NFB Proficio vol 49 by NFB

NFB FINANCIAL UPDATE Volume49 April 2010

FROM THE CEO’s DESK

hen will somebody in the ANC hierarchy stand up and crap on Julius Malema? Nobody in post–apartheid South Africa should be allowed to carry on like this fool does. Describing a person, who misbehaves and acts like he does, no matter what his woodwork grade was, as a fool, does not imply he is stupid. On the contrary, he is street smart and is probably a product of a country which withheld education and, through crazy laws, broke down family pride and also family and cultural values. This in my opinion makes him very dangerous, as he lives in a place, much like some wannabe Zimbabwean cadres, who associate with previous struggle generations and act like there are no rules other than those which suit themselves and their cronies. This latest action, where he sings songs promoting certain people being harmed or even killed, cannot be described as being “quoted out of context”. This simply doesn't wash with a South African community which is striving to move on. He needs to be made an example of and I wish someone like the president, who himself could think a little about where the funding, trade pacts and tax revenue really comes from, would take him in hand and curtail his foolish and inflammatory actions. I also worry that he is resorting to the old “Kill A Boer” tactics in an effort to re-popularize himself amongst his powerbase, a relatively unsophisticated constituency, which Comrade JZ needs to bolster his own position. These people don't read the same newspapers we do and probably don't know half of what has been aired in the last few months about this so-called leader. We need this to happen so that the rank and file South African can see what he is up to and deal with this bully accordingly. In the marketplace, we have seen a budget (purposefully spelt with a lower case b) speech, come and go. Nothing noteworthy for high worth clients, other than the fact that bracket creep will impact as no relief was evident. The one worrisome fact is the deficit and the obvious need for the government to deliver to the constituents who voted JZ in to power. This is the link to Malema. The funding required is enormous and, whilst we find ourselves in a reasonably under-geared position, this is going to change. The fiscal deficit, combined with the funding needed to fund capital projects, is critical to keep a battered economy going, which, when combined with the capital market having to cope with banks, parastatals (read ESKOM) and corporate tapping it for rollover and recapitalization, will see upward pressure on the cost of long term money. We also need to watch the global inflation indicators for signs of rapid upward trending CPI and PPI data. This is one way the developed market governments can extricate themselves from the debt and deficit burdens they

have created through the rescuing they have had to do. If this does not happen, the opposite is possible with the fear of further failure; even Sovereign failure looming (read GREECE et al). I heard these Southern European cripples recently described as Club Med and thought this was rather apt. Or we could see a muddle through environment where, after a sluggish few years, we see resurgence in confidence and a return to buoyant economies. This is probable, but great care is necessary to avoid a radical slide into a Japanese scenario where so much pain was taken in the early 90's that no amount of stimulus over the subsequent twenty years has been able to restart this previously dynamic economy. I think the world will eventually recognize the new Governor of the Fed as a hero of this crazy period. He studied the Great Depression at 'varsity and the errors of that period were avoided by him and his team at the US Fed and US Treasury by acting fast, bravely and in unison with their global counterparts, thereby saving the day. Had this not happened, I fear the financial system as we know it, would have failed! So where to now? We believe that dividends, income streams and deep value propositions are the name of the game for the next years and perhaps decades. When liquidity returns, not to the banks but to the consumer (individual and corporate) and when big pension funds and investors come back in to markets, the shares and assets showing consistently higher earnings will benefit. We seek these shares, and also funds, focusing on them. We also believe that developing or GEM (global emerging markets) will outperform. These will also become more visible in portfolios. Having had lunch with the Global Head of Equities at Credit Suisse, we heard that his peers, used to having approximately 5% in Global GEMs, are now inclining towards 30% in GEMs. If one grasps the significance of this change, one would put these on the shopping list soon! In conclusion, don't be like me. Please consult with your accountants or your NFB advisor to take advantage, where appropriate, of the amnesty offered with regard to primary residences. I wrote about this it seems yesterday, but the truth is it was months ago. It expires only at the end of 2011, but believe me, that is just around the corner. Whilst on the subject of time, it would be remiss of me not to mention that NFB turns 25 on the 1st April this year, an achievement we are all very proud of considering the volatile markets we have had to endure over the past few years. Congratulations to the staff who have served NFB so well, to our Institutional friends, the Board of Directors and, most importantly, our clients. Mike Estment, CFP® - Chief Executive Officer

“Retirement Annuities – You can have your cake and eat it!” see inside

IN THIS ISSUE From The Ceo’s Desk Retirement Annuities Please Sir, I want some more Medical Schemes and Open Enrolment

financial services group

Retirement Annuities Please Sir, I want some more You can have your cake and eat it! Contributions to a retirement annuity, within certain guidelines, are tax deductible; there is no tax on income or capital gains within the investment; and lastly there is no estate duty upon your death. By Stephen Katzenellenbogen, Financial Advisor - NFB.

ast week, when speaking to Mike Estment, NFB

legislation:

preparing a submission to the Financial Mail around

= Maximum equity (shares) exposure of 75%

retirement annuities. Given Mike's article and having just

= Maximum foreign exposure of 20%

ended the 2010 tax year (retirement annuities can reduce your personal income tax – read on) we thought it would be worthwhile continuing this theme through our very own Proficio. When the term 'retirement annuity' comes up in conversation

= Maximum property exposure of 25%

The various institutions deal with these Prudential restrictions in different ways: = Client level – each and every client must conform to the above

our immediate thoughts turn to Rob Rusconi's reports and a number

limitations

of scathing articles that sporadically appear in the papers. All things

= Product level – the institution monitors the combination of all their

considered the aforementioned reports and articles were, and are,

retirement annuity members and as long as this overall allocation is

critically important in that they made investors ask questions

PIGs compliant they are then satisfied. By way of an example, if

previously ignored. However, there is a lingering aftertaste that has

there are 2 members of the same retirement annuity fund and one

made a large part of the investor community averse to a potentially

has a 100% equity exposure and the other a 100% cash exposure

great investment.

they are then compliant as the overall fund allocation is split equally

This article will aim to unpack retirement annuities and we hope that by the time you finish reading this you will consider this

between equity and cash

investment vehicle as a serious contender for investment of the

Chocolate or Vanilla?

century.

Now that we have an understanding of what needs to go into a

Before we cover the detail it is important to distinguish between a linked retirement annuity and an assurance related retirement annuity. The latter type of investment is the one that has received all

retirement annuity we can begin choosing those ingredients that best suit our personal taste and will ultimately generate our return. The linked retirement annuity, referred to earlier on, offers the

the negative media attention due to hidden, mostly high, costs;

investor an open-architecture unit trust platform with which to

restrictive options; and very often severe penalties for early

construct their investment. Furthermore, the more recent retirement

retirement or changing your premium pattern where recurring

annuity products allow investors to include direct equity exposure in

contribution patterns have been used. Contrary to the assurance

their investments. Putting this all together you then have an

related retirement annuity, the linked retirement annuity provides

investment that can accommodate single or multi-asset class unit

the investor with a flexible, low cost, high choice investment that is

trusts including direct equity with potential exposure to South Africa's

easily adaptable to investors' changing needs – but more about this

premier managers that can be reviewed at any stage to suit

later on.

changes in personal, economic or fund manager circumstances.

The Ingredients

retirement annuity is determining your risk profile. This step should be

A retirement annuity is a fund which is approved by the

completed with the guidance of your financial advisor who can

Commissioner for Inland Revenue and registered under the

then recommend one, or a blend of unit trusts, that conform to both

provisions of the Pension Funds Act, 1956 (Act No. 24 of 1956).

your risk profile and objectives.

On a basic level the ultimate investment choice needs to BigStockPhoto.com

regulation 28 of the Pension Funds Act and Exchange Control

Johannesburg's CEO, he mentioned that he was busy

comply with the Prudential Investment Guidelines (PIGs) of

The first step in selecting the ingredients to include in your

A common misconception is that retirement products should have a conservative bias as this is after all your 'nest egg'. In all

likelihood a retirement investment will be one that you hold longer

Product taxation:

than any other investment. You thus have two opposing factors,

Retirement Fund Tax was abolished in 2007 and, as such, any

being time and inflation – if time is on your side the need to beat

income within your investment is completely tax free with no Capital

inflation then implies that you should take on more risk in the form of

Gains Tax either. Besides a dividend, although this is set to change

a reasonable exposure to equity. In fact, even once you have

soon due to dividend withholding tax, there is no other investment

retired, you need to maintain some equity exposure to make sure

that comes to mind that has this distinct tax advantage.

you are inflation protected.

The above two tax concessions are given by SARS as an enticement to save with the belief that if you save you will not have

Cash or card?

to be supported by the government. The only, and not necessarily

Beyond a much larger choice of investment options the biggest

so, consideration to the deal is that at retirement you can withdraw

differentiator between a linked retirement annuity and the older

up to a maximum of one third of your investment value as a cash

style assurance retirement annuity is the cost structure.

lump sum with the balance being used to purchase an annuity

Linked retirement annuities have an as-and-when cost structure

(pension). I will not be covering the post-retirement aspects of a

which means that the fees are levied on the investment value both

retirement annuity, but please feel free to contact your advisor

on an upfront and ongoing basis. This is in stark contrast to

should you require any further information.

assurance retirement annuities on which commission was earned based on future contributions i.e. if at age 30 you took out a

Estate Duty:

retirement annuity whilst contributing R10 000 p.m. with a retirement

Simply, there is no estate duty applied to a retirement annuity on

date of 60, the financial advisor would be paid upfront based on

death.

your future contributions spanning a 30 year period. If you then stopped or decreased your premium during the term you were

The cooking class

penalized based on unrecovered costs that were earned by the

Let us do a calculation to determine the actual benefit of the

advisor and issuing institution.

above tax concessions:

Another attribute of the cost structure associated to linked

Ms. Doughnut and Mrs. Panettone have the following attributes:

retirement annuities is transparency – all the costs involved are

shown to the client; there are no hidden costs.

Current age – 40 Retirement age – 65 =

The linked retirement annuity cost structure makes the product

Investment term – 25 years

Marginal tax rate – 40%

these can be stopped, increased, decreased and reinstated with

15% of non-retirement funding available for investment – R500 000

no penalties or additional costs being incurred by the investor.

(investment amount)

more feasible, especially when considering recurring premiums as

When considering your retirement date you are also able to retire early (minimum age 55) without incurring costs.

Ms. Doughnut elects to put her funds in the NFB Balanced Fund via a unit trust. Mrs. Panettone uses the same fund, however, she

You can have your cake and eat it!

accesses it by investing in a retirement annuity. Furthermore, let us assume that the NFB Balanced fund has a return of 10% p.a. (net of costs) over both our investors' investment term with 40% of the return

Please read this next sentence slowly making sure you have time to

being interest and 60% capital gain. Due to the different manner in

digest it all:

which direct unit trusts and retirement annuities are taxed the

Contributions to a retirement annuity, within certain guidelines,

following after tax return will apply to our clients:

are tax deductible; there is no tax on income or capital gains within

Ms Doughnut – 8.4%

the investment; and lastly there is no estate duty upon your death –

Mrs. Panettone – 10%

doesn't that taste amazing?

After 25 years Mrs. Panettone's investment has grown by an additional R3 163 875 or 140%. (Please see table below)

Contributions: Your contributions are tax deductible, provided they fall within the

Conclusion:

following range:

The investment case for a retirement annuity is clear in the previous

The greater of:

example and this is without considering the estate duty benefits, or

R1,750 p.a.

CGT, which would further vindicate the potential use of the

R3,500 less your pension or provident fund contribution, or

investment product.

15% of non-retirement funding income

Non-retirement funding income is that income which is not used

When reflecting on the various tax benefits alongside the investment choices (unit trusts and direct equity) retirement

to calculate individual or company contributions to a pension or

annuities are certainly worth consideration in most investors'

provident fund, such as a commission or bonus

portfolios.

These deductions may be the one free meal you do get: you

In ending I believe Ben Campbell's quote in the movie ”21”

can make contributions to a unit trust or direct equity retirement

substantiates both the content and theme of this article: “Winner,

annuity at a 40% (marginal tax payer) discount.

winner, chicken dinner!”

Ms Doughnut (Unit Trust)

Mrs. Panettone (Retirement Annuity)

Net Investment Amount After Tax

R300 000 (R500 000 - 40% tax)

R500 000

Return

8.4%

10%

Term

25 years

25 Years

Future value at age 65

R2 253 478

R5 417 353

MEDICAL SCHEMES AND OPEN ENROLMENT Do you belong to a medical aid? Late joiner penalties and waiting periods mean it is better to join sooner rather than later. Written by Leonie Schoeman, NFB Healthcare Consultant

efore the introduction of the Medical Schemes Act in 2000, medical schemes were allowed to choose who they would

admit as members and who they would turn away, and this was typically referred to as “cherry picking”. Schemes were allowed to determine the contribution which a member was

on the number of years you have not belonged to a Registered South African medical scheme. The scheme will add the penalty fee (worked out as a percentage of a member's risk contribution) to the standard monthly contribution and this late joiner penalty will follow a member even if they move to another scheme. See table

required to pay on the basis of age and health status, and in doing so, clearly discriminated against the older and sicker applicants. Risk-rating and risk-selection were replaced with community

Years you have not been a member of a scheme after the age of 35

Late Joiner penalty

rating and open enrolment, and medical schemes were now obliged to deal with new applicants and members of medical schemes on a basis free from discrimination. All members on the

1 to 4 years 5 to 14 years 15 – 24 years

5% of contribution 25% of contribution 50% of contribution

same benefit option must pay the same contribution, regardless of their age and/or health status, and anyone who wishes to join a medical scheme must be allowed to do so and be admitted to the

25 + years

75% of contribution

open scheme of his/her choice. In the new medical scheme environment, medical schemes are allowed to use certain risk management tools such as the application of waiting periods and late joiner fees. Late Joiner fees came into effect on 1 April 2001. Government gave members time to join medical schemes without the schemes being able to apply these penalties and this “amnesty period” ended 31 March 2001. The aim is to encourage young, healthy individuals to join medical schemes early in their working careers in order to maximize the potential for cross-subsidisation. A late-joiner is an applicant or a dependant who at starting date of membership: = Is 35 years or older and = Was not a member or a dependant of a registered South African medical scheme (foreign schemes are not recognized) on or before 1 April 2001 or = Has allowed more than 90 days break in membership since 1 April 2001. These penalties are applied according to penalty bands, based

Many people wait until they are sick and need medical treatment before they apply for medical scheme membership and waiting periods were introduced as a mechanism for medical schemes to delay the risk of taking on sick members. The idea is that there should be a period during which previously uninsured people should pay their premiums, but be denied medical care. There are two types of waiting periods, a “3 month general waiting period” and a “condition-specific waiting period” of up to 12 months. A waiting period is a period during which members pays contributions, but are not entitled to benefits, unless they qualify for prescribed minimum benefits (discussed in a previous article). Please see table below As the percentage penalty fee ranges from 5% to 75%, individuals who are currently not covered by a registered medical scheme are encouraged to apply for membership sooner rather than later. For further information please contact Leonie Schoeman on tel. 043-735 2000 or lschoeman@nfbel.co.za for medical scheme information or assistance.

3-month general waiting period

12-month conditionspecific waiting period

Cover for Prescribed Minimum Benefits

Applicants who have not been members of a South African Scheme or have not been members for the past 90 days

Yes

Applicants who were members for less than 2 years and have applied for membership less than 90 days since ending previous membership

Yes

Applicants who were members for more than 2 years and have applied for membership less than 90 days since ending previous membership

Yes

Changing between benefit options within the scheme

Not applicable

Child dependent born during period of membership

Not applicable

Involuntary transfers due to a change of employment or employer changing scheme

Not applicable

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