NFB Sensible Finance Magazine Issue 15

TAXATION AND ESTATE PLANNINGsome issues to consider

BUSINESS ASSURANCE

who needs it?

CHECKING UP ON YOUR FINANCIAL ADVISOR

what you should expect

Eastern Cape's Community...

PERSONAL FINANCE

a FREE publicationdistributed by NFB Private Wealth Mangement

p r i v a t e w e a l t h m a n a g e m e n t

issue 15July 2010

NFB

PERSONAL FINANCEMagazine

Eastern Cape's Community...

TAXATION AND ESTATE PLANNINGsome issues to consider

BUSINESS ASSURANCE

who needs it?


what you should expect

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Only the present is within our reach. To care forthe present is to care for the future.”

- Buddha


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a sensible read

Ke Nako! The World Cup is finally happening after years of

nervous anticipation as to whether or not we could pull it off

in time.

Thankfully, it has been a great success so far and I personally

took great pride in giving a good old “I told you so” to sceptical

foreign friends of mine. I think we all under estimated just how

positive the event can be in terms of branding South Africa

overseas. Bafana Bafana (despite their Uruguayan performance)

have done us proud in terms of nation building and certainly at a

time when we needed it! Vuvuzelas, love them or hate them, have

been a global hit and I have heard stories of thousands of vuvuzela

orders being placed by French unionists planning on using them

during protests in France and free vuvus being given out with every

edition of a certain UK newspaper. I think we can also give our

police force, and the special courts formed to deal with World Cup

crime, a big thumbs up – it is so refreshing to read reports of crime

being so effectively dealt with.

I have been to one match so far (in P.E.) and was highly

impressed by the efficiency of everyone, from the ticket collectors

to the park and ride facilities. It just proves that South Africans, and

Africa in general, have the ability to do anything as well, if not better

than, the rest of the world.

I wonder how quickly South African flags will be taken off our

cars and whether our Bafana t-shirts will be moth-eaten this time

next year? Let's take the lessons learned beyond the 11th July. May

the police continue to show the same commitment, may the courts

continue to deal with crime effectively, may municipalities continue

to keep our cities clean and may we, as a people, show the same

pride in our country and enthusiasm in uniting and working together

as we all have done during the SWC month!

Until next time, enjoy what is left of the tournament and don't

spend all your money on football memorabilia!

Brendan Connellan - Editor and Director of NFB

editor

advertising

layout and design

address

contributors

Brendan Connellan

[email protected]

Philip Shapiro (NFB Gauteng),

Travis McClure (NFB), Chris

Lemmon (NVest), Shaun Murphy

(Klinkradt & Assoc.), Grant Berndt

(Abdo & Abdo), Claire Broedelet

(Travel Experience), Natalie Dillon

(Old Mutual), Marcel Bradshaw

(Glacier International), Julie

McDonald (NFB), Robyne Moore

(NFB), Paul Marais (NFB Gauteng),

Debi Godwin (IE&T).

Robyne Moore

[email protected]

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

Management.

©2010 All Rights Reserved.

No part of this publication may be

reproduced in any form or

medium without prior written

consent from the Editor.

Jacky Horn Design

[email protected]

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: [email protected]

Web: www.nfb.co.za

a sensible read

sensible finance ED’SLETTER

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sensible finance July10

CONTENTSSENSIBLE

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THE MUNICIPALITY'S RIGHT TO DISCONNECT ELECTRICITY

CAPITAL GAINS TAX IMPLICATIONS FOR THE INDIVIDUAL

ESTATE DUTY ACT – RECENT AMENDMENTS

FOREIGN INVESTMENTS – LOOK BEFORE YOU LEAP

BUSINESS ASSURANCE – WHO NEEDS IT?

CREATING WEALTH THROUGH INVESTING

TAXATION AND ESTATE PLANNING – SOME ISSUES TOCONSIDER

THE LIFE OF A MODERN TRAVEL CONSULTANT

TAXATION OF MY RETIREMENT BENEFIT

LOCAL IS SO YESTERDAY

NFB CORPORATE RESPONSIBILITY – FULL STEAM AHEAD!


WHERE HAS LIBERTY INTERNATIONAL GONE?

TOTAL EXPENSE RATIOS

Q&A.

WIN A ONE NIGHT STAY AT THE PREMIER HOTELCASCADES

Know your rights as a tenant.

CGT will affect every tax payer at some time or other, and although potentially

confusing, it is relatively simplistic in its basic form.

How these changes could affect you and your beneficiaries.

Factors to consider when deciding to invest internationally.

Why business assurance is vital to the successful continuity of your company.

Anyone can and should do it.

With proper estate planning a substantial amount can be saved.

Constantly adapting to the ever-changing travel environment.

As a member of a fund, what are your options on retirement?

A look at current market trends and how investors are being affected.

An update on the Loaves & Fishes Network. Touching lives in our community – you

too can make a difference!

What to ask and what to expect.

How the name change and restructuring affect your shareholding.

The future of fee disclosure.

You ask. We answer. Advice column answering your investment, personal finance,

life and/or risk insurance questions

Stand in line to win a one night stay for two, compliments of the House of Travel, East

London

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By Grandt Berndt - Abdo & Abdo.

By Shaun Murphy, CA (SA) Partner -

Klinkradt & Associates.

By Debi Godwin,

Director - Independent Executor & Trust.

By Marcel Bradshaw,

Head of Glacier International.

By

Robyne Moore - NFB.

By Philip Shapiro,

Financial Director - NFB Gauteng.

By Claire Broedelet,

Marketing & Operations Director - Travel Experience.

By Natalie Dillon, Senior

Legal Advisor - Old Mutual Broker Division.

By Brendan Connellan, Director - NFB.

By Julie McDonald, Paraplanner - NFB.

By Chris Lemmon,

Director/Portfolio Manager - NVest Securities.

By Paul Marais, Director - NFB Gauteng.

with Travis McClure, Private Wealth Manager - NFB.

Source www.peterpyburn.co.za/investing

Source:

Stafford Thomas - Financial Mail

SENSIBLE INVESTORSENSIBLE SOLUTIONS

Know your rights as a tenant. By

Grandt Berndt - Abdo & Abdo

The Municipality'sRight To Disconnect

Electricity

4

Know your rights as a tenant. By

Grandt Berndt - Abdo & Abdo

The disconnection of electricity without notice

to the consumer has been challenged and

heard by the Constitutional Court. For the

past couple of years the municipality has required

the account to be in the name of the owner of the

property with the responsibility being on the owner

to ensure that any tenant pays for the municipal

services utilised.

In the case in question, numerous tenants

occupied a building in Johannesburg and paid

their rental and electricity to the owner, who was in

turn to pay the electricity portion to the

municipality. The owner, however, never paid the

municipality and the municipality, without notice,

cut off the electricity. The tenants, after losing their

case in the High Court, approached the

Constitutional Court for an order that their

electricity supply be reconnected and that they

were entitled to notice and an opportunity to

make representation to the municipality before

their electricity supply was cut off.

The tenants relied on, in terms of the

Constitution, their right to adequate housing and to

human dignity and in terms of the Promotion of

Administrative Justice Act, that the municipality

was required to afford them notice of the intended

termination, before taking a decision to disconnect

their electricity, as such a decision materially and

adversely affected their rights.

The municipality claimed that, in terms of its

Credit Control By-laws, the tenants were not

customers as the municipality had no contractual

relationship with them. The municipality thus

claimed not to owe the tenants any duty, but only

owed a duty to the owner with whom they had

contracted.

The Constitutional Court held that the supply of

electricity is in fulfillment of the Constitutional and

Statutory duties of the local government to provide

basic services to all persons within their city. When

people receive electricity they do so by virtue of

their public law right to receive this basic municipal

service. In depriving them of a service they were

already receiving as a matter of right, the

municipality was obliged to give them notice of the

intended termination.

On the facts, the tenants were held to be

entitled to 14 days pre-termination notice in the

form of a physical notice placed in a prominent

position in the building. This notice would then

enable the user of the electricity to challenge the

proposed termination, or to make arrangements to

settle any arrears.

The by-laws relating to Credit Control and Debt

Collection have to be read with the Promotion of

Administrative Justice Act so that procedural

fairness is afforded to, not only the customers of the

municipality, but any person whose rights are

adversely affected by the cutting off of the

electricity supply. The by-laws permitting the

termination of electricity supply without notice was

held to be unconstitutional and the municipality

was accordingly ordered to re-connect the

electricity supply.

Thus in conclusion, the municipality needs to

give reasonable notice to any person prior to

disconnecting their electricity supply. Failure to do

so would render the municipality's action invalid

and unconstitutional and would make them liable,

not only for the actions such as the one discussed

above, but also for claims for damages any

consumer may suffer as a result of the cutting off of

their electricity supply without notice. Each case

would, however, be dependent upon its own

circumstances.

The Municipality'sRight To Disconnect

Electricity

SENSIBLY LEGALPhoto BigStockPhoto.com


CAPITAL GAINS TAXIMPLICATIONS

FOR THE INDIVIDUAL

6

CGT will affect every tax payer at some time or other, and

although potentially confusing, it is relatively simplistic in its basic

form. By Shaun Murphy, CA (SA) Partner - Klinkradt & Associates

In this issue we will take a look at an area of

the income tax act that at some point or

another in a tax payer's lifetime will come to

fruition, and potentially create some confusion.

acquired

disposed

Capital Gains are usually as a result of two

occurrences in a taxpayer's lifetime, firstly an asset,

capital in nature (a listed share with a long term

capital appreciation intention for example,

included in this is units in unit trust schemes) must be

, and secondly, this asset must be

of for a gain. The term “disposal” is very

widely defined in the Tax Act, but simply, should

you ever sell the asset for a profit, this profit will be

taxable at the applicable capital gains tax rate.

There are, however, certain exclusions that are

applicable and disposal of these assets will not

attract CGT.

The rate applicable to a capital gain depends

on the taxpayer's tax bracket or income earned

(i.e. the other taxable income earned; salary,

interest, pension, annuities) during the year of

assessment in which the capital gain is made. The

maximum marginal rate that can be applied to a

capital gain is 10%, and this is if the taxpayer

currently earns in excess of R600 000 per annum.

Should your other income be below this bracket,

then the resultant effective capital gains tax rate

will be reduced.

The most common exposure to CGT for the

individual will be as a result of investment properties

or share investment portfolios, acquired over a

taxpayer's lifetime as a supplement to retirement

funding income. When these assets / investments

are eventually disposed of the profits will be subject

to CGT. The gain or loss made on a share portfolio

or unit trust is usually simple to calculate as the

funds themselves usually issue the taxpayer with an

IT3 certificate, detailing the capital gains made on

that particular investment. With regards to

investment properties it is a little more complicated

and an area which clients often have queries on.

What expenses can I claim against the proceeds

from disposal of the property? In a nutshell,

everything that you have not claimed against your

rental income received; for example: estate agents

commission, any structural additions / alterations,

the full purchase price including attorney's fees and

transfer duties, and any bond registration fees

incurred.

What is commonly mistaken is the fact that the

settlement of the outstanding mortgage bond is

not a deduction for CGT purposes. This is an

important point to remember, because the

property investor may have utilized spare equity in

previous properties for deposits on additional

property purchases. When the first property is

disposed of and the full bond settled, CGT is

payable on the difference between the original

purchase price and the full proceeds received, not

the after bond settlement cost.

For properties acquired before CGT became

effective on 1 October 2001, property valuations

should have been performed on all investment

properties held at that point in time, the cut off

date being 30 September 2004, for these to be

completed. The capital gain calculation is slightly

altered in this instance, as it is not the original cost

that is used, but the 1 October 2001 value that is

used as the so called base cost, including any costs

of disposal and capital expenses incurred on the

property after 1 October 2001. If a valuation was

not obtained at 1 October 2001 by the due date

there is another calculation available to the

taxpayer to increase the base cost of properties

acquired prior to CGT becoming effective; this is

called the Time Apportionment Base Cost formula

and, if you are in this position, it is suggested that

you contact your accountant for some assistance

SENSIBLE ADVICEPhoto BigStockPhoto.com

Photo BigStockPhoto.com

sensible finance July10...continued on page 20

SENSIBLE PLANNING

Arecent, welcome amendment to the Estate

Duty Act gives spouses access to each

other's estate duty abatements and

eliminates the need for the artificial use of

structures, such as trusts, to achieve this objective.

The amendment applies from 1 January 2010. This

could have implications for your estate plan and

you may need to revisit your will.

Estate duty is levied at 20% on the dutiable

portion of your estate - in other words, after the

exemption of R3.5 million has been accounted for.

Each spouse is entitled to use the abatement of

R3.5 million. Previously, if you did not take

advantage of the abatement, you lost it. The

amendment means that the R3.5 million

abatement can be rolled over; in effect, the estate

of the surviving spouse can use a deduction of up

to R7 million on death.

When the amendment Bill was initially drafted,

you had to bequeath your entire estate to your

surviving spouse for him or her to benefit from the

R7 million abatement. However, this has been

changed, and you no longer have to bequeath

your entire estate to your spouse to enjoy the full

abatement.

The estate of the surviving spouse can use the

portion of the exemption that was not used by the

first-dying spouse, as long as the Estate Duty return

can be produced. The portability of the exemption

makes it all the more important that executors

keep proper records. The executor of the second-

dying spouse will have to submit a copy of the first-

dying spouse's estate duty return to SARS.

It is important to note that although the

portability of the deduction simplifies matters for

many estates, the need for estate planning still

exists and many factors need to be considered,

such as succession planning and the protection of

assets.

Points to consider when deciding whether to

use the R3.5 million exemption, or to leave

everything to your spouse and allow his or her

estate to use the combined exemption:

you need to consider

whether you want to set up a trust. You may want

to do so if you want to protect assets for the benefit

of your minor children or to allow your assets to be

used by future generations of your family. If you set

up a trust, you will probably want to use the estate

duty exemption to pass on assets worth up to R3.5

million free of estate duty to the trust.

the easiest option is to

leave your assets to your spouse and to pass on

your exemption to your spouse's estate. But if you

are leaving a growth asset, such as a property or

an investment, and particularly if you and your

spouse are relatively young, it may be wise to

consider leaving the asset to a trust and using the

abatement in the first-dying spouse's estate. This will

help you to limit or reduce the estate duty liability

when the surviving spouse dies. For example, if you

transfer a property valued at R3.5 million to a

testamentary trust and the property appreciates at

12 percent a year, in 18 years the value of the

property will be close to R30 million. As the surviving

spouse is not the owner of the property (it is owned

by the trust), the value of the property will be

excluded from his or her dutiable estate.

The Estate Duty definition of a spouse extends

to unmarried same-sex or heterosexual couples in a

long-term relationship.

Asset protection:

Growth of the assets:

ESTATE DUTY ACT – RECENT AMENDMENTSHow these changes could affect you and your beneficiaries.

By Debi Godwin, Director - Independent Executor & Trust

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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.

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49 Beach Road, Nahoon, East London, 5241 | PO Box 8081, Nahoon, 5210

e-mail: [email protected]: (043) 735 4633 Fax: 086 693 3356 / (043) 735 3942 |


Factors to consider when deciding to investinternationally. By Marcel Bradshaw, Head of

Glacier International

Foreign investments – look before you leap

8

Any client looking to invest a sizeable

amount should include foreign investments

as part of their total portfolio. This is the

view of Marcel Bradshaw, head of Glacier by

Sanlam's new international division, Glacier

International.

There are, however, an equal amount of

opportunities and risks attached to investing

internationally and clients need to have a clear

understanding of exactly what it is that they want

to achieve. Some investors may want considerable

assets overseas as they're considering emigrating or

retiring abroad, while others may be considering

sending their children overseas to study.

When are the funds needed? Are they

intended for retirement, or does the client need to

access the money sooner?

What is the age of the client and how far away

from retirement is he?

Is the client considering emigrating or retiring

overseas?

In the case of a client with an investment

horizon of more than five years, it is suggested that

between 20 – 40% of the discretionary amount be

invested overseas. If the client is considering

relocation, then a larger sum – if not all of the funds

– should be invested overseas. Essentially, the rule

is – the longer the investment term, the higher the

percentage of funds that should be invested

overseas. Clients should not be investing funds

globally that are needed to provide income.

The global investment environment is decidedly

more sophisticated and offers more choice in terms

of asset classes, geographical areas and

currencies. The average investor would do well to

consider an international balanced fund from a

well-recognised asset manager, using a spread of

international equities, bonds and cash. In this case,

the fund manager makes the asset allocation

decisions on behalf of the client, such as whether

to be overweight in emerging or developed

markets.

A more seasoned investor could use a

balanced fund as the core of his portfolio and

could use specific asset class or geographical

funds as satellite investments, depending on the

individual risk profile and personal preferences. For

example, the investor can overweight his portfolio

with emerging markets, property or a specific

country of choice.

The next decision revolves around currency

selection. If the client is going to be spending the

money overseas, he should invest in the particular

currency in which the money will be spent.

Currency movements are particularly difficult to

predict, and the average investor is advised to

leave currency choice to an experienced asset

manager.

The final decision involves the choice of

investment vehicle. Clients can either invest

overseas directly, using their individual offshore

allowance, currently R4 million (or R8 million in the

case of a husband and wife), or they can utilise the

asset-swap capacity of a life company. Choosing

the former method allows the investor to spend the

money in the particular foreign currency as the

funds do not need to be repatriated back to South

Africa. An asset-swap investment is suited to

smaller amounts or to situations where the client

has already used up his individual allowance or

does not wish to realise the investment abroad. In

this case the client enjoys the benefits of

international exposure, but the funds will need to

be repatriated back to South Africa.

International diversification is a must for every

portfolio, but it's a sophisticated process with a

need for a high level of advice. Clients are urged

to consult with their financial intermediaries to

ensure their investment plan meets their needs

now, and into the future.

Factors to consider whendeciding to invest internationally

Other considerations

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SENSIBLE PORTFOLIO

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BUSINESSASSURANCE

WHO NEEDS IT?

SENSIBLE BUSINESS

9

Business assurance is vital to any business,

whether large or small. The purpose of

business assurance is to ensure the

continuation of the business after a

partner/owner dies (or is disabled) and to protect

the owner and his family against financial

difficulties. Each business has its own unique and

particular list of financial requirements. This article

will cover two of the more common needs

assessed, namely buy-and-sell agreements and key

man assurance.

In the case of death or disability, of either yourself

or one of your partners, your business can be left

vulnerable, as a part of it may have to be sold to

pay out the shares to the estate of the deceased

party. The answer is for all partners/shareholder of

the business to enter into a buy-and-sell

agreement, ultimately ensuring business continuity.

This will ensure peace of mind for yourself and the

knowledge that, should you die, your family's future

income is safe and that they will not have to

change the lifestyle to which they have become

accustomed.

A buy-and-sell agreement may contain a

number of terms and conditions, but is based on

the following essential elements:

A stipulation which obligates each

owner/shareholder sells his/her shares in the

business to a fellow owner/shareholder on his/her

departure from the business

An agreement that the surviving owners will

purchase the deceased owner's share of the

business

A standard formula which will determine any

future selling price

An agreement on how the purchase will be

funded by the surviving owners/partners should any

one other owner/partner pass away. Normally,

funding would take place by taking out life

assurance on the life of each owner.

The agreement would need to cover how the

life assurance policies will be structured, and how

they will be ceded.

F

Buy-and-sell agreements

or example: Dave, John and Mike all own a

business together. In the event of Mike's death,

Dave and John have agreed that they will pay 'x'

(determined by the formula) across to Mike's

estate, which in turn will be distributed to his

beneficiaries according to his Will. In order to fund

the purchase of the deceased's shares, Dave and

John have taken out a policy (of which they are

the beneficiaries) on Mike's life. In the same way,

Mike and John will own a policy on Dave's life, and

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Why business

assurance is vital to

the successful

continuity of your

company. By

Robyne Moore - NFB

BUSINESSASSURANCE

WHO NEEDS IT?


...continued on page 17


CREATINGTHROUGH INVESTING

WEALTH

10

A STARTSENSIBLE

Want to start investing?

Why should you start now?

So why have you not startedinvesting yet?

What is your heart's desire?

Maybe you wish to retire early, build your own

business in the future, buy a home or to pay for

your kid's education. Or anything else that needs

money.

Something for only wealthy or

experienced people?

There are two ways you can create You

can exchange your time for money or you can

make your work for you.

Most of us work for money. We trade our

working hours for a salary. In order to make more,

we need to work more. But there are only so many

hours in a day, even with overtime!

It makes far more sense to make your money

work for you. .

Investing will help you maintain your current

lifestyle. It will help secure your financial future.

What if you were retrenched? What will happen

when you retire?

By investing today, you can build up a source

of funds to help you live comfortably in the future.

You invest so that you can provide for yourself in

the way you are accustomed to, both before and

after retirement.

Do you feel that investing is too hard or too risky or

that you need a lot of money to invest? Not so, and

I can show you why!

The earlier you start, the more money you will

earn. The effect of compound interest is huge,

however, it needs time to really work for you. The

sooner you begin, the sooner you can reap the

rewards.

The longer you invest, the more your money

works for you.

Travel the world? Fly an airplane? Sail the seas? Buy

a home or a new car? Get a Pentium 4 computer?

Whatever you desire could come true - if only you

had the money!

You just need a disciplined savings plan that

offers you the potential to grow your money

quickly!

Do you feel that seems too

complicated?

The truth is that investing is something that

everyone can and should do and as soon as

possible!

money.

money

And there is

more to life than working for money.

And you do this by investing

Just begin NOW!

Well, by saving some of what you

earn, you WILL be able to afford these things,

SOONER THAN YOU THINK!

investing

Some investment truths;Since 1940 there have been only 2 YEARS

WITHOUT INFLATION!

Your money cannot grow without

accepting some RISK.

Investing has at least a 5-YEAR HORIZON,

anything less is either savings or gambling!

PAST PERFORMANCE is no indication of

future results.

The power of COMPOUND INTEREST is not

fully understood.

You should regularly save at least a TENTH

OF YOUR INCOME.

BANK investments never give real capital

growth.

You invest to PROTECT YOUR MONEY from

inflation and make it grow.

You invest to provide an INCOME IN

RETIREMENT.

Your most important long-term investment

goal is a COMFORTABLE RETIREMENT.

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Anyoneand do it.

canshould Source



http://www.peterpyburn.co.za/investing.html

12

The amount of money that may be saved by

planning an estate properly can be

substantial, and warrants more than a cursory

glance. Consider the following:

Should the 1st R3.5m of assets be bequeathed

to a Trust or other appropriate 3rd party on the

death of a spouse, even though any part of the

abatement not utilized is rolled up into the estate

of the 2nd dying spouse?

Does it make sense to pay estate duty upfront

or should this be deferred to a later date?

Should capital gains tax be paid upon death or

can it be shifted to a time frame that may be

better suited?

Is it possible to reduce the value of your estate

without compromising your financial means?

These issues, amongst others, should be well

thought-out when planning an estate, which is not

an overly complicated affair… in fact, certain

basic steps can be addressed to give you the

rudiments of a structured plan, but this doesn't

happen overnight and the culmination of the plan

and the potential savings takes place over a

period of time.

Donations are an effective way of reducing one's

estate and can be made to the extent of R100,000

per individual in any one tax year without

attracting any tax implications in the form of

donations tax. Donations are typically made to

one's family trust or children, but can be made to

any 3rd party if so desired.

If this concept is extended a little further to the

family unit as a whole, a husband and wife can

together donate R200,000 each year. If this is done

consistently over a number of years, a substantial

amount will have been donated to the family trust

– resulting in saving of estate duty, but equally, and

perhaps more importantly, the growth on the

annual donations will be housed in the family trust.

Deferment of estate duty is another option to

consider. Do you pay estate duty upon the death

of the 1st dying spouse (i.e. upfront) and so diminish

the estate / family assets or should it be deferred to

a later date, namely upon the death of the

surviving spouse. To achieve the latter option

Annual Donations:

Deferment of Estate Duty:

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With proper estate planning a substantial amount can besaved. By Philip Shapiro, Financial Director - NFB Gauteng


13

SENSIBLE INVESTORSENSIBLE INVESTOR

(ignoring the optimization of the R3.5m abatement

for the moment), the 1st dying would simply

bequeath his or her estate to the surviving spouse.

There may be circumstances in a particular

relationship or family situation that preclude such

simple bequests.

Is the surviving spouse a rational person who will

not be unduly influenced by the romance of a 2nd

marriage and end up squandering the family

fortune?

Is the person of sound mind, who will not be

misguided and spend recklessly or give money

away to a meaningless cause?

Should you rather protect your assets for the

benefit of your children and grandchildren?

The outcome of these factors will influence

one's decision in this regard.

The above considerations also extend to Capital

Gains Tax. Do you pay CGT (at an effective cost of

10%) upon the death of the 1st dying spouse (i.e.

upfront) and so diminish the estate / family assets or

should it be deferred to the death of the surviving

spouse. If an asset is bequeathed to a surviving

spouse the CGT event is 'rolled over' and will

materialize on the death of the 2nd dying spouse.

Similar circumstances to those outlined above

should be considered.

It may still make sense to ensure that the full

abatement of R3.5m (the current value of assets up

to which no estate duty is payable) is fully utilized in

the estate of the 1st dying even though there are

roll up provisions relating to the unused portion of

the abatement. An Inter-Vivos Trust may already be

in existence and this may provide a more

structured means of controlling assets left to

beneficiaries, or be an opportunity to transfer assets

to a trust with no further transaction taxes.

An is often used as a vehicle for

pegging the value in an estate and can also be

used as the receptacle for the 1st R3.5m bequest

to ensure use of the full abatement. Any increase in

the value of assets bequeathed (or transferred) to

a trust will ultimately be excluded from a person's

dutiable estate, as the growth takes place in the

trust.

A trust also offers protection of assets against

creditors. It provides for easy succession of assets

and use thereof by the beneficiaries. It is not

impacted by the death of the founder or principal

trustee of the trust. If a beneficiary dies there will be

no impact on the future enjoyment of trust assets

by other beneficiaries. The use of a trust can result

in effective estate planning for future generations

and also protect an heir or legatee from the effects

of a future marriage regime or potential insolvency.

The planner's death will have no consequence

in terms of assets being frozen or having to provide

an immediate cash flow to a surviving spouse and

other family members. There are no CGT

implications (no deemed events) or estate duty

consequences other than perhaps in relation to the

value, if any, of the planner's loan account with his

trust.

A is equally effective as the

receptacle to receive the 1st R3.5 million bequest

from an estate. A testamentary trust is created

upon the death of the testator and is a simple and

inexpensive way of forming a trust that will ensure

that assets bequeathed to such trust will be

properly looked after upon the death of the

deceased, whilst at the same time ensuring that

the abatement is optimized by bequeathing the

prevailing amount, currently R3.5 million, to such

testamentary trust.

The inevitable event of death may be an

appropriate time to transfer assets to a trust or any

other 3rd party without the consequences of any

transfer duty normally associated with the transfer

of assets to such party.

Assets bequeathed in terms of a Will to a tax-

exempt organization, such as a charity, university,

Church etc., obtain relief in the form of an estate

duty deduction, thereby saving estate duty.

Deferment of Capital GainsTax:

R3.5 million Abatement:

Trusts – Inter-vivos andTestamentary:

Other Considerations:

inter-vivos trust

testamentary trust

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THE LIFE OF AMODERN TRAVEL

CONSULTANTConstantly adapting to the ever-

changing travel environment. By ClaireBroedelet, Marketing & Operations

Director - Travel Experience

15

SENSIBLE TRAVEL

Iam increasingly amazed at how much travel

consultants have to deal with these days and

how well they adapt to the ever-changing travel

environment.

Between airline strikes, ash clouds, political

uprisings, airline delays and security measures there

is a great amount of stress involved in ensuring that

your customer's holiday is well planned.

Of course, this is a part of the job, like all

professions. Travel consultants overcome most

obstacles due to their many years of experience

and constant training in new technological

developments and product updates. One piece

of advice I can give you is that if your trip is a

complicated one, make sure that the consultant

you are dealing with is very experienced in

planning intricate international trips. If your holiday

has many legs with different visa's required, you

need someone who knows the 'ins and outs' of all

of these legs. This comes with vast training and at

least 10 years of international travel consulting

experience.

When it comes to security measures post 9-11

becoming increasingly strict, our travel consultants

have to ensure that they have all your correct

details before issuing any and all tickets. In other

words, if you full name is “Clair Mary Broedelet”, but

everyone calls you “Mary Broedelet”, you need to

ensure that you give your travel consultant a copy

of your passport prior to booking to ensure that

they book with your correct first name. If this does

not happen the airline will not honour your ticket

and you will not be able to travel without

purchasing a new ticket. The same rule applies for

the spelling of your name; it has to be 100% correct

with no errors whatsoever. Keep in mind that your

travel consultant deals with a number of bookings

within one working day; please ensure that you

check ALL confirmations for bookings to ensure

dates, times and names are completely correct.

When it comes to airline strikes or events such

as ash clouds and political uprisings (events out of

our control completely), there are a limited number

of things your travel consultant can do, dependent

on what moves the airlines are making to

accommodate affected passengers. As soon as

they are aware of this kind of occurrence taking

place, the consultants will check their booking

systems to make sure we know who is affected.

They then find out what can be done, particularly

when the traveller is already overseas and maybe

does not know there is a problem. It is particularly

important in this instance that we have a way to

get hold of you while you are travelling and that

you make a point of reconfirming your flights three

days before you are due to fly. The reconfirmation

is important as the airline can tell you whether your

flight times have changed, or if there is any further

information you may need prior to returning home.

Clair Broedelet is the Marketing and

Operations Director of Travel

Experience. Should you have any

queries or comments please contact

her on clair@travel-

experience.co.za.

THE LIFE OF AMODERN TRAVEL

CONSULTANTConstantly adapting to the ever-

changing travel environment. By ClaireBroedelet, Marketing & Operations

Director - Travel Experience


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16

When a person receives a lump sum pay

out from a retirement fund at retirement,

the amount is subject to tax in the

retiree's hands.

A person is a member of a pension or

provident fund by virtue of their employment and is

regarded as having retired from the fund when

they retire from employment.

Where a member of a fund has previously

resigned from employment, their retirement

provision may have been preserved in either a

pension preservation or provident preservation

fund. Retirement from either of these is normally at

age 55 unless the transferring fund specified an

age above 55.

A member of a retirement annuity (RA)

reaches retirement when the policy matures. The

earliest this can happen is when a person reaches

the age of 55.

A member of a pension, pension preservation fund

or RA may take a maximum 1/3 of the fund value

in cash and must purchase a pension with the

remaining portion.

A member of a provident or provident

preservation fund may take the full provision as a

lump sum or, assuming that the rules allow it, to

purchase an annuity with the full proceeds or with

a portion thereof.

Regardless of the source of the retirement lump

sum, the tax treatment is the same.

The first R300 000 of any retirement lump sum is

tax-free. Any previously disallowed contributions will

be added to the R300 000. This is regarded as the

'tax-free portion' of the lump sum. The remaining

'taxable portion' is taxed as follows:

R300 000 – R600 000 18%

R600 000 – R900 000 27%

R900 000 and above 36%

E.g. Mrs Smith retires from her RA (value R1.8m). She

has contributed R20 000 which did not qualify for a

deduction against her income tax. She takes 1/3 as

a lump sum. Her tax is calculated as follows:

Lump sum: 1/3 of R1 800 000 = R600 000

Tax-free portion: R300 000 plus R20 000 = R320

000

Taxable portion: R280 000

Tax on R280 000 @ 18% = R50 400

NOTE: Where Mrs Smith has previously received a

lump sum from another retirement fund, this

amount will be added to the current lump sum and

taxed accordingly.

If Mrs Smith has a second RA (value R300 000) and

retires from it later, the tax is calculated as follows:

Lump sum: 1/3 of R300 000 = R100 000

Total - all lump sums: R100 000 plus R600 000 =

R700 000

Tax-free portion: R300 000 plus R20 000 = R320

000

Taxable portion: R380 000

Tax on R300 000 @ 18% = R54 000

Tax on R800 000 @ 27% = R21 600

Total tax – R75 600 less tax paid on previous lump

sum of R50 400

Tax payable = R25 200

The annuity purchased with the 2/3 of the fund

value will be taxed as part of gross income in the

annuitant's hands.

What options does a memberhave at retirement?

Taxation of the lump sum

Taxation of the annuity

As a member of a fund, what areyour options on retirement? By

Natalie Dillon, Senior Legal Advisor -Old Mutual Broker Division

TAXATIONRETIREMENT BENEFIT

OF MY

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17

SENSIBLE BUSINESS

Mike and Dave will own a policy on John's life.

Some of the benefits of having a buy-and-sell

agreement in place are:

Cash is made available as soon as it is needed

Beneficiaries of your estate receive a market-

related and fair value of the portion of the business

which they have inherited

Enough capital is made available to purchase

the shares

The existence and continuity of the business is

assured

Many businesses have one or more staff members

on whom they depend heavily for their success.

These staff members are essential because of

special skills and/or knowledge which they impart,

and the sudden and unexpected loss (either

through death or disability) of such a staff member

would be detrimental to the ongoing business

operations and productivity, and can lead to huge

financial implications. The benefit paid out by key

person assurance guards businesses against this risk.

Most insurance providers would have a set of

minimum criteria which would need to be met

before key person assurance is issued for any staff

member of a company. Among this list of

requirements, would be the following:

The business must be able to show that the

employee has the necessary qualifications,

creativity, expertise, experience etc. which is

crucial to the continued operation and

sustainability of the company.

The cover would only be in effect for the time

that the employee continues to meet the

insurance company's requirements, and continues

to demonstrate that they play a vital role and are

key in the continuation of the business.

Generally speaking, key person assurance

would only be valid where the employee passes

away or is disabled eg. the insurance would not

come into effect where the employee retires. In

most cases, insurance companies will not cover the

resignation or dismissal of a key employee

(however, there may be exceptions to this rule).

The purpose of key person assurance is to assist

the business on the loss/disability of a key person by

using the resources from the policy benefit to

recruit and train a suitable replacement, the

outsourcing of various functions, and can also be

used as a buffer to absorb the impact of any

financial/productivity loss while a new employee is

being trained or upskilled.

Businesses usually take out key person

assurance in the form of life insurance and disability

insurance to guard against the risk of loss of one of

their key employees or executives. The premiums

are paid by the business, the policy is owned by

the business, and ultimately, the benefits on pay-

out of the policy, are utilised by the business, usually

to maintain stability of the company and to guard

against any major disruptions.

It is important to bear in mind that for each of these

types of business assurance there may be differing

tax implications in the following instances: estate

duty, capital gains tax (CGT) and income tax (the

intricacies of which do not fall within the ambit of

this article).

Your business is an important asset and it is vital

to have business assurance in place to avoid any

future disputes between owners/partners or to

guard against any losses on the demise of a key

individual, and to guarantee the successful

continuity of your business.

Key person assurance

Tax and Estate Duty

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Should you require assistance in setting up either a

buy-and-sell agreement or key person assurance

for your business, kindly contact one of NFB's

Private Wealth Managers on 043 – 735 2000 or e-

mail us on [email protected]

BUSINESS ASSURANCE – WHO NEEDS IT?...continued from page 9

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LOCAL IS SOYESTERDAYLOCAL IS SOYESTERDAY

18

An old market adage tells us that the trend is

your friend. This has certainly held true for

SA investors who for the better part of the

past decade have enjoyed abundant returns by

riding the domestic asset trend.

Coronation Asset Management CIO Karl

Leinberger

Allan Gray CIO Ian

Liddle

Investec Asset Management

Tobie van Heerden, IAM's head

of institutional business

Adam Ebrahim, CEO of asset

management firm Oasis

But as markets have also shown countless

times, a trend is your friend until it comes to an end.

Many leading asset managers are cautioning

investors not to become permanently attached to

their domestic-only stance.

Still, many investors are wary of offshore

investment. Still fresh in their minds is the damage

done by a trend that went horribly wrong — a

stampede into foreign equity funds in 2000 and

2001.

For investors who poured money into the

average SA-based foreign general equity fund at

the end of 2001, the result has been a 20% capital

loss. The average domestic general equity fund

produced a 200% capital gain over the same

period.

says the danger is that investors will

extrapolate the past decade's trend into the future.

“SA assets were very undervalued 10 years

ago,” says Leinberger. “What followed was an

amazing decade for SA assets, but they no longer

offer great value.”

Better value is to be had in the equity markets

of developed countries, he says. “Investors should

be increasing offshore exposure, but regrettably

few are,” he says.

Underscoring his view,

says all funds in which the firm has a

discretionary mandate have 20% of their assets

offshore, the maximum permitted.

(IAM) is following

a similar strategy. “In many funds there is a strong

bias towards overweight positions in major global

companies,” says

.

He adds that big brand name global

corporates such as Coca-Cola, Microsoft, Johnson

& Johnson and Pfizer offer solid value but have

lagged behind the equity market recovery. He

points to their strong balance sheets and attractive

free cash flow (FCF) yields averaging 8%.

FCF is the cash a company generates in excess

of its operating and dividend payment needs. The

FCF yield is FCF per share as a percentage of the

share price and is regarded by many analysts as

the best indication of the return generated by a

company.

Van Heerden says if you take an FCF yield of

8% and a company capable of growing

consistently at 5% annually, you have an effective

and very attractive return of 13%.

Also emphasising the value offered by major

global corporates is

. Some major corporates

offer FCF yields of 15%-20%, he says. Add dividend

yields to this of around 6% and an investor

prepared to take a five- to 10- year view is faced

with an outstanding opportunity, he says.

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Investors should be

increasing offshore exposure,

but regrettably few are.

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A look at current market trends and how investors are being affected.Source: Stafford Thomas - Financial Mail

SENSIBLE TRENDS

19

Boldly, Coronation puts estimates to its view on

domestic and foreign asset returns over the next 10

years. For SA equity it forecasts an average 11%

annual return compared with a 17% average over

the past 10 years. For foreign equity, Coronation

forecasts an average 14% annual return compared

with a 2,3% average over the past 10 years.

Value is not confined to equity, says Ebrahim.

He says commercial property in the US, UK and

Europe also represents a rare investment

opportunity.

Major foreign-listed property companies have

emerged from the financial crisis with strong

balance sheets and cash to invest and are buying

properties on exceptionally high yields, explains

Ebrahim. In the US, for example, property

companies are buying prime properties yielding

10%-13%, he says.

Contrast this, he says, with yields of about 8%

on prime SA retail property and the potential for

rentals to fall by 10%-20% on renewals.

Another trend investors must pay heed to is the

run the rand has enjoyed, which made it the

world's best-performing currency over the past 18

months.

“The rand is overvalued,” says Van Heerden,

echoing Leinberger, Liddle and Ebrahim. The rand

is the most liquid emerging-market currency,

making it foreign investors' “risk play” of choice, he

says. Though the rand could strengthen further, he

adds, “there is a bigger risk of a blow-out”.

While emerging markets remain in favour, the

rand will hold or even strengthen, says research

and advisory firm Econometrix's chief economist,

Azar Jammine. But he warns that a shock to global

investors' risk appetite could see them turn their

backs on emerging markets and the rand weaken

dramatically.

Emerging markets in general are seen as fully

valued. “We were bullish on emerging markets a

year ago, but now see better value in developed

markets,” says Van Heerden.

Ebrahim poses the question: “Why buy

emerging-market shares on 30 p:e's when you can

buy global corporates with emerging-market

exposure of up to 50% on p:e's of 10 or 12?”

Many asset managers are backing their views

on foreign investment with expansion of their

offshore capabilities and product range. Among

these is Sanlam, through its Sanlam International

Investment Partners (SIIP) unit.

SIIP has acquired stakes in specialist equity,

bond and property investment firms in Australia

and the UK as part of a strategy to increase

Sanlam's foreign capabilities, says

“We believe it is the time to be expanding

offshore,” he says.

Adding to its offshore range, Allan Gray has

launched the Global Optimal Fund of Funds,

targeting investors with a high risk aversion, says

Liddle. The fund's equity exposure is fully hedged.

The fund joins Allan Gray's Global Fund of

Funds, which targets investors with a moderate risk

tolerance, and Global Equity Fund, targeting those

wanting full equity exposure. Managed by Allan

Gray affiliate, Orbis, the funds are among only

seven rand-denominated foreign funds to have

produced positive returns over the past three years.

Coronation has also increased its foreign fund

offerings, says Leinberger, the latest addition being

its Global Managed Fund, launched in October

2009. The fund's mandate is to maximise returns in

developed and emerging equity and bond

markets.

For those sharing Oasis' optimism on property in

developed markets, Ebrahim says Oasis will soon

launch a rand- denominated feeder fund into its

Global Property Equity Fund.

The big question is: how much should be

invested offshore? “I would advise the average

person to have 20%-30% of their assets offshore,”

says Ebrahim.

SIIP MD Hendrik

Pfaff.


Many asset managers are

backing their views on

foreign investment with

expansion of their offshore

capabilities and product

range.

NFB CORPORATE RESPONSIBILITY –

FULL STEAM AHEAD!An update on the Loaves & Fishes Network. Touching

lives in our community – you too can make a

difference! By Brendan Connellan, Director - NFB

NFB CORPORATE RESPONSIBILITY –

FULL STEAM AHEAD!

In 2009, NFB led a debit order and media

campaign to assist the Loaves and Fishes

Network to try and get out of financial difficulty

following a government decision to stop funding of

it, and several other NGO's, in favour of a new

initiative they were following. We are happy to

report that this, combined with various other

avenues of support received by the organisation,

bore fruit and the organisation has managed to

keep afloat financially and continues to do

exceptional work in and around East London,

mainly in the area of pre-school education,

feeding schemes and development of facilities of

centres caring for those who are most in need.

A special word of thanks also to organisations

such as the DG Murray Trust for providing funding

for the “Flying Children's” programme (essentially

the core of the organisation's strategy, a

programme aimed at providing educare to

children who otherwise would not have that

positive start in life, and training to the volunteers

who care for the children) for 2010, the Catholic

Women's League for “adopting” some centres , the

children of various schools who donated enough

food in the Children for Children campaign to last

for 3 months, as well as to the Italian community

as a whole – specifically UCODEP and Co-Op

Italia who have donated R350,000 for refurbishing

centres and R10,000 to develop a soccer pitch in

Mdantsane, and La Dante Alighieri Society who

have held fundraising events.

In the words of Dr Trudy Thomas, the

chairperson of the Loaves and Fishes Network:

“These monies, crucial as they are for our

existence, not only boost our bank accounts, but

also our spirit and resolve. They also demonstrate

that we are not alone, but part of a community of

people who care for the well-being of our children,

and that it is entirely possible to begin to turn

around the crisis of childhood that besets our

society.”

If you would like to assist in any way, please

contact Robyne Moore of NFB at either 043 735

2000 or [email protected] - debit order forms are

also available for those who are willing to make

regular donations from as little as R30 per month!

SENSIBLE EXPECTATIONS

20

SENSIBLE RESPONSIBILITY

Touching lives

in our

community.

You too

can make a

difference!

Loaves & FishesNetwork

Loaves & FishesNetwork


and guidance in this regard. It is critical to

determine whether or not the asset is in fact a

capital asset or a revenue asset and we will deal

with this issue at a later stage.

To conclude, CGT is not necessarily the big evil

everyone made it out to be when it was first

introduced and is relatively simplistic in its basic

form. However, it is important to consult your

accountant or tax advisor when encountering

these areas of the tax act as a certain degree of

interpretation can be involved in certain instances.

CAPITAL GAINS TAX IMPLICATIONS FOR THE INDIVIDUAL ...continued from page 6

21

SENSIBLE EXPECTATIONS

CHECKING UPON YOUR

FINANCIALADVISOR

So you have finally gotten around to getting

your financial planning on the go and have

set up an appointment with an advisor who

comes into your home with an application form,

gets you to sign it and leaves without you really

understanding what they have done or if there is

any benefit to you.

knowledge is power!

STOP RIGHT THERE. The financial planning

process should be one where you, as the client, are

fully informed, and after receiving all the facts and

recommendations - you make the choice.

On the initial visit with your financial advisor these

are the things you should make sure you are

receiving and/or covering:

They should first get to know a bit about you –

what service do you require? E.g. retirement

planning, life cover or a small monthly investment.

Once they know what you require you should

expect to answer questions on your financial

situation, establish your risk profile and where you

would like to be financially. Your advisor will also

disclose to you their current qualifications and what

they are licensed to advise about. You would need

to sign a form in order to give the advisor access to

view any current investments you may already

have.

An analysis should be done to see what is

required to reach your goals.

Your advisor should make a recommendation

as to what needs to be done to achieve your

goals, specify the financial products to do this and

why certain products are recommended over

others.

Then it is your turn, as the client, to make the

final decision after getting all the information –

which could include quotes, a comparison of

different products and all other material

information e.g. fees, benefits, penalties etc.

The advisor should always provide you with a

copy of the proposal in writing, which would

include a summary of what was recommended

based on the information they gleaned from you,

the different products considered, the final product

that was recommended and why, and the reasons

for the product being selected.

Why do you recommend this product/institution

over another?

When will I see you again to review my

investments?

What are the fees on this product?

Can I withdraw my money at any time or is

there a restricted period/penalties?

Provide the advisor with all your financial

information

Do not sign blank or incomplete forms

Inform the advisor of any material changes

when they happen eg. change in address,

addition to your family, retrenchment etc.

Do not be afraid to contact the advisor or

his/her assistant to ask questions about anything

you don't understand.

Read all the information given to you –

What you should expect fromyour financial advisor: A few questions to make sure

you ask your advisor:

What should I do as the client?

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What to ask and what to

expect. By Julie McDonald,

Paraplanner - NFB


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22

Liberty International's restructuring has caused

quite a stir on local markets, especially for

those clients who noticed the share had

mysteriously disappeared from their portfolios.

Rather than disappearing, Liberty International has

undergone a name change and restructuring

resulting in your portfolio holding equal shares in

Capital Shopping Centres PLC and Capital &

Counties PLC. These two companies combined

hold the old assets of Liberty International , with

Capital Shopping Centres holding all the regional

shopping centres (approximately 73% of assets)

and Capital & Counties the central London assets,

including the well known Covent Garden

(approximately 27% of assets).

As a South African investor you are now able to

choose your entry point into the London property

market, focusing either on an income generating

stream from Capital Shopping Centres or the

potential for capital growth through the

redevelopment of the central London assets held in

Capital & Counties. While both companies retain a

listing in London and South Africa, Capital

Shopping Centres maintains a dual-listed structure

with Capital & Counties deemed an inward listed

security. While this has little relevance for the

majority of individual investors, for institutional

investors it is more complicated. In essence,

holding an inward listed company is deemed

owning foreign assets and is subject to exchange

controls. As we saw with the Mondi Limited and

Mondi PLC structure, institutional investors holding

the old Liberty International have two years within

which to dispose of their Capital & County shares

before the holding becomes subject to exchange

control in their hands. Could this stock overhang

be contributing to the weakness in the Capital &

Counties since unbundling, or are investors looking

for the better yield in Capital Shopping Centres?

Regardless, from our perspective we see a

good investment case for holding both shares, but

at this stage are particularly interested in the

redevelopment of the central London property

portfolio. With rentals below comparable yields

and asset prices depressed, we see the potential

for the Capital & Counties management team to

add real long-term value. For the patient investor

who doesn't require a meaningful income in the

short term, Capital & Counties provides an easy

entry point into the London property market, with

the benefit of holding pound denominated assets

providing a further potential tailwind against the

backdrop of an uncharacteristically strong Rand. In

a market once again displaying considerable

volatility, Capital & Counties provides the

opportunity to buy tangible assets at depressed

levels.


The Eastern Cape's first

NVest Securities (Pty) Ltd:

www.nvestsecurities.co.za

NFB House 42 Beach Road,

Nahoon, East London 5241

P O Box 8041 Nahoon 5210

Tel: (043) 735-1270

Fax: (043) 735-1337

Email: [email protected]

home-grown stock brokerage…..

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How the name change and restructuring affect your shareholding.

By Chris Lemmon, Director/Portfolio Manager - NVest Securities


Opening Gambit

What's in? What's out?

The Amorphous Beast

Closing Salvo

Imagine, if you will, that you had invested a

hundred thousand rand with two managers. Over

the course of ten years both managers,

remarkably, managed to generate a gross return

of 15% per annum. However, Manager A's pricing

structure was 1% lower than manager B – who

charged 2% per annum. Manager A's net return

was 14% p.a. and Manager B's net return was, you

guessed it, 13%. At the end of ten years Manager B

would have generated only 88% of what Manager

A managed to achieve – solely because of the

difference in fees. Doesn't it make sense that

investors and those that advise them have access

to complete disclosure of manager fees? It

absolutely makes sense and the collective

investment schemes (unit trust) industry is

embracing this logic with a concept called Total

Expense Ratios, also known by the rather

unimpressive acronym TER's.

TER's attempt to capture all of the expenses

incurred by a manager in the process of

generating investment returns. It is important to

note that TER's do not attempt to capture the costs

of investment advice or of the products through

which these collective investment schemes are

purchased. In plain English: TER's include investment

management fees but exclude financial advisor

fees as well as product fees (such as retirement

annuity, endowment policy, etc fees).

TER's will also capture that most amorphous of

beasts: performance fees. Consider this scenario:

Manager C charges a flat fee of 2% per annum

and Manager D charges a flat fee of 0.5% per

annum plus a performance fee of 20%. Which of

these managers has the higher charging structure?

At the beginning of the year there is absolutely no

way to tell. It is only at the end of the year, after

Manager D's performance fee has been

calculated, that we are able to determine which

of these managers is the most cost effective. (It is of

vital importance that funds with low TER's are not

confused with high quality funds – investors should

be prepared to pay higher than average annual

fees if the manager has the skill to generate higher

than average returns). If both managers in this

scenario generated performance of 20% for the

year and Manager D's benchmark return was 10%

and both managers had R100m under

management at the end of the year (for simplicity

we assume fees are only charged at the end of the

year) then Manager C would have earned R2m in

management fees. Manager D would have

earned R0.5m in management fees and R2m in

performance fees for a total fee of R2.5m – higher

than Manager C's even though they generated

the same investment return.

TER's will capture the effect of performance fees

and will require that management companies

disclose their fees in both percentage and rand

terms. This will be done on a retrospective basis – in

other words comparing TER's will only provide valid

conclusions for the prior period but nonetheless will

make for superbly interesting reading and here at

NFB we take the greatest care in ensuring that our

clients’, friends’ and investors’ investment returns

are not compromised by inefficient pricing

structures.

SENSIBLE FEES

23

PhotoBigStockPhoto.com TOTAL

EXPENSESRATIOS

The future of feedisclosure. By PaulMarais, Director -

NFB Gauteng


24 sensible finance July10

“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.

SENSIBLE FINANCE QUESTIONS & ANSWERS

Q:

A:

A question often asked with regards to Living

Annuities is what level of income should I be

drawing, and what are the risks to both my capital

and income?

A few points to note

The reality of the situation is that only 6% of

people in SA are able to retire independently. This

means that the majority of retirees have not

provided enough for retirement. This then leads on

to a higher withdrawal rate from their retirement

capital which puts pressure on the growth in the

portfolio and inevitably leads to capital and

income drawdown over time.

Below are some points sourced from an article

written by Ian De Lange of Seed Investments which

covers these factors.

“Because the investor or annuitant takes on

the risks, there is no guarantee from the life

company that funds will be available to provide an

income for life. In many instances because of

selecting a drawdown level that is too high and

because of sustained poor performance, the

capital value can be depleted, reducing the

annuity in real terms.

While performance is naturally also very

important, because of the compounding effect

working in reverse when it comes to drawing down

on a lump sum, setting the annual percentage

drawdown for the living annuity is crucial.

Currently living annuities allow the annuitant to

annually select a drawdown level of between 2,5%

and 17,5%.

Asisa wants life companies to send out annual

information to investors in these annuities setting

out the importance of selecting the appropriate

income level.

They have also recommended including a

table similar to highlighting the relation

between the drawdown and the investment

performance on the sustainability of the portfolio.

Tax is an important consideration especially

where investors have a combination of living

annuities and investments directly in their own

names. It is important to optimise the tax planning

across all investments. Income received into the

annuity is tax free, but the annuity itself is taxable as

income.

Drawdown analysis must not only be done on

the living annuities, but a comprehensive plan

down on an investor's total investment base, where

again often a living annuity is but just one

component.

Asset allocation modelling is also important to

consider across an investors total portfolio.”

In the current low inflation, low yield

environment it is imperative that your portfolio is

structured correctly to meet your income needs. It

is also important that one understands the risk to

capital and income drawdown and that these are

communicated through to you.

If you have any questions on your living annuity

or would like to have a comprehensive retirement

plan drawn up, please don't hesitate to contact us.

on the right

Please address all Questions to: Travis McClure,

NFB Sensible Finance Q&A, Box 8132, Nahoon, 5210

or email: [email protected]

Investment return per annum(before inflation & after all fees

2.50% 5.00% 7.50% 10.00% 12.50%

2.50% 21 30 50+ 50+ 50+

5.00% 11 14 19 33 50+

7.50% 6 8 10 13 22

10.00% 4 5 6 7 9

12.50% 2 3 3 4 5

15.00% 1 1 2 2 2

17.50% 1 1 1 1 1

An

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NFB Sensible Finance Magazine Issue 15

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