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PERSONAL FINANCE
issue 15 July 2010
Magazine
TAXATION AND ESTATE PLANNING some issues to consider
BUSINESS ASSURANCE who needs it?
CHECKING UP ON YOUR FINANCIAL ADVISOR what you should expect
WIN A NIGHT'S STAY AT THE PREMIER HOTEL CASCADES 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.nfb.co.za NFB is an authorised Financial Services Provider
sensible finance
ED’SLETTER
editor Brendan Connellan bconnellan@nfbel.co.za
contributors Philip Shapiro (NFB Gauteng), Travis McClure (NFB), Chris Lemmon (NVest), Shaun Murphy
a sensible read
(Klinkradt & Assoc.), Grant Berndt (Abdo & Abdo), Claire Broedelet (Travel Experience), Natalie Dillon (Old Mutual), Marcel Bradshaw (Glacier International), Julie McDonald (NFB), Robyne Moore (NFB), Paul Marais (NFB Gauteng), Debi Godwin (IE&T).
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
K
e Nako! The World Cup is finally happening after years of
nervous anticipation as to whether or not we could pull it off in time. Thankfully, it has been a great success so far and I personally took great pride in giving a good old “I told you so” to sceptical foreign friends of mine. I think we all under estimated just how positive the event can be in terms of branding South Africa overseas. Bafana Bafana (despite their Uruguayan performance) have done us proud in terms of nation building and certainly at a time when we needed it! Vuvuzelas, love them or hate them, have been a global hit and I have heard stories of thousands of vuvuzela orders being placed by French unionists planning on using them during protests in France and free vuvus being given out with every edition of a certain UK newspaper. I think we can also give our police force, and the special courts formed to deal with World Cup crime, a big thumbs up – it is so refreshing to read reports of crime being so effectively dealt with. I have been to one match so far (in P.E.) and was highly impressed by the efficiency of everyone, from the ticket collectors to the park and ride facilities. It just proves that South Africans, and Africa in general, have the ability to do anything as well, if not better than, the rest of the world. I wonder how quickly South African flags will be taken off our cars and whether our Bafana t-shirts will be moth-eaten this time next year? Let's take the lessons learned beyond the 11th July. May the police continue to show the same commitment, may the courts continue to deal with crime effectively, may municipalities continue to keep our cities clean and may we, as a people, show the same pride in our country and enthusiasm in uniting and working together as we all have done during the SWC month! Until next time, enjoy what is left of the tournament and don't spend all your money on football memorabilia!
editor or the NFB Private Wealth Management.
Brendan Connellan - Editor and Director of NFB
No part of this publication may be
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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©2010 All Rights Reserved.
medium without prior written consent from the Editor.
sensible finance July10
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SENSIBLE CONTENTS
nfb sensible finance
July 2010
4 THE MUNICIPALITY'S RIGHT TO DISCONNECT ELECTRICITY Know your rights as a tenant. By Grandt Berndt - Abdo & Abdo.
6 CAPITAL GAINS TAX IMPLICATIONS FOR THE INDIVIDUAL CGT will affect every tax payer at some time or other, and although potentially confusing, it is relatively simplistic in its basic form. By Shaun Murphy, CA (SA) Partner Klinkradt & Associates.
7 ESTATE DUTY ACT – RECENT AMENDMENTS How these changes could affect you and your beneficiaries. By Debi Godwin, Director - Independent Executor & Trust.
8 FOREIGN INVESTMENTS – LOOK BEFORE YOU LEAP
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Factors to consider when deciding to invest internationally. By Marcel Bradshaw, Head of Glacier International.
9 BUSINESS ASSURANCE – WHO NEEDS IT? Why business assurance is vital to the successful continuity of your company. By Robyne Moore - NFB.
10 CREATING WEALTH THROUGH INVESTING Anyone can and should do it. Source www.peterpyburn.co.za/investing
12 TAXATION AND ESTATE PLANNING – SOME ISSUES TO CONSIDER With proper estate planning a substantial amount can be saved. By Philip Shapiro, Financial Director - NFB Gauteng.
15 THE LIFE OF A MODERN TRAVEL CONSULTANT Constantly adapting to the ever-changing travel environment. By Claire Broedelet, Marketing & Operations Director - Travel Experience.
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16 TAXATION OF MY RETIREMENT BENEFIT As a member of a fund, what are your options on retirement? By Natalie Dillon, Senior Legal Advisor - Old Mutual Broker Division.
18 LOCAL IS SO YESTERDAY A look at current market trends and how investors are being affected. Source: Stafford Thomas - Financial Mail
20 NFB CORPORATE RESPONSIBILITY – FULL STEAM AHEAD! An update on the Loaves & Fishes Network. Touching lives in our community – you too can make a difference! By Brendan Connellan, Director - NFB.
21 CHECKING UP ON YOUR FINANCIAL ADVISOR What to ask and what to expect. By Julie McDonald, Paraplanner - NFB.
22 WHERE HAS LIBERTY INTERNATIONAL GONE? How the name change and restructuring affect your shareholding. By Chris Lemmon, Director/Portfolio Manager - NVest Securities.
23 TOTAL EXPENSE RATIOS The future of fee disclosure. By Paul Marais, Director - NFB Gauteng.
24 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.
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25 WIN A ONE NIGHT STAY AT THE PREMIER HOTEL CASCADES Stand in line to win a one night stay for two, compliments of the House of Travel, East London
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SENSIBLE SENSIBLESOLUTIONS INVESTOR
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SENSIBLY LEGAL
The Municipality's Right To Disconnect Electricity Know your rights as a tenant. By Grandt Berndt - Abdo & Abdo
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he disconnection of electricity without notice to the consumer has been challenged and heard by the Constitutional Court. For the past couple of years the municipality has required the account to be in the name of the owner of the property with the responsibility being on the owner to ensure that any tenant pays for the municipal services utilised. In the case in question, numerous tenants occupied a building in Johannesburg and paid their rental and electricity to the owner, who was in turn to pay the electricity portion to the municipality. The owner, however, never paid the municipality and the municipality, without notice, cut off the electricity. The tenants, after losing their case in the High Court, approached the Constitutional Court for an order that their electricity supply be reconnected and that they were entitled to notice and an opportunity to make representation to the municipality before their electricity supply was cut off. The tenants relied on, in terms of the Constitution, their right to adequate housing and to human dignity and in terms of the Promotion of Administrative Justice Act, that the municipality was required to afford them notice of the intended termination, before taking a decision to disconnect their electricity, as such a decision materially and adversely affected their rights. The municipality claimed that, in terms of its Credit Control By-laws, the tenants were not customers as the municipality had no contractual relationship with them. The municipality thus claimed not to owe the tenants any duty, but only owed a duty to the owner with whom they had contracted. The Constitutional Court held that the supply of electricity is in fulfillment of the Constitutional and
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Statutory duties of the local government to provide basic services to all persons within their city. When people receive electricity they do so by virtue of their public law right to receive this basic municipal service. In depriving them of a service they were already receiving as a matter of right, the municipality was obliged to give them notice of the intended termination. On the facts, the tenants were held to be entitled to 14 days pre-termination notice in the form of a physical notice placed in a prominent position in the building. This notice would then enable the user of the electricity to challenge the proposed termination, or to make arrangements to settle any arrears. The by-laws relating to Credit Control and Debt Collection have to be read with the Promotion of Administrative Justice Act so that procedural fairness is afforded to, not only the customers of the municipality, but any person whose rights are adversely affected by the cutting off of the electricity supply. The by-laws permitting the termination of electricity supply without notice was held to be unconstitutional and the municipality was accordingly ordered to re-connect the electricity supply. Thus in conclusion, the municipality needs to give reasonable notice to any person prior to disconnecting their electricity supply. Failure to do so would render the municipality's action invalid and unconstitutional and would make them liable, not only for the actions such as the one discussed above, but also for claims for damages any consumer may suffer as a result of the cutting off of their electricity supply without notice. Each case would, however, be dependent upon its own circumstances.
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SENSIBLE ADVICE
CAPITAL GAINS TAX IMPLICATIONS FOR THE INDIVIDUAL CGT will affect every tax payer at some time or other, and although potentially confusing, it is relatively simplistic in its basic form. By Shaun Murphy, CA (SA) Partner - Klinkradt & Associates
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n this issue we will take a look at an area of the income tax act that at some point or another in a tax payer's lifetime will come to fruition, and potentially create some confusion. Capital Gains are usually as a result of two occurrences in a taxpayer's lifetime, firstly an asset, capital in nature (a listed share with a long term capital appreciation intention for example, included in this is units in unit trust schemes) must be acquired, and secondly, this asset must be disposed of for a gain. The term “disposal� is very widely defined in the Tax Act, but simply, should you ever sell the asset for a profit, this profit will be taxable at the applicable capital gains tax rate. There are, however, certain exclusions that are applicable and disposal of these assets will not attract CGT. The rate applicable to a capital gain depends on the taxpayer's tax bracket or income earned (i.e. the other taxable income earned; salary, interest, pension, annuities) during the year of assessment in which the capital gain is made. The maximum marginal rate that can be applied to a capital gain is 10%, and this is if the taxpayer currently earns in excess of R600 000 per annum. Should your other income be below this bracket, then the resultant effective capital gains tax rate will be reduced. The most common exposure to CGT for the individual will be as a result of investment properties or share investment portfolios, acquired over a taxpayer's lifetime as a supplement to retirement funding income. When these assets / investments are eventually disposed of the profits will be subject to CGT. The gain or loss made on a share portfolio or unit trust is usually simple to calculate as the funds themselves usually issue the taxpayer with an IT3 certificate, detailing the capital gains made on that particular investment. With regards to
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investment properties it is a little more complicated and an area which clients often have queries on. What expenses can I claim against the proceeds from disposal of the property? In a nutshell, everything that you have not claimed against your rental income received; for example: estate agents commission, any structural additions / alterations, the full purchase price including attorney's fees and transfer duties, and any bond registration fees incurred. What is commonly mistaken is the fact that the settlement of the outstanding mortgage bond is not a deduction for CGT purposes. This is an important point to remember, because the property investor may have utilized spare equity in previous properties for deposits on additional property purchases. When the first property is disposed of and the full bond settled, CGT is payable on the difference between the original purchase price and the full proceeds received, not the after bond settlement cost. For properties acquired before CGT became effective on 1 October 2001, property valuations should have been performed on all investment properties held at that point in time, the cut off date being 30 September 2004, for these to be completed. The capital gain calculation is slightly altered in this instance, as it is not the original cost that is used, but the 1 October 2001 value that is used as the so called base cost, including any costs of disposal and capital expenses incurred on the property after 1 October 2001. If a valuation was not obtained at 1 October 2001 by the due date there is another calculation available to the taxpayer to increase the base cost of properties acquired prior to CGT becoming effective; this is called the Time Apportionment Base Cost formula and, if you are in this position, it is suggested that you contact your accountant for some assistance ...continued on page 20
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SENSIBLE PLANNING
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ESTATE DUTY ACT – RECENT AMENDMENTS How these changes could affect you and your beneficiaries. By Debi Godwin, Director - Independent Executor & Trust
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recent, welcome amendment to the Estate Duty Act gives spouses access to each other's estate duty abatements and eliminates the need for the artificial use of structures, such as trusts, to achieve this objective. The amendment applies from 1 January 2010. This could have implications for your estate plan and you may need to revisit your will. Estate duty is levied at 20% on the dutiable portion of your estate - in other words, after the exemption of R3.5 million has been accounted for. Each spouse is entitled to use the abatement of R3.5 million. Previously, if you did not take advantage of the abatement, you lost it. The amendment means that the R3.5 million abatement can be rolled over; in effect, the estate of the surviving spouse can use a deduction of up to R7 million on death. When the amendment Bill was initially drafted, you had to bequeath your entire estate to your surviving spouse for him or her to benefit from the R7 million abatement. However, this has been changed, and you no longer have to bequeath your entire estate to your spouse to enjoy the full abatement. The estate of the surviving spouse can use the portion of the exemption that was not used by the first-dying spouse, as long as the Estate Duty return can be produced. The portability of the exemption makes it all the more important that executors keep proper records. The executor of the seconddying spouse will have to submit a copy of the firstdying spouse's estate duty return to SARS. It is important to note that although the portability of the deduction simplifies matters for many estates, the need for estate planning still
exists and many factors need to be considered, such as succession planning and the protection of assets. Points to consider when deciding whether to use the R3.5 million exemption, or to leave everything to your spouse and allow his or her estate to use the combined exemption: Asset protection: you need to consider whether you want to set up a trust. You may want to do so if you want to protect assets for the benefit of your minor children or to allow your assets to be used by future generations of your family. If you set up a trust, you will probably want to use the estate duty exemption to pass on assets worth up to R3.5 million free of estate duty to the trust. Growth of the assets: the easiest option is to leave your assets to your spouse and to pass on your exemption to your spouse's estate. But if you are leaving a growth asset, such as a property or an investment, and particularly if you and your spouse are relatively young, it may be wise to consider leaving the asset to a trust and using the abatement in the first-dying spouse's estate. This will help you to limit or reduce the estate duty liability when the surviving spouse dies. For example, if you transfer a property valued at R3.5 million to a testamentary trust and the property appreciates at 12 percent a year, in 18 years the value of the property will be close to R30 million. As the surviving spouse is not the owner of the property (it is owned by the trust), the value of the property will be excluded from his or her dutiable estate. The Estate Duty definition of a spouse extends to unmarried same-sex or heterosexual couples in a long-term relationship.
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: debi@iet.co.za
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SENSIBLE PORTFOLIO
Foreign investments – look before you leap Factors to consider when deciding to invest internationally. By Marcel Bradshaw, Head of Glacier International
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ny client looking to invest a sizeable amount should include foreign investments as part of their total portfolio. This is the view of Marcel Bradshaw, head of Glacier by Sanlam's new international division, Glacier International. There are, however, an equal amount of opportunities and risks attached to investing internationally and clients need to have a clear understanding of exactly what it is that they want to achieve. Some investors may want considerable assets overseas as they're considering emigrating or retiring abroad, while others may be considering sending their children overseas to study.
Factors to consider when deciding to invest internationally
n When are the funds needed? Are they intended for retirement, or does the client need to access the money sooner? n What is the age of the client and how far away from retirement is he? n Is the client considering emigrating or retiring overseas? In the case of a client with an investment horizon of more than five years, it is suggested that between 20 – 40% of the discretionary amount be invested overseas. If the client is considering relocation, then a larger sum – if not all of the funds – should be invested overseas. Essentially, the rule is – the longer the investment term, the higher the percentage of funds that should be invested overseas. Clients should not be investing funds globally that are needed to provide income.
Other considerations The global investment environment is decidedly more sophisticated and offers more choice in terms of asset classes, geographical areas and currencies. The average investor would do well to consider an international balanced fund from a well-recognised asset manager, using a spread of international equities, bonds and cash. In this case, the fund manager makes the asset allocation
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decisions on behalf of the client, such as whether to be overweight in emerging or developed markets. A more seasoned investor could use a balanced fund as the core of his portfolio and could use specific asset class or geographical funds as satellite investments, depending on the individual risk profile and personal preferences. For example, the investor can overweight his portfolio with emerging markets, property or a specific country of choice. The next decision revolves around currency selection. If the client is going to be spending the money overseas, he should invest in the particular currency in which the money will be spent. Currency movements are particularly difficult to predict, and the average investor is advised to leave currency choice to an experienced asset manager. The final decision involves the choice of investment vehicle. Clients can either invest overseas directly, using their individual offshore allowance, currently R4 million (or R8 million in the case of a husband and wife), or they can utilise the asset-swap capacity of a life company. Choosing the former method allows the investor to spend the money in the particular foreign currency as the funds do not need to be repatriated back to South Africa. An asset-swap investment is suited to smaller amounts or to situations where the client has already used up his individual allowance or does not wish to realise the investment abroad. In this case the client enjoys the benefits of international exposure, but the funds will need to be repatriated back to South Africa. International diversification is a must for every portfolio, but it's a sophisticated process with a need for a high level of advice. Clients are urged to consult with their financial intermediaries to ensure their investment plan meets their needs now, and into the future.
SENSIBLE BUSINESS
BUSINESS ASSURANCE WHO NEEDS IT? Why business assurance is vital to the successful continuity of your company. By Robyne Moore - NFB Photo BigStockPhoto.com
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usiness assurance is vital to any business, whether large or small. The purpose of business assurance is to ensure the continuation of the business after a partner/owner dies (or is disabled) and to protect the owner and his family against financial difficulties. Each business has its own unique and particular list of financial requirements. This article will cover two of the more common needs assessed, namely buy-and-sell agreements and key man assurance.
Buy-and-sell agreements In the case of death or disability, of either yourself or one of your partners, your business can be left vulnerable, as a part of it may have to be sold to pay out the shares to the estate of the deceased party. The answer is for all partners/shareholder of the business to enter into a buy-and-sell agreement, ultimately ensuring business continuity. This will ensure peace of mind for yourself and the knowledge that, should you die, your family's future income is safe and that they will not have to change the lifestyle to which they have become accustomed. A buy-and-sell agreement may contain a number of terms and conditions, but is based on the following essential elements:
<
A stipulation which obligates each owner/shareholder sells his/her shares in the business to a fellow owner/shareholder on his/her departure from the business < An agreement that the surviving owners will purchase the deceased owner's share of the business < A standard formula which will determine any future selling price < An agreement on how the purchase will be funded by the surviving owners/partners should any one other owner/partner pass away. Normally, funding would take place by taking out life assurance on the life of each owner. < The agreement would need to cover how the life assurance policies will be structured, and how they will be ceded. For example: Dave, John and Mike all own a business together. In the event of Mike's death, Dave and John have agreed that they will pay 'x' (determined by the formula) across to Mike's estate, which in turn will be distributed to his beneficiaries according to his Will. In order to fund the purchase of the deceased's shares, Dave and John have taken out a policy (of which they are the beneficiaries) on Mike's life. In the same way, Mike and John will own a policy on Dave's life, and ...continued on page 17 sensible finance July10
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A SENSIBLE START
CREATING WEALTH THROUGH INVESTING Anyone can and should do it. Source http://www.peterpyburn.co.za/investing.html
Want to start investing? Maybe you wish to retire early, build your own business in the future, buy a home or to pay for your kid's education. Or anything else that needs money. Do you feel that investing seems too complicated? Something for only wealthy or experienced people? The truth is that investing is something that everyone can and should do and as soon as possible!
Why should you start now? There are two ways you can create money. You can exchange your time for money or you can make your money work for you. Most of us work for money. We trade our working hours for a salary. In order to make more, we need to work more. But there are only so many hours in a day, even with overtime! And there is more to life than working for money. It makes far more sense to make your money work for you. And you do this by investing. Investing will help you maintain your current lifestyle. It will help secure your financial future. What if you were retrenched? What will happen when you retire? By investing today, you can build up a source of funds to help you live comfortably in the future. You invest so that you can provide for yourself in the way you are accustomed to, both before and after retirement.
So why have you not started investing yet? Do you feel that investing is too hard or too risky or that you need a lot of money to invest? Not so, and I can show you why! The earlier you start, the more money you will earn. The effect of compound interest is huge,
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however, it needs time to really work for you. The sooner you begin, the sooner you can reap the rewards. The longer you invest, the more your money works for you. Just begin NOW!
What is your heart's desire? Travel the world? Fly an airplane? Sail the seas? Buy a home or a new car? Get a Pentium 4 computer? Whatever you desire could come true - if only you had the money! Well, by saving some of what you earn, you WILL be able to afford these things, SOONER THAN YOU THINK! You just need a disciplined savings plan that offers you the potential to grow your money quickly!
Some investment truths;
< Since 1940 there have been only 2 YEARS WITHOUT INFLATION! < Your money cannot grow without accepting some RISK. < Investing has at least a 5-YEAR HORIZON, anything less is either savings or gambling! < PAST PERFORMANCE is no indication of future results. < The power of COMPOUND INTEREST is not fully understood. < You should regularly save at least a TENTH OF YOUR INCOME. < BANK investments never give real capital growth. < You invest to PROTECT YOUR MONEY from inflation and make it grow. < You invest to provide an INCOME IN RETIREMENT. < Your most important long-term investment goal is a COMFORTABLE RETIREMENT.
Ph ot oB igS to ck Ph ot o.c om
With proper estate planning a substantial amount can be saved. By Philip Shapiro, Financial Director - NFB Gauteng
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he amount of money that may be saved by planning an estate properly can be substantial, and warrants more than a cursory glance. Consider the following: < Should the 1st R3.5m of assets be bequeathed to a Trust or other appropriate 3rd party on the death of a spouse, even though any part of the abatement not utilized is rolled up into the estate of the 2nd dying spouse? < Does it make sense to pay estate duty upfront or should this be deferred to a later date? < Should capital gains tax be paid upon death or can it be shifted to a time frame that may be better suited? < Is it possible to reduce the value of your estate without compromising your financial means? These issues, amongst others, should be well thought-out when planning an estate, which is not an overly complicated affairâ&#x20AC;Ś in fact, certain basic steps can be addressed to give you the rudiments of a structured plan, but this doesn't happen overnight and the culmination of the plan and the potential savings takes place over a period of time.
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Annual Donations: Donations are an effective way of reducing one's estate and can be made to the extent of R100,000 per individual in any one tax year without attracting any tax implications in the form of donations tax. Donations are typically made to one's family trust or children, but can be made to any 3rd party if so desired. If this concept is extended a little further to the family unit as a whole, a husband and wife can together donate R200,000 each year. If this is done consistently over a number of years, a substantial amount will have been donated to the family trust â&#x20AC;&#x201C; resulting in saving of estate duty, but equally, and perhaps more importantly, the growth on the annual donations will be housed in the family trust.
Deferment of Estate Duty: Deferment of estate duty is another option to consider. Do you pay estate duty upon the death of the 1st dying spouse (i.e. upfront) and so diminish the estate / family assets or should it be deferred to a later date, namely upon the death of the surviving spouse. To achieve the latter option
SENSIBLE INVESTOR
(ignoring the optimization of the R3.5m abatement for the moment), the 1st dying would simply
used as the receptacle for the 1st R3.5m bequest to ensure use of the full abatement. Any increase in
bequeath his or her estate to the surviving spouse.
the value of assets bequeathed (or transferred) to
There may be circumstances in a particular
a trust will ultimately be excluded from a person's
relationship or family situation that preclude such
dutiable estate, as the growth takes place in the
simple bequests. < Is the surviving spouse a rational person who will
trust. A trust also offers protection of assets against
not be unduly influenced by the romance of a 2nd
creditors. It provides for easy succession of assets
marriage and end up squandering the family fortune?
and use thereof by the beneficiaries. It is not impacted by the death of the founder or principal
<
trustee of the trust. If a beneficiary dies there will be
Is the person of sound mind, who will not be
misguided and spend recklessly or give money away to a meaningless cause?
no impact on the future enjoyment of trust assets by other beneficiaries. The use of a trust can result
<
in effective estate planning for future generations
Should you rather protect your assets for the
benefit of your children and grandchildren? The outcome of these factors will influence one's decision in this regard.
Deferment of Capital Gains Tax: The above considerations also extend to Capital Gains Tax. Do you pay CGT (at an effective cost of 10%) upon the death of the 1st dying spouse (i.e. upfront) and so diminish the estate / family assets or should it be deferred to the death of the surviving spouse. If an asset is bequeathed to a surviving spouse the CGT event is 'rolled over' and will materialize on the death of the 2nd dying spouse. Similar circumstances to those outlined above should be considered.
R3.5 million Abatement: It may still make sense to ensure that the full abatement of R3.5m (the current value of assets up to which no estate duty is payable) is fully utilized in the estate of the 1st dying even though there are roll up provisions relating to the unused portion of the abatement. An Inter-Vivos Trust may already be in existence and this may provide a more structured means of controlling assets left to beneficiaries, or be an opportunity to transfer assets to a trust with no further transaction taxes.
Trusts â&#x20AC;&#x201C; Inter-vivos and Testamentary: An inter-vivos trust is often used as a vehicle for pegging the value in an estate and can also be
and also protect an heir or legatee from the effects of a future marriage regime or potential insolvency. The planner's death will have no consequence in terms of assets being frozen or having to provide an immediate cash flow to a surviving spouse and other family members. There are no CGT implications (no deemed events) or estate duty consequences other than perhaps in relation to the value, if any, of the planner's loan account with his trust. A testamentary trust is equally effective as the receptacle to receive the 1st R3.5 million bequest from an estate. A testamentary trust is created upon the death of the testator and is a simple and inexpensive way of forming a trust that will ensure that assets bequeathed to such trust will be properly looked after upon the death of the deceased, whilst at the same time ensuring that the abatement is optimized by bequeathing the prevailing amount, currently R3.5 million, to such testamentary trust.
Other Considerations: The inevitable event of death may be an appropriate time to transfer assets to a trust or any other 3rd party without the consequences of any transfer duty normally associated with the transfer of assets to such party. Assets bequeathed in terms of a Will to a taxexempt organization, such as a charity, university, Church etc., obtain relief in the form of an estate duty deduction, thereby saving estate duty.
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SENSIBLE TRAVEL
THE LIFE OF A MODERN TRAVEL CONSULTANT
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am increasingly amazed at how much travel consultants have to deal with these days and how well they adapt to the ever-changing travel environment. Between airline strikes, ash clouds, political uprisings, airline delays and security measures there is a great amount of stress involved in ensuring that your customer's holiday is well planned. Of course, this is a part of the job, like all professions. Travel consultants overcome most obstacles due to their many years of experience and constant training in new technological developments and product updates. One piece of advice I can give you is that if your trip is a complicated one, make sure that the consultant you are dealing with is very experienced in planning intricate international trips. If your holiday has many legs with different visa's required, you need someone who knows the 'ins and outs' of all of these legs. This comes with vast training and at least 10 years of international travel consulting experience. When it comes to security measures post 9-11 becoming increasingly strict, our travel consultants have to ensure that they have all your correct details before issuing any and all tickets. In other words, if you full name is “Clair Mary Broedelet”, but everyone calls you “Mary Broedelet”, you need to ensure that you give your travel consultant a copy of your passport prior to booking to ensure that they book with your correct first name. If this does not happen the airline will not honour your ticket and you will not be able to travel without
Photo BigStockPhoto.com
Constantly adapting to the everchanging travel environment. By Claire Broedelet, Marketing & Operations Director - Travel Experience purchasing a new ticket. The same rule applies for the spelling of your name; it has to be 100% correct with no errors whatsoever. Keep in mind that your travel consultant deals with a number of bookings within one working day; please ensure that you check ALL confirmations for bookings to ensure dates, times and names are completely correct. When it comes to airline strikes or events such as ash clouds and political uprisings (events out of our control completely), there are a limited number of things your travel consultant can do, dependent on what moves the airlines are making to accommodate affected passengers. As soon as they are aware of this kind of occurrence taking place, the consultants will check their booking systems to make sure we know who is affected. They then find out what can be done, particularly when the traveller is already overseas and maybe does not know there is a problem. It is particularly important in this instance that we have a way to get hold of you while you are travelling and that you make a point of reconfirming your flights three days before you are due to fly. The reconfirmation is important as the airline can tell you whether your flight times have changed, or if there is any further information you may need prior to returning home. Clair Broedelet is the Marketing and Operations Director of Travel Experience. Should you have any queries or comments please contact her on clair@travelexperience.co.za.
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SENSIBLE RETIREMENT
TAXATION OF MY RETIREMENT BENEFIT Photo BigStockPhoto.com
As a member of a fund, what are your options on retirement? By Natalie Dillon, Senior Legal Advisor Old Mutual Broker Division
W
hen a person receives a lump sum pay out from a retirement fund at retirement, the amount is subject to tax in the retiree's hands. A person is a member of a pension or provident fund by virtue of their employment and is regarded as having retired from the fund when they retire from employment. Where a member of a fund has previously resigned from employment, their retirement provision may have been preserved in either a pension preservation or provident preservation fund. Retirement from either of these is normally at age 55 unless the transferring fund specified an age above 55. A member of a retirement annuity (RA) reaches retirement when the policy matures. The earliest this can happen is when a person reaches the age of 55.
What options does a member have at retirement? A member of a pension, pension preservation fund or RA may take a maximum 1/3 of the fund value in cash and must purchase a pension with the remaining portion. A member of a provident or provident preservation fund may take the full provision as a lump sum or, assuming that the rules allow it, to purchase an annuity with the full proceeds or with a portion thereof.
Taxation of the lump sum Regardless of the source of the retirement lump sum, the tax treatment is the same. The first R300 000 of any retirement lump sum is tax-free. Any previously disallowed contributions will be added to the R300 000. This is regarded as the 'tax-free portion' of the lump sum. The remaining 'taxable portion' is taxed as follows:
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R300 000 – R600 000 18% R600 000 – R900 000 27% R900 000 and above 36% E.g. Mrs Smith retires from her RA (value R1.8m). She has contributed R20 000 which did not qualify for a deduction against her income tax. She takes 1/3 as a lump sum. Her tax is calculated as follows: Lump sum: 1/3 of R1 800 000 = R600 000 Tax-free portion: R300 000 plus R20 000 = R320 000 Taxable portion: R280 000 Tax on R280 000 @ 18% = R50 400 NOTE: Where Mrs Smith has previously received a lump sum from another retirement fund, this amount will be added to the current lump sum and taxed accordingly. If Mrs Smith has a second RA (value R300 000) and retires from it later, the tax is calculated as follows: Lump sum: 1/3 of R300 000 = R100 000 Total - all lump sums: R100 000 plus R600 000 = R700 000 Tax-free portion: R300 000 plus R20 000 = R320 000 Taxable portion: R380 000 Tax on R300 000 @ 18% = R54 000 Tax on R800 000 @ 27% = R21 600 Total tax – R75 600 less tax paid on previous lump sum of R50 400 Tax payable = R25 200
Taxation of the annuity The annuity purchased with the 2/3 of the fund value will be taxed as part of gross income in the annuitant's hands.
SENSIBLE BUSINESS
BUSINESS ASSURANCE â&#x20AC;&#x201C; WHO NEEDS IT?...continued from page 9
Some of the benefits of having a buy-and-sell agreement in place are: < Cash is made available as soon as it is needed < Beneficiaries of your estate receive a marketrelated and fair value of the portion of the business which they have inherited < Enough capital is made available to purchase the shares < The existence and continuity of the business is assured
Key person assurance Many businesses have one or more staff members on whom they depend heavily for their success. These staff members are essential because of special skills and/or knowledge which they impart, and the sudden and unexpected loss (either through death or disability) of such a staff member would be detrimental to the ongoing business operations and productivity, and can lead to huge financial implications. The benefit paid out by key person assurance guards businesses against this risk. Most insurance providers would have a set of minimum criteria which would need to be met before key person assurance is issued for any staff member of a company. Among this list of requirements, would be the following: < The business must be able to show that the employee has the necessary qualifications, creativity, expertise, experience etc. which is crucial to the continued operation and sustainability of the company. < The cover would only be in effect for the time that the employee continues to meet the insurance company's requirements, and continues to demonstrate that they play a vital role and are key in the continuation of the business. Generally speaking, key person assurance would only be valid where the employee passes away or is disabled eg. the insurance would not come into effect where the employee retires. In most cases, insurance companies will not cover the resignation or dismissal of a key employee (however, there may be exceptions to this rule). The purpose of key person assurance is to assist
Photo BigStockPhoto.com
Mike and Dave will own a policy on John's life.
the business on the loss/disability of a key person by using the resources from the policy benefit to recruit and train a suitable replacement, the outsourcing of various functions, and can also be used as a buffer to absorb the impact of any financial/productivity loss while a new employee is being trained or upskilled. Businesses usually take out key person assurance in the form of life insurance and disability insurance to guard against the risk of loss of one of their key employees or executives. The premiums are paid by the business, the policy is owned by the business, and ultimately, the benefits on payout of the policy, are utilised by the business, usually to maintain stability of the company and to guard against any major disruptions.
Tax and Estate Duty It is important to bear in mind that for each of these types of business assurance there may be differing tax implications in the following instances: estate duty, capital gains tax (CGT) and income tax (the intricacies of which do not fall within the ambit of this article). Your business is an important asset and it is vital to have business assurance in place to avoid any future disputes between owners/partners or to guard against any losses on the demise of a key individual, and to guarantee the successful continuity of your business. Should you require assistance in setting up either a buy-and-sell agreement or key person assurance for your business, kindly contact one of NFB's Private Wealth Managers on 043 â&#x20AC;&#x201C; 735 2000 or email us on nfbel@nfbel.co.za
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PhotoBigStockPhoto.com BigStockPhoto.com Photo
LOCAL IS SO
YESTERDAY
A
n old market adage tells us that the trend is your friend. This has certainly held true for SA investors who for the better part of the past decade have enjoyed abundant returns by riding the domestic asset trend. But as markets have also shown countless times, a trend is your friend until it comes to an end. Many leading asset managers are cautioning investors not to become permanently attached to their domestic-only stance. Still, many investors are wary of offshore investment. Still fresh in their minds is the damage done by a trend that went horribly wrong — a stampede into foreign equity funds in 2000 and 2001. For investors who poured money into the average SA-based foreign general equity fund at the end of 2001, the result has been a 20% capital loss. The average domestic general equity fund produced a 200% capital gain over the same period. Coronation Asset Management CIO Karl Leinberger says the danger is that investors will extrapolate the past decade's trend into the future. “SA assets were very undervalued 10 years ago,” says Leinberger. “What followed was an amazing decade for SA assets, but they no longer offer great value.” Better value is to be had in the equity markets of developed countries, he says. “Investors should be increasing offshore exposure, but regrettably few are,” he says. Underscoring his view, Allan Gray CIO Ian Liddle says all funds in which the firm has a discretionary mandate have 20% of their assets
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offshore, the maximum permitted. Investec Asset Management (IAM) is following a similar strategy. “In many funds there is a strong bias towards overweight positions in major global companies,” says Tobie van Heerden, IAM's head of institutional business. He adds that big brand name global corporates such as Coca-Cola, Microsoft, Johnson & Johnson and Pfizer offer solid value but have lagged behind the equity market recovery. He points to their strong balance sheets and attractive free cash flow (FCF) yields averaging 8%. FCF is the cash a company generates in excess
Investors should be increasing offshore exposure, but regrettably few are. of its operating and dividend payment needs. The FCF yield is FCF per share as a percentage of the share price and is regarded by many analysts as the best indication of the return generated by a company. Van Heerden says if you take an FCF yield of 8% and a company capable of growing consistently at 5% annually, you have an effective and very attractive return of 13%. Also emphasising the value offered by major global corporates is Adam Ebrahim, CEO of asset management firm Oasis. Some major corporates offer FCF yields of 15%-20%, he says. Add dividend yields to this of around 6% and an investor prepared to take a five- to 10- year view is faced with an outstanding opportunity, he says.
SENSIBLE TRENDS A look at current market trends and how investors are being affected. Source: Stafford Thomas - Financial Mail Boldly, Coronation puts estimates to its view on domestic and foreign asset returns over the next 10 years. For SA equity it forecasts an average 11% annual return compared with a 17% average over the past 10 years. For foreign equity, Coronation forecasts an average 14% annual return compared with a 2,3% average over the past 10 years. Value is not confined to equity, says Ebrahim. He says commercial property in the US, UK and Europe also represents a rare investment opportunity. Major foreign-listed property companies have emerged from the financial crisis with strong balance sheets and cash to invest and are buying properties on exceptionally high yields, explains Ebrahim. In the US, for example, property companies are buying prime properties yielding 10%-13%, he says. Contrast this, he says, with yields of about 8% on prime SA retail property and the potential for rentals to fall by 10%-20% on renewals. Another trend investors must pay heed to is the run the rand has enjoyed, which made it the world's best-performing currency over the past 18 months. “The rand is overvalued,” says Van Heerden, echoing Leinberger, Liddle and Ebrahim. The rand is the most liquid emerging-market currency, making it foreign investors' “risk play” of choice, he says. Though the rand could strengthen further, he adds, “there is a bigger risk of a blow-out”. While emerging markets remain in favour, the rand will hold or even strengthen, says research and advisory firm Econometrix's chief economist, Azar Jammine. But he warns that a shock to global investors' risk appetite could see them turn their backs on emerging markets and the rand weaken dramatically. Emerging markets in general are seen as fully valued. “We were bullish on emerging markets a year ago, but now see better value in developed markets,” says Van Heerden. Ebrahim poses the question: “Why buy emerging-market shares on 30 p:e's when you can buy global corporates with emerging-market exposure of up to 50% on p:e's of 10 or 12?” Many asset managers are backing their views
on foreign investment with expansion of their offshore capabilities and product range. Among these is Sanlam, through its Sanlam International Investment Partners (SIIP) unit. SIIP has acquired stakes in specialist equity, bond and property investment firms in Australia and the UK as part of a strategy to increase Sanlam's foreign capabilities, says SIIP MD Hendrik Pfaff. “We believe it is the time to be expanding offshore,” he says. Adding to its offshore range, Allan Gray has launched the Global Optimal Fund of Funds, targeting investors with a high risk aversion, says Liddle. The fund's equity exposure is fully hedged.
Many asset managers are backing their views on foreign investment with expansion of their offshore capabilities and product range. The fund joins Allan Gray's Global Fund of Funds, which targets investors with a moderate risk tolerance, and Global Equity Fund, targeting those wanting full equity exposure. Managed by Allan Gray affiliate, Orbis, the funds are among only seven rand-denominated foreign funds to have produced positive returns over the past three years. Coronation has also increased its foreign fund offerings, says Leinberger, the latest addition being its Global Managed Fund, launched in October 2009. The fund's mandate is to maximise returns in developed and emerging equity and bond markets. For those sharing Oasis' optimism on property in developed markets, Ebrahim says Oasis will soon launch a rand- denominated feeder fund into its Global Property Equity Fund. The big question is: how much should be invested offshore? “I would advise the average person to have 20%-30% of their assets offshore,” says Ebrahim.
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EXPECTATIONS SENSIBLE RESPONSIBILITY
NFB CORPORATE RESPONSIBILITY –
FULL STEAM AHEAD! An update on the Loaves & Fishes Network. Touching lives in our community – you too can make a difference! By Brendan Connellan, Director - NFB
I
n 2009, NFB led a debit order and media campaign to assist the Loaves and Fishes Network to try and get out of financial difficulty
following a government decision to stop funding of it, and several other NGO's, in favour of a new initiative they were following. We are happy to
In the words of Dr Trudy Thomas, the chairperson of the Loaves and Fishes Network: “These monies, crucial as they are for our existence, not only boost our bank accounts, but also our spirit and resolve. They also demonstrate that we are not alone, but part of a community of
report that this, combined with various other
people who care for the well-being of our children,
avenues of support received by the organisation, bore fruit and the organisation has managed to
and that it is entirely possible to begin to turn around the crisis of childhood that besets our
keep afloat financially and continues to do
society.”
exceptional work in and around East London, mainly in the area of pre-school education, feeding schemes and development of facilities of centres caring for those who are most in need. A special word of thanks also to organisations such as the DG Murray Trust for providing funding for the “Flying Children's” programme (essentially the core of the organisation's strategy, a programme aimed at providing educare to children who otherwise would not have that positive start in life, and training to the volunteers who care for the children) for 2010, the Catholic Women's League for “adopting” some centres , the children of various schools who donated enough food in the Children for Children campaign to last for 3 months, as well as to the Italian community as a whole – specifically UCODEP and Co-Op Italia who have donated R350,000 for refurbishing centres and R10,000 to develop a soccer pitch in Mdantsane, and La Dante Alighieri Society who have held fundraising events.
If you would like to assist in any way, please contact Robyne Moore of NFB at either 043 735 2000 or rmoore@nfbel.co.za - debit order forms are also available for those who are willing to make regular donations from as little as R30 per month!
Loaves & Fishes Network Touching lives in our community. You too can make a difference!
CAPITAL GAINS TAX IMPLICATIONS FOR THE INDIVIDUAL and guidance in this regard. It is critical to determine whether or not the asset is in fact a capital asset or a revenue asset and we will deal with this issue at a later stage. To conclude, CGT is not necessarily the big evil everyone made it out to be when it was first
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...continued from page 6
introduced and is relatively simplistic in its basic form. However, it is important to consult your accountant or tax advisor when encountering these areas of the tax act as a certain degree of interpretation can be involved in certain instances.
SENSIBLE EXPECTATIONS
Photo BigStockPhoto.com
CHECKING UP ON YOUR FINANCIAL ADVISOR What to ask and what to expect. By Julie McDonald, Paraplanner - NFB
S
o you have finally gotten around to getting
<
your financial planning on the go and have set up an appointment with an advisor who
final decision after getting all the information – which could include quotes, a comparison of
Then it is your turn, as the client, to make the
comes into your home with an application form,
different products and all other material
gets you to sign it and leaves without you really understanding what they have done or if there is
information e.g. fees, benefits, penalties etc. < The advisor should always provide you with a
any benefit to you. STOP RIGHT THERE. The financial planning process should be one where you, as the client, are fully informed, and after receiving all the facts and recommendations - you make the choice.
copy of the proposal in writing, which would include a summary of what was recommended based on the information they gleaned from you, the different products considered, the final product that was recommended and why, and the reasons for the product being selected.
What you should expect from your financial advisor: On the initial visit with your financial advisor these
A few questions to make sure you ask your advisor:
are the things you should make sure you are receiving and/or covering: < They should first get to know a bit about you –
< Why do you recommend this product/institution over another? < When will I see you again to review my
what service do you require? E.g. retirement planning, life cover or a small monthly investment. < Once they know what you require you should expect to answer questions on your financial situation, establish your risk profile and where you would like to be financially. Your advisor will also disclose to you their current qualifications and what they are licensed to advise about. You would need to sign a form in order to give the advisor access to view any current investments you may already have. < An analysis should be done to see what is required to reach your goals. < Your advisor should make a recommendation as to what needs to be done to achieve your
investments? < What are the fees on this product? < Can I withdraw my money at any time or is there a restricted period/penalties?
goals, specify the financial products to do this and why certain products are recommended over others.
<
What should I do as the client?
<
Provide the advisor with all your financial information < Do not sign blank or incomplete forms < Inform the advisor of any material changes when they happen eg. change in address, addition to your family, retrenchment etc. < Do not be afraid to contact the advisor or his/her assistant to ask questions about anything you don't understand. Read all the information given to you – knowledge is power!
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The Eastern Cape's first home-grown stock brokerageâ&#x20AC;Ś..
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
WHERE HAS LIBERTY INTERNATIONAL GONE? How the name change and restructuring affect your shareholding. By Chris Lemmon, Director/Portfolio Manager - NVest Securities
L
iberty International's restructuring has caused quite a stir on local markets, especially for those clients who noticed the share had mysteriously disappeared from their portfolios. Rather than disappearing, Liberty International has undergone a name change and restructuring resulting in your portfolio holding equal shares in Capital Shopping Centres PLC and Capital & Counties PLC. These two companies combined hold the old assets of Liberty International , with Capital Shopping Centres holding all the regional shopping centres (approximately 73% of assets) and Capital & Counties the central London assets, including the well known Covent Garden (approximately 27% of assets). As a South African investor you are now able to choose your entry point into the London property market, focusing either on an income generating stream from Capital Shopping Centres or the potential for capital growth through the redevelopment of the central London assets held in Capital & Counties. While both companies retain a listing in London and South Africa, Capital Shopping Centres maintains a dual-listed structure with Capital & Counties deemed an inward listed security. While this has little relevance for the majority of individual investors, for institutional investors it is more complicated. In essence, holding an inward listed company is deemed
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sensible finance July10
owning foreign assets and is subject to exchange controls. As we saw with the Mondi Limited and Mondi PLC structure, institutional investors holding the old Liberty International have two years within which to dispose of their Capital & County shares before the holding becomes subject to exchange control in their hands. Could this stock overhang be contributing to the weakness in the Capital & Counties since unbundling, or are investors looking for the better yield in Capital Shopping Centres? Regardless, from our perspective we see a good investment case for holding both shares, but at this stage are particularly interested in the redevelopment of the central London property portfolio. With rentals below comparable yields and asset prices depressed, we see the potential for the Capital & Counties management team to add real long-term value. For the patient investor who doesn't require a meaningful income in the short term, Capital & Counties provides an easy entry point into the London property market, with the benefit of holding pound denominated assets providing a further potential tailwind against the backdrop of an uncharacteristically strong Rand. In a market once again displaying considerable volatility, Capital & Counties provides the opportunity to buy tangible assets at depressed levels.
SENSIBLE FEES Ph ot o
Bi gS to ck Ph ot o. co m
TOTAL EXPENSES RATIOS The future of fee disclosure. By Paul Marais, Director NFB Gauteng
Opening Gambit Imagine, if you will, that you had invested a hundred thousand rand with two managers. Over the course of ten years both managers, remarkably, managed to generate a gross return of 15% per annum. However, Manager A's pricing structure was 1% lower than manager B – who charged 2% per annum. Manager A's net return was 14% p.a. and Manager B's net return was, you guessed it, 13%. At the end of ten years Manager B would have generated only 88% of what Manager A managed to achieve – solely because of the difference in fees. Doesn't it make sense that investors and those that advise them have access to complete disclosure of manager fees? It absolutely makes sense and the collective investment schemes (unit trust) industry is embracing this logic with a concept called Total Expense Ratios, also known by the rather unimpressive acronym TER's.
What's in? What's out? TER's attempt to capture all of the expenses incurred by a manager in the process of
generating investment returns. It is important to note that TER's do not attempt to capture the costs of investment advice or of the products through which these collective investment schemes are purchased. In plain English: TER's include investment management fees but exclude financial advisor fees as well as product fees (such as retirement annuity, endowment policy, etc fees).
The Amorphous Beast TER's will also capture that most amorphous of beasts: performance fees. Consider this scenario: Manager C charges a flat fee of 2% per annum and Manager D charges a flat fee of 0.5% per annum plus a performance fee of 20%. Which of these managers has the higher charging structure? At the beginning of the year there is absolutely no way to tell. It is only at the end of the year, after Manager D's performance fee has been calculated, that we are able to determine which of these managers is the most cost effective. (It is of vital importance that funds with low TER's are not confused with high quality funds – investors should be prepared to pay higher than average annual fees if the manager has the skill to generate higher than average returns). If both managers in this scenario generated performance of 20% for the year and Manager D's benchmark return was 10% and both managers had R100m under management at the end of the year (for simplicity we assume fees are only charged at the end of the year) then Manager C would have earned R2m in management fees. Manager D would have earned R0.5m in management fees and R2m in performance fees for a total fee of R2.5m – higher than Manager C's even though they generated the same investment return.
Closing Salvo TER's will capture the effect of performance fees and will require that management companies disclose their fees in both percentage and rand terms. This will be done on a retrospective basis – in other words comparing TER's will only provide valid conclusions for the prior period but nonetheless will make for superbly interesting reading and here at NFB we take the greatest care in ensuring that our clients’, friends’ and investors’ investment returns are not compromised by inefficient pricing structures.
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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.
A: The reality of the situation is that only 6% of people in SA are able to retire independently. This means that the majority of retirees have not provided enough for retirement. This then leads on to a higher withdrawal rate from their retirement capital which puts pressure on the growth in the portfolio and inevitably leads to capital and income drawdown over time. Below are some points sourced from an article written by Ian De Lange of Seed Investments which covers these factors. “Because the investor or annuitant takes on the risks, there is no guarantee from the life company that funds will be available to provide an income for life. In many instances because of selecting a drawdown level that is too high and because of sustained poor performance, the capital value can be depleted, reducing the annuity in real terms. While performance is naturally also very important, because of the compounding effect working in reverse when it comes to drawing down on a lump sum, setting the annual percentage drawdown for the living annuity is crucial. Currently living annuities allow the annuitant to annually select a drawdown level of between 2,5% and 17,5%. Asisa wants life companies to send out annual information to investors in these annuities setting out the importance of selecting the appropriate income level. They have also recommended including a table similar to on the right highlighting the relation between the drawdown and the investment performance on the sustainability of the portfolio. A few points to note Tax is an important consideration especially where investors have a combination of living annuities and investments directly in their own
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sensible finance July10
names. It is important to optimise the tax planning across all investments. Income received into the annuity is tax free, but the annuity itself is taxable as income. Drawdown analysis must not only be done on the living annuities, but a comprehensive plan down on an investor's total investment base, where again often a living annuity is but just one component. Asset allocation modelling is also important to consider across an investors total portfolio.” In the current low inflation, low yield environment it is imperative that your portfolio is structured correctly to meet your income needs. It is also important that one understands the risk to capital and income drawdown and that these are communicated through to you. If you have any questions on your living annuity or would like to have a comprehensive retirement plan drawn up, please don't hesitate to contact us. Years bedfore your income will start to reduce Investment return per annum (before inflation & after all fees
Annual income rate selected at inception
Q: A question often asked with regards to Living Annuities is what level of income should I be drawing, and what are the risks to both my capital and income?
2.50%
5.00%
7.50%
2.50%
21
30
50+
50+
50+
5.00%
11
14
19
33
50+
7.50%
6
8
10
13
22
10.00%
4
5
6
7
9
12.50%
2
3
3
4
5
15.00%
1
1
2
2
2
17.50%
1
1
1
1
1
10.00% 12.50%
Please address all Questions to: Travis McClure, NFB Sensible Finance Q&A, Box 8132, Nahoon, 5210 or email: nfb@nfbel.co.za
WIN A FANTASTIC…
One night stay for two people including Dinner, Bed and Breakfast at the Premier Hotel Cascades courtesy of Travel Experience East London
at
th Win e n Th er Ju unz of rie i B we Ve ush ek nt Lo en er d d ge
With panoramic views of the coastline, East London's port harbour and the Indian Ocean, Premier Hotel Cascades is the latest offering of Premier Hotels & Resorts International. This contemporary designed Hotel provides the ultimate in luxurious accommodation to the business executive. Premier Hotel Cascades offers guests a choice of 260 stylishly decorated rooms, ranging from suites, executive suites and penthouse suites, all with spectacular views of the Indian Ocean. All rooms have satellite television and wireless internet. For those guests who have some time to unwind, the internationally renowned Camelot Spa, located within the hotel, is the perfect place to be pampered.
is:
SUBSCRIBE and
WIN
with Travel Experience and NFB Private Wealth Management
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 1st August 2010 to 31st January 2011, is not transferable and cannot be exchanged for cash. • The draw will take place on 30th July 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;
sensible finance July10
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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.nfb.co.za
private wealth management
NFB is an authorised Financial Services Provider