NFB FINANCIAL UPDATE Issue67 April2013
FROM THE CEO’s DESK
T
Mike Estment BA, CFPÂŽ CEO - NFB Financial Services Group
IN THIS ISSUE Front Page: From the CEO’s desk Center Page: Budget 2013/2014 Boring? Back Page: Rewards programs are you making the most of them?
financial services group
he recent weakness shown by our currency warrants a little attention. Much has been written about the exceptional relative strength of the rand over the last decade which, when added to the strength of local equity and property investments, has had commentators gushing about this tip of Africa's superb performance when compared to those dastardly developed, big braggarts such as the USA and Europe. They are correct, but I hasten to add, every dog has its day! I have said in recent publications of this editorial that without crystal ball gazing, my view is that the elastic band was stretching a little too far for my liking and a correction was (and still is) due. In my opinion, this is taking place and to some extent has already happened. In simple English, the world's investors have been starved of returns in cash in their home bases. Like some other faraway places, SA has offered good yields on our bonds and even cash. The trick always is the volatility of the rand. As long as it behaves, typically because of such issues as government policy, balance of payments, muted inflation, etc... , um, well-mannered and predictable labour and industrial relations, all is well. Should these, or any combination of them, go out of kilter, those fickle foreigners, having enjoyed the so called "carry trade" run away. In so doing, they do two things: firstly, they exit our bonds or shares; secondly, they sell the rand to buy something "safer". What this is, I don't know, but run they do. Depending on whether this is a localized SA event or alternatively, a global emerging market event, will determine the impact. The former might be over in a jiff, the latter might have seismic impact. What this means, is the weakening of the rand, and possibly the rapid increase of interest rates to help soften this. It would also bedevil the government's efforts to finance the deficit they need to fill as announced in the budget and in terms of the medium to long term strategic plans of the state. This is important - ask any self-respecting central bank governor. The issue is the current and sustained low cost of borrowing which enables treasuries around the world to issue debt (read bonds) and enjoy sub-inflationary interest rates. Should this reverse we start a slow spiral into trouble, where the interest bills swallows more and more of the revenue the economy and taxes generates for the government. Interestingly, SA is not over-borrowed in international markets. There has been sustained appetite for our bonds. This represents a double edged sword. It has been attractive for us to issue debt and we have taken advantage, but the danger is the reversal of this trend, just when our Treasury is getting ready to finance the government's spend. We are also witnessing the negative effects of the rand's weakness and the unprecedented and ridiculous wage settlements negotiated in the recent past; both in the mining sector and in the general economy. Our wage bill relative to productivity is shocking and this will have an impact in the form of added inflationary pressure in time to come.
So where does this leave us as investors? Notably, when analyzing the makeup of local unit trust portfolios, one notes that all of the portfolios we support are heeding these trends and are all pretty fully invested; in some cases even slightly over the limits allowed. We also think that taking advantage of the now generous annual foreign allowance we are entitled to is smart. What we do with these funds once overseas is dependent on one's appetite for risk. Importantly, if time is on your side and income or even access to funds isn't required, a quality portfolio of top global shares (preferably with higher dividends) or a well managed balanced portfolio, is bound to have a positive impact. Cash should be avoided given that interest rates are negative in real terms. Property overseas is also attractive. The probability, given the unprecedented worldwide issuance of money, is a resurgence of inflation in years ahead. This inclines us to promote, whenever possible, growth assets in portfolios. Property in a commercial sense has not returned to favour with legacies of the meltdown of 2007/8 still clear in the memories of investors and borrowers alike. It requires a cautious approach, but is certainly enjoying a lot of attention and research at NFB, given the positive cash flows and longer term capital growth these investments enjoy. Once again, we like a multi management approach where we entitle either our Asset Management team, or top managers the right to switch monies between asset classes.
Either way, the key message is trying, where possible and where monetary and risk budgets permit the luxury, to allow your wealth manager the mandate to create inflation beating returns, both locally and, importantly right now, globally. The risk of loss is ever-present when investing in growth assets. This risk is diminished by time on the block. The risk of running into troubled water is unavoidable where riskier growth assets are avoided, for fear of short-term losses being incurred. This statement does not promote wholesale commitment to risk. It does, however, strongly promote detailed engagement with your wealth manager to review your needs, understand risk, inflation, and to adapt portfolios if necessary. In conclusion, recent developments in the retirement savings space has created a very effective and flexible opportunity in the space of Estate Planning. Your NFB wealth manager is aware of these developments. I would promote this being discussed as Estate Duty and associated costs are very significant and can often be moderated.
fortune favours the well advised
Budget 2013/2014
Boring? “The avoidance of taxes is the only intellectual pursuit that carries any reward” ~ John Maynard Keynes.
Susan belongs to a pension fund with a current value of R10m. She retires
Image credit: 123RF Stock Photo
from the fund, transfers to a living annuity, and has R2 000 000 in accumulated non-deductible contributions. Option 1: Susan does not take a lump sum at retirement. The first R2 000 000 of income from the living annuity will be exempt from tax.
F
inance Minister, Pravin Gordhan, does not seem to agree with Mr Keynes and delivered a budget that did not offer much incentive to taxpayers. In fact, most commentators cited the budget as a non-event with little to discuss. When assessing the budget more closely there are a number of items discussed that are of interest to us and we will in the course of this article endeavour to touch on these.
Retirement and Retirement Assets
retirement funding income. This will change effective from 1 March 2014 with a capped Rand value of R350 000 for contributions to pension, provident and retirement annuity funds. = At death there is NO
# Estate Duty (save 20%) # Executor's fees (save 3.99%) # Capital Gains Tax (save 13.3%) = Within the retirement annuity itself
tax is applied at # 0% Income Tax # 0% Capital Gains tax
Option 2: Susan takes a lump sum withdrawal equal to R315 000 Section 10C exemption only applies to taxable annuity (not the R315 000 taxed at 0%) R315 000 – R2 000 000 = -R1 685 000. Therefor there is no tax on the lump sum. The lump sum is first set off against the non-deductible contributions and does not in this scenario form part of the lump sum retirement tax table. The amount of R1 685 000 will be set off against the
The Taxation Laws Amendment Act
# 0% Dividends Withholding Tax The above detail in itself makes a compelling case for the inclusion of a
2012 was promulgated on 1 Feb 2013 and included Section 10C which is effective from 1 March 2014. It is this
retirement annuity in your portfolio. In addition to these factors Section 10C states that any non-deductible
Option 3: Susan take a lump sum of
Section that will provide some fantastic investment planning opportunities going forward through
contributions (contributions over and above the maximum allowable deductions) can be used to reduce
R2 315 000 – R2 000 000 = R315 000
the use of retirement annuities. Before we get to Section 10C lets summarise the basics of a retirement annuity:
tax in respect of income from compulsory annuities. The following examples illustrated the potential
= Your contributions are tax
benefit:
deductible up to 15% of your non-
income from the living annuity.
R2 315 000
The R315 000 is then subject to the lump sum retirement tax table, where the first R315 000 is taxed at 0%, so Susan gets R2 315 000 tax free at retirement.
In addition to the examples above, should you pass away while you are
this, determine whether your objectives may or may not be compromised by any potential
still invested in a retirement annuity and the beneficiaries elect to commute their portions, they can
changes. The Minister is concerned around the use of trusts to avoid Estate Duty and also plans to limit the
then take a combined tax free lump sum equal to the deceased's accumulated non-deductible
use of Trusts as flow through vehicles. The bottom line of his proposal is that
contributions. Said another way, your beneficiaries would get an amount
all income will be taxed in the Trust and any capital that is distributed out
that is free of Estate Duty, Income Tax, Capital Gains Tax, Executors fees and any tax on retirement lump sum
will be taxed as income. If the
benefits. Boring budget? (we have used some poetic license here as 10C was
be able to reduce the Trust's tax rate by distributing income and gain to beneficiaries with lower tax rates than
part of the recently promulgated Taxation Laws Amendment Act and not the budget itself).
Income Protection The landscape of income protection benefits will be changing. It was discussed in the Budget that premiums towards income protection will no longer be deductible, however, pay-outs will be exempt from tax where they were previously taxable. We will be keeping a keen eye on this development and inform you accordingly. Boring budget?
Taxation of Retirement funds Earlier we touched on proposed changes to deductible contributions in respect of a retirement annuity from 15% of non-retirement funding income to a capped value of R350 000. Developing this subject a bit more it was proposed that contributions to retirement funds (to now include pension and provident funds as well as retirement annuities) can be deducted up to 27.5% of the higher of your remuneration or taxable income capped at the R350 000. Employer contributions to your retirement benefits will be treated as a fringe benefit, however, they should be deductible later on in the tax calculation. All of these changes are in an effort to harmonise the tax treatment of all types of retirement fund contributions. Boring budget?
Pre-Retirement Preservation and PostRetirement Annuitisation
aforementioned proposals are promulgated Trustees will no longer
retirement annuitisation all in an effort to get consumers to retain their accumulated retirement benefits: = From a date still to be determined
(P-day) upon resignation from a provident or pension fund a member's benefit will go to a default preservation fund or a preservation fund of their choice upon request. = Currently you can make one full or
partial pre-retirement withdrawal from a preservation fund. Withdrawals from new preservation funds, after P-day, will be capped at one withdrawal per year with each withdrawal limited to 10% of fund value. = After P-day provident fund
withdrawals at retirement will be limited to one third of fund value with the balance used to purchase an annuity. This ruling will only be applicable to contributions made after P-day. = At retirement accumulated
benefits will go to a default annuity product unless the member requests a fund of their choice. = The rules surrounding living
annuities will also get revised incorporating new age-related drawdowns and prudential asset requirements. It is very important to make an informed decision when retiring or resigning. Boring budget?
the Trust; although there will be certain 'deductible contributions'. Please note that this is just a framework put forward by SARS and it is fraught with existing legal precedent that will make for an arduous process to reach enactment. Through the appropriate use of product when making investments into unit trusts or direct equity portfolios it is possible to reduce the income tax on trust income to 30%, from 40%, and capital gains to 10% from 26.6%. Please speak to your NFB advisor for more detail. Boring budget?
Conclusion We have strayed from the norm of the traditional content of our articles into an area that is both confusing and technical. It is essential for us that our clients are well informed and our advisors on the cutting edge of market and legal advancements. The majority of the detail above still has to be promulgated (and is subject to interpretation) and will likely be panelbeaten and change form along the way. We will keep you informed of progress and continue to ensure that your portfolios are positioned to best suit your requirements alongside the prevailing investment environment.
Stephen Katzenellenbogen B.Com (Hons),
Taxation of Trusts The propositions put forward by Minister Gordhan regarding the taxation of trusts have caused many
There are a few proposals discussing
frantic e-mails and phone calls. Before we get to the detail it is always important to consider your rationale
pre-retirement preservation and post
for using a Trust, and then only after
CFP速, Adv PDFP
Private Wealth Manager - NFB Gauteng
Rewards programs are you making the most of them?
o you go to the gym, have regular health checkups and do assessments online in order to improve your status on the many wellness and rewards programs available such as Discovery's Vitality and Momentum's Multiply.
S
Image credit: 123RF Stock Photo
But the question is - are you taking full advantage of the rewards that they offer? Wellness programs provide tools; information and incentives to adopt and maintain a healthy lifestyle, so why not take advantage of these incentives? Besides the reduction in your life premiums and the paybacks on offer from Discovery and Momentum there is whole world of rewards on offer! For example if you are on Discovery Vitality, have you taken advantage of the extra cash-backs available from Clicks by activating your Healthy care benefit? Received your cash back from buying healthy foods at Pick'n Pay with the Healthy Foods Benefits? Do you enjoy the lower movie price at Ster-Kinekor? Have you taken advantage of the great savings available when travelling?
Example: on Discovery Vitality and planning a trip to Thailand? Take advantage of the discounts along the way! Get in shape for the trip first by working out at Virgin Active. Get magazine subscriptions via Vitality Mall giving you reading material for your trip and buy all your travel necessities from Clicks. You could fly to Johannesburg with Kulula, rent a car from Europcar for the day and stay over at a Southern Sun hotel. You could then fly with Emirates to Thailand and if you have the Discovery Card and your accommodation is booked through World Leisure Holidays, your whole holiday is sorted every step of the way with vitality discounts ranging from 5% to 50%. A sure reason to improve your Vitality status! Having a baby? The Baby benefit offered by Vitality gives you a free goodie bag with discount coupons for all those necessary baby items. If you belong to Momentum Multiply do you know that you can take advantage of the flight discounts on Virgin Atlantic and enjoy being royally treated at Bidvest premier lounge at a discount while waiting for your flight? While on a business trip or holiday, look at staying, at a fraction of the price, at a Protea Hotel or Citi Lodge. There are great discounts on a wide selection of magazine subscriptions for the whole family including the Getaway, Popular Mechanics, Ideas, FinWeek, House & Garden, Complete Golfer and National Geographic Kids. Looking for a great gift? Utilize the discounts by buying some books, DVD's and CD's online with Kalahari. For the sports lovers, discounts are available on certain cricket match tickets. Wellness programs really do offer an extensive range of benefits for the whole family.
Remember that increasing and maintaining your status on the various wellness programs is not difficult to do: 1. Do a few online assessments 2. Have your health checkups and 3. Have a fitness assessment / keep active and enjoy the wide range of rewards on offer! Besides all the discounts and savings, the underlying benefits such as death, disability and severe illness by the likes of Discovery and Momentum are comprehensive and top quality. By using these wellness programmes and your savings in premium, you can also look to increase your risk benefits while at the same time getting some value back from what is often felt is a grudge payment. Contact your Private Wealth Manager for more details on how to enjoy these rewards and improve your benefits.
Julie McDonald B.Com, CFP速 Financial Paraplanner - NFB East London
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