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PERSONAL FINANCE
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p r i v a t e w e a l t h m a n a g e m e n t
Issue 18July 2011
NFB
PERSONAL FINANCEMagazine
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WIN A WEEKEND STAY ATBUSHMAN SANDS
Forming a base casescenario on which to base
future expectations ofinvestment returns
YOURFINANCIALADVISOR
Is he/she “fit &proper”?
RISK AND LIFEINSURANCEA necessaryevil or aninvestment inpeace ofmind?
CRYSTAL BALL?
“The best way of preparing for the future is to takegood care of the present, because we know that ifthe present is made up of the past, then the futurewill be made up of the present.
Only the present is within our reach. To care forthe present is to care for the future.”
- Buddha
p r i v a t e w e a l t h m a n a g e m e n t
East London tel no: (043) 735-2000 or e-mail: [email protected]
Port Elizabeth tel no: (041) 582-3990 or email: [email protected]
Johannesburg tel no: (011) 895-8000 or email: [email protected]
Web: www.nfbec.co.za
NFB is an authorised Financial Services Provider
contact one of NFB's private wealth managers:
fortune favours the well-advised
Providing quality retirement,
investment and risk planning
advice since 1985.
a sensible readWe certainly live in interesting times!
There is said to be a Chinese Curse which goes along the lines of
“may you live in interesting times”. Although the origin of the saying
is actually uncertain, it is said to possibly come from the Chinese
saying, “it is better to be a dog in peaceful times than a man in
chaotic times.” Now I think times would have to be very chaotic for
me to want to come back as a dog (although some do lead pretty
cushy lives), but times they are a changing and I am very pleased to
be a witness to it.
What is interesting is that I think we are reaching a time where
people, wherever they may be, are tired of leaders who do not
have the best interests of the people at heart. The change may be
a slow one and there are certainly still many leaders who use their
position to line their own pockets (recent warnings by Zwelinzima
Vavi of the dangers of SA becoming a Banana Republic come to
mind), but happenings in Syria, Libya, Egypt and even in South
Africa, if we look at the results of the municipal elections where the
DA won 24% of the vote, indicate a mind shift. The DA has
traditionally been a “white” and “coloured” party, however, if all the
white, coloured and Indian people in the country are aggregated,
they only form 20% of the population – so some kind of cultural
convergence seems to be appearing. I believe the shift will come
from the youth of the country who are increasingly educated and
finding themselves with little opportunity for economic
advancement and no real voice. But their vote will make them be
heard! The days of blind loyalty are numbered and politicians
everywhere need to beware as the vote will be one based on
delivery and accountability and not congeniality and skin colour.
Personally, I am happy to support anyone who has the best interests
of South Africa and its people at heart and look forward to the day
where all people are open-minded enough to judge on merit.
Brendan Connellan - Editor and Director of NFB
editor
Advertising
layout and design
Address
Contributors
Brendan Connellan
Stephen Katzenellenbogen (NFB
Gauteng), Travis McClure (NFB
East London), Shaun Murphy
(Klinkradt & Assoc.), Grant Berndt
(Abdo & Abdo), Patrick Sheehy
(Glacier by Sanlam), Debi Godwin
(IE&T), Natalie Dillion (Old Mutual),
Robert McIntyre (NVest Securities),
Robyne Moore (NFB East London)
Robyne Moore
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.
©2011 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
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.nfbec.co.za
a sensible read
sensible finance ED’SLETTER
1
Email your full name to [email protected] to subscribe to
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another aspect of our comprehensive service
sensible finance july11
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SENSIBLE CONTENTSPhoto BigStockPhoto.com
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A LOOK INTO THE NEW COMPANIES ACT
A BRIEF GUIDE TO BUYING OR SELLING YOUR HOME
CRYSTAL BALL?
TESTAMENTARY FREEDOM
A TAX DEDUCTION IS NOT THE ONLY REASON TO
PURCHASE A RETIREMENT ANNUITY
RISK AND LIFE INSURANCE
SHOULD YOU BE HOLDING ANGLOS IN YOUR
PORTFOLIO?
Q&A. YOU ASK. WE ANSWER
WIN A WEEKEND STAY AT BUSHMAN SANDS
How it impacts on Close Corporations.
A brief overview of the duties of the two principal parties involved.
Forming a base case scenario on which to base future expectations of investment
returns.
The reasons for possibly challenging a Will.
A look at some of the other benefits.
A necessary evil or an investment in peace of mind?
A compelling investment at current levels.
Advice column answering your investment, personal finance, life and/or risk
insurance questions
Stand in line to win an awesome weekend stay for two, compliments of Harvey
World Travel, East London
YOUR FINANCIAL ADVISORWhat does it mean that they are “fit and proper”?
By Shaun Murphy, CA (SA), Partner -
Klinkradt & Associates.
By Grandt
Berndt - Abdo & Abdo.
By Stephen Katzenellenbogen, Private Wealth Manager – NFB, Gauteng.
By Debi Godwin, Director -
Independent Executor & Trust.
By Natalie Dillon, Senior Legal Advisor - Old
Mutual Broker Division.
By Patrick Sheehy, Head of
Product Management - Glacier by Sanlam.
By Rob McIntyre, Portfolio Manager -
NVest Securities.
with Travis McClure, Private Wealth Manager – NFB, East
London
By Robyne Moore - NFB, East
London.
2 sensible finance july11
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A LOOK INTO THE NEWCOMPANIES ACT:
4
How it impacts on Close Corporations.By Shaun Murphy, CA (SA) Partner -
Klinkradt & Associates
A LOOK INTO THE NEWCOMPANIES ACT:
71 OF 2008
Ahotly debated topic in financial circles of
late has been the long awaited
introduction of the new Companies Act,
which although had a slightly delayed introduction,
has been welcomed as a new era in South African
business unveils itself.
Close Corporations
Less than 100 points
Between 100 and 350 points
350 and above
between 100 and 350
The first point of interest is the impact that the
new Companies Act has on .
The initial indicators leaned towards a phasing out
period, during which all close corporations would
be converted to Proprietary Limited's or private
Companies. This was to take place over a ten year
period during which time no new Close
Corporations would be able to be registered. This
provision was changed somewhat in that Close
Corporations may be registered up to the date
that section 13 of the Companies Act, 2008 comes
into effect and all those registered up to that date
will continue for the foreseeable future. This may
have placed a premium on the cost of shelf Close
Corporations available as the numbers will slowly
dwindle over time.
Although Close Corporations that are
registered at the effective date of section 13
coming into being, there are still provisions within
the Companies Act, 2008 that are applicable.
Firstly, the requirements surrounding the
preparation of financial statements are the same
for both forms of entities; secondly, the persons
eligible for membership of a Close Corporation
must satisfy the same criteria as if they were being
appointed as a director of a company. The third
item is the most interesting: it is that of whether or
not the financial statements of the close
corporation are required to be audited or not; this
is based on a Public Interest Score (PIS), which is
derived as follows:
1 Point for every R1 million of turnover generated
in the financial year
1 point for every shareholder / member
1 Point for every employee of the company /
close corporation
1 point for every R1 million of unencumbered
debt of the company / close corporation (this
excludes secured debt over assets like installment
sale agreements)
The points are totaled and evaluated in three
brackets:
1. , a basic compilation of
financial statements occurs which is much the
same as the current situation for a Close
Corporation.
2. , an independent
review of the financial statements must be
conducted by an independent accounting
professional.
3. requires a full statutory audit
4. The last bracket, which is probably not
applicable, is where the PIS is
and the entity prepares its own annual financial
statements; this type of entity is required to have a
full statutory audit.
It is our understanding that the above
introductory guidelines for the audit criteria are at
present being reviewed and there may well be
some changes to the thresholds depicted above
as the powers that be deliberate the matter further.
The above is a very brief introduction and in
next issue we will elaborate on one or two of the
items mentioned above that require further
explanation.
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For more detailed advice and insight
into how this may help you please feel free to
contact me on 043 – 7269555.
sensible finance july11
SENSIBLE ADVICEPhoto BigStockPhoto.com
A BRIEF GUIDE TOBUYING OR SELLING
YOUR HOME
A brief overview of the dutiesof the two principal parties
involved. By Grandt Berndt -
Abdo & Abdo
A BRIEF GUIDE TOBUYING OR SELLING
YOUR HOME
SENSIBLY LEGAL
The buying or selling of property is usually the
largest investment most people make during
their lives. In this article we will attempt to
give a brief overview of the duties of two of the
principal parties involved, namely the estate agent
and the conveyancing attorney.
As a purchaser, one needs to know how much
you can afford and the cost involved in the
registration of the property, any mortgage bond
and relocation costs. Most estate agents and
attorneys will be able to give an indication of the
transfer and bond costs, which are dependent on
the value of the property or mortgage bond.
The seller is usually liable for the payment of the
estate agent's commission and will mandate the
agent/s to sell the property. In terms of the Estate
Agency Affairs Board Code of Conduct, estate
agents have a duty to protect the public's interest
and to protect their client's interests at all times,
with due regard to the interest of all other parties
concerned.
The estate agent is to disclose to any purchaser
or prospective purchaser all facts relating to a
property which are, or could be, material to such
purchaser or prospective purchaser, and further,
has a duty to explain the meaning and
consequence of the material provisions of any
offer.
No estate agent is, without good and sufficient
cause to encourage or influence any party or
potential party to a transaction, to use or not to
use, as the case may be, the services of any
particular conveyancing attorney or firm of
attorneys or financial institution. Accepted practice
is that the estate agent is to enquire from the seller
whether he has an attorney who is to attend to the
conveyancing, and if not, to make a
recommendation of approximately three attorneys
or firms of attorneys, leaving the choice thereof to
the seller.
As in most cases, the conveyancer is
nominated by the seller, and the conveyancer's
primary duty is to protect the seller's interests. The
conveyancer, however, still has a duty to the
purchaser and must advise the purchaser if there is
any abuse of rights by the seller. If a dispute arises,
the conveyancer will usually attempt to mediate
an amicable resolution, bearing in mind his primary
duty lies in protecting the seller. In the event of
being unable to resolve any dispute, the purchaser
should be advised to consult his own attorney.
Attorneys may have estate agents as their
clients, but the conveyancer's duty is to effect
registration in terms of the deed of sale. If conflict
arises, the conveyancer may be torn between his
duty to the seller and his estate agent client, in
which event, he must disclose this conflict, and if
necessary withdraw from the transaction. If any
seller or purchaser requires clarity on any aspect of
an offer to purchase, this should be raised with the
estate agent or referred to an attorney of such
party's choice, prior to the signing of any offer.
In conclusion, both the estate agent and the
conveyancing attorney have codes of conduct to
be adhered to in order to ensure that the
consumers' (both the seller and the purchaser)
rights are protected. Any transgression thereof can
be reported to the Estate Agency Affairs Board in
respect of an estate agent and the Law Society in
respect of the conveyancing attorney.
9sensible finance july11
SENSIBLE ADVISOR
Consumers are frequently reminded to only
deal with financial advisors who comply
with the regulatory requirements as set out
by the Financial Services Board (FSB), and who
conduct themselves in a professional manner.
Honesty and integrity:
Competency requirements:
Operational ability requirements:
Financial soundness:
This
issue has been highlighted once again with the
recent collapse of a property syndication, in which
a financial advisor has been ordered by the
Ombud for Financial Services Providers, Noluntu
Bam, to compensate his client for the loss. There
have been a number of such cases since June last
year.
With the introduction of more stringent “Fit and
Proper” requirements in terms of the FAIS Act in
2008, the bar was raised for any individual wanting
to operate as a Financial Advisor.
As one of the largest, independent brokers in
South Africa, NFB not only strives to be fully
compliant at all times with all regulatory
requirements, but also aims to service our clients
with the utmost professionalism.
Regulatory requirements include the following:
your financial advisor's
personal characteristics become critical factors
when considering to hand over your financial
dealings to him/her. As a client, you expect your
financial advisor to advise you honestly and openly
with regard to financial services and products.
According to the Fit and Proper requirements an
FSP (Financial Services Provider) may not appoint a
representative if they have been found guilty by a
court of law, a regulatory or supervisory body of
dishonesty, negligence, fraud, acting
unprofessionally or dishonourably, or in breach of
their fiduciary duty. Honesty and integrity is an
ongoing process and financial advisors currently
have to declare on a quarterly basis to the FSP,
that their status has not changed.
before a financial
advisor is appointed by an FSP, they are required to
satisfy specific competencies; the minimum
experience and qualifications a representative
must meet are prescribed by the Fit and Proper
requirements. In order to standardise the minimum
competency requirements in the financial services
industry, it is now a requirement of the FSB, that
every representative pass the Regulatory 1 and 2
examinations. The RE1 exam will test the
representative's factual knowledge and
understanding of relevant legislation and the SA
regulatory framework eg. Code of Conduct, FAIS
Act and FIC Act. The RE2 exam will test the
knowledge financial advisors have of specific
financial products in which they provide advice.
Once financial advisors have passed the relevant
RE exams, they would need to take part in
Continuous Professional Development (CPD) in
order to develop and maintain a certain standard
of professional competence. They are at all times
required to act with due skill and diligence, and in
the best interest of the client.
this
requirement applies to all categories of Financial
Services Providers. There are a number of
requirements/conditions which need to be in place
at all times in order for an FSP to remain operational
and to fulfil the responsibilities imposed on them by
the FAIS Act.
this requirement is
applicable to the FSP itself and not the financial
advisors. The FSP must at all times be holding assets
which exceed their liabilities, and depending on
the category of the FSP, they must maintain liquid
assets at a set level.
At NFB we pride ourselves on our strong
compliance focus, and in the professional, expert
manner in which our financial advisors deal with
their clients. We are committed to keeping abreast
of any and all changes within the financial services
industry, thereby constantly offering you, our client,
our best attention at all times.
So is your financial advisor “Fit andProper”?
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What does it mean that they are “fitand proper”? By -
NFB, East London.Robyne Moore
YOUR FINANCIAL
ADVISOR
10
THE BASE CASEThis article will breakdown and then rebuild an
investment return in order to gain some insight as
to what we could expect from our investment
portfolios in terms of future returns. Before we get
going, it should be noted that the content to follow
will be based on equity returns in South Africa.
Secondly, there are some inputs that are variable
and, as such, assumptions or analysis needs to take
place alongside these. We would ask that you
apply your own views to these variables and, in so
doing, challenge our thinking.
If you happen to own or pick up some form of
theoretical investment book you are likely to come
across a section describing the components of an
investment return. It is these components that we
will look at individually and then try to decide
whether historical averages are likely to remain
true or, if untrue, whether we have entered a new
phase of economic and investment cycles.
When building an investment return from the
bottom up, we use, based in part on the textbooks
mentioned above, the following components:
Inflation (CPI) – an investment needs to match
CPI to maintain its purchasing power.
Risk Free Rate (STEFI Call Deposit) – this is the
minimum return you would expect from a risk free
asset. In other words: for anything other than risk
free cash you would demand a higher return.
Dividend Yield - it is quite easy to forget the
importance of a dividend yield, alternatively
known as cash flow, but when looking at long term
total returns from equity you will see that the
reinvestment of dividends accounts for the majority
of your overall return.
X-factor – this would be very difficult, if not
impossible, to predict as this is the positive or
negative return enjoyed by investors after
deducting CPI, STEFI and dividend yield from the
total return of the JSE All Share Index. The x-factor is
our complete unknown.
If you take the above 4 factors and add them
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In order to know the outcome of the nextDurban July horse race or which market willperform best over the next year, would it notbe handy to have a crystal ball? I think weall understand that this type of foresight orforecasting is not possible with anysemblance of accuracy. However, we dothink that through the analysis ofhistorical information we may be ableto form some type of base casescenario on which to base futureexpectations of investmentreturns. Unfortunately, wecannot help with horses!Written by StephenKatzenellenbogen, NFBGauteng, Private WealthManager
sensible finance july11
CRYSTAL BALL?CRYSTAL BALL?
together you should then get the total return on the
All Share Index for the corresponding period. This
works better for longer-term periods (i.e. ten years)
than it does for shorter periods.
The average inflation rate, using CPI, for the
last ten years has been 5.84%. This should also be
placed in the context of the South African Reserve
Bank's target range of 3% - 6%. Inflation has a vast
number of interrelated components than can
positively or negatively affect the final number. We
will not make an attempt at predicting these
variables, but rather give a broad synopsis. We do
think that the Reserve Bank will, on average, keep
inflation within the target range. It is also likely that
global authorities will continue to pursue a positive,
but controlled inflation environment, thus
impacting South Africa's inflation environment.
The above graph depicts the downward trend
in interest rates. We do think that going forward we
will continue to be in a lower interest rate, and
lower inflation rate, environment. As such, the ten
year risk free return, measured by the STEFI Call
Deposit rate of 8.93%, is likely to average down
over time.
When you buy a share you are buying a part of
that particular business and, as such, will
participate in the profits and losses of that entity. If
a business has excess profits it can either apply
these within the business to fund future expansion
projects or, alternatively, these profits can be
distributed to shareholders in the form of a
dividend. Very often a combination of these
options is used and shareholders enjoy a dividend
to reward them as loyal owners of the company.
We have discussed the importance of dividend
reinvestment and long term returns and, as such, it
is worth noting that the average dividend yield of
the JSE All Share Index over the last ten years has
been 3.49%.
(We must not forget that a quality company
may not always pay a dividend, with Anglo
American being top of mind during 2010).
We mentioned above that the final and fourth
component of total equity return is:
JSE ALSI Total Return minus (inflation + risk-free
rate+ dividend yield)
The net result of this sum gives us an average
ONE STEP AT A TIME
X-FACTOR
INFLATION
RISK FREE RATE
DIVIDEND YIELD
SENSIBLE INVESTOR
11sensible finance july11
continued overleaf...
return of -1.61% over the last 10 years.
Let us begin by looking at a graphical
representation combining the different
components of investment return.
At a glance we can see that historically both
the dividend yield and risk-free rate have been
positive, with inflation and the x-factor moving
between positive and negative territory.
The average yield of the above components
can be summarized as follows:
Risk Free Rate (STEFI Call Deposit) 8.93%
Inflation (SA CPI) 5.84%
Dividend Yield (JSE All Share Index) 3.49%
X-Factor (JSE Total Return minus CPI,
STEFI & Dividend Yield) -1.61%
What we have achieved so far is identifying,
describing and quantifying the different
components of total return. The next and final step
is to determine how this affects us as investors. For
the purposes of our discussion let us assume the
following going forward:
Inflation 4.5% This is in the middle of the
target range
Risk Free rate 6.5% Common belief is for
interest rates to
remain lower than those
enjoyed historically
Dividend Yield 3% Increased competition
may lead to lower profits
X-Factor 0% We have given this the
benefit of the doubt
against its historical track
record of -1.61%
Due to a lack of space please forgive us for
making some assumptions with little explanation in
'Table 2'. Nevertheless, if we can in principal agree
with these numbers we then could expect long
term returns to be around 2.6% lower than those
enjoyed historically. Put another way, future
expected returns could be approximately 15.5%
lower than historical averages.
Throughout this article we have focused on equity
returns. A balanced portfolio should have a blend
of cash, bonds, property and equity in accordance
with the appropriate risk-profile. Expected returns
would thus need to be modified based on the
overall asset allocation. In some instances you may
have inflation plus (e.g. CPI + 5%) targets and can
adjust your sights accordingly.
An unfortunate consequence of a lower return
environment is the need to save additional funds
for retirement or other investment goals. Always
remember to, as far have possible, have a well
thought out investment plan constructed in
conjunction with a professional advisor to ensure
prosperity and peace of mind.
WHAT IS THE 'BOTTOM LINE'?
THE END GAMETable 1
AVERAGE TOTAL RETURN 16.65%
Table 2:
TOTAL 14%
*All graphs courtesy of NFB Asset Management
12 sensible finance july11
SENSIBLE INVESTOR
...continued from page 10
CRYSTAL BALL?CRYSTAL BALL?
13
SENSIBLE PLANNING
The phrase "testamentary freedom", i.e. the
freedom to leave your property to whomever
you wish in your Will, is well known, but what
can you do if you have been written out of a Will or
want to challenge the wishes of a recently
departed family member?
It is surprisingly common for individuals to try to
disinherit their families and leave it all to the
proverbial cats' home. The more unusual cases
make the papers – remember the case of Golda
Bechal, an 88-year-old widow living in the UK,
whose relatives challenged her Will after she left
most of her £10m fortune to the owners of her
favourite Chinese restaurant.
As people are now living longer many often
decide to change their Wills later in life without the
assistance of a professional. This can lead to family
members suspecting foul play if they have been
written out of the Will. Challenges to Wills are costly
and difficult to win, not least because the principal
party one might want to obtain evidence from is
no longer with us!
Legally-speaking, it is possible to challenge a
Will for one or more of the following reasons:
Lack of proper formalities
Lack of testamentary capacity
Lack of knowledge and approval
Undue influence and fraud
A Will must be made in writing, preferably not
handwritten, and signed by the testator on every
page, in the presence of two witnesses who must
each also attest and sign the Will in the presence
of the testator. If any of these requirements are
missing the Will is invalid.
To make a valid Will the testator must have the
requisite mental capacity. The testator must be
capable of understanding that they are making a
Will and disposing of their assets on death. The
testator must also be capable of understanding
the extent of their estate and appreciate the
claims on that estate to which he ought to give
effect.
The difficulty with proving this ground is that
you must produce evidence of the testator's
capacity after their death. When a Will is drawn up
by a professional and if there are doubts about a
person's capacity, the professional should ask a
doctor to assess capacity before a Will is made.
A testator must know and approve the contents of
the Will. If a Will has been properly executed, it is
presumed that the Will is valid on this ground and,
generally-speaking, you will have to prove (on the
balance of probabilities) that the testator did not
know and approve the contents of the Will.
A presumption of Undue Influence usually arises
when the beneficiary had actively participated in
the preparation and execution of the Will and had
disproportionately benefited from it. Undue
influence means coercion, but no physical force is
necessary. This is not the same as persuasion.
Reminding the testator of their family obligations or
what you have done for them in the past is not
undue influence. It is essentially down to the person
alleging undue influence to show that the testator
was coerced into making the Will. Given that the
testator is no longer around and that they have
often been isolated by the person against whom
undue influence is alleged, it is one of the most
difficult allegations to sustain - there may be lots of
suspicion, but relatively little hard evidence!
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Lack of proper formalities
Lack of testamentary capacity
Lack of knowledge and approval
Undue influence and fraud
49 Beach Road, Nahoon, East London, 5241 | PO Box 8081, Nahoon, 5210
e-mail:Telephone: (043) 735 4633 Fax: 086 693 3356 / (043) 735 3942 | [email protected]
The reasons for possibly challenging a Will.By , Director - Independent Executor &Debi Godwin
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.
&
&
TESTAMENTARY
FREEDOM
sensible finance july11
15
SENSIBLE ADVICE
Most people are advised to purchase a
retirement annuity because of the tax
concession allowing a deduction, in
respect of that contribution, for an amount of up to
15% of a person's taxable non-retirement funding
income.
1. Protection against creditors
2. Protection against insolvency
3. Protection against Estate Duty and Executor's
fees
Don't lose sight of the fact that the primary
reason for purchasing an RA, however, is to
accumulate capital towards your retirement. The
tax concession certainly is a benefit, but is merely a
pat on the back from SARS for planning for your
retirement.
Besides these obvious benefits, there are
several other benefits to owning a retirement
annuity. Let's look at a few…
The Pension Fund Act provides that a member's
benefit and any annuity purchased by the fund for
that member, may not be reduced, attached or
subject to any form of execution under a court
order. An exception to this is a reduction in respect
of a housing loan from an employer or damage
caused to the employer by a member's theft or
fraud.
This means that if someone obtains a
judgement against you in respect of a debt that
you owe that party, the funds in your retirement
annuity cannot be laid claim to by such parties.
If a person's estate is sequestrated, a benefit under
a retirement fund is excluded from being an asset
in that person's insolvent estate.
The trustee of the insolvent estate or a creditor
of that estate may not attach or appropriate the
retirement benefit i.e. the retirement annuity is
effectively disregarded as an asset in the estate
and it can thus not be taken it into consideration
when realising assets to generate the funds
needed to repay the insolvent estate's creditors.
At death, a person's estate is subject to executor's
fees of 3.99% (incl. Vat) and Estate Duty of 20%. A
person's estate consists of all the assets that are
registered in that person's name – properties,
vehicles, cash in the bank, investments, etc., as well
as any policies on which that person is the life
assured (life policies, for example).
Retirement annuities are not regarded as an
asset in a person's deceased estate and are thus
not subject to Estate Duty or Executor's fees.
Contributing towards/purchasing a retirement
annuity is thus a very effective estate planning tool.
Effectively, the value of any contributions to a
retirement annuity will be 'removed' from a person's
estate.
For example, R1 000 000 in a money market
account will attract estate duty of R200 000 and
executor's fees of R39 900. This will leave R760 100
available to the spouse/dependants to generate
an income. Purchasing an RA with that money will
immediately remove the asset from your estate
and will leave R1 000 000 available in the RA for
your spouse/dependants to generate an income.
A retirement annuity is not just a retirement plan - it
is also a very effective estate planning tool that
should be used as such!
A look at some of the other benefits.By , Senior Legal Advisor -
Old Mutual Broker Division.Natalie Dillon
A tax deduction
Retirement Annuity
is not the onlyreason to
purchase a
sensible finance july11
“Life insurance is an investment in your family'sfuture financial security, and should not be seen
as a grudge purchase,” says Patrick Sheehy, Headof Product Management at Glacier by Sanlam.
Risk and life insurance.A necessary evil oran investment inpeace of mind?
Afamily needs to know that its finances will
be sufficient to maintain its standard of
living in the event of the death, critical
illness or disability of the main breadwinner.
Life cover
Disability
Critical Illness cover
The purpose of life cover is to protect the financial
well-being of your family in the event of your death.
Some of the many considerations when evaluating
the adequacy of your life cover include the
following:
When last your life cover was reviewed by a
financial intermediary
Changes in your family or business
circumstances, your lifestyle or occupation since
your life cover was last reviewed
If your children's future education will be
guaranteed in the event of your death or disability
How your debt will be paid off in the event of
your death
The possible reduction in your income should
you be forced to stop working due to ill health.
Inflation may also result in your cover
becoming insufficient over time. There are policies
available that automatically provide for inflation-
linked increases in cover. However, this should not
replace reviewing your cover needs on a regular
basis.
There are two main forms of disability cover,
namely lump sum or income replacement benefits.
A lump sum disability benefit cover will pay out the
sum insured in the event of you becoming
permanently disabled. Because it pays out a lump
sum it is ideally suited to covering outstanding
debts and once-off expenses associated with the
disability.
An income replacement benefit is designed to
replace any reduction in income you might suffer
as a result of disability. It covers permanent as well
as temporary disability up until your normal
retirement age.
The premiums you pay under an income
replacement benefit are tax deductible, with
benefit payments taxed as part of your income. By
contrast, no tax is payable by you on any lump sum
disability payment, but the premiums you pay are
not tax deductible.
Critical Illness cover is designed to offset the
expenses associated with a critical illness. Aside
from the direct medical costs there may well be
substantial expenses incurred during the
recuperation period. Because the costs associated
with different critical illnesses vary substantially, the
Critical Illness benefits will vary according to both
the type and severity of the illness. The amounts
paid by different companies do vary so it is
important that you understand exactly what level
of cover you're getting and what you're covered
for.
Life insurance should never be purchased on
price alone. The range of conditions covered and
corresponding benefit payments should always be
looked at. A cheaper policy may have exclusions
or limitations. In certain instances a more
expensive policy, which is more appropriate for
your needs, may be the wiser choice in the long
run.
Given the amount of information to be
considered and the complexity of the policies, it is
recommended that clients consult a qualified
financial intermediary. As stated earlier, life cover
should be seen as an investment. When seen this
way, it becomes obvious that it needs to be
planned for and adjusted continuously to ensure
peace of mind for the entire family.
�
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SENSIBLE ESTATE PLANNING
16 sensible finance july11
18
On the JSE, Anglo has the third largest
market capitalisation of R458bn as at 31
May 2011 (after British American Tobacco
plc of R620bn and BHP Billiton plc (BHP) of R585bn).
Anglo is also listed on the London Stock Exchange
where it is a constituent of the FTSE 100 index. The
FTSE 100 index comprises the 100 most highly
capitalised blue chip companies, representing
approximately 81% of the UK market.
Together with BHP and Rio Tinto plc (Rio), Anglo
constitutes the only large capitalisation,
multinational and well-diversified mining
companies worth investing in. There are a number
of other contenders such as Vedanta Resources
plc (Indian), Companhia Vale do Rio Doce
(Brazilian), Antofagasta plc (Chilian), Xstrata plc
and the recently listed commodities trader and
mine owner; Glencore International AG. However,
none of these companies have the diversity of
mining resources that BHP, Anglo and Rio do.
The recent global financial crisis was punishing
to mining companies, in particular, as demand for
its products was severely curtailed and the prices
of the commodities fell dramatically. Given its
strong balance sheet, BHP was the company that
navigated this crisis the best. This financial strength
enabled BHP to increase its dividend in US Dollars
throughout the crisis. From an income perspective,
BHP investors were therefore unaffected. Rio fared
the worst as it had taken on substantial debt at the
peak of the cycle to buy Aluminum assets.
Aluminum (given its industrial demand) was one of
the worst performing commodities and Rio was
eventually forced to pass its dividends and
undertake a substantial rights issue at a deep
discount to clear this debt. Anglo muddled through
by passing its dividend for the first time in its history
on three occasions (an interim and two finals),
however, it did not have to undertake a rights issue
and therefore avoided the consequential dilution
to existing shareholders.
Given the fact that Anglo has interests in
diamonds (through De Beers) and platinum
(through Angloplats) in its portfolio, it was badly
affected by the sharp fall in the demand and the
prices for these two commodities. Anglo had to
SHOULD YOU BE HOLDINGANGLO AMERICAN PLC (ANGLO)
IN YOUR PORTFOLIO?A compelling investment at current levels. By Rob McIntyre,
CA (SA), Portfolio Manager - NVest Securities.
sensible finance july11
SENSIBLE PORTFOLIO
19
underwrite recapitalisations in these two divisions
during the crisis.
Anglo earns its income in US Dollars and pays
its labour in the currency of the country in which it
extracts its resources. Given the weakening of the
US Dollar over the past few years, Anglo has found
that currency issues have had a negative effect on
its earnings.
During 2010 Anglo resumed the payment of
dividends as its income recovered and its balance
sheet stabilised and comments from the new
chairman, Sir John Parker, seem to indicate that
the level of these dividends has formed a new
base from which investors can expect reasonable
growth. The Chief Executive, Cynthia Carroll, has
been determinately implementing the strategy of
Anglo since her appointment and, apart from the
questionable merit of the share buy backs over
R500 per share, this strategy seems to be bearing
fruit.
For the 2010 year Anglo earned roughly R30 a
share (up 90% from 2009) and the consensus
forecasts taken from I-Net is that Anglo should earn
roughly R45 a share for 2011. At the current share
price of R340, this places Anglo on a forward price
earnings (PE) ratio of 7.5 times. By comparison, I-Net
places BHP on a forward PE of 9.5 times. We
believe that the fact that investors are prepared to
pay 27% more for BHP than Anglo is chiefly due to
the fact that BHP is seen as better managed than
Anglo and the lingering country risk ascribed to
South Africa (in which Anglo is far more
represented than BHP). However, one cannot
choose where platinum and other resources are
found, and country risk goes with the terrain! Anglo
is forecast to pay just short of a 2% dividend at its
current share price.
To some extent the PE ratios for all commodity
companies reflect the belief that the commodity
super cycle may well be over and that commodity
prices will return to a more normalised long term
trend. This is a discussion for another article, but our
view is that commodity prices should continue to
benefit from elevated growth in emerging
economies for many years to come and will begin
to also reflect the under investment in new
commodity capacity over the last few years of the
economic crisis as projects were cancelled or
scaled back.
Anglo has substantial projects in developments
on its balance sheet in iron ore (Minas-Rio in Brazil
of USD5bn coming into full production in 2014),
copper (Los Bronces in Chile of USD2.5bn coming
into full production in 2012) and diamonds
(Jwaneng in Botswana of USD3bn coming into full
production in 2024 – but already in partial
production). There are also other projects in nickel,
platinum and thermal coal. It is funding these
projects and not earning an income until these
have been commissioned. While there is a level of
execution risk in bringing these projects into full
production, we believe that such projects should
meaningfully enhance Anglo's earnings and
increase its earnings outside of South Africa. Anglo's
development record is no worse than its
competitors, so we are encouraged by its new
projects. Anglo did not get where it is now without
undertaking substantial projects in the past.
Anglo has also continued delivering against its
stated objective of disposing of assets that no
longer fit into its portfolio. The most significant
remaining asset is Tarmac in the UK and Europe
and it has taken steps to create a joint venture as a
means to extract value. Anglo has, however,
largely completed such disposals over the past 5
years.
Our view is that as its diamond and platinum
earnings recover to match its investments in these
commodities and as it brings into full production its
new projects, together with continued
performance of its iron ore, copper, nickel and
coal assets, that Anglo is a compelling investment
at current levels.
Given the US Dollar nature of its income, we
also believe that at current levels of the Rand, it is
an opportune time to be accumulating Anglo to
an appropriate weighting in any general equity
portfolio (such weighting would depend on the
investor's individual circumstances, but should be
around 10%).
So where does this leave us?
sensible finance july11
20
Q:
A:
When taking out life cover and disability cover
there seems to be a myriad of options and different
benefits and premiums. This is all rather confusing
and I would like to know what one should be
looking out for when considering taking out cover?
Most South Africans are under insured when it
comes to life and disability cover. It is often seen as
a grudge payment or one of those necessary evils.
There is no benefit paid back to you and if there is
then something bad has happened to you in order
for the benefits to be paid.
It is therefore important for you to make sure
that you are getting value for your money and
understand what options you have. One needs to
understand what you are getting for the premium
you are paying and how that premium will change.
Cheaper is not always better.
The benefits you take out will determine the
price you pay. Life cover is generally the same
across all companies. It is in the disability and
severe illness space that you may find differences
in how these benefits are paid. You have the
choice of Comprehensive cover or Core cover. We
would always suggest that you go for
Comprehensive cover as this eliminates any gaps in
your cover. You will also have the option of
choosing between having benefits at lower severity
levels or upgrading the cover to pay out a higher
amount even though the severity level is low.
Companies also offer multiple payouts and claims
while others will pay out 100% of the benefit as soon
as any severity level is obtained. This should be
discussed with your advisor and you need to ensure
that in the event of a claim that you are
comfortable with what will be paid to you. If you
have an illness that is in a low severity level stage
then you may only receive a smaller payout
initially, but should the illness get worse you could
end up with more payouts than had you just
received a full benefit payout in the early stages.
It is also important to understand, with Disability
cover, the difference between own occupation
based disability versus own or similar occupation
based Disability. Own occupation disability
protects you against you being able to perform
your nominated occupation. Own or similar will
look at whether or not you could still work and earn
a living doing something similar.
You are also able to choose your disability or
severe illness cover as an accelerated benefit or a
stand alone benefit. If it is accelerated then this will
reduce your life cover amount down by the
amount of the disability or severe illness claim.
Stand alone costs more, but a claim will not affect
the life cover amount.
The choices you make will determine the
premium you pay. You can also change the type
of premium pattern and cover increases. You are
able to choose between a level premium or a
premium that starts off cheaper, but increases
each year. You will also be able to choose what
percentage you would like your benefit to increase
by each year. A level premium will generally work
out to be cheaper in the long run, but a premium
with a compulsory increase each year will be
significantly cheaper in the shorter term.
It is important to get comparative quotes and
to ensure that you compare “apples with apples”.
Your Financial Advisor should be able to assist and
explain the differences.
“Sensible Finance - Questions and Answers” is an advice column
that will allow our readers the opportunity to write to a professional
and experienced financial advisor for advice regarding
investments, personal finance, life and/or risk cover.
Travis McClure will be answering any questions that you may have.
Travis McClure
SENSIBLE FINANCE QUESTIONS & ANSWERS
Please address all Questions to: Travis McClure,
NFB Sensible Finance Q&A, Box 8132, Nahoon,
5210 or email: [email protected]
sensible finance july11
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