NFB
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Eastern Cape's Community... Issue 17 March 2011
PERSONAL FINANCE Magazine
TIME TO REVISIT YOUR LIFE POLICIES do you have adequate cover?
DEFERRED COMPENSATION SCHEMES a look at the changes to these schemes
2011/2012 BUDGET SPEECH HIGHLIGHTS and how they affect you WIN A WEEKEND STAY AT HUNTSHOEK LODGE 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.nfbec.co.za NFB is an authorised Financial Services Provider
sensible finance
ED’SLETTER
editor Brendan Connellan bconnellan@nfbel.co.za
Contributors Glen Wattrus (NFB East London), Travis McClure (NFB East London), Shaun Murphy (Klinkradt & Assoc.),Grant Berndt (Abdo &
a sensible read
Abdo), Debi Godwin (IE&T), Natalie Dillion (Old Mutual), Clair Broedelet (Travel Experience), Robyne Moore (NFB East London), Tanya Cohen (Glacier by Sanlam), Chris Lemmon (NVest Securities).
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.nfbec.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 editor or the NFB Private Wealth
Photos used in this magazine BigStockPhoto.com
Management. ©2011 All Rights Reserved. No part of this publication may be reproduced in any form or
W
ith Christmas out of the way, New Year parties a distant memory and the year in full swing, I thought I would take the opportunity to give you an overview of developments within the financial advisory industry which are likely to positively impact on you. Since 2004, when the Financial Advisory and Intermediary Services (FAIS) Act was introduced, the financial planning industry has had a major overhaul and has become far more regulated. FAIS governs almost every aspect of a financial services provider from the manner in which advice is given and presented to clients, to rules regarding advertising, conflicts of interest, fit and proper requirements and dealing with client complaints. One of the latest additions comes by way of the new Regulatory Exams (or RE Exams as they are better known). Essentially, all financial advisors and key individuals within financial services providers are required to write various exams by the end of 2011 which will test knowledge and understanding of the various laws, rules and regulations that govern the industry. Further exams will then also need to be passed before the end of 2013, which will relate to the various types of financial products in respect of which advisors give advice and/or provide an intermediary service – the more products they deal in, the more exams they will have to write. NFB are proud to say that we are at the forefront of this movement and all of our financial advisors have recognised financial planning qualifications, with many at postgraduate degree level. We are also proud of our 1 year internship programme which our trainee financial advisors need to successfully complete before being allowed to give any financial advice whatsoever. So, although you may not see us out socialising much over the next two years as a result of our having to hit the text books and although we are not over-enthused at the prospect of even more exams, I do believe that it is high tide that the industry is cleaned up, and that those financial advisors that are still left out there who are not fit to be giving financial advice, are barred from doing so. Brendan Connellan - Editor and Director of NFB
medium without prior written
Email your full name to nfb@nfbel.co.za to subscribe to NFB's free economic electronic newsletters.
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another aspect of our comprehensive service
sensible finance march 11
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SENSIBLE CONTENTS
nfb sensible finance
March 2011
4 THE GRANNY FLAT CONUNDRUM The saying is that possession is 9/10ths of the law, but when family is involved, this may not be the case. By Grandt Berndt - Abdo & Abdo.
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6 2011/2012 BUDGET HIGHLIGHTS By Shaun Murphy, CA (SA), Partner - Klinkradt & Associates.
9 YOUR FIRST JOB? Make your salary count from the get-go. By Robyne Moore - NFB East London.
10 TIME TO REVISIT YOUR LIFE POLICIES
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Are you sure you have adequate cover or will your loved-ones be left wanting? By Glen Wattrus, Private Wealth Manager - NFB East London.
13 MAINTENANCE CLAIMS AND DECEASED ESTATES Even after death you have an obligation to support dependent children. By Debi Godwin, Director - Independent Executor & Trust.
14 THE RISK-REWARD RELATIONSHIP IN EQUITIES Understanding the dynamics of the market you are invested in. By Chris Lemmon, Director/Portfolio Manager - NVest Securities.
15 DEFERRED COMPENSATION SCHEMES AND THE NEW LAW st
Effective 1 January 2011, the loopholes have been closed. By Natalie Dillon, Senior Legal Advisor - Old Mutual Broker Division.
16 THE USE OF TRUSTS IN ESTATE PLANNING Trusts remain a very useful estate planning tool, if set up and managed properly. By Tanya Cohen, Head of Glacier Fiduciary.
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18 THE IMPORTANCE OF TRAVEL INSURANCE Rather be safe than sorry‌ buy Travel Insurance. By Clair Broedelet, Marketing & Operations Director - Travel Experience East London.
20 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 East London.
21 WIN A WEEKEND STAY AT HUNTSHOEK LODGE Stand in line to win an awesome weekend stay for two, compliments of Travel Experience, East London.
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SENSIBLY LEGAL
THE GRANNY FLAT CONUNDRUM The saying is that possession is 9/10th’s of the law, but when family is involved, this may not be the case. By Grandt Berndt - Abdo & Abdo.
T
he old saying is that possession is 9/10th's of the law. In the case of building on someone else's property this does not necessarily apply. In these trying financial times, one often hears of elderly parents selling their home in order to build a granny flat or garden cottage on the property owned by a child or a son or daughter-inlaw. This transaction is entered into at a time of good family relationships and when no one foresees anything going wrong. It is anticipated that the parent will die first, with the child inheriting and so the investment is seen as an early inheritance. This is, however, an extremely risky exercise on the part of the investor, in that it is reliant on continued good family relationships, the investor being the first dying and the child not going through a divorce, marriage or re-marriage, or sequestration.
Good family relationships: there is the risk that the parties may establish after some time that the plan is not working as intended and there is conflict between them. Should the parents wish to move, they will probably need the finances put into the granny flat / cottage, but may well find that the child is not possessed of the financial means to reimburse them. The parent being the first dying: provided good family relations have been maintained, one needs to consider what happens if the child dies before the investing parent. In all likelihood the child's will would leave their estate to their spouse or children, or if there is no will, depending on the value of the estate, it would be inherited by the surviving spouse and children. The surviving son-in-law or daughter-in-law is now owner of the property and there are many examples of the souring of such a relationship. Whilst the investor has a claim for the enrichment of the property, there may not be the financial means for reimbursement.
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Divorce, re-marriage or sequestration: upon divorce one party often has a financial claim against the other, resulting in the major asset, the home, having to be sold. With marriage or re-marriage, the family dynamics can change, while should there be an inability to service the debt, or even worse sequestration, the property may end up being sold at a sale in execution or auction sale, with the investing parent only being a concurrent creditor with all other creditors after the bondholder, for repayment of the investment. So one can see that there are considerable risks involved. What follows is by no means an exhaustive list, with the best advice being dependent on each person's circumstances. The best way to protect the investor is to either subdivide the property so each owns their own property or to convert the property into a sectional title scheme with the main house and flat or cottage being separate sections of the scheme, and again, with the parent owning his or her section. The ability to register a sectional title scheme on traditional residential property has been made possible through a fairly recent amendment of the municipal zoning requirements. Another way is to register a right such as a usufruct over the flat or cottage, but as this requires a Surveyor General approved diagram from a Land Surveyor in respect of the flat or cottage, one should rather consider the subdivision of the property or following the sectional title route, as the Land Surveyor's involvement is required for subdivision or registration of a sectional title scheme. As an absolute minimum one should ensure that a written agreement is reached at the time of the purchase or construction, in an attempt to avoid tears at a later stage. However, should ownership of the flat or cottage not be held by the investor, there is always a risk.
2011 BUDGET HIGHLIGHTS By Shaun Murphy, CA (SA) Partner - Klinkradt & Associates
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The foreign interest-income threshold will remain at R3 700. Social security and retirement reforms Tax treatment of contributions to retirement funds From 1 March 2012: =An employer's contribution on behalf of an employee will be deemed a taxable fringe benefit in the hands of the employee. Individuals will be allowed to deduct up to 22.5% of their taxable income for contributions to The main tax proposals include: pension, provident and retirement annuity funds. =Personal income tax relief of R8.1 billion =To ensure greater equity, two thresholds will be established – a minimum annual deduction of R12 000 =A third rebate for individuals 75 years and older and an annual maximum of R200 000. =Conversion of medical tax deductions to tax credits Adjustment of monetary thresholds =Transfer duty relief In addition to the measures mentioned above, =Higher taxes on fuel government proposes to increase capital gains exclusion =Higher taxes on alcohol and tobacco amounts as follows as from 1 March 2011: =Taxation of gambling winnings =For individuals and special trusts from R17 500 to R20 000 annually Income tax relief for individuals The 2011 Budget proposes direct tax relief to individuals =On death from R120 000 to R200 000 of R8.1 billion through adjustments to personal income =On disposal of a small business when a person is over 55 years old from R750 000 to R900 000 tax brackets and rebates. Gambling Government proposes that with effect from 1 April 2012 INDIVIDUAL TAX TABLES - 2011/12 all gambling winnings above R25 000, including those Taxable income (R) Rates of tax from the National Lottery, be subject to a final 15% R150 000: 18% of each R1 R150 001 - R235 000: R27 000 + 25% of the amount above R150 000 withholding tax. Similar gambling taxes exist in India, the R235 001 - R325 000: R48 250 + 30% of the amount above R235 000 Netherlands and the United States. R325 001 - R455 000: R75 250 + 35% of the amount above R325 000 Business taxes R455 001 - R580 000: R120 750 + 38% of the amount above R455 000 Dividends tax R580 001 and over: R168 250 + 40% of the amount above R580 000 The dividends tax will take effect on 1 April 2012, replacing the secondary tax on companies. The Rebates introduction of the tax should correct the impression that Primary R10 755 a tax on dividends is another tax on businesses: legally Secondary R6 012 and economically, it will be a tax on individuals and nonThird rebate R2 000 resident shareholders. Tax threshold Below age 65 R59 750 Promoting skills development and job creation Age 65 and over R93 150 Youth employment subsidy To support job creation, a youth employment subsidy in Age 75 and over R104 261 the form of a tax credit costing R5 billion over three years will be introduced. Medical deductions and conversion to medical tax Transfer duty credits Government proposes to increase the transfer duty The 2011 Budget proposes to increase the monthly exemption threshold from R500 000 to R600 000. A rate of monetary threshold for tax-deductible contributions to 3% will be applicable to the value from R600 001 to R1 medical schemes from R670 to R720 for the first two beneficiaries, and from R410 to R440 for each additional 000 000; an amount of R12 000 plus 5% to the value between R1.0 and R1.5 million; and an amount of R37 beneficiary. 000 plus 8% to amounts above R1.5 million. This revised National health insurance rate structure will apply to properties acquired under Government expects that national health insurance purchase agreements concluded on or after 23 February (NHI) will be phased in over 14 years. While initial allocations are made in the 2011 Budget, the NHI system 2011. It will also be applicable to legal persons (close corporations, companies and trusts). will require funding over and above current revenues allocated to public health. Fuel taxes Government proposes to increase the general fuel levy Savings by 10c/l on both petrol and diesel effective from 6 April The tax-free interest-income annual threshold will increase from R22 300 to R22 800 for individuals below 65 2011. The RAF levy will be increased by 8c/l to 80c/l on years, and from R32 000 to R33 000 for 65 years and over. the same date. he 2011 Budget tax proposals are intended to broaden the tax base in support of inclusive growth. Businesses will receive tax breaks to support skills development and job creation, particularly for young workers. Various loopholes will be closed and tax equity will be improved by reforming the tax treatment of contributions to medical schemes and contributions to retirement funds.
SENSIBLE GOALS
YOUR FIRST JOB?
MAKE THE MOST OF YOUR SALARY FROM THE GET-GO Written by Robyne Moore, NFB East London.
F
or many out there who are in their late-teens or early twenties, the beginning of this year will hold many exciting opportunities and challenges. There will be many school leavers and graduates entering the work place for the first time; this is an exciting, but also stressful time and many will be overwhelmed with the idea of getting paid their very first salary. Although at the end of your first month at work you may feel like you have won the lotto (especially if you have never had money of your own before), do not be deceived into thinking that there is now an endless supply. Just as you will not work forever, the money you receive does not emanate from a bottomless pit. The money you earn in your lifetime is finite – and you need to look after it wisely and prudently. Although you are young, this time is vital in setting habits for how you deal with your money. Try to train yourself to be financially disciplined right from the very beginning. The following steps will help to plant the seeds for a financially secure future, and will also assist you in attaining your financial goals.
1. Create a budget The first and most important step is to create a budget. Before you get to pay day, draw up a list of funds you have coming in, and a list of money flowing out. You would also need to differentiate between needs and wants. Needs are things like rent, electricity and petrol. Wants are the little things (when you're
honest with yourself) you could probably do without; the little luxuries: flashy sunglasses, a weekend away or brand-name clothing. There are many, ingenious ways in which you could possibly cut expenses, but more importantly – do not live beyond your means!
2. Manage your debt Once you are in the debt-trap it is extremely difficult to extricate yourself from it. Should you have a student loan to pay back, make paying this off as quickly as possible, part of your action plan. You may find that you are inundated with offers to take up credit cards and/or credit facilities. There is an old saying which goes “If you can't pay cash for it – you can't afford it”. For smaller purchases like food, clothing, books etc. try to stick to this adage, as it will pay off in the long run, and teach you to save for the larger items which you may want eg. a holiday, a new flat-screen TV or a piece of art. Delayed gratification has never harmed anyone before! Having a credit card can be very convenient, but should be used wisely – stay in charge! Keeping a debit balance can be a good way to save, and should you need to run up a credit balance, always try to pay off the entire balance before the due date. Do not fall into the trap of spending your next salary when you have not received it yet.
3. Begin to save (and invest) You need to discipline yourself to save from your very first salary; and this includes saving towards your ...continued on page 17 sensible finance march 11
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Are you sure you have adequate cover or will your loved-ones be left wanting? By Glen Wattrus, Private Wealth Manager - NFB East London.
LIFE POLICIES uman nature, being what it is, we tend to avoid, as far as possible, incurring expenses relating to what is often regarded as a grudge purchase. Unfortunately, in our industry, we often have to deal with situations where a need has arisen and the client is either woefully under-insured or, even worse, does not have any cover relating to the specific need. It is then a case of trying to close the stable door after the horse has bolted. The situation is often exacerbated by the client becoming uninsurable due to the nature of the event that has arisen. In the event of death, the loved ones left behind are often placed in a situation where assets have to be sold off at cut-rate prices in order to meet day to
H
Nowadays, a client is fortunate if the rate is significantly over 5,5%. An investment of R1 million will only provide a monthly income of R4 583 at the afore-mentioned rate. People with children of school-going age or at tertiary institutions know far too well that an amount in this range is gobbled up before you can wipe your eyes out. Realistically, one should sit down with your partner, if applicable, and establish exactly what your income need will be in the event of them passing away and try, as far as possible, to match that need with the appropriate amount of cover. More often than not this will prove more expensive than what is affordable, but fore-warned in forearmed and even if you are not able to afford
day needs. The above paragraph is not to be interpreted as a scare tactic, but a reminder to the reader
the full amount, you have at least taken a step in the right direction. By far, one of the greatest needs to be met for clients who are still economically
that, like everything in life, one's needs in this regard evolve and you need to re-look at the cover that you have in place and address any shortfalls before it is too late. A few years ago, interest rates were unusually high and an
active is education as mentioned above. Establish whether the group life that you may have in place addresses this need. If not, request your advisor to establish whether such provision can be added to your existing personal life policy or perhaps
investment in a bank account could give a risk-free (but not tax-free) return in the region of 12%.
investigate the option of trading up to one that will offer that protection.
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sensible finance march11
SENSIBLE INVESTOR
Disability is another aspect that needs to be placed under a microscope. Protection can be
assured, needs to be aware of is whether you fully understand the type of cover in place on your
obtained either by way of a lump sum or a
existing policy and, if not, take steps to rectify this
recurring monthly income. The definitions vary from
situation. Too often we as advisors hear that a
company to company and the levels at which they
client wants to make a decision based solely on
kick in vary accordingly. Ensure that you have a full understanding of how your cover works. More often
the premium payable and mostly the client will settle for the lowest premium. Life often teaches us
than not, a disabled person will have specific
the lesson that we are Pennywise and Pound
needs which will require alterations being made to their place of residence. Make sure that you have
foolish. “Goedkoop” is often “duurkoop”. Don't make the mistake of basing your decision on the
taken this into account as the emotional impact of
premium alone as this may come back to bite you.
being disabled is hard enough to overcome without having the additional stress of being short
Also, establish whether the life cover you have in place reduces in the event of a claim for severe
of funds to meet practical needs. If the severity of
illness, or disability for that matter. It may well
the disability is such that you are unable to continue in your present place of employ, or in a
happen that your life cover effectively reduces after a claim for one of these eventualities
similar line of work, your monthly income will also
although some companies do give the assured the
undergo a drastic change. More about that later. Severe illness or dread disease cover is often overlooked or insufficiently met as it usually is the most expensive type of cover, particularly for those of us who are more advanced in years. Make sure that you don't bury your head in the sand with this aspect. Every single one of us knows someone afflicted by a severe illness. Statistics quoted are frightening to say the least. Whether or not they are precisely accurate will have little meaning unless you become one of the estimated 25% of the population that suffers from cancer in one form or another. It is estimated that up to 90% of severe illnesses are limited to four major incidences, namely heart attacks, strokes, cancer and coronary artery bypass grafts. Depending on the company selected to provide the cover, these may pay out, as with disability, according to the level of severity of the illness concerned, and each and every company is convinced that their offering is the most appropriate based on their historical claims ratios. For instance, company A may take the view that, whatever the level of severity, the emotional impact that such a disease has on the person is sufficient to justify a full payout of the amount insured. Company B may prefer to base their payout on the level of severity and based on their own adopted definitions. The point I would like to make in this regard is that it is irrelevant which
option of not dropping their cover beyond a certain level. Income protection, mentioned briefly above, is the last matter to be addressed in this brief overview. Be aware that industry standards limit the amount of income one can claim should they no longer be able to work. Whilst it is seldom the case that a person is over-insured, it may well happen that, when all the risk cover under various policies are aggregated, they exceed the amount of cover to which a person may be entitled. Make sure this is not the case with your cover as it will be nothing more than wasted money if your claim is limited. Companies do investigate claimants, so don't be one of those who assume that you won't fall foul to such an audit as the whole idea behind income protection is not to place the claimant in a better position than they were prior to the need arising. It is not often that one gets something for nothing, but most companies now have added bells and whistles attached to their policies, be it gym memberships, reduced rates at established hotel chains or 24 hour a day legal advice. It's there - find out what it is and make use of it to ease the pain of those premiums you've been paying.
approach is the correct one. What you, as the life
nfb@nfbel.co.za
Should you require further information or clarity with regards your life policies, kindly contact one of our Private Wealth Managers on 043 – 735 2000 or
sensible finance march 11
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SENSIBLE PLANNING
MAINTENANCE CLAIMS and DECEASED ESTATES Even after death you have an obligation to support dependent children. By Debi Godwin, Director Independent Executor & Trust.
A
testator may for the flimsiest of reasons, or for no reason at all, disinherit his spouse or children in favour of a third party. But even in death he cannot escape his obligation to support his dependent children. His children will have a claim for maintenance against his estate, whatever he may or may not say in his will. If you are the financially dependent spouse in a marriage, it is essential to ensure that the will of your spouse makes adequate provision for your maintenance. This is a delicate matter, and many people feel uncomfortable in asking to see their spouse's will. Even having read the will, you have no guarantee that they won't later change the will that they have shown you. Consider this unpleasant scenario: you are financially dependent on your spouse, and when he or she dies, you discover that the will makes no provision, or inadequate provision, for your ongoing maintenance. Perhaps it was an oversight, or perhaps your spouse had a long-standing grudge against you, and now it's pay-back time. In any event, the will now leaves you financially high and dry.
What are your legal rights? The law provides that, if a person, whether in error or with intent, fails to make provision in their will for the maintenance of a person to whom they owe a legal duty of support (for example, a minor child) the latter can lodge a claim against the deceased estate for maintenance. The Maintenance of Surviving Spouses Act
gives a surviving spouse the right to claim maintenance from the deceased estate of the firstdying spouse, if the surviving spouse cannot maintain themselves from their own resources. The Act provides that the claim must be calculated for the provision of their reasonable maintenance needs until their death or remarriage, in so far as they are not able to provide for these needs from their own means and earnings. This also applies to same-sex partners in a permanent life relationship. The Act also allows the executor of an estate to satisfy any such claim for maintenance by a surviving spouse by any appropriate agreement with that surviving spouse and the heirs or by the creation of a trust. Any award of maintenance made by the court in terms of this Act has to be in the form of periodic payments, and cannot take the form of a lump-sum payment. As a beneficiary of a discretionary trust, the surviving spouse has no absolute right to any income or capital of the trust. They receive trust income and capital only if the trustees, in their discretion, decide to make a distribution to them. The surviving spouse may, therefore, be left in uncertainty as to whether the trustees will distribute trust income to them, and whether they will continue to do so on a regular basis. It is advisable to seek advice as to whether the spouse should require the trustees to pass a resolution binding themselves to pay trust income to him/her, or whether they should lodge a claim against the deceased estate for maintenance in terms of the Maintenance of Surviving Spouses Act.
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: iet@iet.co.za
sensible finance march 11
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THE RISK-REWARD RELATIONSHIP IN EQUITIES With investing directly in equities becoming increasingly accessible, it has become increasingly important for investors to understand the dynamics of the market they are invested in. Written by Chris Lemmon, Director/Portfolio Manager - NVest Securities
W
ith the implementation of screen based trading and the abolition of the open outcry system on Diagonal Street, the Johannesburg Stock Exchange has become increasingly accessible to investors looking to take direct equity exposure in their investment portfolios. With more and more retail investors entering the market, it has become increasingly important for them to understand the dynamics of the market they are invested in, as well as having an understanding of the relationship between risk and return. Modern portfolio theory posits that every investor attempts to maximise their return for a given level of risk. Intuitively this makes sense as one would expect to make greater returns by investing in direct equities, where one puts capital at risk to participate in the profits of a business, than one would expect from money market yields, or in fact government retail bonds with their underlying guarantee. Where this gets a little more intricate in portfolio construction is that not all equities carry the same inherent risk. While there are a number of ways in which an investor can protect themselves against unnecessary risk, we will look at two specific factors. The first is to commit only long-term money to the construction of your portfolio. A carefully constructed equity portfolio is a powerful investment vehicle, providing an investor with real growth over the long-term. However, the risk of negative equity returns increases significantly as one's investment horizon compresses. This risk is magnified where investors take positions in the equity market on already committed money. It is specifically in this instance that traders are forced out of the market in loss-making positions to cover other financial commitments falling due. We subscribe to the idea that the market will track earnings growth over time, but routinely goes through periods of euphoria and pessimism. While a fundamental review of a company's financials gives one insight into their ability to grow earnings, underpinning share price appreciation, market sentiment is far more difficult to predict. Although
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sensible finance march11
relatively short in nature, it is a powerful force that can drive returns for a number of years. The JSE today is a good example of this phenomenon, as the market tries to price a recovery from the depths of the financial crisis we're currently trading on a trailing PE of 17.62, a premium of approximately 20% over its long-term average. The second way to manage your risk is to understand the company and industry you are investing in. Different industries carry different risk profiles, with cyclical businesses such as mining companies, Anglo American as an example, far more vulnerable to an economic slowdown than a pharmaceutical company such as Aspen. This is further illustrated by a share's beta coefficient. With the market at a beta of one you would expect a company with a beta of more than one to be more risky than the market i.e. its share price variation relative to its historic average is greater than the variation on the return on the market relative to its long term average. This is clearly evident when looking at Anglo's and Aspen. Anglo American carries a beta coefficient of 1.32 (remember a cyclical business and more volatile), while Aspen carries a beta of 0.32, a defensive pharma business. Besides industry specific factors, each company carries its own unique elements of risk. From capital structure to cash flows, earnings profile to capex expenditure, small growth businesses to mature industry stalwarts, each brings with it a unique relationship between risk and reward. As an investment house we tend to look for protection (or lower risk) by buying companies we believe trade in value territory. Broad value metrics include low price to book and price to cash flow multiples, low PE ratios and higher dividend yields. In an uncertain environment a focus on key fundamentals allows you to make conviction calls on businesses you understand and that offer reasonable downside protection. Remember modern portfolio theory: you need to understand the risk you have taken on in your investment portfolio to assess its performance correctly.
SENSIBLE ADVICE
Deferred Compensation Schemes and the new tax law
Effective 1st January 2011, the loopholes have been closed. By Natalie Dillon, Senior Legal Advisor - Old Mutual Broker Division.
D
eferred Compensation Schemes (DC) were
loopholes that allowed employers to benefit from
widely used by employers as a tax efficient way of providing a “golden
such schemes have been closed. With effect from the start of the employer's
handshake� to employees when reaching retirement age. The employer would take out a policy on the employee's life and contribute a premium to the policy which would accumulate in value over time. The employer and employee would enter into a service agreement in terms of which the employer is obligated to pay the policy proceeds to the employee at a determined future date. Since the employee derived no immediate benefit from the policy, the premium did not attract income tax in his hands. The employer had the option to comply with certain regulations which made the premiums tax deductible. If the employer claimed a deduction in respect of the premiums, the proceeds were taxable in the employer's hands. Since the service agreement obligated the employer to pay the proceeds to the employee, the employer claimed a tax deduction for the payment to the employee. The employer thus benefited from the tax deduction without having to pay tax on the proceeds. The employee also benefited from preferential tax treatment on the amount paid to him by the employer. An amount of R30 000 was tax free and a further portion was taxed at the employee's average rate. This is expected to fall away under
new financial year starting after 1 January 2011, the employer may only deduct the premium on the DC policy if the premium is included in the employee's salary and is thus subject to income tax. There are, thus, negative tax consequence for the employee. Further to this, when the proceeds pay out to the employer they will be included in the employer's gross income (as was always the case), but there is no longer a deduction in respect of the payment to the employee of the proceeds under the service agreement. The implication will thus be that the employer pays tax on an amount that he previously would not have been taxed on as it was allowed as a deduction when paid to the employee in terms of the service agreement. We still await clarity on the best route to follow to unwind these schemes. One option is to cede the DC policy to the employee. It appears to be SARS' intention that the unwinding of schemes in such a manner during this window period will not result in any negative tax consequences for either the employee or employer (there is confusion surrounding when this window period is). There may, however, be tax implications when the policy proceeds pay to the employee on maturity. We also await clarity on this.
the new budget. SARS has for a long time frowned on the DC
In light of the clarity we still await, employers with DC schemes in place need to seek expert
Scheme and with effect from 1 January 2011, the
advice in dealing with these policies.
sensible finance march 11
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SENSIBLE ESTATE PLANNING
THE USE OF TRUSTS IN ESTATE PLANNING Trusts remain a very useful estate planning tool, if set up and managed properly. By Tanya Cohen, Head of Glacier Fiduciary. which is filed at the Master's Office, a trust's financial affairs are never made publicly available. Many settlors want to know that a competent board of trustees will continue to manage family assets when they are not around. In this way, family members who may not be able to or who are not interested in financial matters can be taken care of.
T
he unique feature of a trust is the separation of legal and beneficial ownership. This means that different legal personae hold the legal obligation to manage assets to those who are entitled to benefit from the assets. It is this unique feature that many financial intermediaries and their clients overlook, but which gives rise to the benefits that can facilitate a client's estate planning and succession wishes.
Benefits of Trusts Many clients and advisors focus only on the estate duty saving achieved by transferring growth assets to a trust. This potential benefit should never be considered apart from the other tax and non-tax advantages and disadvantages of trusts. The most significant non-tax benefits include the following: the trust's assets (net of the settlor's loan claim) are protected from creditors of the settlor, the trustees and the beneficiaries, as well as the administrative procedures (freezing of accounts, and so on) and costs, such as executor's fees, incurred at death. A discretionary trust caters for flexibility in a way that no other legal entity can. The trustees decide what and how much to distribute to beneficiaries, depending on changes in both the legislative environment and in the beneficiaries' circumstances. Indeed, trust assets can be vested in a beneficiary or applied for his benefit, without actually being distributed to him. Furthermore, whereas the details of one's deceased estate appear in the liquidation and distribution account
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Proper set and management However, having determined that a trust is appropriate for you, you and your financial intermediary need to ensure that the deed is drafted by a specialist and with your specific requirements and circumstances in mind. In addition, you need to ensure that you are advised in relation to the ongoing management and taxation of the trust. We frequently see clients who have set up trusts and never transferred assets to them, or whose deeds are defective, or who do not benefit from the tax advantages, simply because they don't know how to. We also see potentially crucial errors in template type trust deeds drafted by non-specialists; for example, we have seen trust deeds that do not provide for adopted children, or default beneficiaries, or that grant trustees impermissible powers, or powers that if used, would contravene exchange control regulations, and so on. In an increasingly complex legal and economic environment, financial intermediaries should avoid trying to be everything to their clients. Estate planning is a highly technical area and intermediaries will refer their clients to specialists where they have their clients' best interests at heart.
The Eastern Cape's first home-grown
STOCK BROKERAGE NVest Securities (Pty) Ltd NFB House, 42 Beach Road, Nahoon East London 5241 PO Box 8041, Nahoon 5210 Tel: (043) 735-1270, Fax: (043) 735-1337 Email: nvest@nvestsecurities.co.za
www.nvestsecurities.co.za
SENSIBLE GOALS
YOUR FIRST JOB?... continued from page 9 retirement. You will adjust your lifestyle and spending habits according to the money you have available, and should you not save from the first you may find it a bit difficult at a later time to “do without” the money you have now decided to put away. It is always a good idea to have some money put away in an emergency fund for those unexpected expenses, so that there is no need to use your credit card or make a loan. The general rule of thumb is to have 3 – 6 months worth of your salary available for use in a time of crisis. However, life needn't be all about saving. If you are making the effort and putting a portion of your salary away every month, every now and then there is no reason why you should not treat yourself. Most financial advisors will tell you that you need to “pay yourself first”. Have a definite goal in mind when deciding to save, as this will serve as an incentive in keeping you focused.
4. Retirement?
job! Right now, retirement is a word which refers only to “old” people, and surely couldn't apply to you. Wrong! If you're starting to save, why not also put a small amount away each month towards your retirement one day. The sooner you start saving small amounts at a young age, the less you'll have to try and “catch up” when you're older and you eventually realise you'll need an income when you retire. All the small amounts begin to add up when you take compound interest into effect. There is no time like the present, and this is especially true when you are young and it comes to saving. Before you know it, your working life will be over and you will be heading into retirement. If you have looked after your money, your money will now look after you. Contact an NFB Wealth Manager to assist you in securing your financial future on email nfb@nfbel.co.za or phone 043 - 735 2000.
But you're young and you've only just started your first
sensible finance march 11
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SENSIBLE TRAVEL
THE IMPORTANCE OF TRAVEL INSURANCE Rather be safe than sorry… buy Travel Insurance. By Clair Broedelet, Marketing & Operations Director - Travel Experience East London.
T
ravel Insurance… You may think it's an unnecessary extra expense, but it really is not. It's not nice to think of, but bad things can happen when you travel and you need to be covered for all eventualities; for example flight delays, baggage loss and pilferage, earthquakes, illness and injury etc. Should you have paid for your trip with your credit card you may be covered, but you will need to check this with either your travel consultant or the bank. Depending on which card you used you may need a top up cover. If you have paid cash for your trip, the cover can cost you as little as R285.00 per person for up to 8 days cover. This is a very low cost for R25 million cover! You can run through R25 million quite quickly in hospitals overseas. Here is an example of a claim made with TIC insurance, by a lady travelling to Russia - Total claim amount: R2 905 422.00. A female traveller was on a cruise when she fell ill with lower abdominal pains, vomiting and diarrhoea. She was admitted to hospital when the ship docked in Russia and was diagnosed with acute bowel obstruction. Urgent surgery was performed and then she was moved by air ambulance to Switzerland for further care. Due to post-op
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complications, she required further surgery. TIC arranged payment of her medical expenses, and medical evacuation, as well as her husband's accommodation expenses. All of this can be covered by paying a much smaller amount in advance, the amount depends on how long you are travelling for and how many people will be travelling. If you are still unsure, think of it this way…would you drive around in your expensive car or live in your house without insurance to cover you in case of an emergency? Think about the costs in comparison to the example above and make the smart choice to buy travel insurance before you travel. An important note - you have to buy the travel insurance before you leave South Africa, and not after you have left the country. Our travel consultants will be able to give you full information and costing on travel insurance, just call Melanie, Jacqui or Tammy on 043 726 0601 or pop in to our office at 45 Devereux Avenue, Vincent. Clair Broedelet is the Marketing and Operations Director of Travel Experience East London, contact her on clair@travel-experience.co.za.
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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. Travis McClure will be answering any questions that you may have. Travis McClure
Q: I have been told that I will be retrenched at the end of March. I have been offered a severance package and I will obviously have to do something with my pension. I have heard that the tax laws applicable to retrenchment have been changed. Is this correct and what are my options? A: It is never nice to be retrenched, but SARS have recently made it a bit easier to take the news of retrenchment by allowing your severance package to be taxed as a retirement benefit as from 1 March 2011. This effectively allows you to take up to R300 000 of your severance package as a tax free amount. Should the severance package be more than R300 000 then the funds will be taxed according to the retirement tax tables. Previously only the first R30 000 was tax free after which the balance was taxed at your average tax rate. In order to qualify for this the tax free benefit the reason for leaving employment needs to be one of the following: = Due to medical disability; or = Their employer's ceasing business; or = Due to retrenchment; or = Retirement/retrenchment over age of 55 With regards to your Pension Fund you have the following options on retrenchment: = take the cash and pay the tax in terms of the retirement table; or = transfer your benefit to an approved standalone fund established by the employer, if the employer did establish such a fund; or = transfer your benefit to a retirement annuity fund where the benefits are then locked in until age 55; = transfer your benefit to a pension preservation fund or a provident preservation fund
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The Income Tax Act has been amended to allow for a tax-free transfer of a lump sum retrenchment benefit payable by a fund to another fund. The implication of this is that a member can now take R300 000 tax free of their retrenchment benefit payable by their pension or provident fund in cash, and transfer the balance to another fund such as a retirement annuity, tax-free. The R300 000 tax free portion that is applied to the severance package and the pension fund will be aggregated. In other words you will only get to use the R300 000 tax free portion once. Once you have used the R300 000 up, then any further withdrawals will be taxed as per the retirement tables. Many make the mistake of having their pension funds paid out to them, not realising that they are able to transfer the funds to a Preservation Fund or Retirement Annuity and avoid paying any tax. It would therefore be wise to continue to preserve your Pension Fund value by allowing it to continue to grow rather than diluting it by paying the funds out and paying tax. We would suggest that when you are retrenched that you take the severance package and try and re-invest as much as you can. The Pension Fund value should then be transferred to a Preservation Fund so that the funds can continue to grow towards your retirement. The Preservation Fund allows you one withdrawal prior to retirement which gives you the flexibility should you need to access funds before retirement. Each individual's circumstances and needs will be different so it would be wise to seek advice from your Financial Advisor so that he/she can come up with a solution that is the most efficient for you. 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…
W Po at inn rt th er Al e of fre Ro th d ya e is: l G tw M u o r K es ni Weekend stay dinner, bed & breakfast (as well as a limited amount of SA el th gh vi ou t s n s ta beer and wine) at Huntshoek Lodge, worth R5000.00, courtesy of Travel He e y rm in Experience East London. an
Without the distractions of the modern world, surround yourself with the peace and tranquility of the African bush where the only disturbance is the call of the magnificent fish eagle piercing the morning skies and the lazy flow of the river far below. Feel yourself unwind as the 1300ha expanse of land melts away your stress, and collect your thoughts while reveling in the abundance of gentle wildlife and the serenity of communing with nature. Situated 43 km from Grahamstown, on the N2 towards East London, Huntshoek Lodge finds itself in the heart of Frontier Country, rich in history and culture. Discover this hidden gem – truly a retreat to a forgotten frontier!
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 8th April 2011 to 8th October 2011 (subject to availability), is not transferable and cannot be exchanged for cash. • The draw will take place on 6th April 2011 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;
Private Wealth Manager, 6 years experience; Phillip Bartlett (BA LLB, CFP®) - Private Wealth Manager, 9 years experience;
Gavin Ramsay (BCom, MIFM) - Executive Director and Private Wealth Manager, 16 years experience;
Duncan Wilson (BCom Hons, CFP®) – Private Wealth Manager, 5 years experience;
Andrew Kent (MIFM) - Executive Director and Share Portfolio Manager, 17 years experience;
Glen Wattrus (B.Juris LL.B CFP®) – Private Wealth Manager, 10 years experience;
Walter Lowrie - Private Wealth Manager, 24 years experience;
Leona Trollip (RFP™) - Employee Benefits Divisional Manager and Advisor, 33 years experience;
Robert Masters (AFP™, MIFM) - Private Wealth Manager, 23 years experience; Bryan Lones (AFP™, MIFM) - Private Wealth Manager, 19 years experience; Travis McClure (BCom, CFP®) - Private Wealth Manager, 12 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.
Marc Schroeder (BCom Hons(Ecos), CFP®) sensible finance march 11
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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.nfbec.co.za
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