A further point of clarity is that it is not a once off or lifetime exclusion. It is applicable to each primary residence which you may occupy. As far as the investment properties are concerned, the only relief you will receive on those is the annual abatement of R17 500 for 2010, which is a deduction against all accumulated capital gains and losses for the year prior to applying the inclusion rate applicable of 25%. The inclusion rate determines how much of the gain is taxable in the hands of the taxpayer and as indicated above, for natural persons 25% of the gain is subject to tax at the marginal rate per the tables applicable to that income bracket. Should you have any TAX related queries or require some advice or assistance, please feel free to contact me on 043 726 9555 or via email at shaun@kliwal.co.za.
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SENSIBLY LEGAL
STANDARD CONTRACT CONDITIONS As a customer, ensure that the goods or services to be supplied are specified in the contract. By Grandt Berndt Abdo & Abdo
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ith the purchase of certain goods or in contracting with a supplier for the rendering of a service or the production of goods, one is often faced with having to accept the supplier's standard terms and conditions.
The kinds of conditions are usually such as: 1. The customer confirms that the goods or services reflected on any tax invoice issued, duly represent the goods or services ordered by the customer and that where delivery has already occurred, the customer is satisfied the goods or services conform in all respects to the quality and quantity ordered and are free from defects. 2. No claim under this agreement shall arise unless the customer has within three days of the alleged breach or defect occurring, given the supplier thirty (30) days written notice to rectify or remedy any defect or breach. 3. The customer has no right to withhold payment for any reason and agrees that no extension of payment will be granted unless agreed to by the supplier. The issue of withholding payment as a result of a customer establishing, outside the prescribed period, the defectiveness of the goods purchased and claiming damages for the defectiveness of the goods, has recently been considered by our Courts. In the particular case, the customer ordered a substantial quantity of roof sheeting of a specified thickness and strength. The sheeting delivered was not of the required thickness or strength. The customer was unaware of this as it was neither
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possible to ascertain with the naked eye whether the material met these specifications nor to conduct a physical examination of every sheet. During the installation by the customer some two weeks later, problems with the strength of the sheeting was experienced and it was established that the sheeting did not in fact meet the agreed specifications. The customer claimed damages for the cost of re-installing the roof to the original specifications and refused to pay the outstanding balance due to the supplier. The supplier claimed in terms of its standard clauses that the customer was outside its contractual time limit and had no right to withhold payment. The Supreme Court of Appeal found that the roof sheeting delivered bore no relation to the goods ordered and was an entirely different and inferior product, meeting none of the minimum requirements specified. The contract could not be performed by delivering sheeting irrespective of its specifications. It could only be performed by the delivery of sheeting of the required specification. The Court held further that the suppliers standard clauses can only govern the situation where defective goods are delivered in terms of the contract and do not apply where the goods delivered are a different product to the goods ordered. It is thus important that as a customer, one ensures that the goods or services to be supplied are specified in the contract in order to ensure that the supplier's standard conditions can not be imposed by the supplier in the event of it failing to deliver as specified in the contract.
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SENSIBLE ESTATE PLANNING
Estate Planning Challenges for Farmers A brief overview of some estate planning techniques. By Nadia Muller, Estate Planner - Glacier by Sanlam.
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armers face specific challenges when embarking on an estate planning exercise. These include (a) the prohibition on the subdivision of agricultural land in the Subdivision of Agricultural Land Act, (b) the potential for unintended consequences of the traditional usufruct and (c) the provision of adequate liquidity on death as a farmer's major growth asset is usually his immovable farming property which he would not necessarily want sold on his death. This article provides a brief overview of useful estate planning techniques to overcome specific challenges facing farmers.
An Inter Vivos Trust One option is to sell the farm land (not the farming operation) to an inter vivos trust (often referred to as a family trust). The potential advantages include: = The value of the farm land is pegged in the estate of the farmer for estate duty, capital gains tax and executor's fees in the event of his death. = Depreciating assets (such as farming implements and machinery) remain in the personal name of the farmer. = The value of the farm land is protected against the farmer's creditors in the event of his insolvency – except to the extent of any surety he signed for the liabilities of the trust or to the extent of his loan claim against the trust. = If there is more than one child, all the children can benefit from income or capital generated by the trust assets in terms of the farmer's specific guidelines to the trustees in the trust deed. = A trust can provide all the benefits of a usufruct in favour of the surviving spouse, without any of a usufruct's unintended negative consequences. Implementation: = The farmer establishes an inter vivos trust if there
is no existing trust in use. = The farmer sells the farm land on an interest–free
loan account. This sale may be done at the market value of the farm less 30%.
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= The loan account can be reduced by annual
donations of R100,000 made by the farmer to the trust. = The farmer is not hindered in continuing his farming operations in his own name. = The trust may charge the farmer rent for the use of the land.
A Sheep lease agreement A farmer leases his livestock to a family trust. For tax purposes the farmer has not disposed of the livestock. In terms of the lease agreement the trust must pay the stipulated rental and must return the same number of livestock to the farmer at the termination of the lease. Such a lease is typically terminated at the death of the farmer so that the growth of the livestock from the date of the lease until termination accrues to the trust i.e. the growth is excluded from the famer's estate for estate duty, capital gains tax and executors' fees.
A Retirement Annuity Recent changes in the legislation governing retirement annuities have made them a very useful estate planning tool for a wider market. Using a farmer as an example, he may donate R1 million to his spouse (free of donations tax). The spouse may in turn purchase a retirement annuity. The lump sum purchase is treated as a “disallowed contribution” for income tax purposes. As a result the dutiable value of the farmer's estate is decreased by the amount of the donation, and the amount donated is not dutiable in the estate of the spouse. In addition the retirement annuity can be used to purchase a living annuity to provide income to the surviving spouse. Due to the complexities and personal nature of the estate of a farmer, it is always advisable to speak to a specialist regarding which estate planning techniques would best serve his personal requirements.
SENSIBLE MARKETS
A Break from Tradition
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SA will benefit from the move into emerging market debt and equity. Source: Stephen Cranston – Financial Mail.
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ust 10 years ago, investors around the world were surprisingly home-based. Even in the UK, pension funds were still allocating 50% of their equity money to domestic investments. And this was in the most outward-looking large financial market in Europe, which had been free of exchange controls since 1979. Emerging markets were seen as a fad. A dedicated emerging markets mandate for a reputable pension fund would have been unthinkable. Now, the asset classes growing most strongly are those that until recently would have been considered fringe assets. SA will benefit from the move into emerging market debt and equity as well as commodities — perhaps even currencies, with our macho rand. Pension funds and sovereign wealth funds — where countries such as Norway and Singapore park their surplus wealth — no longer allocate money in the traditional way. Fund managers used to have different mandates for domestic bonds, domestic equity, global equity and global bonds.
Global equities were based around the MSCI World, the benchmark index, which excluded emerging markets. But John Green, head of global distribution for Investec Asset Management, says just 5% of new equity money in the UK is allocated on a domesticonly basis. About 50% of equity allocations in the US are into global ex-US equity mandates. Global equity now usually includes emerging markets, which represent 12% of the MSCI all countries world index. Pension funds in the US, Japan and Europe need to find investment returns to meet obligations to members — and these have been lacking in their equity markets, which are down 10% over 10 years. Bonds have been far better, but after a 10year bull market, in which investors have doubled their money, yields are 2%-3%, even less in some markets. “The developed world's balance sheets are in a poor state,” says Green. In the circumstances, anybody looking for yield needs to consider emerging market debt and ...Continued on page 15 sensible finance Nov10
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Significant changes made to legislation have made RA's a powerful investment structure. By Marc Schroeder, Private Wealth Manager - NFB East London.
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or a long time now, retirement annuities along with long term endowment plans have been regarded as the vulgarities on the list of available investment options out there, and for good reason. The truth of the matter is that RA's have traditionally been expensive, inflexible and complicated structures to own, and earned their reputation as being “the poor man's investment”. However, over the past few years there have been significant changes made to legislation and the design of retirement annuities that should encourage even the greatest cynic to review his stance on the matter. For purposes of reference to this article, and for those of you still not up to speed with retirement fund tax, the following tax table is currently applied on retirement annuities at retirement: Retirement Benefit Taxable Portion Taxable income Rate of Tax R0 - R300,000 0% of taxable income R300, 001 - R600,000 18% R600, 001 - R900,000 R54, 000 plus 27% over R600,000 R900, 001 and above R135, 000 plus 36% over R900, 000
Retirement Annuities as Cost Efficient and Flexible Structures Firstly, the darkest cloud of controversy surrounding retirement annuities was that of costing, inflexibility and penalties for early surrenders. In fact, the dubious RA character often made financial headlines and even featured on Carte Blanche several times for abusing the uninformed consumer. The truth of the matter is that in the “good old days”, retirement annuities paid their sellers an upfront commission based on the term of the investment – unfortunately, many were set to the maximum. The longer the term, the more likely
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a default on contributions became. A default on contributions could mean that an investor was maturing his annuity early or making it paid up, both of which would incur penalties. The life companies justified the penalties as a consequence of breach of contract between the annuitant and the life company, as the former was not sticking to the “agreed” upon term. Huge penalties were incurred and left a very sour taste in many peoples' mouths. The possibility is very high that one will need to stop or reduce contributions during their working careers; the new era retirement annuities fully cater for these expected events and renders the prerequisite for a definite retirement age obsolete. One is now able to retire from a retirement annuity at any time from age 55 onwards without any of the legacy complications traditionally associated with retirement annuities. The myth that retirement annuities are expensive can also be dispelled: it is now possible to own a retirement annuity for the same cost as owning a unit trust portfolio.
Retirement Annuities as an Effective Estate Planning Tool As financial planners we are well versed in suggested methods to make estate planning more efficient; tried and tested methods we are all aware of include: = Intervivos Trusts = Donations = Section 4q – spouse nomination = Usufructs What most people are unaware of is that due to recent legislation, retirement annuities have become one of the simplest and most efficient structures to reduce one's estate liability. Recent amendments to retirement legislation have resulted in the following significant changes to retirement
SENSIBLE INVESTOR annuities: = All payouts from retirement annuities on death are now FREE of estate duty; = The FULL value of a retirement annuity can now be paid to beneficiaries. When considering what strategy to consider for efficient estate planning, one always needs to consider the tax implications. For example: donations incur tax, trusts are highly taxed and usufructs carry tax consequences. Thanks to government's efforts to make retirement annuities attractive saving mechanisms they have become the most tax efficient structures available. Here is a simple situation. Mr A has a vast estate and wishes to reduce his estate duty liability. He donates R3 million rand to a retirement annuity; R450,000 is deductable and the balance is not allowed. When he dies two years later, the estate implications for his contribution are as follows: = The full amount plus untaxed growth will pay out directly to his beneficiaries - estimate value at R3,600,000; = The annuity value will not be dutiable, saving estate duty of R720,000. = Executor's fees of up to 4% or R144, 000 will be saved. = Net saving of up to R864, 000 for the estate. = The tax-free portion of the payout is R300,000 plus any disallowed tax-deductible contribution. The tax-free portion is therefore R300,000 + R2,550,000 = R2,850, 000. The taxable portion of R750,000 will be taxed at 25% based on the retirement funds tax tables on death of the annuitant. The amount realised by beneficiaries would therefore be R3,600,000 less tax of R187,500 = R3,412,500. To put this in contrast, had Mr A not contributed to the RA, the following would be realised by his beneficiaries: = The value of investment of R3,000,000 would be taxed at an average tax rate of around 35%; the value after two years at time of death would therefore be R3,600,000 less 35% = R3,390,000. = After estate duty of 20% plus executor's fees of 4% the value would be R2,576,400. The potential difference for Mr A's beneficiaries could be as much as R836,100.
RA's as Effective Investment Planning Vehicles of Business Owners Most small business owners earn non-retirement funding income of which 15% is allowed as a taxdeduction if contributed to a retirement annuity. A business owner who generated an annual income
of R1,000,000 could contribute a tax-free annual amount of R150,000 into a portfolio that will grow tax free. Many investors believe this to be a case of “tax smoke and mirrors� as the tax avoided at source will be applied later. This statement is marginally true as there will be tax paid on the withdrawal, but at a much reduced rate than that for the individual. If this investor's tax-deductible contributions amounted to a value of R2.7 million at retirement, he could withdraw the R900,000 and pay only 15% tax on the income, as opposed to up to 40% paid by the upper income bracket. Apart from the huge tax savings available, the funds invested into RA's are protected against insolvency allowing the business owner further security. Recent changes to legislation has allowed investors with small RA's to withdraw their full proceeds, if the fund value is less than R75,000 per house. This means that an investor who earned a million rand in a tax year could make a tax efficient contribution of R150,000, split three ways into three separate RA's at different investment houses prior to age 55. The investor benefits in the following ways: = Tax deductible contribution into 3 RA's; = Investment into a tax-free structure; = Redeem full proceeds from the RA's if each fund is less than R75,000. The tax saving on the contribution alone could be as much as R60,000, apart from the tax free growth that will hopefully be achieved.
Share Portfolios as Underlying Investment to a Retirement Annuity Lastly, the myth that retirement annuities can only invest in old school, non-transparent portfolios can also be put to bed. It is now possible to have your retirement annuity invested entirely into a managed share portfolio that one can have a hand in managing. One of the drawbacks to a managed share portfolio is that capital gains tax becomes heavy over the longer-term. As retirement funds are untaxed structures, all growth is tax-free allowing investors to realise great untaxed capital gains. Retirement Annuities are powerful investment structures that can save the investor huge amounts in terms of tax and now estate duty. Apart from the tax benefits, if utilised correctly they can outperform all other investment avenues in terms of returns. The bad press these structures received in the past may have been well warranted, however, there is absolutely no reason these pitfalls should ever be repeated considering current choice and legislation.
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SENSIBLE PLANNING Photo BigStockPhoto.com
ARE YOU SURE YOUR HEIRS ARE GOING TO RECEIVE THEIR INHERITANCE? A look at the Guardian's Fund and the necessity for every individual to have a well drafted Will. By Debi Godwin, Director Independent Executor & Trust.
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t was with absolute shock and dismay that I read about the embezzlement of approximately R80 million from the Guardian's Fund by corrupt justice officials. The Guardian's Fund falls under the administration of the Master of the High Court and was created to hold and administer funds paid to the Master on behalf of various people such as minors, people who are incapable of managing their own affairs, unborn heirs and missing or absent people. This development of fraud perpetuated by corrupt officials highlights the necessity for every individual to have a well drafted Will. To explain a little further‌.In practice, the most common form of inheritances ending up in the Guardians Fund, are as follows: Inheritances due to the minor heirs to an estate. This frequently happens when the Will does not stipulate the funds are to be retained in Trust for the benefit of the minor, or where there is no Will and a minor inherits under the Intestate Succession Act, 81 of 1987. Guardians of minor heirs with funds in the Guardians Fund can of course make application to the Guardians Fund, during the heir's minority to obtain funds for specific purposes such as education, clothing, medical and other motivated needs (if they haven't been stolen!). However, this is a lengthy process and the funds are not instantly obtainable. Inheritances due to major heirs who cannot be traced. Whilst Executors should do all they can to trace the heirs, and at times even appoint tracing
agents, there are times when an heir, whose contact details are not known to the family, simply can't be found. If a person suspects that there are funds due to them from an inheritance /bequest, the first step would be to contact the Executor and ask if they have inherited from the estate. When making payments to the Guardians Fund, Executors are provided with receipts for the payment and such receipt can be handed by the Executor to the person seeking benefits, to take to the relevant Master of The High Court's Office. If the Executor confirms that there are funds deposited with the Guardians Fund, then the claimant can claim the funds together with any accrued interest on turning 18 (attaining the age of majority). There are some other instances when a minor may attain majority earlier than 18, such as getting married or being declared a major by the High Court. After the lapse of a period of five years after the money has become claimable, the Master pays the unclaimed money to the Receiver of Revenue Payment Register. This does not mean that the owner of the money cannot claim the money from the Guardian's Fund. However, after the lapse of a period of 30 years after the money has become claimable, the money is forfeited to the state. Every year during September the Master advertises accounts that have been unclaimed in the Government Gazette.
At Independent Executor & Trust we are committed to personalized service and individual attention. With combined experience of 65 years, we specialize in the Drafting of Wills, Administration of Estates & Testamentary Trusts. 49 Beach Road, Nahoon, East London, 5241 | PO Box 8081, Nahoon, 5210 Telephone: (043) 735 4633 Fax: 086 693 3356 / (043) 735 3942 | e-mail: iet@iet.co.za
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SENSIBLE ACTIVITY
BEING ACTIVE IS GOOD FOR
YOUR
SENSIBLE EXPECTATIONS
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RETIREMENT
HEALTH Active management assumes action – now more vital than ever in the management of your living annuity. Written by Philip Bartlett, Private Wealth Manager, NFB East London
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t would be naive to expect the recessionary consequence to have hop-scotched one's living annuity, and it would be hazardous to carry on regardless. Unfortunately, the holding of thumbs and the ability to quote sound bites from Summit, although making for interesting debate, is not really adding value to the management of one of your most important retirement assets. Active management, which assumes action, is essential, and if ever there is a time for the dynamics of the working relationship between advisor and client to take hold, it is in the management of a living annuity. The hangover from the historic Bull Run is the delusional expectations of an easy income stream. Three years ago cash was giving you 11%, and an income rate of 10 % was sustained with no risk and a real return on capital left under the Christmas Tree. But one needs to put this into some sort of economic context and defer to the lie of the land at that time - inflation at the beginning of 2008 was sitting at 10% and the Repo rate was 11%. If we were to mirror the context in today's terms, it equates to an income of 6% and a cash return of 6.5%. The obvious conclusion is that a 10 % income stream in today's world comes with a whole new set of dynamics. Like any going concern, cash flow is an active element of management. When demand falters and prices bottom out, successful business owners focus on their bottom lines, cutting costs, retrenching and tightening up on the entertainment allowance, all in a bid to preserve
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working capital in readiness for when the shoppers return. One surely needs to copy and paste this ethos into the Living Annuity strategy. There are really only three components an investor can manage: 1. Risk - what risk is one prepared to take in order to sustain income? 2. Growth - how will one invest capital in order to sustain a growing income stream over the long term? 3. Income - what rate of income is sustainable without compromising the appropriate risk mandate (1) and ensuring the longevity of income stream by growing capital (2)? In a world where risk is up and growth is down, cost cutting must surely be the first responsible step to take in a bid to protect the longevity of one's income stream. The reality of the matter, however, is that not everyone is in a position to manage a bottom line, when ultimately, it is managing them. It is in this space that something has to give; either one compromises the growth element and focuses on capital preservation and income generation, or one compromises the risk element and risks capital erosion in the short term, trusting the growth assets to adhere to the cyclical nature of the markets. Both seem reasonable options - but neither is sustainable for a long period and requires close monitoring together with your advisor. As mentioned above, one needs to actively assess the world around us, and adapt accordingly. The good times will come again, but for the moment, “vasbyt� comes to mind.
SENSIBLE MARKETS
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A BREAK FROM TRADITION...continued from page 9 First to increase exposure to emerging market
funds. Active management of currencies is
assets, but Green says this year Investec won an EMD mandate for one of the large Canadian
increasingly seen as a good source of extra return. Such thinking was still light years away when
public-sector pension funds and for a Scandinavian
Investec Asset Management first moved into the
pension fund. Big supporters of newer asset classes
international market in 1998, when it bought the
are US foundations. Like sovereign wealth funds, they do not have to worry too much about
London-based Guinness Flight. But Green says that while it might have been seen as a weakness to
liabilities, as they aren't paying pensions so they
come in as an outsider back in the 1990s, it is now
can afford to experiment with fringe asset classes. The most specialised mandate Investec has received was for a frontier public equity fund, investing in the likes of Kazakhstan and Ghana. Africa is seen as one of the most exciting frontier regions, as the population heads towards 1bn and the economy grows off a low base. Investec also runs a global commodities and resources mandate for one of the five largest Asian public pension funds. Green argues the attraction of commodities is that demand and supply seem to be structurally mismatched, so prices should trend upwards. “But an investment in financial assets, a futures-based play on metals, for example, has not delivered and proved far too volatile. A combination of direct investment into commodities as well as resource equities is now seen as a more reliable way to tap into commodity growth,” he says. The number of requests by US consultants for managers to pitch to run commodity assets for pension fund clients has increased from two in 2004 to 45 in 2010. Currency is another area in which funds are looking for returns. Daily currency trading has increased from $1trillion to $4trillion since 2001. And it is not just the usual suspects such as the US dollar, euro, pound and yen but the rand, the Polish zloty, Thai baht and Peruvian new sol which are
seen as a strength. “We have a distinctive emerging markets perspective and are more truly global in our approach than investors brought up in London or New York, who have a distinct home bias.” Undoubtedly, Investec has a much more global client base than the rest of the SA managers. Old Mutual has substantial assets under management, but they are predominantly domestic US assets, run by domestic brands such as Dwight and Barrow, Hanley. Firms such as Coronation and RMB have offices in London, but primarily to serve their SA client base. Sanlam is buying up a network of international asset managers, but it is still early days. Allan Gray's Orbis, one of the best-performing global equity funds in the world, does not have a significant number of pension funds (outside SA) or sovereign wealth funds in its client base. Many investment consultants and multimanagers are impressed with Orbis, but it has high fees which are not negotiable. Investec AM has leveraged off the group's zebra campaign, which has made the brand recognisable in the UK, the main hub for international, non-US fund management. The business has attracted flows from a wide range of countries. Africa accounts for 27% of net flows, the UK for 19%, Asia for 11%, cross-border (mainly multinational) business another 27% and the
considered part of the universe for global currency
balance is from the rest of the world.
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SENSIBLE OPTIONS
NFB's Healthcare Advisory Service Medical Schemes have undergone many changes in recent years and the process of identifying the appropriate scheme has become more difficult for both individuals and employers. By Leonie Schoeman, Divisional Manager of Healthcare Advisory Services - NFB East London. “The first wealth is health.” ~ Ralph Waldo Emerson
M
ost medical schemes offer a wide selection of benefit options and it is important to match your medical needs with a medical solution that suits your budget - often a very confusing, complicated and time-consuming task. Once you have joined an option, you need to understand how the plan works and how to manage your medical expenses in order to get the most out of your medical scheme. NFB's Healthcare Advisory Services Division is committed to offering you quality, objective advice to best suit your individual circumstances, with an exceptionally strong focus on Service Excellence.
NFB can provide the following services: = Handling enquiries on benefit structures offered
by various medical schemes. = Personal Product presentations to prospective
medical scheme members. = Handling enquiries on premiums payable. = Advising on exclusions and enrolment
conditions. = Assisting you with all aspects of claims. = Assisting you with pre-authorisations. = Providing you with Service Provider details. = Providing you with and advising you on Medical
Scheme rules. = Continuously updating you on your medical
scheme's products, benefits and services. = Processing and following up on membership
NFB's Added Value - what we can do for you in a nutshell: ü Compare current benefit options with similar options on different medical schemes. ü Advise on legislative changes. ü Ongoing product education. ü Provide administrative support. ü Best of all - peace of mind! NFB Healthcare Advisory Services is not affiliated with any one particular medical scheme and, as such, is able to give objective advice, most especially as far as ensuring that your current plan is the one most suited to your needs. We are also able to provide administrative support on most of the major medical schemes in the country. You are thus able to make use of our services without needing to change medical schemes. In addition, as we are not affiliated with any particular medical scheme, we are thus able to advise you accordingly as the market changes, as legislation changes and as changes within your current medical scheme occur; and hopefully, before you are impacted negatively in any way.
registrations. = General follow-ups and assistance.
NFB Healthcare Advisory Services are accredited to market, amongst others, the following schemes: Discovery Health Fedhealth Bonitas Momentum Health Liberty Health Resolution Health Medshield Oxygen Medihelp The medical schemes landscape is an extremely confusing, complicated and daunting one and our job is to give you the peace of mind of knowing that your hard earned money is being spent on a plan suitable to your current and, most likely, future needs and that various possible risks are catered for. For further information on how NFB's Healthcare Advisory Service can be of assistance to you, contact Leonie Schoeman on 043 – 735 2000 or email her: lschoeman@nfbel.co.za
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The Eastern Cape's first home-grown stock brokerage‌..
Photo BigStockPhoto.com
NVest Securities (Pty) Ltd: NFB House 42 Beach Road, Nahoon, East London 5241 P O Box 8041 Nahoon 5210 Tel: (043) 735-1270 Fax: (043) 735-1337 Email: nvest@nvestsecurities.co.za www.nvestsecurities.co.za
QE II By Chris Lemmon, Director/Portfolio Manager - NVest Securities
W
hat will the world central banks do next? That is the question on every trader's mind, with billions of dollars washing around global markets trying to anticipate currency, commodity, bond and equity market moves. While quantitative easing has nothing to do with the grand old cruise liner The Queen Elizabeth 2, I couldn't help but spend some time looking into her past successes. For a ship built in 1967, she was the epitome of luxurious transatlantic cruising, launched by Her Majesty Queen Elizabeth II, with her official maiden voyage across the Atlantic having taken place on the 2nd of May 1969. The QE2 of 1967 was symbolic of a world embarking on the early stages of globalisation. From continent to continent she sailed, linking cities that would eventually become the global community that we now live in. The QE2 of 2010 is a rather different animal. Like the original QE2 the effects of this voyage of money will be global, crossing the world from New York to Sydney, filtering into assets and markets on all continents. The lavish exterior of the QE2 masked the brute force driving this massive ship across the world. 9 MAN B&W diesel engines producing 10,625 KW each, 2 propellers, 42 tons a piece and 1 rudder of 75 tons - an incredible piece of engineering. What we see today is again a marvel of engineering, but this time of a financial kind. There is no doubting its muscle; we've seen the far reaching effects of QE1 as aggressive buying of global government bonds has forced interest rates to near zero, in the process flooding institutions with cheap cash. The problem
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sensible finance Nov10
is this QE doesn't have a cabin class. With the velocity of money so low the second leg of the transmission of cheap finance is not initiating correctly with those sitting in first class (International investment banks) choosing to invest this cheap money in emerging market currencies and assets rather than on-lend to business and consumers (cabin class), who in many instances are still struggling with the after effects of leveraged consumption. And while the QE2's course was governed by a carefully controlled rudder, the course of Bernanke's QE2 seems a little less certain. While we have not yet received any definitive move from the US Fed, it would seem the market has begun to price close on a further trillion dollar programme. Now that could certainly buy you more than 9 diesel engines! But the question is, will it be more effective than those 9 engines on the old QE2? With emerging markets benefitting substantially from the flow of cheap money, it's imperative that we begin to see a marked improvement in economic fundamentals in the G7 nations for a true recovery to take place. Whether a further large scale bond purchase will be the correct mechanism to achieve that, remains to be seen. In what has been an unprecedented level of financial stimulation, markets are finding it increasingly difficult to price the consequences. We have always maintained the view that the world will recover; we feel it may just take a little longer than the market wants it to.
SENSIBLE EXPECTATIONS
SENSIBLE SONGS
THE CHRISTMAS
SONG
QUIZ
So every year Christmas comes around, the carols and songs begin until you're quite certain you can sing them in your sleep. But can you? Take our Christmas songs quiz to see just how well you know them. By Robyne Moore - NFB East London.
1. In Bing Crosby's song he wishes that all your Christmases may be? a) white b) blue c) merry d) sunny 2. In the song 'Christmas Without You' by Dolly Parton, the fireworks have no: a) spark b) bang c) fuse d) colour 3. What "will soon be out of sight" in the song 'Have yourself a merry little Christmas'? a)our money b)our turkey c)our Christmas dinner d)our troubles 4. In the song 'Rudolph the Red-nosed Reindeer', what was Christmas Eve like? a) misty b) foggy c) cold d) clear 5. In the Christmas carol 'Away in a Manger' in what type of sky were the stars? A)dark b)cloudy C)moonless d)bright 6. Where was Mommy when she was kissing Santa Claus? a) on the stairs b) underneath the mistletoe c) cooking in the kitchen d) next to the Christmas tree 7. In Mariah Carey's song 'All I Want for Christmas', what is it that she wants? a) falling snow b) lots of presents c) you d) Christmas dinner 8. What song was originally titled "One Horse Open Sleigh"? a) Jingle Bells b) Away in the Manger c) Drummer Boy d) Frosty the Snowman 9. What Christmas carol contains the word "Fa-lala-la-la-la-la-la-la"? a) Winter Wonderland b) Christmas Song c) Let it Snow d) Deck the Halls 10. In Wham's song 'Last Christmas' George Michael this year will give his heart to someone: a. Else b. special c. Caring d. Kind
Answers 1. A 6. B
2. C 7. C
3. D 8. A
4. B 9. D
5. D 10. B
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SENSIBLE FINANCE QUESTIONS & ANSWERS
“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. Travis McClure
Q: What are the benefits of a Financial Needs Analysis (FNA)? A: The role of the FNA is to provide both the client and the advisor with the tools to identify any risks or shortfalls a client may have with regards to death, disability, education, estate planning and retirement. It is effectively a bunch of calculations that take into account a number of variables to give an answer that will act as a guideline or an illustration. The strength of any FNA is only as good as the information given by the individual. Values of assets and liabilities need to be accurate and goals need to be realistic within the context of the client's current income earning ability. This allows the advisor to use various assumptions with regards to growth rates and inflation which in turn gives calculated results relating to the goals and needs set out at the beginning. With regards to retirement the main concern for people is whether or not they will have enough capital to provide an income that will sustain the lifestyle that they are accustomed to. The FNA will not only highlight the capital amount required, but also highlight the monthly amount that needs to be invested to reach these goals. Most people will only retire on about 75% of their current earnings and often there is still a shortfall. The FNA can also highlight the sustainability of income and growth of capital in your retirement years. It takes into account inflation and expected
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mortality and is able to graph these results giving the client a look into the future. It is also able to highlight these calculations in both real and nominal terms. An FNA also identifies capital amounts that are needed to ensure that one's family will be financially secure in the event of death or disability. It takes into account existing assets and life and disability policies as well as liabilities that would need to be settled. The advisor is then able to suggest the correct amount and type of cover. This is often an area that is overlooked and many are underinsured. There are obviously many assumptions and variables that one can use. A slight change in assumed growth rates of 2% p.a. will make a massive difference compounded over a 20 year term. It is better to be more conservative and look at the worst case scenario to ensure that you are not caught short when it is too late. The FNA is a powerful tool that can not only assist with retirement and risk planning, but is also flexible and can be revisited and updated regularly. Should you wish for an FNA to be done on your portfolio contact one of our NFB Private Wealth Managers for assistance.
Please address all Questions to: Travis McClure, NFB Sensible Finance Q&A, Box 8132, Nahoon, 5210 or email: nfb@nfbel.co.za
at W th inn e e Pr r o e An m f th ge ier e o la Ho ne Di tel n 2 Night stay for two people in an Executive Room, including Bed and ck C ig in as ht Breakfast, at the Royal Guest House courtesy of Travel Experience East London. so c st n ad ay es The Royal Guest House can be found in the quaint coastal town of Port Alfred, high on the east bank of is: the Kowie River. The beaches are almost deserted and our main beach is a safe Blue Flag recognised beach. Stay in any one of the 11 luxurious rooms, all with en-suite bathrooms, bar fridge, air conditioner, flat screen TV, telephone and internet facility and hair dryer. The Royal Guest House has amazing views overlooking the marina, which you can view from the cozy lounge with a bar, television, recliner chair and plush lounge suite. There is also a large log fire should the evenings turn chilly. French doors from the lounge open onto a magnificent wooden deck, with a plunge pool and loungers, from where you can overlook the town and enjoy the stunning sea view.
WIN A FANTASTIC…
TO ENTER SIMPLY… Send your first name, surname, email address and contact telephone number to nfb@nfbel.co.za with “NFB Sensible Finance Giveaway” as the subject line. Please specify in the email if you would like an NFB private wealth manager to contact you for a free investment portfolio evaluation or financial advice. TERMS AND CONDITIONS • All entrants will be added to NFB's electronic mailing list (recipients may then manually unsubscribe). • The contact telephone number is simply to contact the winner telephonically. Unless NFB are specifically authorised to do so, entrants will not be contacted directly in an attempt to solicit business. • The give-away is valid from 15th December 2010 to 15th June 2011 (subject to availability), is not transferable and cannot be exchanged for cash. • The draw will take place on 6th December 2010 and the winner will be contacted telephonically. • No employees or direct family of employees of NFB or Travel Experience will be eligible to win the prize.
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, 22 years experience; Gavin Ramsay (BCom, MIFM) - Executive Director and Private Wealth Manager, 16 years experience; Andrew Kent (MIFM) - Executive Director and Share Portfolio Manager, 17 years experience; Walter Lowrie - Private Wealth Manager, 24 years experience; Robert Masters (AFP, MIFM) - Private Wealth Manager, 23 years experience; Bryan Lones (AFP, MIFM) - Private Wealth Manager, 19 years experience;
Marc Schroeder (BCom Hons(Ecos), CFP) Private Wealth Manager, 6 years experience; Phillip Bartlett (BA LLB, CFP) - Private Wealth Manager, 9 years experience; Duncan Wilson (BCom Hons, CFP) – Private Wealth Manager, 5 years experience; Leona Trollip (RFP) - Employee Benefits Divisional Manager and Advisor, 33 years experience; Leonie Schoeman (RFP) - Healthcare Divisional Manager and Advisor, 12 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.
Travis McClure (BCom, CFP) - Private Wealth Manager, 12 years experience;
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“It requires a great deal of boldness and a great deal of caution to make a great fortune...but when you have got it, it requires 10 times as much wit to keep it” Nathan Rothschild, 1834
You’ve worked hard for your money... now let NFB make your money work for you. fortune favours the well advised contact one of NFB’s financial advisors East London • tel no: (043) 735-2000 or e-mail: nfb@nfbel.co.za Port Elizabeth • tel no: (041) 582 3990 or e-mail: nfb@nfbpe.co.za Johannesburg • tel no: (011) 895-8000 or e-mail: nfb@nfb.co.za Web: www.nfbec.co.za
private wealth management
NFB is an authorised Financial Services Provider