IN THIS ISSUE
From the CEO’s desk
Retirement Reform:
what it means to you
Graduates and the
idea of saving
NFB FINANCIAL UPDATE
Issue65 December2012
FROM THE CEO’s DESK
We are fast
approaching
another year end
and it is interesting
to note some of the events and
results that 2012 has dealt us. This
is a good practice as it allows
one to reflect and also revise our
approach going forward.
On the local political front,
much has taken place and the
most worrisome of these is the
absolute disregard the politicians
seem to be affording the
deteriorating environment in the
lives of the really poor people of
South Africa.
At a recent event hosted by
Prof. Nick Binedell at GIBS,
focused on the nature of
Industrial Relations post
Marikana, it became patently
obvious that a key issue was a
lack of awareness by South
Africans of the dire
circumstances people at the
bottom end of the labour market
face and the conditions of
squalor in which they are
surviving. Before I am accused of
being a super liberal, or worse,
the point is that we face a real
risk of a societal meltdown and a
revolt, perhaps violent, as an
outcome.
Organized labour
acknowledged it has not really
embraced the young, fairly
militant and lowest paid
members of their constituencies.
A clear statement regarding the
apartheid legacy of mine
workers not being much more
than a "means of production",
rather than a person who enjoys
respect from their employers,
makes one reflect on whether SA
Inc. is really the Rainbow Nation
or whether we are rather in the
Calm before the Storm. A natural
by-product of the panic stricken
settlements arrived at after
Marikana will be the mischievous
manipulation of this information
and some of the radical
adjustments in remuneration into
other "negotiations" facing other
industries and businesses. Note
the violent actions erupting
around the farm workers wage
demands in the Cape. My fear is
we ain't seen the end of this by a
long shot.
I recently advocated
investors seriously revisiting
offshore as a means of
managing political and market
risks. In the very short term this
advice has proven correct, but
serious investors should neither
celebrate nor regret decisions
and their outcomes when
measured in months. The
opportunity we have, to consider
moving some or all of our local
investment elsewhere, is not the
reserve of local investors. The
truth of 2012, and for a few years
before, is that we have, as a
country, enjoyed fairly healthy
onshore flows of investment.
These foreigners can also beat it
and cause damage to both
markets and our rather
overvalued Rand.
On a totally different tack, I
thought I might entertain our
readers with a rather interesting
take on the American Economy
having seen a recent article
comparing their National
economy to that of a household
in an attempt to allow normal
people to grasp the enormity of
their problem, and once again
the dangerously mischievous
actions and omissions of their
body politic.
By knocking off 8 zero's we
can compare the desperate
situation America finds itself in
when compared to a household.
Some stats about the US
government:
US Tax revenue:
$2,170,000,000,000
Fed budget:
$3,820,000,000,000
New debt: $ 1,650,000,000,000
National debt:
$14,271,000,000,000
Recent budget cuts:
$38,500,000,000
Now, remove 8 zero's and
pretend it is a household budget:
Annual family income: $21,700
Money the family spent:
$38,200
New debt on the credit card:
$16,500
Outstanding balance on the
credit card: $142,710
Total budget cuts: $385
The pressing question you should
ask is: Would I lend any money to
this family?
Not only is the country
bankrupt, but so is its leadership
playing high stake games with its
people and yet to be born
generations. The real story is
about trust as I guess that is the
premise on which bank notes
rely! What happens if lenders
(Americans, Pension Funds, other
countries and investors local and
abroad), lose faith in the
Greenback? The answer is chaos,
so the machine keeps smiling
and printing, and the silly thing is,
this cannot and will not stop.
The crazy place Americans
find themselves in is also in no
way unique to them. Many of
their major European
counterparts and Japan are in
similar and in some cases worse
shape.
Just have a look at recent
debt statistics of the largest
economies and some of the crisis
economies.
Accordingly, the way to deal
with this is to remain focused on
reasonable investments, taking
less than normal risk, particularly if
your time horizon is short.
We also recommend
discussing options carefully with
your advisors and staying away
from that which sounds too good
to be true. As my granddad used
to say "if it sounds too good to be
true - it probably is!”
Wishing our readers, our
clients and our Product providers
a safe and secure Christmas and
Festive Season and a Prosperous
2013.®Mike Estment, BA CFP
CEO, NFB Financial Services
Group
f i n a n c i a l s e r v i c e s g r o u p
Retirement Reform: what it means to you
ational Treasury has recently tabled
Ndiscussion papers on legislation
surrounding retirement reform. Why are
they seeking to introduce these changes?
Do you wait until the legislation is promulgated to
plot your future contributions or do you proactively
seek a solution to the proposed changes? Do you
now channel more of your savings to your personal
investments or do you increase your contributions to
your retirement funds given the envisaged tax
benefits? Nothing is always as easy as it seems and
the downside to the tax benefits is the increased
level of government control over the funds upon
retirement. It is impossible to capture the full scope of
these changes in a single article, but I will deal with a
few pertinent issues.
It is important to bear in mind that feedback has
been invited from the public at large, but it is clear
from the tone of the documents that the ruling party
has set a course for major changes, not only in the
rules pertaining to pension provision, but also looking
at incentivising individuals to increase their non-
retirement savings provision. We have repeatedly
heard calls from Government that South Africans
have a poor savings culture and we should be doing
more to provide for our golden years. The immediate
knee-jerk reaction from the public would be that
everything has become more expensive and we as
citizens have to provide out of our own pocket for
necessities and services that should be paid for out
of taxes.
Why is National Treasury proposing these changes?
Government has a serious problem as more
individuals turn to social welfare departments when
their retirement nest egg has been depleted by
excessive drawdown of capital, poor investment
performance and the cost of running a portfolio. Part
of the problem has been that many people have
not contributed adequately to their pension or
provident fund by way of their employer
pension/provident fund or by way of retirement
annuities if self-employed. The announcements in
Budget 2012 regarding future contributions are as
follows:
1. Employees under age 45 will be allowed to
contribute 22.5% of the greater of employment or
taxable income up to a maximum of R250 000 per
annum.
2. Over age 45 will be allowed to contribute up
to 27.5% p.a. to a maximum of R300 000.
3. Any contributions exceeding the above-
mentioned limits form part of the tax-free lump sum
upon retirement. A further point under discussion is
whether this excess contribution will remain as an
aggregation of the contributions or whether the
growth on these contributions will be factored in
upon retirement.
Few people stay with the same employer
throughout their working life nowadays. Upon
resignation or retrenchment the employee usually
transfers whatever funds have accumulated into a
preservation fund in the hope of leaving these funds
untouched until age of retirement. Alternatively,
these funds are taken as a cash payout less tax and
are used immediately to either settle debt or used to
start a new business or buy an existing business in
which the person has little experience or acumen.
The consequences are usually disastrous and years
of retirement provision are lost when these business
ventures fail.
To counter this depletion of funds, punitive taxes
were introduced to prevent the early withdrawal of
funds, but this has had very little effect when
individuals face very trying economic times and the
lure of that money “just sitting there” is more difficult
to resist than that apple was to Eve. Treasury is thus
looking at further deterrents such as pension funds
directing accumulated benefits into funds to which
the employee would not have access prior to
retirement. Bear in mind though that vested rights
appear not to be under scrutiny and these reforms
would target future employees.
Of more importance though to the majority of
contributors to retirement funds will be the proposals
put forward to rationalise the differences between
pension, provident and retirement annuity funds.
Each of these has been treated differently with
regard to deductibility of contributions and
withdrawal on funds either on death, disability or
retirement. National Treasury appears to be moving
towards a position of treating these all in the same
manner, a proposal that will not be welcomed by
most provident fund members. Cosatu has, in fact,
threatened to take to the streets if these changes
are implemented regarding Provident funds as they
are particularly annoyed at not having been
consulted during this process. The underlying reason
for this is that funds were available in total upon
retirement to provident fund members, less tax of
course, whereas the other two vehicles provided for
a maximum of one third being taken in cash, less tax,
with the remaining two thirds being used to purchase
a compulsory annuity.
Treasury has noted that since 2003 retirees
electing to purchase a compulsory annuity
guaranteeing an income stream until the death of
the retiree (or their partner) have dropped from
approximately 50% down to 14% whereas the
annuities market has grown from a level of R8 billion
in 2003 to R31 billion at the end of 2011. Treasury
obviously favours a compulsory annuity with a
guaranteed income for life as the likelihood of these
annuitants looking to the State for financial
assistance is less likely than retirees who elect to
purchase a living annuity in circumstances that are
unsuitable to that option. The statistics showing the
drop-off in income upon retirement can be
manipulated any number of ways to suit any
viewpoint, but it is fair to say that most retirees'
income will drop by approximately 50% upon
retirement, with an income level of 40% on average
being one that is most often quoted. The obvious
downside to the living annuity option is that it gives
the annuitant the ability to draw an income level at
a far higher rate than what can be reasonably
achieved in terms of after cost investment returns.
What does Treasury envisage?One of the proposals from National Treasury is
that the first R1 500 000 be used to purchase a life
annuity which guarantees an income for life and any
funds over and above that amount be utilised in a
living annuity type vehicle with funds similar to unit
trusts, but called retirement investment trusts. The
choices available to those entering the living annuity
market now are much wider than the envisaged
options down the line should these proposals be
implemented. Realistically, though, our legislation
regarding retirement funds and the financial
planning environment closely follows the UK and
Australian models. The provision enforcing the
purchase of a compulsory annuity with 75% of the
retiree's available funds fell away in the United
Kingdom at the end of 2011 as it did not end up
adequately addressing the reason for its
incorporation into applicable legislation. It thus
follows that this particular provision will probably not
see the light of day in the South African environment.
A further concern for National Treasury is that the
living annuity is not always properly understood by
the purchaser of the product, particularly in the case
of where the annuitant's exposure to financial
products may have been rather limited prior to
retirement. The underlying funds used are not always
understood by the purchaser in instances where the
advisor may not have taken the time to explain the
selection of funds and the manner in which they
complement each other to achieve the
requirements set by the client. Treasury feels the wide
array of options is confusing and unnecessary. The
retirement investment trusts being mooted will be far
fewer in number than the current selection of funds,
but one needs to question where this intervention by
government might end. Some readers of this article
may well remember the days under the Nationalist
government where pension funds were forced to
invest in certain assets such as government bonds
that were used to fund projects of the state and it
may well be the case that this is where we may end
up too. First world countries are not immune to this
kind of scenario. Japan, for instance, requires that
the vast majority of pension contributions find their
way into government bonds as a means of financing
its debt. One should note, however, that whenever
new bonds are issued by government they tend to
be over-subscribed so perhaps this scenario will not
be relevant in SA.
Practical questions to considerSo where does this limitation of choice and
government intervention in options leave you in
terms of future contributions? Do you reduce your
contributions to the retirement fund vehicles and
increase your discretionary savings to move as much
money as possible out of the government's net? The
tax advantages are significant in terms of an impact
on investment returns within a retirement vehicle, but
this must be weighed against fund choice allowed in
discretionary savings which is not subject to
Regulation 28 (Prudential investment guidelines for
retirement funds). Your desire for personal control
over your money may outweigh the afore-
mentioned tax advantages. Additional
considerations are that there is no taxation on
interest, dividends, estate duty, executor fees or
Capital Gains Tax issues to consider with retirement
funds which may well sway the argument in your
particular case.
Financial planning is not a one-size-fits-all science
so it is important that you consult with your advisor as
to the best option for you once clarity is reached on
the proposed amendments and how they affect
your existing or future options.
Ima
ge
cre
dit:
123R
F St
oc
k P
ho
to
Retirement Reform: what it means to you
National Treasury has recently tabled
d i scuss ion papers on leg i s lat ion
surrounding retirement reform. Why are
they seeking to int roduce these
changes? By Glen Wattrus, NFB East
London, Private Wealth Manager
Retirement Reform: what it means to you
ational Treasury has recently tabled
Ndiscussion papers on legislation
surrounding retirement reform. Why are
they seeking to introduce these changes?
Do you wait until the legislation is promulgated to
plot your future contributions or do you proactively
seek a solution to the proposed changes? Do you
now channel more of your savings to your personal
investments or do you increase your contributions to
your retirement funds given the envisaged tax
benefits? Nothing is always as easy as it seems and
the downside to the tax benefits is the increased
level of government control over the funds upon
retirement. It is impossible to capture the full scope of
these changes in a single article, but I will deal with a
few pertinent issues.
It is important to bear in mind that feedback has
been invited from the public at large, but it is clear
from the tone of the documents that the ruling party
has set a course for major changes, not only in the
rules pertaining to pension provision, but also looking
at incentivising individuals to increase their non-
retirement savings provision. We have repeatedly
heard calls from Government that South Africans
have a poor savings culture and we should be doing
more to provide for our golden years. The immediate
knee-jerk reaction from the public would be that
everything has become more expensive and we as
citizens have to provide out of our own pocket for
necessities and services that should be paid for out
of taxes.
Why is National Treasury proposing these changes?
Government has a serious problem as more
individuals turn to social welfare departments when
their retirement nest egg has been depleted by
excessive drawdown of capital, poor investment
performance and the cost of running a portfolio. Part
of the problem has been that many people have
not contributed adequately to their pension or
provident fund by way of their employer
pension/provident fund or by way of retirement
annuities if self-employed. The announcements in
Budget 2012 regarding future contributions are as
follows:
1. Employees under age 45 will be allowed to
contribute 22.5% of the greater of employment or
taxable income up to a maximum of R250 000 per
annum.
2. Over age 45 will be allowed to contribute up
to 27.5% p.a. to a maximum of R300 000.
3. Any contributions exceeding the above-
mentioned limits form part of the tax-free lump sum
upon retirement. A further point under discussion is
whether this excess contribution will remain as an
aggregation of the contributions or whether the
growth on these contributions will be factored in
upon retirement.
Few people stay with the same employer
throughout their working life nowadays. Upon
resignation or retrenchment the employee usually
transfers whatever funds have accumulated into a
preservation fund in the hope of leaving these funds
untouched until age of retirement. Alternatively,
these funds are taken as a cash payout less tax and
are used immediately to either settle debt or used to
start a new business or buy an existing business in
which the person has little experience or acumen.
The consequences are usually disastrous and years
of retirement provision are lost when these business
ventures fail.
To counter this depletion of funds, punitive taxes
were introduced to prevent the early withdrawal of
funds, but this has had very little effect when
individuals face very trying economic times and the
lure of that money “just sitting there” is more difficult
to resist than that apple was to Eve. Treasury is thus
looking at further deterrents such as pension funds
directing accumulated benefits into funds to which
the employee would not have access prior to
retirement. Bear in mind though that vested rights
appear not to be under scrutiny and these reforms
would target future employees.
Of more importance though to the majority of
contributors to retirement funds will be the proposals
put forward to rationalise the differences between
pension, provident and retirement annuity funds.
Each of these has been treated differently with
regard to deductibility of contributions and
withdrawal on funds either on death, disability or
retirement. National Treasury appears to be moving
towards a position of treating these all in the same
manner, a proposal that will not be welcomed by
most provident fund members. Cosatu has, in fact,
threatened to take to the streets if these changes
are implemented regarding Provident funds as they
are particularly annoyed at not having been
consulted during this process. The underlying reason
for this is that funds were available in total upon
retirement to provident fund members, less tax of
course, whereas the other two vehicles provided for
a maximum of one third being taken in cash, less tax,
with the remaining two thirds being used to purchase
a compulsory annuity.
Treasury has noted that since 2003 retirees
electing to purchase a compulsory annuity
guaranteeing an income stream until the death of
the retiree (or their partner) have dropped from
approximately 50% down to 14% whereas the
annuities market has grown from a level of R8 billion
in 2003 to R31 billion at the end of 2011. Treasury
obviously favours a compulsory annuity with a
guaranteed income for life as the likelihood of these
annuitants looking to the State for financial
assistance is less likely than retirees who elect to
purchase a living annuity in circumstances that are
unsuitable to that option. The statistics showing the
drop-off in income upon retirement can be
manipulated any number of ways to suit any
viewpoint, but it is fair to say that most retirees'
income will drop by approximately 50% upon
retirement, with an income level of 40% on average
being one that is most often quoted. The obvious
downside to the living annuity option is that it gives
the annuitant the ability to draw an income level at
a far higher rate than what can be reasonably
achieved in terms of after cost investment returns.
What does Treasury envisage?One of the proposals from National Treasury is
that the first R1 500 000 be used to purchase a life
annuity which guarantees an income for life and any
funds over and above that amount be utilised in a
living annuity type vehicle with funds similar to unit
trusts, but called retirement investment trusts. The
choices available to those entering the living annuity
market now are much wider than the envisaged
options down the line should these proposals be
implemented. Realistically, though, our legislation
regarding retirement funds and the financial
planning environment closely follows the UK and
Australian models. The provision enforcing the
purchase of a compulsory annuity with 75% of the
retiree's available funds fell away in the United
Kingdom at the end of 2011 as it did not end up
adequately addressing the reason for its
incorporation into applicable legislation. It thus
follows that this particular provision will probably not
see the light of day in the South African environment.
A further concern for National Treasury is that the
living annuity is not always properly understood by
the purchaser of the product, particularly in the case
of where the annuitant's exposure to financial
products may have been rather limited prior to
retirement. The underlying funds used are not always
understood by the purchaser in instances where the
advisor may not have taken the time to explain the
selection of funds and the manner in which they
complement each other to achieve the
requirements set by the client. Treasury feels the wide
array of options is confusing and unnecessary. The
retirement investment trusts being mooted will be far
fewer in number than the current selection of funds,
but one needs to question where this intervention by
government might end. Some readers of this article
may well remember the days under the Nationalist
government where pension funds were forced to
invest in certain assets such as government bonds
that were used to fund projects of the state and it
may well be the case that this is where we may end
up too. First world countries are not immune to this
kind of scenario. Japan, for instance, requires that
the vast majority of pension contributions find their
way into government bonds as a means of financing
its debt. One should note, however, that whenever
new bonds are issued by government they tend to
be over-subscribed so perhaps this scenario will not
be relevant in SA.
Practical questions to considerSo where does this limitation of choice and
government intervention in options leave you in
terms of future contributions? Do you reduce your
contributions to the retirement fund vehicles and
increase your discretionary savings to move as much
money as possible out of the government's net? The
tax advantages are significant in terms of an impact
on investment returns within a retirement vehicle, but
this must be weighed against fund choice allowed in
discretionary savings which is not subject to
Regulation 28 (Prudential investment guidelines for
retirement funds). Your desire for personal control
over your money may outweigh the afore-
mentioned tax advantages. Additional
considerations are that there is no taxation on
interest, dividends, estate duty, executor fees or
Capital Gains Tax issues to consider with retirement
funds which may well sway the argument in your
particular case.
Financial planning is not a one-size-fits-all science
so it is important that you consult with your advisor as
to the best option for you once clarity is reached on
the proposed amendments and how they affect
your existing or future options.
Ima
ge
cre
dit:
123R
F St
oc
k P
ho
to
Retirement Reform: what it means to you
National Treasury has recently tabled
d i scuss ion papers on leg i s lat ion
surrounding retirement reform. Why are
they seeking to int roduce these
changes? By Glen Wattrus, NFB East
London, Private Wealth Manager
GRADUATES AND THE IDEA OF
SAVING
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or a 20-something saving for such a distant
Ftime in the future does not seem such a great
priority; buying a new car, clothes, etc. seem
far more attractive. But it's worth noting that
the very fact that you're young gives you a huge
edge if you want to be rich in retirement. The reason
being is because in your 20's, you can invest
relatively little for a short period of time and wind up
with far more money than someone who is much
older and is saving more.
As I am a 20-something I can relate to the fact that
saving is not the easiest thing to do; we prefer to
spend on clothing and entertainment. I have,
however, taken my own advice and put a small
amount away every month into a retirement annuity
to subsidise my employer provident fund. Institutions
have minimum amounts that can be invested per
month. For example, Allan Gray has a minimum
investment amount of R500.00 per month; Investec
has a minimum of R1 000.00 per month. In the grand
scheme of things this is a small piece of your pay
cheque and if you start this from the first month you
won't notice the contribution as you have never had
a monthly income before.
Being in your 20's you have less financial
commitment and minimal expenses, and therefore
you have a greater savings capacity. Once we start
a family and buy a home there is less money to put
into a savings/retirement vehicle. Often individuals
look back and wish they had started saving when
they were younger, but were ignorant to the power
of compound interest and time value of money,
which can grow the small monthly saving to become
a substantial amount during retirement. Each month
that you put off saving in favour of spending, either
increases the amount that you will have to save in
the remaining months, or pushes out the date at
which you will reach your goal.
An additional savings would also be a good idea,
in the form of a separate bank account or even a
unit trust investment. This way you can set aside for
that “rainy day” and not have to overextend yourself
and go into debt. Ideally, an amount equal to 3
months living expenses should be available for
emergency circumstances; having this will hopefully
eradicate unnecessary expenditure on credit cards
and falling into debt. Once we start paying off debt
there becomes little or no room for saving in any
form.
Once you make the decision to start saving, your
ability to make the most of it depends on whether
you are able to remain committed for long enough
to benefit from the potential returns, ride out the
short-term ups and downs and allow the power of
compound interest to increase the value of your
money.
Should you be young and starting out in your
working life and need advice or assistance in
planning out your financial future, please contact an
NFB advisor.
That time of the year is here again: exams
are being written and graduates are
planning to go into the working world.
Whether you are graduating from school
or from University, and going straight into
the workforce, it will be of great benefit to
you to kick start your retirement savings. By
Nicole Boucher, NFB East London,
Paraplanner
GRADUATES
Ima
ge
cre
dit: 1
23
RF
Sto
ck P
ho
to
AND THE IDEA OF
SAVING