November 2015

Machrie Economic and Retirement

Outlook 2015

Let’s Talk Retirement AnnuitiesLet’s Talk Retirement AnnuitiesLet’s Talk Retirement AnnuitiesLet’s Talk Retirement Annuities� How it works now:

� You can contribute up to 15% of Non-Pensionable Income� When you Contribute Assets to an RA it is immediately out of your estate = No 20% Estate Duty when you pass away.

� Protected from Creditors� Internal Tax Rate of 0%

� What is going to change:� You can contribute up to 27.5% of Remuneration or Taxable income Capped at R 350 000 pa

� Your Contributions are only excluded from your estate if already deducted from Taxable income. IE Disallowed Contributions form part of your taxable estate.

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What do we hear?What do we hear?What do we hear?What do we hear?

1. ‘Retirement annuities don’t grow so well I can do better on the stock exchange!’

2. ‘I have been paying this RA for 15 years and it only has R109 682.22 and I’m paying R 1 500 pm in it there is no way I can retire on this. This is a terrible investment’

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What you should ask?What you should ask?What you should ask?What you should ask?

1. ‘Retirement annuities don’t grow so well I can do better on the stock exchange!’

� So why not invest on the stock exchange through an RA? It’s and investment Vehicle / Tax Wrapper / Pot. It creates the rules NOT the RETURN!

� How often did you review your underlying investments? –Funds, Shares, Cash etc? – How much do you spend on maintaining and servicing your car?

Why not pay a professional to do the same for your retirement?

What is your car worth?

What is your retirement worth?

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Investing with different POTS

Endowment 30% on

Income, 10% CGT

TFSA0% Tax

Up to 15% soon 27.5% of taxable income tax deductible

Tax Deduction Investable

Contributions limited to R 30 00 pa & R 500K Lifetime

Withdrawal

Withdrawal

WithdrawalWithdrawal

Only after age 55. 1/3rd Lumpsum of which R 500K tax free rest up to 36%. Remaining 2/3rds provide an income taxed at PAYE

CGT Max 13.67%

0% 0%www.machrie.co.za

What you should ask?What you should ask?What you should ask?What you should ask?2. ‘I have been paying this RA for 15 years and it only has R 109 682.22 in it there is no way I can retire on this. This is a terrible investment. Look I’m paying R 1 500 pm’

� How many times in the last 15 years have you checked that your savings were in line with your retirement goal?

� Have you done the calculation to see what your growth is relative to what you put in and what your fund value is?

� Do you realise your premium has a 15% escalation and you actually started with only R184.34pm? = Your return is actually 10%

�What have you done with your TAX SAVING????

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The Real Value of an RA� If you earn R 300 000pa (R25 000pm) and contribute the current Maximum of 15% pa with a Conservative Growth of 10% (CPI+3%). You get R39,345,229.83 after 40 yrs(age 25 to age 65). Your salary increases with 6% pa

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The Real Value of an RA� If everything else stays the same BUT you contribute the new Maximum of 27.5%. You get R72,132,921.36 after 40 yrs. Let’s compare it to rather investing in a discretionary portfolio, like Shares or direct Unit Trusts (Allan Gray and Coronation). Remember internal Tax rate of RA is 0% so let’s deduct 15% tax on the Discretionary investment. (8.5%) = R52,296,082.22 Difference R 19 836 839

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The Real Value of an RA� But wait there’s more! When you contribute to an RA you get some cash back.

� The value of your RA is the RA plus the invested Tax Refund (In a Discretionary Investment). Suddenly your RA goes from R72,132,921.36 to R88,344,706.85 (Extra: R16,211,785.49 or + 22.5%)

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The Real Value of an RA� Oh but wait yet once again! We are not done yet! What else can you do? I’ll tell you. You can avoid having to pay taxes on your Discretionary Investment by investing first in a TFSA up to the annual maximum of R 30 000 pa. (your 8.5% goes back up to 10% -YAY!)

� This means you get: R4,276,972.20 extra

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The Real Value of an RA� Let’s recap: Instead of investing in a discretionary portfolio we went form R52,296,082.22 to R72,132,921.36: + R 19 836 839

� You then invested your tax saving in a discretionary portfolio:

+ R16,211,785.49

� Then you cleverly invested the maximum allowable amount into a TFSA first: + R4,276,972.20

R300,000.00

Investment

Growth RA

10.00%

Tax Free

Growth

Future Value

of Salary at

Retirement R4,492,337.35

6.00%

Discretionary

Investment

Growth 8.50% less 15% Tax Inflation 7.00%

31.00%

27.50%

Contribution to

RA. Tax Saving Value of RA

Value of

Discretionary

Investment

Value of Tax

Free Savings

Account

Total Value of

Saving in an RAVS

Investment in

Discretionary

Investment

Year 1 R82,500.00 R25,575.00 0 0 0 R0.00 0

Year 2 R87,450.00 R27,109.50 R178,200.00 R0.00 R55,242.00 R233,442.00 R176,962.50

Year 3 R92,697.00 R28,736.07 R288,717.00 R0.00 R89,502.27 R378,219.27 R284,701.31

Year 4 R98,258.82 R30,460.23 R415,847.52 R0.00 R128,912.73 R544,760.25 R407,159.74

Year 5 R104,154.35 R32,287.85 R561,586.62 R2,326.97 R171,804.00 R735,717.59 R545,922.67

Year 6 R110,403.61 R34,225.12 R728,148.89 R6,749.88 R218,984.40 R953,883.18 R702,729.71

Year 7 R117,027.83 R36,278.63 R917,991.61 R13,602.25 R270,882.85 R1,202,476.70 R879,489.56

Year 8 R124,049.50 R38,455.34 R1,133,840.27 R23,213.78 R327,971.13 R1,485,025.18 R1,078,295.67

Year 9 R131,492.47 R40,762.66 R1,378,716.76 R35,949.62 R390,768.24 R1,805,434.62 R1,301,443.27

Year 10 R139,382.01 R43,208.42 R1,655,970.45 R52,213.76 R459,845.07 R2,168,029.27 R1,551,447.96

Year 11 R147,744.93 R45,800.93 R1,969,312.43 R72,452.86 R535,829.57 R2,577,594.86 R1,831,065.97

Year 12 R156,609.63 R48,548.99 R2,322,853.30 R97,160.34 R619,412.53 R3,039,426.17 R2,143,316.21

Year 13 R166,006.21 R51,461.92 R2,721,144.84 R126,880.89 R711,353.78 R3,559,379.52 R2,491,504.30

Year 14 R175,966.58 R54,549.64 R3,169,225.91 R162,215.40 R812,489.16 R4,143,930.48 R2,879,248.74

Year 15 R186,524.58 R57,822.62 R3,672,673.08 R203,826.33 R923,738.08 R4,800,237.49 R3,310,509.46

Year 16 R197,716.05 R61,291.98 R4,237,656.43 R252,443.55 R1,046,111.89 R5,536,211.87 R3,789,618.82

Year 17 R209,579.01 R64,969.49 R4,871,001.09 R308,870.74 R1,180,723.08 R6,360,594.91 R4,321,315.43

Year 18 R222,153.75 R68,867.66 R5,580,254.96 R373,992.42 R1,328,795.38 R7,283,042.76 R4,910,781.00

Year 19 R235,482.98 R72,999.72 R6,373,763.43 R448,781.50 R1,491,674.92 R8,314,219.85 R5,563,680.36

Year 20 R249,611.96 R77,379.71 R7,260,751.73 R534,307.63 R1,670,842.41 R9,465,901.78 R6,286,205.15

Year 21 R264,588.68 R82,022.49 R8,251,415.58 R631,746.27 R1,867,926.65 R10,751,088.51 R7,085,121.27

Year 22 R280,464.00 R86,943.84 R9,357,021.14 R742,388.55 R2,084,719.32 R12,184,129.00 R7,967,820.57

Year 23 R297,291.84 R92,160.47 R10,590,015.09 R867,652.04 R2,323,191.25 R13,780,858.38 R8,942,377.16

Year 24 R315,129.35 R97,690.10 R11,964,145.95 R1,009,092.56 R2,585,510.38 R15,558,748.89 R10,017,608.56

Year 25 R334,037.11 R103,551.50 R13,494,597.65 R1,168,416.93 R2,874,061.42 R17,537,076.00 R11,203,142.40

Year 26 R354,079.33 R109,764.59 R15,198,136.75 R1,347,496.97 R3,191,467.56 R19,737,101.27 R12,509,488.84

Year 27 R375,324.09 R116,350.47 R17,093,274.52 R1,548,384.68 R3,540,614.31 R22,182,273.51 R13,948,119.48

Year 28 R397,843.54 R123,331.50 R19,200,445.51 R1,773,328.87 R3,924,675.74 R24,898,450.13 R15,531,553.18

Year 29 R421,714.15 R130,731.39 R21,542,204.21 R2,024,793.21 R4,347,143.32 R27,914,140.74 R17,273,449.35

Year 30 R447,017.00 R138,575.27 R24,143,441.64 R2,305,475.91 R4,811,857.65 R31,260,775.19 R19,188,709.55

Year 31 R473,838.02 R146,889.79 R27,031,623.82 R2,618,331.15 R5,323,043.41 R34,972,998.38 R21,293,587.88

Year 32 R502,268.30 R155,703.17 R30,237,054.51 R2,966,592.47 R5,885,347.76 R39,088,994.73 R23,605,811.15

Year 33 R532,404.40 R165,045.36 R33,793,164.36 R3,353,798.19 R6,503,882.53 R43,650,845.08 R26,144,709.50

Year 34 R564,348.67 R174,948.09 R37,736,829.46 R3,783,819.13 R7,184,270.78 R48,704,919.37 R28,931,358.48

Year 35 R598,209.59 R185,444.97 R42,108,721.99 R4,260,888.72 R7,932,697.86 R54,302,308.58 R31,988,733.53

Year 36 R634,102.16 R196,571.67 R46,953,696.35 R4,789,635.93 R8,755,967.65 R60,499,299.93 R35,341,878.04

Year 37 R672,148.29 R208,365.97 R52,321,214.27 R5,375,120.96 R9,661,564.41 R67,357,899.65 R39,018,085.97

Year 38 R712,477.19 R220,867.93 R58,265,812.89 R6,022,874.17 R10,657,720.86 R74,946,407.91 R43,047,100.46

Year 39 R755,225.82 R234,120.00 R64,847,620.00 R6,738,938.48 R11,753,492.94 R83,340,051.41 R47,461,329.82

Year 40 R800,539.37 R248,167.20 R72,132,921.36 R7,529,915.45 R12,958,842.24 R92,621,679.05 R52,296,082.22

What your Tax Saving on your RA is worth.

Starting Annual Salary (R 25

000pm)

Annual Salary Increase

Tax Bracket:

Maximum Tax Deduction

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Year 37 R672,148.29 R208,365.97 R52,321,214.27 R5,375,120.96 R9,661,564.41 R67,357,899.65 R39,018,085.97

Year 38 R712,477.19 R220,867.93 R58,265,812.89 R6,022,874.17 R10,657,720.86 R74,946,407.91 R43,047,100.46

Year 39 R755,225.82 R234,120.00 R64,847,620.00 R6,738,938.48 R11,753,492.94 R83,340,051.41 R47,461,329.82

Year 40 R800,539.37 R248,167.20 R72,132,921.36 R7,529,915.45 R12,958,842.24 R92,621,679.05 R52,296,082.22

78% 8% 14%

Effect of

Internal Tax

RA 37.93%

R3,498,591.48 R365,216.01

Effect of Tax

Deduction 31.00% 39.18%

Effect of

Adding TFSA 8.18%

77.11%Total

Improvement

Total Split TFSA

& DI R20,488,757.69 26.38% Improvement

VS R4,276,972.20

DI Only R16,211,785.49

THE VALUE OF ADVICE!!!

Proportional Income Provision

The Real Value of an RA� What am I trying to sell?

� The value of Advice:

By investing in a different WAY not more or in a different fund / share your final portfolio balance improved from R52,296,082.22 to R92,621,679.05.

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Return� Yes income is taxed differently at drawdown between RA’s and discretionary investments. It still works but not on the very small / short investments. Must be reviewed on a case by case basis.

� 10% is quite conservative in the long run (CPI+3%)

� You should probably do your calculations with a higher expected return say CPI+6%? If you have enough time?

� Unrealistic lets see………

� My Favourite, Offshore: What will the Rand do?

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Return� Let’s see what it has done:

� Would you agree it’s safe to assume a LONG-term average depreciation of 9.31% for the Rand?

� Safe to assume a 5% return offshore?

� Rand equivalent return 14.31% pa? (long-term)

� Do the same RA calculation but with new return = R188,760,762.62 instead of R92,621,679.05 – 103% improvement.

16-Nov-15

Today

1 year AgoAve

Devaluation

5 years

Ago

Ave

Devaluation

10 years

ago

Ave

Devaluation

20 Years

Ago /Euro

16 yrs

Ave

Devaluation

30 Years

Ago

Ave

Devaluation

Dollar 14.38 11.03 30.37% 6.98 21.20% 7.19 10.00% 4.67 10.40% 2.23 18.16%

Pound 21.85 17.37 25.79% 11.19 19.05% 11.73 8.63% 5.67 14.27% 3.84 15.63%

Euro 15.45 13.89 11.23% 9.5 12.53% 7.92 9.51% 6.35 7.17%

3 Currency

Ave 22.46% 17.59% 9.38%

2 Currency

Ave USD &

GBP 28.08% 20.13% 9.31% 12.33% 16.90%

Only existed as a

curency since 1999

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ConclusionConclusionConclusionConclusion� A little bit of planning can have a huge effect

� You usually need advice more than you need a product.

� Machrie’s fee based financial planning means your and our interests are aligned.

� Consider the benefits of a formal financial coaching relationship. Ask us about our coaching agreements.

� Thank you for listening.

ENJOY the BEER!

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Thank YouThank YouThank YouThank You

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