NFB Proficio Issue 59

NFB FINANCIAL UPDATE Volume59 Dec 2011

FROM THE CEO’s DESK

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ovember, no kidding! A remarkable year with extraordinary volatility, risks and a few rewards is almost a thing of the past. A few days back it was 11-1111. What's special about this? Never again this century will the calendar show this duplication in numbers!

As humans we are full of quirks, habits and superstitions. The Chinese hold a special place for the number 8. Thank heavens for this as the government will do just about anything to ensure their growth rate is greater than or equal to their national lucky number. A while back I was treated to a lecture by a prominent China/India expert. He suggested that China's position as the leading global economy would be established by the middle of this century. I think, given developments of late, he was correct except his forecast is true, in certain respects, right now!

Finding safe ways to ensure your needs are met is the basic stuff of investing. Similarly, ensuring your needs are reasonable and you aren't trying to tap blood from the proverbial stone is also relevant. Not expecting massive capital gains from the price of assets is not only a safer bet, but is also prudent in these times of greater uncertainty. A theme we have adopted at NFB is seeking earnings in whatever form these take.

Unsafe ways proliferate in these times.

The Reserve Bank and the Regulator are currently dealing with a massive case of fraud, misinformation and theft.

Sharemax will be mainstream news in the next while and it might even eclipse the Masterbond scandal which rocked South Africa in the early 90's. Advisors, some who earned a 10% commission, have placed billions of rands of unsuspecting or, in some cases, perhaps greedy investors' funds into suspect property backed "investments". These convoluted structures are bound to expire without investors recovering their cash. Loads of blaming and recrimination, followed by legal fees, liquidators' fees, disbursements and so forth will further dilute the spoils, leaving thousands of investors penniless!

Changing tack, NFB has a range of portfolios, invested in leading funds, direct equities, bonds and preference shares designed to meet investors' needs.

Your portfolios probably contain these and we continue to refine the selection, the process and the ongoing effort to lessen the cost of money management.

At the beginning of this editorial I mentioned volatility. Seldom have we seen such wild gyrations in the various asset classes. The effect these crazy swings have on individuals is significant.

We would urge you to carefully consider reacting to these movements. Trading can cost money and can trigger tax events. And, as is often the case, this is done just when the market changes trend, potentially causing major doubt, over-reaction and a less than optimal outcome. I believe if the allocation of portfolios is appropriate at a macro level, staying the game is most often the best strategy. At NFB we micro manage the portfolios and effect changes to suit the macro economics as they unfold. This can also, if done in a tax efficient product, minimize the tax effect for the investor.

I would, in approaching the year end, suggest you engage with your advisor to ensure your portfolio is well balanced and also to discuss products and other innovations which are available or in development.

With regard to rewards, gold remains strong. My problem with this metal is that it does not pay a dividend. This aside, for those who believe in gold, you could access it through an Exchange Traded Fund. Discuss this with your advisor, but remember, it reminds me of Icarus and Deadilus! It flies high, but can crash alarmingly when it loses its glow.

It remains for me to thank our clients, business introducers, staff and institutional friends for your support and input during 2011. I wish everyone well over the festive season and look forward to a Malema free 2012... 12-12-12 is just around the corner!

Mike Estment, BA CFP® CEO, NFB Financial Services Group

IN THIS ISSUE From the CEO’s desk The resurgence of the Retirement Annuity Facts and fiction about Risk Cover

financial services group

THE RESURGENCE OF THE RETIREMENT ANNUITY A new age RA is a very effective mechanism from both a tax and estate planning perspective and not one that should be ignored. Article written by Duncan Wilson, NFB Port Elizabeth, Private Wealth Manager

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etirement annuities (RA's) were introduced some 40 years ago to cater predominantly for the self-employed. They have been popular as a top-up plan for salaried employees who belong to a pension fund to close their income gap at retirement and, in so doing, maximise individual tax deductions. Smaller employers have often chosen RA's for their staff over traditional pension schemes, thereby avoiding the

administration and responsibility involved in operating group schemes. Despite the versatility of the RA, extensive misuse of the structure over the years has detracted from their value leaving many advisors and their clients sceptical of the structure. A new age RA is a very effective mechanism from both a tax and estate planning perspective and not one that should be ignored.

The Tax Advantage The structure is best known for the annual tax saving that one can claim. The Income Tax Act allows a taxpayer who is a natural person and a member of an RA to deduct his/her current retirement annuity contributions for income tax purposes up to a certain amount. The maximum deductible contribution is the same for all taxpayers and is subject to the greatest of: a. 15% of the taxpayer's non-retirement funding income (after deducting the exemptions and deductions allowable against such income), capped at R200 000 per annum. b. R3 500 less the deductible pension fund contribution; or c. R1 750 The growth assets used within the structure are no longer limited only to unit trusts. An investor is now able to have a managed share portfolio within the RA, subject to the Prudential Investment Guideline maximum of 75% equity exposure in the total portfolio, ensuring that the growth is optimised, flexible and affordable over the life of the RA. If this wasn't enough, the funds within the RA are free of any tax, removing the Capital Gains Tax consequences.

At retirement When a member's benefit pays out under a retirement annuity, an amount that must be used to buy a compulsory annuity becomes available.

However, the member has a choice of receiving up to a maximum of 1/3 of the total benefit from the retirement annuity in cash, subject to the retirement lump sum tax rules.

A certain portion of this lump sum received in cash from a retirement annuity will be exempt from tax (usually about R315 000 - assuming that the onethird portion is greater than R315 000).

The balance of the amount (or the full amount if no immediate lump sum is taken) is then used to purchase the compulsory annuity, preferably a living annuity.

The Estate Planning Tool The scrapping of the age limit to the Retirement Annuity (RA) has meant that the estate duty advantage of the structure has come to the fore.

The crux of this advantage centres around a provision in the Estate Duty Act and the removal of the restriction on the lump sum of a deceased member, in the Income Tax Act. The combination of both Estate Duty and Capital

Gains Tax (CGT) has always posed a threat to the value of one's estate. The result of the provision, or lack thereof, in the two Acts mentioned above, means we are now able to remove all funds placed into an RA from one's estate and also ensures that one's heirs are able to withdraw the full amount from the structure on your death.

By way of an example...

If one was to assume that NFB Client A contributed R1 000 000 to a Retirement Annuity and nominated beneficiaries on the policy, and then dies four years later, on death there is a total investment value of R1 500 000. As the full amount does not form part of his estate, no estate duty will be payable. It is important to note at this point that the client could also have used the Retirement Annuity as an emergency mechanism with which to reduce his estate. Had he been diagnosed with a terminal disease and discovered that his estate would attract estate duty, he could invest the full R1 000 000 into the RA structure in one move. The client would not receive any tax deductions over and above that allowed within a single tax year, but he would have removed a considerable amount from his estate.

On the death of the owner of the RA, his beneficiary has only recently been able to withdraw the full amount subject to the retirement lump sum taxation rules. If we are to assume the beneficiary of NFB client A wishes to draw the full amount as a lump sum we would find that the lump sum is subject to the retirement lump sum tax (the estate duty exemption has been used). Thus the first R315 000 plus any disallowed contributions (R1 000 000) will not be taxed. The balance of R185 000 will be taxed at 18%. If the funds had not been removed from the estate, they would have been exposed to estate duty at 20% (R300 000). In placing the funds within the RA in this example, the client has effectively saved R151 700.

Estate planning can become very involved in the use of a number of tools and techniques to prevent unnecessary costs and taxes and to better protect any funds left to one's heirs. In so doing, the process can become complex and costly. The estate planning advantages afforded to clients in the retirement annuity structure are highly effective and often understated, especially considering that most clients will already have an RA in their portfolio. This coupled with good underlying assets with which to grow the funds invested, ensures that the RA still has a place in the estate planning space.

Fact and Fiction about

RISK COVER FACT:

Life is very unpredictable - you just don't know what may lie ahead.

FICTION:

You don't need risk cover.

Article by Julie McDonald, NFB Private Wealth Management, Paraplanner

Stock images - www.123rf.com

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ust the above fact is why most people need to ensure that they are adequately covered; if not for their own sake, then for the sake of their loved ones.

Life cover offers a vital protection which you are normally not able to provide, particularly earlier on in one's financial career or family life. More than 50% of death claims are paid for people under the age of 50!

People often forget the expenses incurred by a deceased estate, and without sufficient cover or the nomination of a beneficiary, the estate is often left far worse off than before the event.

Risk cover becomes increasingly important once you get married or with the arrival of dependants in the family.

There are numerous risks faced by any one person throughout their lives: = Death = Becoming disabled, rendering a person unable to earn a living. = Loss of good health.

Thus, the three general risk categories need to be looked at: death, disability and severe illness. The amount paid out by risk assurance policies aims to replace the income stream lost to the individual or the family unit, through one of the risks becoming a reality.

The basic purpose of life cover is to strengthen the value of the remaining estate from claims against it and then to ensure that the sum, which remains, is able to sustain a certain life style for one's dependants. Often one hears of stories of people passing away suddenly without adequate cover. Adequate cover is also very often grossly underestimated, leaving those you love with more worries than the loss or suffering at hand. Life cover can be catered to the individual and their monthly income constraints and differing risks faced. An advisor can help to adequately assess the individual in question and determine the most appropriate levels of cover needed, given the client's specific constraints and then further find the right product with a life company.

Life policy proceeds are included in the deceased's estate for estate duty purposes, and are fully estate dutiable. However, where a beneficiary is nominated, no executor's fees are levied to the estate, and if the proceeds

are paid to the spouse of the deceased, no estate duty is payable, since the s4(q) of the Estate Duty Act deduction applies. If the proceeds are given to a charity organization, s4(h) applies and no estate duty is charged to the estate.

Lump sum disability, as well as income protection, needs to be considered. When you become disabled and are unable to work, you have lost your earning ability. Lump sum disability helps with paying off any debt you may have, such as a bond, as well as helping with modifications that may have to take place in the house/car.

Severe/Critical illness cover is becoming more relevant as the number of people developing cancer is on the increase. Last year it was anticipated that cancer would be the leading cause of death globally. Added to this, is the fact that South Africa's primary killer is heart disease; it is estimated that 1 in 4 females and 1 in 3 males are at risk of dying as a result of heart disease. Severe illness cover, once paid out, helps to defray the extra expenses that medical aids do not cover. Some of these could include travel to out of town facilities for treatment or taking extra time off work to look after your severely ill family member.

Remember that when you take out risk cover you are risk rated according to your age, occupation, smoker status and activities, so should any of these change, it is important to let your advisor know to make sure you are still adequately covered.

People who think “It will never happen to me� are normally caught out and it is not always the individual who suffers, but the legacy they fail to provide for, more often than not borne by their loved ones.

Ask yourself: < Do I have adequate life, disability and severe illness cover? < Have I nominated a beneficiary on my life policy? < Have I changed jobs / taken up any hazardous pursuits? < Have I stopped / started smoking? < Have I gotten married and have any new dependants that need to be cared for?

And then make an appointment with your private wealth manager at NFB to access your risk cover.

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