NFB Proficio Issue 65

NFB FINANCIAL UPDATE Issue65 December2012

FROM THE CEO’s DESK

W

e are fast approaching another year end and it is interesting to note some of the events and results that 2012 has dealt us. This is a good practice as it allows one to reflect and also revise our approach going forward.

On the local political front, much has taken place and the most worrisome of these is the absolute disregard the politicians seem to be affording the deteriorating environment in the lives of the really poor people of South Africa.

At a recent event hosted by Prof. Nick Binedell at GIBS, focused on the nature of Industrial Relations post Marikana, it became patently obvious that a key issue was a lack of awareness by South Africans of the dire circumstances people at the bottom end of the labour market face and the conditions of squalor in which they are surviving. Before I am accused of being a super liberal, or worse, the point is that we face a real risk of a societal meltdown and a revolt, perhaps violent, as an outcome.

Organized labour acknowledged it has not really embraced the young, fairly militant and lowest paid members of their constituencies.

A clear statement regarding the apartheid legacy of mine workers not being much more than a "means of production", rather than a person who enjoys respect from their employers, makes one reflect on whether SA Inc. is really the Rainbow Nation or whether we are rather in the Calm before the Storm. A natural by-product of the panic stricken settlements arrived at after Marikana will be the mischievous manipulation of this information and some of the radical adjustments in remuneration into

other "negotiations" facing other industries and businesses. Note the violent actions erupting around the farm workers wage demands in the Cape. My fear is we ain't seen the end of this by a long shot.

I recently advocated investors seriously revisiting offshore as a means of managing political and market risks. In the very short term this advice has proven correct, but serious investors should neither celebrate nor regret decisions and their outcomes when measured in months. The opportunity we have, to consider moving some or all of our local investment elsewhere, is not the reserve of local investors. The truth of 2012, and for a few years before, is that we have, as a country, enjoyed fairly healthy onshore flows of investment.

These foreigners can also beat it and cause damage to both markets and our rather overvalued Rand.

On a totally different tack, I thought I might entertain our readers with a rather interesting take on the American Economy having seen a recent article comparing their National economy to that of a household in an attempt to allow normal people to grasp the enormity of their problem, and once again the dangerously mischievous actions and omissions of their body politic.

By knocking off 8 zero's we can compare the desperate situation America finds itself in when compared to a household.

Some stats about the US government:  US Tax revenue: $2,170,000,000,000  Fed budget: $3,820,000,000,000  New debt: $ 1,650,000,000,000  National debt: $14,271,000,000,000

 Recent budget cuts:

$38,500,000,000 Now, remove 8 zero's and pretend it is a household budget:  Annual family income: $21,700  Money the family spent: $38,200  New debt on the credit card: $16,500  Outstanding balance on the credit card: $142,710  Total budget cuts: $385 The pressing question you should ask is: Would I lend any money to this family?

Not only is the country bankrupt, but so is its leadership playing high stake games with its people and yet to be born generations. The real story is about trust as I guess that is the premise on which bank notes rely! What happens if lenders (Americans, Pension Funds, other countries and investors local and abroad), lose faith in the Greenback? The answer is chaos, so the machine keeps smiling and printing, and the silly thing is, this cannot and will not stop.

The crazy place Americans find themselves in is also in no way unique to them. Many of their major European counterparts and Japan are in similar and in some cases worse shape.

Just have a look at recent debt statistics of the largest economies and some of the crisis economies.

IN THIS ISSUE From the CEO’s desk Retirement Reform: what it means to you Graduates and the idea of saving

financial services group

Accordingly, the way to deal with this is to remain focused on reasonable investments, taking less than normal risk, particularly if your time horizon is short.

We also recommend discussing options carefully with your advisors and staying away from that which sounds too good to be true. As my granddad used to say "if it sounds too good to be true - it probably is!”

Wishing our readers, our clients and our Product providers a safe and secure Christmas and Festive Season and a Prosperous 2013.

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

Retirement Reform: what it means to you National Treasury has recently tabled discussion papers on legislation surrounding retirement reform. Why are they seeking to introduce these changes? By Glen Wattrus, NFB East London, Private Wealth Manager

Image credit: 123RF Stock Photo

N

ational Treasury has recently tabled discussion papers on legislation surrounding retirement reform. Why are they seeking to introduce these changes?

Do you wait until the legislation is promulgated to plot your future contributions or do you proactively seek a solution to the proposed changes? Do you now channel more of your savings to your personal investments or do you increase your contributions to your retirement funds given the envisaged tax benefits? Nothing is always as easy as it seems and the downside to the tax benefits is the increased level of government control over the funds upon retirement. It is impossible to capture the full scope of these changes in a single article, but I will deal with a few pertinent issues.

It is important to bear in mind that feedback has been invited from the public at large, but it is clear from the tone of the documents that the ruling party has set a course for major changes, not only in the rules pertaining to pension provision, but also looking at incentivising individuals to increase their nonretirement savings provision. We have repeatedly heard calls from Government that South Africans have a poor savings culture and we should be doing more to provide for our golden years. The immediate knee-jerk reaction from the public would be that everything has become more expensive and we as citizens have to provide out of our own pocket for necessities and services that should be paid for out of taxes.

Why is National Treasury proposing these changes?

Government has a serious problem as more individuals turn to social welfare departments when their retirement nest egg has been depleted by excessive drawdown of capital, poor investment performance and the cost of running a portfolio. Part

of the problem has been that many people have not contributed adequately to their pension or provident fund by way of their employer pension/provident fund or by way of retirement annuities if self-employed. The announcements in Budget 2012 regarding future contributions are as follows: 1. Employees under age 45 will be allowed to contribute 22.5% of the greater of employment or taxable income up to a maximum of R250 000 per annum.

2. Over age 45 will be allowed to contribute up to 27.5% p.a. to a maximum of R300 000.

3. Any contributions exceeding the abovementioned limits form part of the tax-free lump sum upon retirement. A further point under discussion is whether this excess contribution will remain as an aggregation of the contributions or whether the growth on these contributions will be factored in upon retirement.

Few people stay with the same employer throughout their working life nowadays. Upon resignation or retrenchment the employee usually transfers whatever funds have accumulated into a preservation fund in the hope of leaving these funds untouched until age of retirement. Alternatively, these funds are taken as a cash payout less tax and are used immediately to either settle debt or used to start a new business or buy an existing business in which the person has little experience or acumen.

The consequences are usually disastrous and years of retirement provision are lost when these business ventures fail.

To counter this depletion of funds, punitive taxes were introduced to prevent the early withdrawal of funds, but this has had very little effect when individuals face very trying economic times and the lure of that money “just sitting there� is more difficult to resist than that apple was to Eve. Treasury is thus

looking at further deterrents such as pension funds directing accumulated benefits into funds to which the employee would not have access prior to retirement. Bear in mind though that vested rights appear not to be under scrutiny and these reforms would target future employees.

Of more importance though to the majority of contributors to retirement funds will be the proposals put forward to rationalise the differences between pension, provident and retirement annuity funds.

Each of these has been treated differently with regard to deductibility of contributions and withdrawal on funds either on death, disability or retirement. National Treasury appears to be moving towards a position of treating these all in the same manner, a proposal that will not be welcomed by most provident fund members. Cosatu has, in fact, threatened to take to the streets if these changes are implemented regarding Provident funds as they are particularly annoyed at not having been consulted during this process. The underlying reason for this is that funds were available in total upon retirement to provident fund members, less tax of course, whereas the other two vehicles provided for a maximum of one third being taken in cash, less tax, with the remaining two thirds being used to purchase a compulsory annuity.

Treasury has noted that since 2003 retirees electing to purchase a compulsory annuity guaranteeing an income stream until the death of the retiree (or their partner) have dropped from approximately 50% down to 14% whereas the annuities market has grown from a level of R8 billion in 2003 to R31 billion at the end of 2011. Treasury obviously favours a compulsory annuity with a guaranteed income for life as the likelihood of these annuitants looking to the State for financial assistance is less likely than retirees who elect to purchase a living annuity in circumstances that are unsuitable to that option. The statistics showing the drop-off in income upon retirement can be manipulated any number of ways to suit any viewpoint, but it is fair to say that most retirees' income will drop by approximately 50% upon retirement, with an income level of 40% on average being one that is most often quoted. The obvious downside to the living annuity option is that it gives the annuitant the ability to draw an income level at a far higher rate than what can be reasonably achieved in terms of after cost investment returns.

What does Treasury envisage?

One of the proposals from National Treasury is that the first R1 500 000 be used to purchase a life annuity which guarantees an income for life and any funds over and above that amount be utilised in a living annuity type vehicle with funds similar to unit trusts, but called retirement investment trusts. The choices available to those entering the living annuity market now are much wider than the envisaged options down the line should these proposals be implemented. Realistically, though, our legislation regarding retirement funds and the financial planning environment closely follows the UK and

Australian models. The provision enforcing the purchase of a compulsory annuity with 75% of the retiree's available funds fell away in the United Kingdom at the end of 2011 as it did not end up adequately addressing the reason for its incorporation into applicable legislation. It thus follows that this particular provision will probably not see the light of day in the South African environment.

A further concern for National Treasury is that the living annuity is not always properly understood by the purchaser of the product, particularly in the case of where the annuitant's exposure to financial products may have been rather limited prior to retirement. The underlying funds used are not always understood by the purchaser in instances where the advisor may not have taken the time to explain the selection of funds and the manner in which they complement each other to achieve the requirements set by the client. Treasury feels the wide array of options is confusing and unnecessary. The retirement investment trusts being mooted will be far fewer in number than the current selection of funds, but one needs to question where this intervention by government might end. Some readers of this article may well remember the days under the Nationalist government where pension funds were forced to invest in certain assets such as government bonds that were used to fund projects of the state and it may well be the case that this is where we may end up too. First world countries are not immune to this kind of scenario. Japan, for instance, requires that the vast majority of pension contributions find their way into government bonds as a means of financing its debt. One should note, however, that whenever new bonds are issued by government they tend to be over-subscribed so perhaps this scenario will not be relevant in SA.

Practical questions to consider So where does this limitation of choice and government intervention in options leave you in terms of future contributions? Do you reduce your contributions to the retirement fund vehicles and increase your discretionary savings to move as much money as possible out of the government's net? The tax advantages are significant in terms of an impact on investment returns within a retirement vehicle, but this must be weighed against fund choice allowed in discretionary savings which is not subject to Regulation 28 (Prudential investment guidelines for retirement funds). Your desire for personal control over your money may outweigh the aforementioned tax advantages. Additional considerations are that there is no taxation on interest, dividends, estate duty, executor fees or Capital Gains Tax issues to consider with retirement funds which may well sway the argument in your particular case.

Financial planning is not a one-size-fits-all science so it is important that you consult with your advisor as to the best option for you once clarity is reached on the proposed amendments and how they affect your existing or future options.

GRADUATES AND THE IDEA OF

SAVING That time of the year is here again: exams are being written and graduates are planning to go into the working world.

Whether you are graduating from school or from University, and going straight into the workforce, it will be of great benefit to you to kick start your retirement savings. By Nicole Boucher, NFB East London, Paraplanner

Image credit: 123RF Stock Photo

F

or a 20-something saving for such a distant time in the future does not seem such a great priority; buying a new car, clothes, etc. seem far more attractive. But it's worth noting that the very fact that you're young gives you a huge edge if you want to be rich in retirement. The reason being is because in your 20's, you can invest relatively little for a short period of time and wind up with far more money than someone who is much older and is saving more.

As I am a 20-something I can relate to the fact that saving is not the easiest thing to do; we prefer to spend on clothing and entertainment. I have, however, taken my own advice and put a small amount away every month into a retirement annuity to subsidise my employer provident fund. Institutions have minimum amounts that can be invested per month. For example, Allan Gray has a minimum investment amount of R500.00 per month; Investec has a minimum of R1 000.00 per month. In the grand scheme of things this is a small piece of your pay cheque and if you start this from the first month you won't notice the contribution as you have never had a monthly income before.

Being in your 20's you have less financial commitment and minimal expenses, and therefore you have a greater savings capacity. Once we start a family and buy a home there is less money to put into a savings/retirement vehicle. Often individuals look back and wish they had started saving when

they were younger, but were ignorant to the power of compound interest and time value of money, which can grow the small monthly saving to become a substantial amount during retirement. Each month that you put off saving in favour of spending, either increases the amount that you will have to save in the remaining months, or pushes out the date at which you will reach your goal.

An additional savings would also be a good idea, in the form of a separate bank account or even a unit trust investment. This way you can set aside for that “rainy day� and not have to overextend yourself and go into debt. Ideally, an amount equal to 3 months living expenses should be available for emergency circumstances; having this will hopefully eradicate unnecessary expenditure on credit cards and falling into debt. Once we start paying off debt there becomes little or no room for saving in any form.

Once you make the decision to start saving, your ability to make the most of it depends on whether you are able to remain committed for long enough to benefit from the potential returns, ride out the short-term ups and downs and allow the power of compound interest to increase the value of your money.

Should you be young and starting out in your working life and need advice or assistance in planning out your financial future, please contact an NFB advisor.

A licensed Financial Services Provider

Johannesburg Office:

East London Office:

Port Elizabeth Office:

NFB House 108 Albertyn Avenue Wierda Valley 2192, P O Box 32462 Braamfontein 2017, Tel: (011) 895-8000 Fax: (011) 784-8831 E-mail: nfb@nfb.co.za Web: www.nfbfinancialservicesgroup.co.za

NFB House 42 Beach Road Nahoon East London 5241, P O Box 8132 Nahoon 5210, Tel: (043) 735-2000 Fax: (043) 735-2001 E-mail: info@nfbel.co.za Web: www.nfbec.co.za

110 Park Drive Central Port Elizabeth 6001, P O Box 12018 Centrahil 6001, Tel: (041) 582-3990 Fax: (041) 586-0053 E-mail: info@nfbpe.co.za Web: www.nfbec.co.za