IN THIS ISSUE

From the CEO’s desk

Unit trust or a

retirement annuity?

SAIF remains SAFE

NFB FINANCIAL UPDATE

Volume63 Jul2012

FROM THE CEO’s DESKsuccessfully blend aggressive traders with those who e have been through a period of seek out deep value or high dividend paying stocks, remarkable volatility in Global Markets, and do so both on a local as well as global basis. led by Europe, but certainly not their W These are further blended with experts from the cash, preserve. The euro, as a major fixed interest and property sectors to arrive at an currency has been beaten up, many of their markets outcome best suited to individual investor's needs have given up remarkable value, the key borrowing and appetite for risk.rates of the Club Med countries have gone through

The 21st century, I feel, will continue to generally the roof and yet Germany is able, as a major player in muddle along for quite some time. It will suit Central the "contagion zone", to record negative interest Bankers and Politicians alike to favour cheap money rates when borrowing two year money in the capital remaining the order of the day. This in turn will at markets. Someday, not necessarily soon, these some point bolster inflationary pressure as consumers unusual events and markets will reverse. For more risk and corporate,in typical boom and bust style, fill their tolerant investors, this will signal a superb buying coffers with cheap money, triggering the opportunity as equities and bonds, as well as unavoidable consequence, i.e. demand side property, begin to pay decent dividends, rentals or inflation. A further global inflationary risk will, I feel, be income, and banks, both commercial and Central, triggered should China cease it's subsidy of many begin to balance their books.inputs into Chinese production. If they raise taxes, An alternate outcome, most feared by costs of utilities, public transport, or any number of Governments and Central Banks alike, is a Japanese-inputs, this could rapidly need to be passed on to like meander through nowhere! The Nikkei has been a global consumers, triggering further “push” inflation.sad tale for over twenty years now. Returns in any

Inflation, if controlled,is not all that bad an form are difficult to find, but impossible to predict, outcome for the Globe. It will diminish the size of the and cash or property offer little respite. Interestingly hole, making it easier for countries to repay the though, as is almost always the case, the Nikkei has extraordinary and unprecedented levels of debt not been flat for twenty years. Although the outcome created in the recent meltdown. The danger is hyper is desperate should you have remained invested in it, inflation where control is lost of the increase in prices if you were able to trade, the Nikkei has offered, and great harm is done, particularly to less wealthy similar to Europe and the Western markets in current communities and countries, and notably to people in times, significant volatility and accordingly, retirement, unable to invest in typically inflation proof opportunities to profit.

or protected assets. Central

Banks have an important role to

play in this space, managing

money supply and accordingly

managing the market and

economy and diminishing these

risks.

In the current environment,

tax efficiency remains important,

as retention of as much of the

meagre, predictable return

available is important. Clever use

of dividends from shares,

preference shares or drawings

from tax efficient investments,

rather than from taxable sources,

such as pensions, can alleviate

your tax position. This needs

detailed assessment and I would Quite obviously, the sad tale of mis-timing this

advise this being discussed with your investment strategy is equally true, so I am not for a second

advisor or accountant.motivating our clients to go out there and take on the

European markets!

Mike Estment, CFPWhat NFB continues to strive towards, is the

CEO, NFB Financial Services Groupcorrect blending of investment strategies where we

®BA

f i n a n c i a l s e r v i c e s g r o u p

The Unit Trust

The Retirement Annuity

small exemption available. CGT applicable on gains.

=In the world of investments, you get building blocks or base Offshore fixed interest: distributions fully taxable.

elements that all structures comprise of; these are the A unit trust is taxed according the base elements it

typical asset classes, i.e shares, bonds, cash, property, comprises of.

commodities. Probably the biggest revolution in the

investment world was the creation of what is known as the

unit trust. The unit trust is not a base element, but rather is a The next major development that I wish to highlight,

connection of base elements; as such it can be considered although not as much of an extreme innovation as the unit

on the same level as the base elements. The unit trust did trust, is what we know today as the retirement annuity. The

to the investment world, what Apple did for the world of retirement annuity by itself is just a structure; it is made up of

technology. Where before it was difficult to buy a nothing but tax legislation. It is a parking bay, in which we

government bond, a stake in Warren Buffet's company, a can place assets, the most popular 'parker' in the bay

nugget of gold and a section of a viable commercial being the unit trust. The most significant attraction to the

property without some serious ammo, time and research, retirement annuity is that allows the assets (unit trusts)

now you can change the volume on your hi-fi, using your parked within it to flourish untaxed.

iphone, while on the loo as you skype call your mom in The two cannot be compared, just as a Ferrari being

Australia. compared to a garage just doesn't make any sense.

However, we can argue where the Ferrari is better off: out

The base elements have different tax consequences, as tearing up the highway, or being polished up in its show

follows: room. As long as the Ferrari on the highway is being

= Cash: taxed at marginal rate, exemptions apply. compared with a similar or identical car as in the garage,

= Property: rentals taxed at marginal rate, CGT there are grounds for comparison.

applicable on gains. This brings me to my major talking point in this article,

= Local Equities: dividends now taxed in your hands at which is better: a unit trust housed within, or outside of a

15%, CGT applicable on gains. retirement annuity? Putting your foot down on the pedal,

= Offshore Equities: dividends taxed at marginal rate, or keeping her preserved for a later purpose.

If you haven't picked up already, the Ferrari is a metaphor *Note that while you will not have access to the full amount

for an investment. For my article the investment I am going invested within the RA, on your death the full amount can

to analyse is what is referred to as the balanced blend in be accessed by your beneficiaries subject to retirement tax

the graph that follows, courtesy of I-Net Money Mate tables.

(Please see graph 1 below).

The balanced blend comprises of some of the longest We can see that from a purely rands and cents

standing balanced, asset allocation type unit trust funds in perspective, there is no more tax-efficient savings structure

South Africa, the breakdown is as follows: than the retirement annuity; no investment will outperform

40% Investec Opportunity its twin if the twin is housed within the retirement annuity,

30% Allan Gray Balanced even more so now considering that dividends are received

30% Coronation Balanced Plus tax-free into retirement funds.

The portfolio is illustrated by the red line. The JSE is in So why not put all your money into the RA? The

Blue, the sector average is in yellow and inflation in green. problem is that South Africa is one seriously volatile

The returns have been remarkable: the portfolio has investment destination, with our currency sailing in the wind

averaged 17% per annum since January 2001, a vast like a kite, and with the political outlook as stable as Shaik's

outperformance over the equity market (avg 14% per latest medical report, it would be foolish to relinquish total

annum), but with significantly less risk. access to your funds. The ANC have made suggestions

So, which is better? Holding the investment directly, or that pension funds should start investing in 'government

within the RA? I trust all understand now the difference developmental projects'; how serious this is to be

here between asking this question and 'which is better, a considered, only time will reveal. It seems the drive is for

unit trust or a retirement annuity?' government to be encouraging people to invest for their

It's a subjective call, but here are how the stats stack up retirements, not dissuade them, evidenced by retirement

assuming a R100,000 lump sum investment on the fund's tax being reduced to 0% and tax deductions

01.01.2001, assuming a marginal rate of tax of 35%, for permitted on contributions. For this reason, I would advise

purposes of the CGT calculation. anyone to maximise the tax-efficiencies offered by

retirement annuities and pension funds. Over and above

Direct Holding RA Holding that, investing directly into well managed unit trust funds is

Current Value R 610, 200 R 610, 200 probably the safest, surest and cheapest way of

Tax on income marginal retirement tax, generating wealth over the medium to longer-term.

rate now at 0% Considering the quality managed unit trust solutions out

Dividends withholding tax yes - 15% not applicable there, whether you are the park and polish investor, or love

CGT Yes No screaming over the highways, there is no reason why your

Net CGT R 550, 736 R 610, 200 'car' shouldn't be a Ferrari.

Access Full Partial* So, next time instead of asking, “Which is better? A unit

Estate Duty Included Not Included trust or a retirement annuity?” Rather ask, “How long is a

Protected from Creditors No Yes piece of a string?”

Protected from scorned

ex wife No No

=

=

=

I was recently asked, which is a better investment: a unit trust or a retirement annuity?

This type of question is at least, a pain in the neck and, at most, an opportunity to help

a layman investor better understand the pecking order in the world of investments.

By Marc Schroeder, NFB East London, Private Wealth Manager

UNIT TRUST RETIREMENT ANNUITY?

OR

Ima

ge

cre

dit:

12

3R

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Graph 1

The Unit Trust

The Retirement Annuity

small exemption available. CGT applicable on gains.

=In the world of investments, you get building blocks or base Offshore fixed interest: distributions fully taxable.

elements that all structures comprise of; these are the A unit trust is taxed according the base elements it

typical asset classes, i.e shares, bonds, cash, property, comprises of.

commodities. Probably the biggest revolution in the

investment world was the creation of what is known as the

unit trust. The unit trust is not a base element, but rather is a The next major development that I wish to highlight,

connection of base elements; as such it can be considered although not as much of an extreme innovation as the unit

on the same level as the base elements. The unit trust did trust, is what we know today as the retirement annuity. The

to the investment world, what Apple did for the world of retirement annuity by itself is just a structure; it is made up of

technology. Where before it was difficult to buy a nothing but tax legislation. It is a parking bay, in which we

government bond, a stake in Warren Buffet's company, a can place assets, the most popular 'parker' in the bay

nugget of gold and a section of a viable commercial being the unit trust. The most significant attraction to the

property without some serious ammo, time and research, retirement annuity is that allows the assets (unit trusts)

now you can change the volume on your hi-fi, using your parked within it to flourish untaxed.

iphone, while on the loo as you skype call your mom in The two cannot be compared, just as a Ferrari being

Australia. compared to a garage just doesn't make any sense.

However, we can argue where the Ferrari is better off: out

The base elements have different tax consequences, as tearing up the highway, or being polished up in its show

follows: room. As long as the Ferrari on the highway is being

= Cash: taxed at marginal rate, exemptions apply. compared with a similar or identical car as in the garage,

= Property: rentals taxed at marginal rate, CGT there are grounds for comparison.

applicable on gains. This brings me to my major talking point in this article,

= Local Equities: dividends now taxed in your hands at which is better: a unit trust housed within, or outside of a

15%, CGT applicable on gains. retirement annuity? Putting your foot down on the pedal,

= Offshore Equities: dividends taxed at marginal rate, or keeping her preserved for a later purpose.

If you haven't picked up already, the Ferrari is a metaphor *Note that while you will not have access to the full amount

for an investment. For my article the investment I am going invested within the RA, on your death the full amount can

to analyse is what is referred to as the balanced blend in be accessed by your beneficiaries subject to retirement tax

the graph that follows, courtesy of I-Net Money Mate tables.

(Please see graph 1 below).

The balanced blend comprises of some of the longest We can see that from a purely rands and cents

standing balanced, asset allocation type unit trust funds in perspective, there is no more tax-efficient savings structure

South Africa, the breakdown is as follows: than the retirement annuity; no investment will outperform

40% Investec Opportunity its twin if the twin is housed within the retirement annuity,

30% Allan Gray Balanced even more so now considering that dividends are received

30% Coronation Balanced Plus tax-free into retirement funds.

The portfolio is illustrated by the red line. The JSE is in So why not put all your money into the RA? The

Blue, the sector average is in yellow and inflation in green. problem is that South Africa is one seriously volatile

The returns have been remarkable: the portfolio has investment destination, with our currency sailing in the wind

averaged 17% per annum since January 2001, a vast like a kite, and with the political outlook as stable as Shaik's

outperformance over the equity market (avg 14% per latest medical report, it would be foolish to relinquish total

annum), but with significantly less risk. access to your funds. The ANC have made suggestions

So, which is better? Holding the investment directly, or that pension funds should start investing in 'government

within the RA? I trust all understand now the difference developmental projects'; how serious this is to be

here between asking this question and 'which is better, a considered, only time will reveal. It seems the drive is for

unit trust or a retirement annuity?' government to be encouraging people to invest for their

It's a subjective call, but here are how the stats stack up retirements, not dissuade them, evidenced by retirement

assuming a R100,000 lump sum investment on the fund's tax being reduced to 0% and tax deductions

01.01.2001, assuming a marginal rate of tax of 35%, for permitted on contributions. For this reason, I would advise

purposes of the CGT calculation. anyone to maximise the tax-efficiencies offered by

retirement annuities and pension funds. Over and above

Direct Holding RA Holding that, investing directly into well managed unit trust funds is

Current Value R 610, 200 R 610, 200 probably the safest, surest and cheapest way of

Tax on income marginal retirement tax, generating wealth over the medium to longer-term.

rate now at 0% Considering the quality managed unit trust solutions out

Dividends withholding tax yes - 15% not applicable there, whether you are the park and polish investor, or love

CGT Yes No screaming over the highways, there is no reason why your

Net CGT R 550, 736 R 610, 200 'car' shouldn't be a Ferrari.

Access Full Partial* So, next time instead of asking, “Which is better? A unit

Estate Duty Included Not Included trust or a retirement annuity?” Rather ask, “How long is a

Protected from Creditors No Yes piece of a string?”

Protected from scorned

ex wife No No

=

=

=

I was recently asked, which is a better investment: a unit trust or a retirement annuity?

This type of question is at least, a pain in the neck and, at most, an opportunity to help

a layman investor better understand the pecking order in the world of investments.

By Marc Schroeder, NFB East London, Private Wealth Manager

UNIT TRUST RETIREMENT ANNUITY?

OR

Ima

ge

cre

dit:

12

3R

F St

oc

k P

ho

to

Graph 1

SAIF remains SAFE

A licensed Financial Services Provider

Johannesburg Office: East London Office: Port Elizabeth Office:

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Under the spotlight

The replacement of STC with DWT

Previous PracticeEnhanced “SAIFty”

Current Practice

Dividend income funds have been under SARS investigation.

Particular emphasis has been placed on eliminating the use of

the conduit structures and the criteria that need to be met to

generate tax free dividends:

! Preference shares:

! Must be held for longer than three years

! May not be secured by any financial instrument.

! Third party backed shares:

! The proceeds must be used to fund equity and not debt

! The party backing the shares may not own more than 20%

of the equity shares of the issuer of the preference share.

Consequently, of the five major dividend income funds, three

have been closed including Prudential, ABSA and Investec while

SAIF and Stanlib have remained open.

Certain investors are exempt from DWT. Some of these include

Secondary Tax on Companies (STC) was replaced by Dividend South African companies, retirement funds, public benefit

Withholding Tax (DWT) on the 1st of April 2012, aligning South organisations, government, provincial administration and

African Corporate Tax with international standards. In essence, municipalities. A complete list may be found on the SARS

the tax liability has been passed from the corporate to the website.

beneficial owner (shareholder / investor) of the dividend. The fund managers of SAIF had "gross up" clauses built into

Although it was expected that DWT would be introduced at 10% their agreement with the issuers of preference shares prior to the

(equivalent to STC), during the budget speech it was announced transition from STC to DWT, and thus dividends received by the

that DWT would be levied at 15%. fund after the 1st of April 2012 were grossed up by 10%, thereby

partially reducing the impact.

When declaring a dividend, the corporate paid STC on the

dividend whilst the dividend received was tax free in the hands of Dividend income funds offered investors with high marginal rates

the beneficial owner. of tax an alternative option to cash and money market type

instruments. With the majority of dividend income funds closed,

SAIF has shown its secure place in the conservative investment

The corporate no longer pays STC, however, the beneficial space. For the individual investor, DWT has slightly reduced the

owner is now liable to pay 15% Dividend Tax (DT) on the after tax yield, but SAIF still offers an enhanced after tax yield

dividend received. The process of paying the DT is not onerous over cash and money market type instruments and a further

on the beneficial owner as the DT is withheld by the corporate or enhancement for corporate investors due to their exemption from

regulated intermediary and paid to SARS on behalf of the DWT. In an interest rate environment that has continued to

beneficial owner. remain subdued, SAIF remains a compelling proposition in an

Due to the corporate no longer having to pay STC it is investment portfolio.

possible, however, not obligatory, for the corporate to "gross up"

the dividend by 10%. This will cushion the additional burden of For more information, please contact your NFB Financial

the 15% DT to some extent. Advisor.

In February 2011, I wrote about the Sanlam Alternative

Income Fund (SAIF) as a potential alternative to cash and

money market type instruments. More than a year later,

SAIF still offers the conservative investor an enhanced

after tax yield over these types of investments. By Nina

Joannou, NFB Gauteng, Paraplanner.

SAIF remains SAFE

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Prior to 1 April 2012 Post 1 April 2012

The corporate declares a dividend of R100

The corporate declares a dividend of R110 (Dividend of R100 grossed up by R10

(R100 x 10%))

The corporate pays 10% STC:R100 x 10% = R10

15% DT is withheld on behalf of the beneficial owner:

R110 x 15% = R16.50

In total, the corporate pays:R100 + R10 = R110

In total, the corporate pays R110 as they are no longer

liable to pay STC

In total, the investor receives R100, as dividends are tax

free in the hands of the beneficial owner

In total the beneficial owner receives:

R110 - R16.50 = R93.50