Analysts estimates show 2019 could be another rocky year for insurers

Article by Business Live, Londiwe Buthelezi

Sanlam, Old Mutual and Liberty all saw their investment returns decline in 2018 as the JSE all-share index lost 11.37%

Equity analysts are divided about how the country’s largest insurer, Sanlam, will perform in 2019. The company published analysts’ estimates which show that they all expect it to lift headline earnings and value to shareholders.

The estimates, based on input of five sell-side analysts, are similar to analyst consensus that Bloomberg and Reuters publish about listed companies. They were, however, compiled in February, before Sanlam reported the decline in 2018 earnings.

Like other life insurers, Sanlam had a tough 2018, thanks to South African equity market losses, which caused the insurer’s investment returns to plummet 57%. Its peers, Old Mutual and Liberty also saw their investment returns decline by 41% and 81%, respectively, as the JSE all-share index lost 11.37% in 2018.

After seeing 2018 profit declines, analysts said life insurers might continue to struggle if the weak equity markets persist and consumer spending does not turn the corner.

The disparity between highest and lowest estimates given by analysts on some of Sanlam’s financial indicators demonstrate how difficult it is to say with conviction how the insurance industry is likely to do in 2019 . For instance, while the highest value of new business (VNB) that analysts expect Sanlam to achieve in 2019 is R2.28bn, 14% higher than 2018, the lowest is R1.79bn. That is 9% lower than the VNB of R1.96bn that Sanlam achieved in the 2018 financial year.

The same goes for the VNB margin, which indicates profitability of insurers: the lowest forecast is 2.42%. It is lower than what Sanlam achieved in both the 2018 and 2017 financial years.

Karl Gevers, Head of Research at Benguela Global Fund Managers, said that consensus from Reuters — not related to one published by Sanlam — show that analysts reduced their estimates on Sanlam’s earnings per share by about 7% in the last quarter.

“It’s a vague impression of where the market thinks fees and earnings will be. The disparity between the lowest and highest estimates shows uncertainty around the company’s specific dynamics. The timing of the Saham acquisition has created some noise. The performance of Saham is quite challenging to forecast given its exposure to multiple African jurisdictions, all in different stages of business life cycles,” said Warwick Bam, head of research at Avior Capital Markets.

Sanlam’s 2019 earnings will include contribution from the additional 53% stake in Moroccan insurer Saham Finances whose acquisition was finalised later in 2018. Gevers said while Sanlam is still attractive as it is trading at a premium to its group equity value, the market expects that the Saham acquisition might have a slight drag on the company’s return on equity.

The other factors that are likely to have caused the disparity in analysts’ estimates are expectations on economic growth in SA and performance of the bond and equity markets.

Bam said analysts have different views on the quantum of these impacts: “If the equity and bond markets perform better than 2018 then the whole insurance sector will improve earnings in 2019.”

Gevers said given that markets had a strong start to the year, he expected it to support the earnings of insurers in 2019.

New rules will expose hidden fees in SA: expert

Article by Business Tech

Big financial services companies may soon need to find new ways to pad their earnings, as a new industry standard is threatening to expose the financial service sector’s worst kept secret – hidden fees.

This is according to Fedgroup CFO, Sheldon Friedericksen, who said that the Retirement Savings Cost (RSC) Disclosure Standard – developed by the Association for Savings and Investment South Africa (ASISA) – is designed to encourage financial service providers to be more transparent and give clients a clearer picture of their fee structures.

The standardised retirement savings cost disclosure methodology is intended to assist employers when comparing costs from different umbrella fund providers that are members of ASISA, he said.

Friedericksen said that in the past, legislation prescribed what had to be disclosed by financial services companies.

“Until now companies were only required to reveal their asset management fees and their service fees, which is where most of the hidden costs were located – these can include admin fees, reporting fees and share trading costs,” he said.

“You always knew they were there, but you didn’t know what they were, and it was all very hard to get to the bottom of.”

While there is optimism that the standard will change the way in which financial service providers reveal their fee structures, it is unlikely that consumers will see a sudden drop in fees, once hidden costs have been exposed.

And while the standard is aimed at achieving complete and total disclosure, this may take some time, he said.

“The standard is quite prescriptive in terms of what you must disclose, and you have to submit a compliance report to ASISA. But with standards and regulations, especially new ones, there is always a place to hide,” said Friedericksen.

“The new standard is still being interpreted and debated and there will always be loopholes. At the end of the day, it is still up to the moral compass of industry to implement this effectively. And at the moment, clients don’t have trust in the financial sector,” he said.

While he expects that the new standard will not revolutionise the industry, it will force the industry to have a discussion about hidden costs.

“Companies will be forced to justify their hidden costs. People are happy to pay, as long as they see value for their money. If nothing else, it will empower people to start asking the questions,” he said.


Beyond the acceptable level

Fedgroup Life CEO, Walter van der Merwe, said that while it is right for any business to charge a fee or make a profit from delivering services and benefits, some financial services providers have enriched themselves beyond an acceptable level at the expense of their clients.

“There are many organisations whose business strategy is to directly and deliberately offer products that are complex and convoluted. Why do their products have to be so complex that even financial advisors have difficulties explaining them? How am I supposed to understand them as a consumer?”

Van der Merwe said the new standard is a huge leap in the right direction for the consumer, giving people one number to compare from provider to provider.

“It also brings fees into perspective in terms of value. People don’t mind paying slightly more if they can see they are getting a benefit,” he said.

He also believes that the RSC Disclosure Standard will bring about noticeable changes in the industry. “There will be exposure for some of the big providers. It will show where they have been able to charge exorbitant fees and get away with it.

“Hopefully, they will restructure their fees before the new calculation and the past will remain hidden. They will then have a new fee structure where they are charging less.”

The dash for cash

Article by Allan Gray, Duncan Artus and Nathan Wridgway 

The end of the calendar year often leads to reflection on how one’s investments have performed. Many savers are questioning the wisdom of investing in South African equities after a lean period, especially relative to what must currently feel like the safe haven of cash. This has led to a surge in interest in money market and income funds.

Graph 1 puts the last five calendar years into perspective. It assumes that each year an investor had a choice to invest in the FTSE/JSE All Share Index (ALSI) or in cash and calculates the excess return the investor received: When the red bar is above zero, equities performed better than cash, and vice versa. One can immediately see what a tough period it has been for equity investors despite Naspers returning a cumulative 167% over the period. Indeed, the simple five-year average excess return is now negative in contrast to the 118-year average of 8%.

Allan gray 1.png

We’ve been here before

This period feels somewhat similar to 2002 and 2003 when South African equities had underperformed cash over the prior five years, as shown by the red line in Graph 2. The annual excess returns shown by the grey line were particularly poor, with equity investors experiencing significant underperformance during 2002 and 2003. With valuations low and sentiment negative, the market was priced to (and did) embark on a great bull run (even when measured in US dollars) following that period of poor performance from equities. We must however state that today’s valuations are not as low as they were then.

Allan gray 2.png

What about the really long-term picture?

Graph 3 highlights periods when South African equities had underperformed cash over a five-year calendar period starting in 1900. These periods are represented by the grey bars.

Allan gray 3.png

The red bars represent the subsequent four-year excess return of equities versus cash (we normally assess potential investments on a four-year view). Besides the point that you did not want to be significantly overweight equities going into the Great Depression (1929) and the Asian financial crisis (1997), the data does show a generally pleasing picture of strong outperformance by equities after the periods of underperformance. After such points in time, as shown in the grey bars, where equities have underperformed cash, the subsequent four-year excess returns have been positive over 85% of the time, with the average annualised four-year excess returns more than 50% higher than their long-term average.

Light at the end of the tunnel?

It takes depressed valuations and negative sentiment to set the ground for strong excess returns. With the ALSI, when measured in US dollars, at the same level it was in April 2007, it should be no surprise that we are finding more opportunities in South African equities than we have for some time (other than the brief few months during what has become known as Nenegate).

While one cannot be sure what lies ahead, history strongly suggests that there is a higher probability of a positive rather than a negative outcome for equity investors who have a long-term investment horizon. The ALSI has been valued lower before and companies' profits are under pressure, but now does not appear to be the time to have 100% of your assets invested in rand-based money market funds.

Savings, investment is crucial to achieving financial freedom - Old Mutual

Article from Personal Finance, supplied by Old Mutual.

With slow economic growth continuing to put pressure on consumers, now is the time for South Africans to curb unnecessary spending, pay back debt as quickly as possible and invest carefully, says Elize Botha, Managing Director of Old Mutual Unit Trusts.

In his budget speech, Finance Minister Tito Mboweni announced an increase of R15 billion in tax paid by consumers. Fuel levies will increase by 29 cents per litre for petrol and 30 cents per litre for diesel. 

“While these increases are not significant, relative to previous tax hikes, this is little consolation for the man in the street who is already under pressure. Within the current economic environment, it is not only Government that needs to cut down on spending. The average South African will need to cut back on non-essential spending if they want to be able to save,” says Botha.

As was widely expected, no increases in personal income tax were announced. Instead, to boost collection of personal income tax, taxpayers who have received nominal increases in salaries or wages to offset inflation, will be pushed into higher tax brackets, resulting in an increase in income taxes, but no increase in real purchasing power.

The 2018 Old Mutual Savings and Investment Monitor revealed that South Africans are financially under pressure, with many supporting their extended families and high amounts of debt to repay. “Now is the time to take a conscious look at your expenses, see what you can cut back on, avoid unnecessary spending on luxury items and pay off short-term debt, such as credit cards or retails accounts, which carry higher interest rates, with any spare money you may have,” advises Botha.

Botha suggests establishing how much money you can put away each month, by using the simple 50/30/20 budgeting rule: 50% of your salary should go to your living expenses, 30% towards servicing debt, and 20% for investments.

For first time investors, Botha suggests using their tax free-allowance to invest in a local tax-free unit trust exposed to global markets. “This means investors will pay no capital gains tax on the growth of contributions to the maximum of a lifetime limit of R500 000, regardless of the fund’s performance, which is a great incentive,” she says.

Sustainability was also a key theme in the Budget, which is not surprising, with carbon tax (tax levied on the carbon content of gas released into the atmosphere) implementation coming into effect on 1 June 2019. Botha believes that the demand for investment in sound, quality and responsible companies will continue to grow as investors continue to align their personal philosophy with their financial goals.

“Consumers, especially millennials, are holding companies more accountable for how their behaviour impacts society and the environment. A rapidly transforming world makes responsible investment an imperative, as having a long-term investment view is an essential part of ensuring a sustainable future. Environmental, social and governance (ESG) investment funds have repeatedly demonstrated that the funds can not only meet, but often outperform investors’ return expectations,” Botha says.

While the 2019 budget might have highlighted a bumpier road ahead for the national economy, this doesn’t mean that South Africans need to sacrifice their long-term financial security. “Although it might not feel like it, there is still capacity to save and invest, given that households currently spend 67% of their income on living expenses and consumption. It is essential to differentiate between essential and non-essential spend. It is not always important to keep up with the Khumalo’s – financial freedom is far more valuable,” Botha concludes.

Can you take over someone else’s life policy?

Article by Maya Fisher-French, Maya on Money.

If you have an elderly parent who has been paying towards a life or funeral policy for many years but can no longer afford the premiums, it may make sense to take over the policy payments if you are the beneficiary. If the policyholder were to cancel the policy, they would effectively lose out from all those years that they had contributed towards the insurance policy. By continuing the policy, the beneficiary can ensure that the funeral costs are covered, or that the life policy pays out as the parent/relative intended.

However, in taking over the policy premium you need to make sure you follow the correct procedure. A recent ruling by the Ombudsman for Long-Term Insurance highlights some of the legal complexity.

Listen to Maya and Mapalo Makhu discussing this and other stories on the My Money My Lifestyle podcast.

In this particular case Ms M, a client of First Rand Life (administered by FNB) had a funeral policy for R30 000 which she had taken out in October 2011. The beneficiary was her niece Ms J. On 2 January 2017 the policy lapsed due to non-payment. The beneficiary Ms J telephoned First Rand to reinstate the policy on 4 January 2017 and continued to deposit money into her aunt’s bank account to cover the monthly premium.

The policyholder, Ms M passed away eight months later in August 2017 and Ms J claimed the benefit. However, First Rand declined the claim as Ms J had impersonated her aunt when she had reinstated the policy.

The beneficiary, Ms J, argued that she had telephoned because her aunt’s health was bad at the time and her aunt had requested her to telephone in the presence of family members.

She also stated that “This policy was taken and signed for by my aunt in 2011 and immediately after that I paid the premiums every month from my ABSA bank account to her account for some time. I paid these premiums because my aunt did not have money at a time. I took the responsibility to pay it once more because it was my responsibility to bury her should something happen to her. And I took the responsibility to bury her as I always do with all my late mother’s siblings.”

Avoiding an administrative nightmare

As with most cases there are two ways of looking at the situation. From First Rand’s perspective they need to guard against fraud and beneficiaries taking advantage of a policyholder for their own benefit. From the family’s perspective, by pretending to be her aunt, Ms J was most likely simply avoiding an administrative nightmare of getting a power of attorney.

Fortunately for Ms J, the Ombud agreed with her position and took into account that her actions were reasonable and that the insurer had not been prejudiced as the policy had been in force and premiums had been paid.

In its ruling the Ombud stated that “it is accepted that Ms J transferred money to Ms M’s bank account to cover the premium amount so that the late Ms M could pay the premium.  In our view that cannot be used as a reason to decline the claim.  There is no legal principle preventing a beneficiary from funding the policyholder so that the policyholder can afford to pay premiums.  The policyholder may not have been able to afford them otherwise.  There is nothing in your policy, and it would in any event be an unusual and oppressive provision, that directs what the origin of the funds that the policyholder uses to pay premiums, has to be. The fact that the policyholder and the beneficiary arranged their affairs in such a way to benefit themselves is not in itself illegal or unfair.  It is not unusual for parties to organise commercial transactions in such a way that they may derive maximum advantage from their transactions”.

The Ombud went on to point out that this was a funeral policy to cover the funeral costs of Ms M rather than simply benefit Ms J as the beneficiary.

While the Ombud did rule in favour of the beneficiary, it still took time to find resolution and for the payment to be made. Ideally when taking over a policy, it is best to follow correct procedure.

According to Lee Bromfield, CEO of FNB Life, there is no rule stopping a beneficiary from paying money into the policyholder’s account to fund the premiums. The problem is that a third party is not permitted to amend a policy without the required authorisation. It is also illegal for any individual to pose as a policyholder in order to gain access to confidential information.


What are the options?

If a beneficiary wishes to continue the premium payments, there are several options:

You can simply pay the premium amount into the policyholder’s bank account

If any amendments need to be made you must get a valid power of attorney. This is a requirement which protects both the policyholder and the insurance provider.

If you are concerned about the premium being paid, you could set up an alternative payment from your bank account, but this would need to be verified by the policyholder or the power of attorney.

Five things to consider when taking out life policies via a trust

Article by Harry Joffe Head of Legal Services at Discovery Life; article from Business Live.

There may be good reasons for a trust to own a life assurance policy, but it needs to be done correctly. If this is something you are considering, make sure you are aware of these issues:

1. Estate duty

Many articles erroneously state that a trust-owned policy avoids estate duty. A trust-owned policy is still a deemed asset in terms of the Estate Duty Act, and the only estate duty benefit is if the trust pays the premiums on the policy, and is the owner and beneficiary, such premiums paid by the trust compounded at 6% will be allowed as an exemption against the eventual duty. Make allowance for the eventual duty when you do your estate and cash/liquidity planning.

2. Income tax

Unless the life assured is that of an employee of the trust, which is very rare, the premiums paid by the trust will not qualify for a tax deduction. However, the eventual policy payout will then be free of income tax.

3. Authorization

It is vital that the trust has passed an authorising resolution authorising the trust to take out the policy and pay the premiums. This must be signed by all the trustees. The resolution can authorise one of the trustees to do the actual signing of the policy documents, but the original resolution authorising the purchase of the policy must be signed by all the trustees.

I have seen a few cases where the resolution was not properly signed by all the trustees, and later a few trust beneficiaries, or trustees that were not consulted, have taken issue with the policy. They have correctly alleged that the policy was not properly authorised and insisted on the whole contract being unwound back to the beginning. They are supported in this by South African case law.

This can make matters extremely complex if the policy is an investment policy, and even lead to prejudice to the insurer/investment company.

To avoid this, make sure all the documents are correctly signed from the very beginning.

4. Trust deed

Another issue to check is the trust deed. Does it allow the trust to take out a life insurance policy? If it does, does it only allow the trust to insure a trustee or beneficiary? I have seen a few cases like this, where there was such a clause only allowing the trust to insure a trustee or beneficiary. This caused problems when the trust was involved in a buy-and-sell agreement, to buy and sell shares, and wanted to insure a partner or co-shareholder to buy out their shares on death.

However, because such a partner/co-shareholder was not a trustee or beneficiary of the trust, the trust could not take out such a policy without first amending the trust deed. Check your trust deed before taking out a policy.

5. Trust bank account

When the trust takes out a policy, please make sure it has a separate bank account to pay premiums and receive benefits. If the trust does not have a separate bank account and does not pay the premiums, there could be trouble in claiming the premiums plus 6% estate duty exemption from the SA Revenue Service on an eventual death.

If the trust does not have a bank account, and there is a benefit that pays out from the policy, who will it pay to? Insurers will not pay to third parties given all the tax and money-laundering laws, and, in addition, the Trust Property Control Act, section 10, states that: "Whenever a person receives money in his capacity as trustee, he shall deposit such money in a separate trust account at a banking institution or building society."

This obliges a trustee of a trust to have a trust bank account to receive proceeds whenever the trust becomes entitled to receive money.

This could mean there is a delay in the trust receiving the proceeds of a policy while it arranges the opening of a bank account. Make sure such an account is opened when the policy is taken out and the premiums paid.

A final word

A trust-owned policy can have many benefits, particularly if the eventual beneficiary is a minor or incapacitated person, because the proceeds are protected and less likely to be dissipated. This is a benefit even if the beneficiary is a major, as they might not be able to handle such large sums of cash. It also ensures the proceeds do not end up in the estate of the beneficiary and assists them in estate planning.

Finally, if the intended beneficiary is insolvent or faces such risk, it ensures the proceeds will not be attached by creditors when the policy pays out. However, you must understand the estate duty and legal requirements around such a structure.

The dos and don’ts of Section 12J investments

Article by Jonty Sacks Partner at Jaltech, article from FIN24

Section 12J of the Income Tax Act continues become the buzz investment during the last few months of the financial year. 

The reason for this is mainly because many South African taxpayers realise very late in the financial year that they have a significant tax liability.

This is typically pursuant to annual bonuses being awarded late in the financial year, which results in a higher tax liability.

In addition, many taxpayers who have realised a capital gain during the financial year, often leave paying their capital gains tax to the last minute.


Reduce tax liability

With this in mind, after investing in RAs and pension funds, Section 12J is an ideal way to significantly reduce a taxpayer’s tax liability.

From a South African taxpayer’s perspective, Section 12J has much to offer, from investing in high-growth venture capital companies such as Kalon Ventures and KNF Ventures, to investing in more capital preservation investments, such as Zimbali Capital which invests in hospitality developments at the world acclaimed Zimbali estate or investors who are looking for investments which generate semi-annual dividends such as Infinity Anchor Fund.

Even more interestingly, you can soon invest in Titanium VC 1, a listed Section 12J company which offers returns backed by renewable energy assets.

Unlike most traditional asset classes, investors typically take their time before investing, however, during February of each year, we see a frenzy of investors investing in Section 12J investments.

For investors who find themselves having to quickly identify a Section 12J investment/s, here are a few dos and don'ts which should assist you with narrowing down your selection.


Don’t get caught up in investing in a Section 12J investment simply because there is an attractive tax benefit associated.

Ignore the tax benefit when performing your due diligence and select the 12J company based on the underlying investments.


Do engage with the 12J company and ask as many questions as you deem necessary before making an investment.
12J companies earn a fee for managing your funds, so raise as many questions as you need to be comfortable with making the investment, such as what are the fees, how do these fees relate to the market, what percentage of capital under management has actually been invested, what is the targeted IRR, what experience does the fund manager have, et cetera.


Don’t be fooled by the fee structure - make sure the 12J company charges reasonable fees, particularly around the performance fee.

Generally, 12J companies require a small upfront fee, an annual fee and a performance fee. Avoid performance fees based on net/risk capital; 12J companies should earn their performance fee on any amount above your original investment.


Do look for Section 12J investments which have realistic and effective exit strategies.

Simply "endeavouring to dispose off underlying investments" is not an adequate exit strategy, as this will in many cases lead to a long delay before your capital is returned.


Don’t invest more than your taxable income.

Individuals will not benefit from reducing his/her taxable income below their taxable income. 


Do consult a financial advisor who has experience and understands Section 12J investments.

The Section 12J marketplace has introduced an exciting new asset class, which has attracted over R3.7bn within a very short period of time, and the future is looking very promising, with expectations of an additional R2bn being invested by the end of February 2019.

For all Section 12J investors, I would advise that you should consult a financial advisor, or there are a number of websites which provide information on various Section 12J investments. Additionally, there are two Section 12J investor conferences held each year for interested investors.

Still time to benefit from retirement tax breaks

Article by Charlene Steenkamp, Business Live

Time is of the essence if you want to make the most of tax breaks available to retirement fund investors each year to boost your retirement savings.

If you haven't made the most of the tax deductions for retirement savings and you want to top up your savings before the tax year ends, you need to contribute an additional amount to your existing fund or start a new one within the next week, as it takes about a week for the application to be processed, says Lisa Griffiths, associate director at BDO Wealth Advisers.

Saleem Sonday, Head of Group Savings at Allan Gray, says that by contributing to a retirement fund (pension fund, provident fund or retirement annuity) or a tax-free investment you can access attractive tax-saving benefits.

Both offer you tax-free growth on your savings, which can save you lots in tax, but contributions to a retirement fund have the additional benefit of being tax deductible.

If you contribute to a retirement fund before the end of the tax year, you could get back some of the tax you have paid to the South African Revenue Service (Sars) when you file your tax return, and you can use this saving to boost your contributions.

For contributions to a retirement fund you enjoy a tax deduction up to an annual amount of 27.5% of the greater of your taxable income or remuneration. The benefit is capped at a contribution of R350,000 annually. However, if you invest more than this, you can still get the tax benefit in the future, says Sonday.

Contributions for which you do not enjoy a deduction during your working years can be deducted at retirement, and growth on them is tax free, but you may pay tax on the pension you draw.

There are different types of retirement funds. You can either be invested in a pension or provident fund through your employer as a condition of employment, or you can invest in a retirement annuity (RA) in your personal capacity (sometimes these are set up by your employer on a group basis).

You contribute to a retirement fund with pretax earnings, which means you can reduce your taxable income, subject to the annual limits, while saving for retirement. If your employer facilitates your retirement fund contributions, you may pay less tax each month. If you contribute to a retirement fund outside of your employment, such as an RA, you may get a refund from Sars at the end of the tax year.

If you have already invested in an RA, you can make an additional contribution at any time. If you are invested in a pension or provident fund through your employer, you may, depending on the rules of the fund, have the option of making an "additional voluntary contribution". The additional contribution must go through your employer and typically employers cater for additional lump sums to be deducted from annual bonuses, says David Gluckman, Head of Special Projects at Sanlam Employee Benefits.

Michael Prinsloo, Managing Executive of Research and Product Development at Alexander Forbes, says some umbrella funds cater for additional contributions but you will have to comply with Fica (Financial Intelligence Centre Act) requirements and declare the source of the funds.

Unpacking the tax savings

The investment return (interest, dividends and capital gains) you earn within a retirement fund is completely tax free. Because the growth of your money in the product is not taxed, your investment value over the long term could end up being far higher than, for example, the same sum placed in a basic unit trust investment, where your return is taxed at your marginal tax rate, Sonday says.

There are different rules for the different products at retirement.

When you retire and take your money out of your retirement annuity or pension fund, you must transfer at least two-thirds to an investment that will provide you with an income in your retirement. This transfer is tax free. If you are invested in a provident fund you can currently take the full amount as cash although changes have been suggested. Any money you take from a retirement fund in cash is taxed according to the retirement fund tax table. This allows you to get up to R500,000 tax-free at retirement or if you are retrenched at any time.

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Your income in retirement will be taxed according to your marginal income tax rate at the time. If you have excess retirement fund contributions that you have not deducted for tax purposes remaining when you retire, these may be used to reduce your tax bill if you take a cash lump sum, or when you receive annuity income.

Therefore, Sonday says, you should not be deterred from contributing as much as you can afford, even if it falls above the maximum annual tax-deductible amount, as you will receive the tax benefits at some point. You should, however consider the potential benefit of investing without the limits retirement funds have on exposure to offshore markets and equities.

Jenny Williams, Senior Consultant Wealth Management at financial services company GTC, says you need to bear in mind that the 27.5% tax deduction (up to R350,000) includes contributions that you make to your employer-sponsored retirement fund. Employed South Africans typically save 10%-15% of their taxable income, including salary, commission and overtime, in their employer-sponsored funds. This allows them to contribute an additional 12.5%-17.5% to benefit from the tax relief.

RAs are also beneficial in estate planning because they are excluded from your estate for estate duty calculation purposes. Once you reach retirement age you have the option of buying a life or living annuity to provide you with a monthly income in retirement. Furthermore, the value of the living annuity is excluded for estate duty purposes.

The only downside of an RA is that you cannot access your savings in your RA fund before the age of 55 unless you are officially emigrating, and then you will pay tax on the withdrawal, says Williams.

Impact on your long-term savings

Consider the example of two investors, one earning R30,000 a month and the other R50,000 (see the table).

If they each save R5,000 a month between the ages of 25 and 60, the investment over the 35 years would be worth R7m for each, if it earns 7% a year, but the higher-income earner enjoys a greater tax benefit because this investor pays a higher rate of tax.


Article by Grant Hicks, CIM President, Advisor Practice Management 

Favourable introductions are easier than referrals. After 30 years in the financial industry in various roles including being a financial advisor, National Director of Practice Management and financial advisor coach, I truly believe that favourable introductions are easier for financial advisor clients than referrals. Let me explain. When I was growing my financial advisory practice, I was looking for more ideal clients, wealthy individuals who needed complex planning and advice to help them reach all of their goals. The financial industry and all top advisors said, grow your business by referrals only. But, I did not buy it; there must be more to it than sitting at your desk waiting for people to call you because they told a friend how wonderful you are. I was looking for better and better clients, not the same type of clients. I was also taught many years ago to position referrals at every client meeting, usually at the end of the meeting. It seemed so easy, just ask for a few names and away you go. Yet, at the end of the meeting, compliance, and paperwork took control of the meeting, and if I did not do the paperwork, referrals were useless. So with this wonderful sage advice, I decided to find another way to acquire more ideal clients. Favourable introductions.

 Favourable introductions

What is the difference between a favourable introduction and a referral? I truly believe that your best clients are 10 times more comfortable introducing you to someone than giving you a referral or a specific name to call. So how do you get introduced to people by your clients? Simple, go to your client events, not your events. So how do you do that? Let me share a story with you. One of my clients Bob was a retired pilot. In every meeting with clients, I used an agenda. On the agenda was the word ‘events’. It was positioned at the beginning or middle of the meeting, NOT the end of a meeting when the time is running short and paperwork is longer than expected.

Ask the golden question

In the meeting, when it came to the word events, I would always ask one golden question. “Bob, if I was to meet a group of retired pilots, where would I go to meet them, how would I meet and connect with them? Are there any events you are involved in with retired pilots”. Bob replied, “Why yes, there is a group of retired pilots at the small airport where I keep my plane, why don’t we meet next week and I will introduce you to some of them.” This is where Bob introduced me to Greg, another retired pilot. Greg knew that Bob was successful, so being favourably introduced as his financial advisor was all Greg needed to have confidence in talking to me. And as simple as asking one question, I discovered that asking for favourable introductions is easier than asking for referrals. The next week at the hangar, Bob introduced me by saying” Hey Greg, I want you to meet a friend of mine who happens to be my financial advisor, Grant”. Greg was working on his airplane and jokingly said” nice to meet you, Grant, you must be a great advisor since Bob has a better plane than mine. Let’s grab a coffee sometime. “. That is all it took. There was no awkwardness in meeting people and get favourably introduced, not making up an elevator pitch of who you are and what you do. Your clients will be glad to introduce you to anyone, given the opportunity.

You are vetted

How do you get vetted by ideal prospects/ the vetting part can sometimes take a long time, several meetings and tons of questions. But since Bob, the retired pilot is already successful when he favourable introduces me; I am vetted in his friend's mind, as a qualified professional. The meeting with Bob there, allows Bob to introduce me and one sentence confirms I am a professional that you can trust. That sentence looks something like" Hi Greg, I would like you to meet Grant, my financial advisor".

Two simple steps

Make that opportunity happen in two simple steps. First, add the word “events” into the top portion of your agenda. I recommend using agendas with your ideal clients. Use it as a trigger to ask for favourable introductions from ideal clients. Second, ask the question” If I were to meet a group of successful people like you (categorize the group, eg retired pilots, surgeons, dentists, farmers etc.) how would I meet them? You will be shocked by how helpful people will be with this question.

Charitable events

Every week, wealthy people attend charitable events. Another question; if people are having difficulty recognizing events in their group, is to go to charitable and community events by asking this question. “Is there anything near and dear to your heart you are involved in such as charities or community events that you may need help with? We try to align our interests with our client's interests.

Success stories

I can list countless stories of advisors I coach that have added two simple steps to their process, and went to amazing events with their best clients, and met a group of ideal prospects. Referrals are great, but favourable introductions are easier and more comfortable with your ideal clients. If you went to 10 client events this year and was favourably introduced by an influential or ideal client at each event, do you think you will be introduced to your next ideal clients? Favourable introductions have been a game changer for some advisors trying to figure out how to meet more ideal prospects.


A reputable financial adviser 'sells advice, not products'

Article by Devlin Brown, Business Live

Financial advice is key to achieving your investment goals. Choosing the right adviser could have a marked impact on the returns you enjoy over years of meticulous saving.

A study by US financial services provider Vanguard found that advised clients earn returns of about 1.5 percentage points a year more than non-advised clients.

"Good advice does cost money, but the opportunity cost of not having a good professional, independent adviser is very expensive and is rarely calculated," says Barry O'Mahoney, a Financial Adviser at Veritas Wealth.

O'Mahoney is a certified financial planner (CFP), an internationally recognised qualification for financial planners.

The Financial Planning Institute (FPI) is a professional body for financial planners in SA, and the only institution in the country to offer the CFP certification.

Every year the FPI awards a professional with the accolade of Financial Planner of the Year, which the FPI says is the highest award a financial planner can achieve.

O'Mahoney, a former winner of the award, says that engaging a CFP means the person you are dealing with has a postgraduate diploma in financial planning and is required to adhere to a professional code of ethics and code of conduct.

"The internationally recognised CFP designation is one of the best-kept secrets in the industry," he says.


What is a good financial planner?

Financial Planner of the Year 2018 Janet Hugo, Director of Sterling Private Wealth, says: "It's essential that you only take advice from a person who is qualified, experienced and has a successful track record, or works with a reputable firm with sound in-house investment and operational strategies."

Floris Slabbert, Director at Ecsponent Financial Services, says a good financial adviser will bring the skills, qualifications, experience and discipline required to offer advice that will "ultimately unlock the best returns from your investments".

This is done by combining industry knowledge with a cool, collected outside perspective of your unique circumstances.

"The outside perspective on your circumstances - combined with industry knowledge on the effects of tax and estate planning on financial plans - often proves invaluable in constructing the best possible solution to achieve your financial goals," says André Lindeque, a private-client Wealth Management Consultant at the financial advisory firm GTC.

"A good adviser has the ability to listen, understand and interpret the requirements of their client. Crucially, they should be able to communicate the appropriate plan of action in understandable terms to their clients. They must also have a competent support team, to give clients the necessary assurances and information in the event that their adviser is not available," adds Lindeque.

Hugo says it is very important for clients to stay engaged in their financial journey. "All clients should stay informed, and question and discuss the advice they receive from their selected adviser. They should take an active part in the decision-making and understand the pros and cons regarding the selection of their adviser," she says.


What about fees?

O'Mahoney says that a key driver in looking for an adviser is understanding how they make their money. "Look for an adviser who makes money on an annual and ongoing basis, and avoid advisers who rely primarily on upfront commissions, as this motivates the wrong behaviour and does not align your interests with your adviser."

Hugo agrees. "It's advisable to question fees which include a significant upfront amount which is not commensurate with the value of the advice."

Hugo believes professional fees are acceptable when a service adds value. Fees may include an annual management fee on an investment portfolio.

Understand how you are being charged, relative to the advice you're getting and the impact on your investment.


Tied versus independent advisers

A tied adviser has a contract with a specific product provider.

"A tied agent will be most informed and knowledgeable about one range of products," explains Slabbert, "whereas with an independent adviser, there won't be targets and commission tied to how much business is written for a company."

O'Mahoney adds: "It's unlikely that a tied agent would advise you not to use the products offered by his company."

Independent financial advisers are not tied to a particular product supplier, meaning they can allocate their clients' funds to the products and providers that are most suitable to their unique set of needs.

Hugo says successful independent advisers have rigorous systems and dedicated staff to evaluate new product developments.

You need to understand how your money is being invested and what the costs are. You must be confident your adviser has your best interests at heart and operates according to the best standards of professionalism.

When searching for the right adviser, O'Mahoney offers a pearl of wisdom: "A reputable adviser sells advice, not products."

How SA’s financial indicators compare with other emerging markets

Article by Mike Schüssler, Moneyweb.

The rand is undervalued but interest rates are nicely in the middle.

South Africa has a daily forex turnover of $21 billion a day, higher than many developed economies. Picture: Waldo Swiegers, Bloomberg South Africa has a daily forex turnover of $21 billion a day, higher than many developed economies. Picture: Waldo Swiegers, Bloomberg

Financial market movements are an important part of the daily information an economy gets. When it comes to stock markets, forex markets and interest rates, how does South Africa compare with other emerging markets ?

There are five financial market indicators that are fundamental to an economy (stock market performance has been left out for now).

Stock market size – where does the JSE fit in?

South Africa has one of the best and deepest financial markets in the emerging market world. The JSE is the 18th largest stock exchange in the world, which is impressive given that the country’s GDP comes in at 34th. The JSE was 16th largest just two years ago, but with lacklustre performance it has slipped back a little.

The JSE is only the fifth-largest emerging market stock exchange, but South Africa has the third-largest market capitalisation. This is because India and China have two stock exchanges each, and all four are larger than the JSE. South Africa now has a few other exchanges but they are still small in a world context. They are, however, starting to add interesting dimensions to the overall picture.

The JSE market cap was $988.4 billion at the end of November, which is about three times SA’s GDP. The JSE is by far the largest stock market in Africa; the next biggest, Morocco’s Casablanca, has only about 6% of the market cap of the JSE. Botswana is fourth largest but does not disclose its data to the World Federation of Exchanges (WFE). Its market cap is about $39 billion, which is between Cairo (third largest) and Nigeria (fifth).

After these stock exchanges the next biggest stock market in Africa is Mauritius, followed by Tunisia and Namibia. Thus three of the biggest eight stock exchanges in Africa are in Southern African Customs Union countries.

Source: World Federation of Exchanges

Source: World Federation of Exchanges

How important is the rand in a world and emerging-market context?

The fact that the JSE is in the top 20 exchanges in the world helps other parts of the South African financial market – turnover in the rand foreign-exchange market is one example. With the JSE in 18th place with regard to market capitalisation, the rand punches above its weight internationally.

Every three years, the Bank of International Settlements (the central bank of central banks if you wish) does a survey of all forex dealers in over 50 countries where free trade in currencies takes place.

While the US and UK dominate world trading of foreign exchange, South Africa was the largest emerging market regarding volume of foreign exchange traded for a number of years from 1998.

This is a good indicator of the overall importance of a country in the world of finance since bonds and stocks get traded in the local currency – resulting in trade between a foreign currency and the local one.

At present South Africa has the 25th largest forex turnover, and is fifth largest among emerging markets in the dollar value of forex transaction turnover.

China, which had a very small and closed forex market, has in recent years leapt past all the other emerging markets in size and importance, but accounts for just over 1% of the total forex turnover of the world. In SA, the daily turnover (not profits or anything else) is $21 billion a day! Worldwide, forex turnover is in the region of $7 trillion a day.

So, while South Africa is important in Africa and the biggest by far on the continent, it is still very small on a world scale. However, many developed economies such as Ireland do not have the turnover that SA has in the forex market.

The rand is an interesting case of a currency that has been an important emerging market currency – sometimes the most important – but like several South African indicators, it is been overtaken by other developing markets such as China, Russia and India.

South Africa will always be a deep and liquid market in the forex game but is probably going to be overtaken by Brazil in the April 2019 survey on the total turnover and importance of forex volume. SA will then be the smallest of the Brics markets, whereas in 1998 it was the biggest.

However, forex volume is a bit of a vanity indicator once there is enough turnover in a market. I believe around $12 billion is probably enough for a liquid market to function.

Source: Bank for International Settlements

Source: Bank for International Settlements

How cheap is the rand really?

This is a tricky indicator to value. Many institutions have purchase power parity indices for currencies, but they are often old and get redone every few years as spending patterns change.

It is however an important measure of how confident others (and yourself) are in a country’s future.

For this, I use the Big Mac Index as it comes out once a year and is now available for well over 70 countries and about 56 currencies (remember that the euro represents 19 countries). It measures how much a Big Mac costs in dollars in all of these countries, and compares the figures against the US price. From this, one can see how ‘expensive’ or ‘cheap’ a currency is.

With my focus on emerging market countries, I have the relative value – or undervaluation – of these currencies, and see that many are undervalued at present. The rand is nearly 60% undervalued! But it is not the worst currency by far as seven other currencies have lower relative purchasing power than the US dollar at present.

The Big Mac Index gives much insight into currency valuations. Picture: Daniel Acker/Bloomberg

The Big Mac Index was updated early in January, and the results are interesting. Russia is the most undervalued country at over 70% followed by the Ukraine, Turkey and Argentina. Even the Chinese yuan is undervalued, by 45%.

In fact, 52 of the 55 currencies that feature on the index are, in relative price terms, undervalued. Only Sweden, Norway and Switzerland have currencies that, according to their ability to buy Big Macs, are overvalued.

The most expensive country according to the Big Mac Index is Switzerland. The SA Big Mac costs about $2.23 and the Swiss one $6.62 – so a South African can only buy a third of a Big Mac in Switzerland. Or a Swiss person can get three for the price of one in SA, or four for the price of one in Russia! It’s incredible that anyone still wants to eat a Big Mac in the little mountain country.

So the rand is cheap, but a few places are cheaper. In Russia, your rand will buy you one and a third of a Big Mac for the same price as in SA. In the 20-year history of the Big Mac Index in SA, the rand has always been cheap. But at close to 60%, it is probably overdone. So either the SA rand price of a Big Mac increases in the next year or the rand will bounce back a little – or both.

Emerging market currencies are almost always undervalued, and SA has been one of the most undervalued currencies for a long time. However, the rate of decline has to an extent slowed in recent years but more on this another time.

Source:, McDonald’s and

Source:, McDonald’s and

 Are SA interest rates high in an emerging market sense?

The South African Reserve Bank (Sarb) is an inflation hawk and people often say South African interest rates are high. But if we look at the available data from the Bank for International Settlements (BIS), four countries have higher rates than South Africa in their dataset – and all of them are emerging markets. Argentina has an interest rate of over 60% while Turkey has a policy rate of 24%.

The Sarb repo rate is 6.75%, which is on the higher side, but not if one considers that of the five Brics countries, Russia, Brazil and India are all within less than 1% of SA’s repo rate (or within 75 basis points). Russia has a policy rate of 7.5% and India and Brazil are at 6.5%.

China is the only Brics country with a rate of below 5%; at 4.35%, it is the lowest of our Brics partners.

Source: BIS and

Source: BIS and

Policy rates should take inflation – or at least future inflation – into account

Having shown that China has a policy rate of 4.35%, what about the fact that China has an inflation rate of only 2.2%? Well, that means they still have a relatively high real policy rate. India has inflation at 2.4%, Brazil at 3.7%, and Russia at 4.3% at present – so the SA inflation rate of 4.5% is the highest of all the Brics countries.

This brings me to the actual real policy rates, since one often hears that SA interest rates are killing the economy and should be as low as China’s as that is what is helping China to grow.

I see this as bollocks since China has a higher real rate than SA! China recorded an inflation rate of 1.9% in December – so that 4.35% rate works out to a real rate of 2.5%, which is higher than the SA real rate of 2.3%

After inflation, of the 23 emerging markets that have policy rates, South African real rates are very much in the middle. Yes, Chile and Poland have much lower rates than SA and some, like Hungary, have negative real rates – the fact is that SA is in the middle here, which shows that our policy rates are not at all out of line for an emerging market.

Remember too that emerging markets are seen as more risky (although in some cases I would debate that) and many, like SA, need to attract savings to help pay for current account deficits.

Source: BIS, The Economist, various central bank websites and

Source: BIS, The Economist, various central bank websites and

In simple terms, South Africa’s financial indicators are important, and are not the worst or the highest of the emerging markets out there. The rand is undervalued but interest rates are nicely in the middle, and not much can be said of the stock market except that the JSE is a very large emerging market stock market but a medium-sized one in a world context.

Mike Schüssler is an economist at

Offshore tax exemption to be reviewed

Article by Personal Finance, Amanda Visser

The controversial tax on income South Africans earn abroad and the R1million exemption on it will be revisited during a special workshop between National Treasury and industry players in coming weeks.

Several organisations and individuals submitted proposals at the end of November, to be considered during next month’s Budget to address concerns raised about an amendment that the South African Revenue Service (Sars) introduced last year to provide for an exemption on the first R1m earned.

The date for the implementation of the tax is March 1, 2020.

The National Treasury held a workshop at the beginning of last month to discuss submissions for technical tax proposals for the 2019 Budget Review.

However, due to the “importance and extent” of the submissions, a workshop solely to address concerns about the tax on foreign income has been scheduled.

Tax Consulting South Africa says in its submission, on behalf of the Expatriate Petition Group and the South African Rewards Association, that it is “prudent” to deal with the issue in 2019, before it takes effect next year.

Jonty Leon, the legal manager at Financial Emigration, a division of Tax Consulting, says they wish to address the issue of “distorted inflation of taxable income of expatriates by including fringe benefits and allowances”.

“If these benefits are taken into consideration for purposes of the (exemption), we submit that it would result in a disproportionately high tax liability for a number of expatriates,” the November submission read.

The South African Institute of Tax Practitioners (SAIT) says in its submission that the R1m exemption provides little relief for South African employees who are working on assignments overseas.

Andries la Grange, the Chairperson of SAIT’s personal tax work group, says SAIT appreciates the decision to introduce the exemption, but it would like to see it being tweaked.

He says it is evident that the capped exemption as it stands will provide little relief for employer-sponsored assignees, who are normally provided with a number of “assignment specific benefits”.

Other than a tax gross-up (when an employer increases the gross salary to account for the taxes to be withheld), which ensures that an assignee is not adversely affected or benefited by host-country tax rates, and cost-of-living allowances, the major fringe benefit is generally the provision of accommodation.

The current structure and amount of the exemption will leave employers and individuals materially worse off in situations where the transfer and transfer benefits result in a tax charge they would not have incurred had they not been transferred, La Grange says.

Tax Consulting says the cost-of-living differential also poses problems. The cost of housing in some jurisdictions, such as the United Arab Emirates, far exceeds that of South Africa.

“In rand terms, the expatriate may earn a very sizeable package, but this is not reflective of his actual buying power in the country where he works.”

Leon also referred to other benefits, such as security guards or a driver, which may be classified as a taxable benefit in a South African context.

“But where the employee is assigned to perform work in a remote location in Africa, this is almost rudimentary.”

The submissions further raised concern about pegging the cap to the rand, given its volatility.

“It is proposed that the exemption be pegged against a more stable foreign currency, especially considering the fact that the salary packages of the majority of individuals will be based in a foreign currency,” La Grange said in his submission.

Tax Consulting says, against the rand, the dollar and the Emirati dirham increased by about 13% between January and November last year and the English pound increased by more than 7%.

Over a decade, the exchange rate differences have been substantial; against the rand, the dollar rose 106%; against the pound, it rose 32.7%; and against the Emirati dirham, 106%.

What does the price of a unit trust mean?

Article by Ray Mhere, Allan Gray

When you buy a product or a service, the price you pay for that item tells you something about it. An apple that costs R50 (suspiciously expensive) or an Apple computer that costs R500 (suspiciously cheap) might make you doubtful. So what does the price of a unit trust tell you? Does a unit trust that costs R2 have less quality or more value than one that costs R20? To answer these questions, Ray Mhere delves into how unit trusts are priced before looking at what this means for you as an investor.

A unit trust is a type of investment that provides you with easy and affordable access to financial markets. Your money is combined with the money of other investors who have similar investment goals. Our investment managers use the pool of money to buy underlying investments to build a portfolio, which is then split into equal portions called “units”. Units are allocated to you according to the amount of money you invest and the price of the units on the day you buy them.

How a unit is priced

The way a unit in a unit trust is priced is a simple equation: The assets of the unit trust are the shares, bonds, cash and/or property that the unit trust owns on behalf of investors. The value of these assets is generally updated daily, but sometimes weekly, depending on the unit trust.

The operating expenses comprise fund management fees, operating costs – which include trustee and custodian fees, audit fees or their service fee, and bank charges – transactional costs for buying and selling shares, and VAT. Once operating expenses are subtracted from assets, this sum is then divided by the total number of units bought by investors.

The problem with exclusively using unit prices to compare unit trusts is that it says nothing about the value of the unit trust as a whole. If we have two unit trusts both with assets of R1 000, but one has 50 units and the other five, their prices would be R20 and R200 respectively. An investor would be mistaken in thinking that one is 10 times more valuable than the other by virtue of its price.

Unit trusts are priced differently to shares

Investors also often make the mistake of thinking unit trust prices are analogous to share prices. But there is a vast difference. The share price of a stock is the price that buyers and sellers agree to at a given time, which usually has a wavering relationship with the actual value of the business behind the stock.

Sometimes the share price is a wild guestimate based on sentiment, mood and herd behaviour. The price of a unit trust comes from the actual value of the investments within it. Sentiment and mood play no direct role. Put another way: If stock market investors fall in love with a stock and then buy it in excess, the price of that stock will be driven up, but if unit trust investors love a unit trust and buy lots of its units, it will do nothing to influence the unit price.

What changes the price of a unit trust?

The variables that move a unit trust’s price are the value of the assets within it and its operating expenses. When the shares inside an equity unit trust do well, then the pool of assets of the unit trust increases in value and the price of an individual unit increases as well. The same happens when your unit trust manager lowers any part of operating expenses: Lower expenses lead to a bigger pool of assets being divided between unit holders.

Investors are sometimes tempted to try to take advantage of this price movement by attempting to time the market – buying when the price is low and selling when the price is high, just as some traders do with shares. But, just as with shares, timing unit trust purchases is difficult. In fact, trying to time the exact right moment to buy or sell a unit trust may be even more difficult because it involves not just one investment, but a large number of investments, and the price of each investment may move independently of one another.

Most unit trusts are not designed to be traded frequently, and doing so will likely result in a lower return. Their strength is in the accumulation of wealth over time, as time smoothes out the rough-and-tumble of volatile price movements.

How should you compare unit trusts?

Looking at price is a simple but misleading heuristic for comparing unit trusts. So what should you do instead?

The correct way to assess a unit trust is to:

See how the price per unit has grown over time; this will give you an indication of the track record that the investment manager has for creating wealth. You can get the same information by looking at the performance over different time periods on our factsheets.

Examine the operating expenses to see that these are not excessive. Typically, investment management fees should be fair relative to the performance delivered.

In addition to these hard measures related to performance and costs, you should:

·         Think about what you need from your investment and the risk you are comfortable with.

·         Find an investment manager whose philosophy resonates with you.

·         Assess their performance over a long enough time frame, through different market cycles.

·         Ensure that you understand the mandate of the unit trust and that it aligns with your needs.

It’s easier to just look at price, but as Vuyo Nogantshi discusses, being thorough before you invest generally leads to better outcomes.

Monitoring a unit trust

Watching the unit price daily, weekly or even monthly is like watching bombastic daily business reports on the market – fun to do, but almost meaningless to a long-term investor. It is akin to watching the rev meter on your dashboard to see if you are getting closer to your destination. Rather review your investments at reasonably set intervals to see if they still meet your needs, and to check that they are performing as they should.

Where can I see price information?

Allan Gray unit trust prices and factsheets are available on our website. Most other managers include prices on their websites as well, and they are also quoted on various financial news websites. Prices are typically quoted in cents.

Ensure your life savings support you for life

Article by Business Live, Charlene Steenkamp.

Many South Africans have effectively been gambling with their life savings by choosing to draw a pension from a living annuity with no longevity protection and without being rewarded for the higher risk involved.

Actuary Bjorn Ladewig, from retirement product provider Just, says this is because living annuities have generally underperformed with-profit guaranteed annuities since 2006.

The company's recent survey, Just Retirement Insights, shows that 89% of retirees want a lifetime-guaranteed income. Yet, according to the Association for Savings and Investment SA (Asisa), 92% of retirement money is invested in living annuities.

There is renewed interest in traditional guaranteed life annuities as the retirement industry scratches its head to solve the crisis that results in fewer than one in 10 South African retirees receiving a sustainable income in their golden years.

Living annuities are popular because they provide retirees a sense of ownership and control, says Warren Matthysen, Principal Consultant at Alexander Forbes Investments.

They also appear reasonably easy to understand because you earn investment returns on, and draw, an income benefit off the capital you invest. Any capital left when you die is available for your heirs.

Many investors see the flexibility and choice that living annuities offer as desirable, he says.

But "the harsh reality is that those retiring do not have enough savings to sustain their income for life and their desire to leave a legacy will ironically result in them becoming dependent on their family or the state", Ladewig says.

You may not face this challenge if you are able to live on an annual income equal to the broadly accepted figure of 4% or less of your retirement savings, but the average retiree needs to draw more, Roenica Tyson, Investment Product Manager at Glacier by Sanlam, says.

Matthysen says living-annuity investors may be unaware of the cost of providing for a legacy - one of the key reasons that many choose a living annuity - at the expense of their future income.

The answer for many retirees is to use a combination of a living annuity and a guaranteed life annuity to achieve the twin goals of a sustainable income and a legacy, Tyson says.

In a paper presented to the annual convention of the Actuarial Society of SA, Matthysen calculated the cost of the future income and legacy to heirs.

Assume a 65-year-old man makes a R1m investment into a living annuity and draws an income starting at R52,000 a year (5.2% of his capital) and which increases at 6% a year for rest of his life (assuming an investment growth of 6% a year). The cost of the future income stream amounts to only R570,000. This means that R430,000 of the original R1m is funding the legacy and is not being used to provide an income.

Matthysen said living-annuity investors need to properly understand the cost of leaving a legacy.

Deane Moore, CE at Just, says the starting point for a person retiring and wanting to use a combination strategy, is to calculate your annual expected costs in retirement which should include food, utilities, medical, transport, insurance and the ongoing costs of retirement accommodation.

A guaranteed pooled product, such as a with-profit life annuity, can offer better returns at lower risk than a living annuity, because investors in the pool that survive to the end of each year benefit from the pot of money that stays behind in the pool when some of the other investors die, Moore says.

In this way the pool shares the risk rather than the individual having to provide for that risk, as in the case with a living annuity.

What you are getting as an investor in a pooled product is a return from your invested assets plus an additional return from the assets of those who die early.

The longer you live, the greater your additional return from a guaranteed annuity, he says.

Shaun Duddy, Product Development Manager at Allan Gray, says combining living and guaranteed annuities allows you to better utilise and trade off the different characteristics of each.

He adds the industry has some way to go still in equipping financial advisers and annuity investors with the necessary information and tools to combine the two.

There are, however, some options available to retirees who want to benefit from both types of annuities.

Alexander Forbes, Sygnia and Glacier now offer a living annuity with the option to use a portion of your investment to provide a guaranteed annuity income.

In the Alexander Forbes and Sygnia products you buy units in the guaranteed annuity as you would buy into other underlying funds.

The guaranteed annuity is a with-profit one provided by Just that you can use to guarantee an income to cover your essential expenses regardless of how investment markets perform or how long you live.

The lifetime income increases each year roughly by inflation and the increase is derived from the above-inflation investment returns generated by Alexander Forbes or Sygnia asset managers.

Glacier by Sanlam's Investment-Linked Lifetime Income Plan provides a lifetime retirement income that is linked to the growth of an underlying investment portfolio. Unlike typical guaranteed annuities, you get to choose the underlying unit trust funds and the income is linked to the performance.

As Glacier's Investment-Linked Lifetime Income Plan will not provide a legacy for your heirs, you can provide for a spouse or dependants by adding a guaranteed income payment term (for up to 15 years), or by adding life assurance to the policy, Tyson says.

Here’s how you should be saving money during your lifetime

Article by Business Tech.

By assessing your life at various stages can enable you not only to plan ahead, while also target certain financial achievements to ensure your well-being.

This is according to Errol Meyer, legal specialist from Standard Bank Financial Consultancy, who says that personal financial planning becomes easier and adjustments can be made as you go along.

Below, Meyer sets out how you should be saving during your lifetime.

Starting out and becoming established (ages 18 to early 30s):

At this stage, education and getting a car, rather than thinking about retirement are usually priorities. But, this is the time to begin thinking that far ahead.

At this stage of life, you should concentrate on developing life-time habits such as:

  • Making sure that you pay yourself first. Decide what you want to save and put this aside before spending any money. You can build future financial independence earlier than you think if you decide, for example, to put away 33% of your earnings for the future.

  • Learning not to compromise. Committing money to investments that stop you from drawing it out takes away temptation. A 12-month fixed investment is ideal. The money grows and you can’t get it.

  • Putting together a budget. Deduct your compulsory savings and then set aside money for living and money for short-term goals.

  • Consider starting a long-term fund. Investment portfolio’s that are aligned to lifestyle goals, such as education and buying a house are good ways to go. The earlier you invest the less the investment will cost and the more you will benefit.

  • Wisely invest some of your budget. For example, cars just don’t hold their value. Buy a pre-owned car or downsize and you will have money available when you need it.

Moving on and beginning to accumulate assets (mid 30s to 50)

With your education complete and career path decided, you are now focusing on family and other responsibilities such as focusing on home loans, saving for the future of your children and other needs.

Typically, this is the time of your life when you get established and your income increases accordingly. You should be looking at:

  • Increasing your contributions to medium and long-term savings mechanisms and taking out life insurance.

  • Diversifying savings and moving into shares, unit trusts and other products.

  • Reassessing your retirement savings and adjusting them if necessary.

  • Making sure that you have a will.

Review your investment plans regularly and get a professional financial planner to assess what you need for the next stage of your life. As you approach 50, it pays to be realistic about your health and plan for contingencies that could result if your health doesn’t stay good.

Independent family and the road to retirement (age 50-65)

Ironically, life gets cheaper and earnings greater at this stage of your life. Children leave home and even begin their own families. Simultaneously, your earning power peaks. Retirement beckons.

The important things to consider now are:

  • Making sure you have no debt as you approach retirement. After retirement, you have to live on investments and pensions. Major debts can be financially damaging.

  • Consolidating your investments so that they are low-risk investments that offer steady, inflation-linked returns.

  • Adjusting your long-term retirement strategy and thinking about increasing your contributions to a retirement annuity.

  • Planning your estate and taking steps to ensure that your family-rather than the tax man- benefits when you die.

Know what a policy covers

Article by Standard Bank, found on Personal Finance.

Original title: Know what your policy covers

Lodging a life insurance claim needn’t be an ordeal if you and your beneficiaries are aware of what is covered by your life policy and what isn’t, said Felix Kagura, the Head of Long-Term Insurance Propositions at Standard Bank

“Too often clients don’t consider crucial aspects of what is covered by their insurance policies and are then surprised when they find out they may not be covered for certain events,” said Kagura.

“You need to pay particular attention to all the exclusions contained in the policy as well as the premium pattern over time; the language around beneficiaries and any possible waiting periods that may be stipulated.”

Exclusions, as contained in life insurance policies, detail possible claim events which may not be covered by a particular policy. This means that the insurer will not meet a claim that is made on such events. Examples of such exclusions include death due to events like war, civil unrest, epidemics, suicide and even the mere act of being out of your home country for a protracted time (usually more than three months).

“Most policies will not pay out if you willingly relocate to a territory that is in a state of declared war and possibly even if there is civil unrest taking place without advising your insurer in advance,” said Kagura. “If you’re planning to be in any foreign country for a significant period then the critical thing is that you declare it to your insurer.”

Kagura said national risk profiles were usually dependent on the country you may be visiting, with some African countries frequently having diverse risk profiles. It is therefore crucial that you find out what the exclusions are around the country you will be visiting.

4 things expected to hit SA’s financial stability in the next year – Reserve Bank

Article by Business Tech

The South African Reserve Bank (SARB) has released its second annual financial stability review.

One of the key focuses of the report is an analysis of some of the risks which could impact South Africa’s financial stability.

“The SARB regularly assesses the risks to financial stability in the next 12 months, with a view to identifying and mitigating any risks and/or vulnerabilities in the domestic financial system,” it said.

“Potential threats to financial stability are identified and rated according to the likelihood of their occurrence as well as their expected impact on the domestic financial system.

“The identified risks are classified as ‘high’, ‘medium’ or ‘low’ in terms of both the likelihood of each risk materialising and its possible impact on financial stability.”

Four specific risks were focused on by the Reserve Bank, including:

  • Weaker global economic growth

  • Faster than expected tightening of global financial conditions

  • Lower domestic economic growth

  • Cyber-security risks

Notably, the SARB said that there was a high likelihood of lower domestic growth, which could lead to a deteriorating fiscal position, rising debt levels and ratings downgrades triggering capital outflows.

It also highlighted that cyber-security risks could have a high impact on South Africa, with the possibility for corporate security breaches and a crash of crucial financial infrastructure.

Faster than expected tightening of global financial conditions is also expected to have a big impact on South Africa (should it occur), as it leads to a repricing of risk, an increase in capital outflows and possible exchange rate depreciation.


Why retirement contributions don’t reduce your taxable capital gains

Article by Carrie Furman, Allan Gray

You may be aware that every tax year you can make a pre-tax contribution to your retirement fund of up to 27.5% of the higher of taxable income or remuneration, capped at R350 000 per year. But you may not be aware that the tax deduction you are entitled to from contributing to your retirement fund can include taxable capital gains. The logical next question to ask is whether your retirement contributions can reduce that taxable capital gain.

Unfortunately, the answer is no. The retirement savings deduction is applied to reduce your income amount before the taxable capital gain is added. In other words, your taxable capital gain is still fully taxable.

The confusing part is that the South African Revenue Service (SARS) uses the words ‘taxable income’ in two instances: One for determining the maximum amount you can deduct for tax purposes for retirement fund contributions, and the other to determine your final tax liability.

Taxable income is used to determine the maximum amount you can deduct for tax purposes for retirement fund contributions

Your retirement deduction calculation tells you how much of a deduction you will get from SARS based on the amount you save for retirement. It has no bearing on the sum of your taxable capital gain. This is where the first use of ‘taxable income’ comes into play. To work out your maximum annual retirement fund deduction, you need to determine the following amounts:

Your remuneration – how much did you earn from your employer (including any commissions and bonuses)?

Your taxable income – the sum of the taxable income you earn from your employer, other income (such as rental, annuity income and the taxable portion of your interest income) and any taxable capital gain you have made for the tax year. The taxable income amount here is effectively your ‘income’ amount (see Graphic 1), plus your taxable capital gains for the year.

Graph by Allan Gray

Graph by Allan Gray

Next, you choose the higher of the two figures and multiply it by 27.5% to get your retirement savings tax deduction.

Taxable income is used to calculate your tax liability

Once you have calculated your retirement deduction, you can use it to work out your tax liability for the tax year. The retirement fund deduction is first applied to reduce your income amount and then you add the taxable portion of capital gains. If you look at the complete tax calculation shown in the graphic, you can see this bit in block 3.

What is the benefit of including capital gains?

You can look at it this way: Your maximum retirement deduction would be limited to 27.5% of your annual salary plus any other taxable income you may have earned outside of your employment, such as rental income. Allowing you to include your capital gain in the calculation enables you to benefit from a greater deductible amount. If you can’t use the full tax deduction in one year it can roll-over to the following tax year, or it can be used when you take a lump sum from your retirement fund or when you receive an annuity income.

Whether you can use the full tax deduction in the current year or whether it rolls over depends on the proportion of your other taxable income to the amount of your taxable capital gains. There is always a benefit in contributing more to your retirement fund, even if you don’t benefit from the entire deduction in the same tax year as the year you make the contribution.

As the end of the 2017/2018 tax season approaches on 31 October, we encourage you to take advantage of these deductions and file your tax return. If you can afford to increase the amount you save for your retirement, you can benefit from an increased tax deduction when you file your return for the 2018/2019 tax year. If you are able to contribute in excess of the maximum tax-deductible amount for this tax year, you will receive the tax benefit next year or at some point in the future.

Diversified investment portfolio a defence mechanism

Article by Owen S Nkomo, Sowetan Live

A key decision when creating an investment portfolio is how much of each of the main types of asset classes to include.

Knowing the asset classes will assist you in selecting those that are suitable for your investment objectives.

The growth of your investment comes from the underlying asset classes in your portfolio.

The risk profile, benefits, and features of these asset classes are different as this article explains.

An asset class is a group of similar investments whose prices tend to move together. The goal when investing is to have a diversified portfolio of unit trust funds or underlying investments in different asset classes. This lowers your exposure to risk.

The four main asset classes are:

Shares, also known as equities

Most investors buy shares of companies that are listed on a stock exchange - the JSE.

Shares buy you a small part of a company. This gives you a potential share of profits the company makes. Shares provide investors with two types of returns - annual income and long-term capital growth.

Most shares offer income in the form of dividends, which are typically paid twice a year. Dividends can be seen as a reward for shareholders. They are paid when a company is profitable and has cash in the bank after it has satisfied all its obligations.

Share prices go up and down, so buying shares is not without risk.


Cash includes money held in bank fixed deposits and money market assets, which earn interest.

Cash provides a stable low-risk investment and is considered the safest asset class.

It tends to deliver a more regular and reliable income than shares, although the potential returns are lower compared to other asset classes over longer periods.

Cash has the highest risk of losing purchasing power over time due to inflation.


A bond is a loan, similar to the credit you may be granted.

A government or company wanting to borrow money issues bonds. They are usually referred to as fixed-interest assets.

By buying corporate or government bonds, you are lending money to governments or companies in return for regular interest payments and the return of your capital when the bond matures. Your return from bonds comes from the interest the company or government pays and any change in the price of the bond bought and sold in the market.

Bonds tend to deliver a more regular and reliable income than shares, although the potential returns are often lower.


These investments are usually in listed commercial property - you buy a share in the ownership of a number of buildings.

These buildings might be office blocks, shopping malls or industrial properties.

Property investments can provide growth in two ways - through increases in the value of the property and rent paid by the tenants of the buildings.

It is considered long-term investment and is not low risk.

It is important to know what type of asset classes you are invested in, to see if your overall exposure to each asset class is appropriate for your investment objectives and risk profile.

TRUST TO TRUST: Does a trust eliminate estate duty?

Article written by Phia van der Spuy, IOL.  

Although death and taxes are certain, people are always looking for ways to minimise taxes upon death.

In certain instances, people are not even aware of the tax consequences upon death. They may have to pay in excess of 30 percent in costs and taxes - capital gains tax, estate duty and executors fees.

If no provision was made for these costs and taxes, the executor may have to liquidate assets needed by the remaining family, to make these payments from the estate.

Many people are unaware that all the costs and taxes (as if you bequeathed it to any other legatee) will firstly have to be settled from the estate, before the trust is registered, as determined in the deceased’s will. This may leave dependents, such as minor children, with much less assets to survive from.

When you set up a trust during your lifetime, it will determine the tax consequences, both during your lifetime and upon your death. Many people believe that they should only set up a trust after they have created sufficient wealth. This is too late, for two reasons.

Firstly, when you transfer paid up assets held in your personal name to the trust, the trust will not have any liquidity to pay for those assets, and they will either have to be donated to the trust, or acquired on loan account. When you donate assets to the trust, donations tax at 20 percent on the first R30million, and on amounts in excess of R30m at 25 percent will be payable upon transfer to the trust from liquidity, which very few people have.

When you sell your assets to the trust on loan account, you will now be required to either charge interest on such loan accounts at at least the official rate (repo rate plus 1 percent, currently 7.75 percent), or pay ongoing donations tax if your loan was interest-free or interest is charged below the official rate (Section 7C of the Income Tax Act).

The donations tax will be calculated on the interest income forfeited by you. This tax on interest forefeited can be equated to the annual payment of estate duty during your lifetime.

Secondly, the balance of the loan to the trust will be included in your estate upon your death. If you charge interest on the loan, to avoid the donations tax liability, discussed above, all the interest charged will inflate your estate.

Section 7C has been successfully implemented by Sars to prevent the estate duty avoidance that could result when a person transfers growth assets to a trust.

The best time, therefore, to create a trust for estate planning purposes, is before major wealth is created during a person’s life.

In this instance, the assets will be acquired and grow in the trust, such as shareholding in a company which is acquired at nominal value when it is created, and where all the growth happen in the trust, with no resulting taxes as discussed above.

If you intended to create a trust, but you have dealt with the trust assets during your life as if they were your own, then Sars can attack the trust and have it labelled as an alter ego trust; in other words, an extension of yourself.

Despite the fact that the trust does in fact exist, SA Revenue Service will disregard the trust and treat the assets as if they belong to you, and include the assets in your estate. There must be a clear separation of control from enjoyment of trust assets. All trustees - and not just one of them - should control the trust assets for the enjoyment of the beneficiaries.

The Estate Duty Act (Section 3(3)(d)) is relevant where the trust instrument contains a provision that empowers the deceased, immediately prior to his/her death, to: appropriate or dispose of property; or revoke or vary the provisions of any donation, settlement, trust, or other disposition made by him/her for his/her own, or his/her estate’s benefit.

In such cases, the trust property will be included in the estate of the deceased as deemed property, so it is important that you are mindful of inserting problematic provisions when you draft your trust deed.

If you have a trust, please review and amend your trust deed and remove any provisions which may impact your estate negatively, especially if you have not made provision for additional estate duty and capital gains tax payable upon your death, as a result. When and how you set up a trust, and how you execute it, may impact estate duty payable.