IN THIS ISSUE

From the CEO’s desk

Retirement Reform:

what it means to you

Graduates and the

idea of saving

NFB FINANCIAL UPDATE

Issue65 December2012

FROM THE CEO’s DESK

We are fast

approaching

another year end

and it is interesting

to note some of the events and

results that 2012 has dealt us. This

is a good practice as it allows

one to reflect and also revise our

approach going forward.

On the local political front,

much has taken place and the

most worrisome of these is the

absolute disregard the politicians

seem to be affording the

deteriorating environment in the

lives of the really poor people of

South Africa.

At a recent event hosted by

Prof. Nick Binedell at GIBS,

focused on the nature of

Industrial Relations post

Marikana, it became patently

obvious that a key issue was a

lack of awareness by South

Africans of the dire

circumstances people at the

bottom end of the labour market

face and the conditions of

squalor in which they are

surviving. Before I am accused of

being a super liberal, or worse,

the point is that we face a real

risk of a societal meltdown and a

revolt, perhaps violent, as an

outcome.

Organized labour

acknowledged it has not really

embraced the young, fairly

militant and lowest paid

members of their constituencies.

A clear statement regarding the

apartheid legacy of mine

workers not being much more

than a "means of production",

rather than a person who enjoys

respect from their employers,

makes one reflect on whether SA

Inc. is really the Rainbow Nation

or whether we are rather in the

Calm before the Storm. A natural

by-product of the panic stricken

settlements arrived at after

Marikana will be the mischievous

manipulation of this information

and some of the radical

adjustments in remuneration into

other "negotiations" facing other

industries and businesses. Note

the violent actions erupting

around the farm workers wage

demands in the Cape. My fear is

we ain't seen the end of this by a

long shot.

I recently advocated

investors seriously revisiting

offshore as a means of

managing political and market

risks. In the very short term this

advice has proven correct, but

serious investors should neither

celebrate nor regret decisions

and their outcomes when

measured in months. The

opportunity we have, to consider

moving some or all of our local

investment elsewhere, is not the

reserve of local investors. The

truth of 2012, and for a few years

before, is that we have, as a

country, enjoyed fairly healthy

onshore flows of investment.

These foreigners can also beat it

and cause damage to both

markets and our rather

overvalued Rand.

On a totally different tack, I

thought I might entertain our

readers with a rather interesting

take on the American Economy

having seen a recent article

comparing their National

economy to that of a household

in an attempt to allow normal

people to grasp the enormity of

their problem, and once again

the dangerously mischievous

actions and omissions of their

body politic.

By knocking off 8 zero's we

can compare the desperate

situation America finds itself in

when compared to a household.

Some stats about the US

government:

US Tax revenue:

$2,170,000,000,000

Fed budget:

$3,820,000,000,000

New debt: $ 1,650,000,000,000

National debt:

$14,271,000,000,000

Recent budget cuts:

$38,500,000,000

Now, remove 8 zero's and

pretend it is a household budget:

Annual family income: $21,700

Money the family spent:

$38,200

New debt on the credit card:

$16,500

Outstanding balance on the

credit card: $142,710

Total budget cuts: $385

The pressing question you should

ask is: Would I lend any money to

this family?

Not only is the country

bankrupt, but so is its leadership

playing high stake games with its

people and yet to be born

generations. The real story is

about trust as I guess that is the

premise on which bank notes

rely! What happens if lenders

(Americans, Pension Funds, other

countries and investors local and

abroad), lose faith in the

Greenback? The answer is chaos,

so the machine keeps smiling

and printing, and the silly thing is,

this cannot and will not stop.

The crazy place Americans

find themselves in is also in no

way unique to them. Many of

their major European

counterparts and Japan are in

similar and in some cases worse

shape.

Just have a look at recent

debt statistics of the largest

economies and some of the crisis

economies.

Accordingly, the way to deal

with this is to remain focused on

reasonable investments, taking

less than normal risk, particularly if

your time horizon is short.

We also recommend

discussing options carefully with

your advisors and staying away

from that which sounds too good

to be true. As my granddad used

to say "if it sounds too good to be

true - it probably is!”

Wishing our readers, our

clients and our Product providers

a safe and secure Christmas and

Festive Season and a Prosperous

2013.®Mike Estment, BA CFP

CEO, NFB Financial Services

Group

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

Retirement Reform: what it means to you

ational Treasury has recently tabled

Ndiscussion papers on legislation

surrounding retirement reform. Why are

they seeking to introduce these changes?

Do you wait until the legislation is promulgated to

plot your future contributions or do you proactively

seek a solution to the proposed changes? Do you

now channel more of your savings to your personal

investments or do you increase your contributions to

your retirement funds given the envisaged tax

benefits? Nothing is always as easy as it seems and

the downside to the tax benefits is the increased

level of government control over the funds upon

retirement. It is impossible to capture the full scope of

these changes in a single article, but I will deal with a

few pertinent issues.

It is important to bear in mind that feedback has

been invited from the public at large, but it is clear

from the tone of the documents that the ruling party

has set a course for major changes, not only in the

rules pertaining to pension provision, but also looking

at incentivising individuals to increase their non-

retirement savings provision. We have repeatedly

heard calls from Government that South Africans

have a poor savings culture and we should be doing

more to provide for our golden years. The immediate

knee-jerk reaction from the public would be that

everything has become more expensive and we as

citizens have to provide out of our own pocket for

necessities and services that should be paid for out

of taxes.

Why is National Treasury proposing these changes?

Government has a serious problem as more

individuals turn to social welfare departments when

their retirement nest egg has been depleted by

excessive drawdown of capital, poor investment

performance and the cost of running a portfolio. Part

of the problem has been that many people have

not contributed adequately to their pension or

provident fund by way of their employer

pension/provident fund or by way of retirement

annuities if self-employed. The announcements in

Budget 2012 regarding future contributions are as

follows:

1. Employees under age 45 will be allowed to

contribute 22.5% of the greater of employment or

taxable income up to a maximum of R250 000 per

annum.

2. Over age 45 will be allowed to contribute up

to 27.5% p.a. to a maximum of R300 000.

3. Any contributions exceeding the above-

mentioned limits form part of the tax-free lump sum

upon retirement. A further point under discussion is

whether this excess contribution will remain as an

aggregation of the contributions or whether the

growth on these contributions will be factored in

upon retirement.

Few people stay with the same employer

throughout their working life nowadays. Upon

resignation or retrenchment the employee usually

transfers whatever funds have accumulated into a

preservation fund in the hope of leaving these funds

untouched until age of retirement. Alternatively,

these funds are taken as a cash payout less tax and

are used immediately to either settle debt or used to

start a new business or buy an existing business in

which the person has little experience or acumen.

The consequences are usually disastrous and years

of retirement provision are lost when these business

ventures fail.

To counter this depletion of funds, punitive taxes

were introduced to prevent the early withdrawal of

funds, but this has had very little effect when

individuals face very trying economic times and the

lure of that money “just sitting there” is more difficult

to resist than that apple was to Eve. Treasury is thus

looking at further deterrents such as pension funds

directing accumulated benefits into funds to which

the employee would not have access prior to

retirement. Bear in mind though that vested rights

appear not to be under scrutiny and these reforms

would target future employees.

Of more importance though to the majority of

contributors to retirement funds will be the proposals

put forward to rationalise the differences between

pension, provident and retirement annuity funds.

Each of these has been treated differently with

regard to deductibility of contributions and

withdrawal on funds either on death, disability or

retirement. National Treasury appears to be moving

towards a position of treating these all in the same

manner, a proposal that will not be welcomed by

most provident fund members. Cosatu has, in fact,

threatened to take to the streets if these changes

are implemented regarding Provident funds as they

are particularly annoyed at not having been

consulted during this process. The underlying reason

for this is that funds were available in total upon

retirement to provident fund members, less tax of

course, whereas the other two vehicles provided for

a maximum of one third being taken in cash, less tax,

with the remaining two thirds being used to purchase

a compulsory annuity.

Treasury has noted that since 2003 retirees

electing to purchase a compulsory annuity

guaranteeing an income stream until the death of

the retiree (or their partner) have dropped from

approximately 50% down to 14% whereas the

annuities market has grown from a level of R8 billion

in 2003 to R31 billion at the end of 2011. Treasury

obviously favours a compulsory annuity with a

guaranteed income for life as the likelihood of these

annuitants looking to the State for financial

assistance is less likely than retirees who elect to

purchase a living annuity in circumstances that are

unsuitable to that option. The statistics showing the

drop-off in income upon retirement can be

manipulated any number of ways to suit any

viewpoint, but it is fair to say that most retirees'

income will drop by approximately 50% upon

retirement, with an income level of 40% on average

being one that is most often quoted. The obvious

downside to the living annuity option is that it gives

the annuitant the ability to draw an income level at

a far higher rate than what can be reasonably

achieved in terms of after cost investment returns.

What does Treasury envisage?One of the proposals from National Treasury is

that the first R1 500 000 be used to purchase a life

annuity which guarantees an income for life and any

funds over and above that amount be utilised in a

living annuity type vehicle with funds similar to unit

trusts, but called retirement investment trusts. The

choices available to those entering the living annuity

market now are much wider than the envisaged

options down the line should these proposals be

implemented. Realistically, though, our legislation

regarding retirement funds and the financial

planning environment closely follows the UK and

Australian models. The provision enforcing the

purchase of a compulsory annuity with 75% of the

retiree's available funds fell away in the United

Kingdom at the end of 2011 as it did not end up

adequately addressing the reason for its

incorporation into applicable legislation. It thus

follows that this particular provision will probably not

see the light of day in the South African environment.

A further concern for National Treasury is that the

living annuity is not always properly understood by

the purchaser of the product, particularly in the case

of where the annuitant's exposure to financial

products may have been rather limited prior to

retirement. The underlying funds used are not always

understood by the purchaser in instances where the

advisor may not have taken the time to explain the

selection of funds and the manner in which they

complement each other to achieve the

requirements set by the client. Treasury feels the wide

array of options is confusing and unnecessary. The

retirement investment trusts being mooted will be far

fewer in number than the current selection of funds,

but one needs to question where this intervention by

government might end. Some readers of this article

may well remember the days under the Nationalist

government where pension funds were forced to

invest in certain assets such as government bonds

that were used to fund projects of the state and it

may well be the case that this is where we may end

up too. First world countries are not immune to this

kind of scenario. Japan, for instance, requires that

the vast majority of pension contributions find their

way into government bonds as a means of financing

its debt. One should note, however, that whenever

new bonds are issued by government they tend to

be over-subscribed so perhaps this scenario will not

be relevant in SA.

Practical questions to considerSo where does this limitation of choice and

government intervention in options leave you in

terms of future contributions? Do you reduce your

contributions to the retirement fund vehicles and

increase your discretionary savings to move as much

money as possible out of the government's net? The

tax advantages are significant in terms of an impact

on investment returns within a retirement vehicle, but

this must be weighed against fund choice allowed in

discretionary savings which is not subject to

Regulation 28 (Prudential investment guidelines for

retirement funds). Your desire for personal control

over your money may outweigh the afore-

mentioned tax advantages. Additional

considerations are that there is no taxation on

interest, dividends, estate duty, executor fees or

Capital Gains Tax issues to consider with retirement

funds which may well sway the argument in your

particular case.

Financial planning is not a one-size-fits-all science

so it is important that you consult with your advisor as

to the best option for you once clarity is reached on

the proposed amendments and how they affect

your existing or future options.

Ima

ge

cre

dit:

123R

F St

oc

k P

ho

to

Retirement Reform: what it means to you

National Treasury has recently tabled

d i scuss ion papers on leg i s lat ion

surrounding retirement reform. Why are

they seeking to int roduce these

changes? By Glen Wattrus, NFB East

London, Private Wealth Manager

Retirement Reform: what it means to you

ational Treasury has recently tabled

Ndiscussion papers on legislation

surrounding retirement reform. Why are

they seeking to introduce these changes?

Do you wait until the legislation is promulgated to

plot your future contributions or do you proactively

seek a solution to the proposed changes? Do you

now channel more of your savings to your personal

investments or do you increase your contributions to

your retirement funds given the envisaged tax

benefits? Nothing is always as easy as it seems and

the downside to the tax benefits is the increased

level of government control over the funds upon

retirement. It is impossible to capture the full scope of

these changes in a single article, but I will deal with a

few pertinent issues.

It is important to bear in mind that feedback has

been invited from the public at large, but it is clear

from the tone of the documents that the ruling party

has set a course for major changes, not only in the

rules pertaining to pension provision, but also looking

at incentivising individuals to increase their non-

retirement savings provision. We have repeatedly

heard calls from Government that South Africans

have a poor savings culture and we should be doing

more to provide for our golden years. The immediate

knee-jerk reaction from the public would be that

everything has become more expensive and we as

citizens have to provide out of our own pocket for

necessities and services that should be paid for out

of taxes.

Why is National Treasury proposing these changes?

Government has a serious problem as more

individuals turn to social welfare departments when

their retirement nest egg has been depleted by

excessive drawdown of capital, poor investment

performance and the cost of running a portfolio. Part

of the problem has been that many people have

not contributed adequately to their pension or

provident fund by way of their employer

pension/provident fund or by way of retirement

annuities if self-employed. The announcements in

Budget 2012 regarding future contributions are as

follows:

1. Employees under age 45 will be allowed to

contribute 22.5% of the greater of employment or

taxable income up to a maximum of R250 000 per

annum.

2. Over age 45 will be allowed to contribute up

to 27.5% p.a. to a maximum of R300 000.

3. Any contributions exceeding the above-

mentioned limits form part of the tax-free lump sum

upon retirement. A further point under discussion is

whether this excess contribution will remain as an

aggregation of the contributions or whether the

growth on these contributions will be factored in

upon retirement.

Few people stay with the same employer

throughout their working life nowadays. Upon

resignation or retrenchment the employee usually

transfers whatever funds have accumulated into a

preservation fund in the hope of leaving these funds

untouched until age of retirement. Alternatively,

these funds are taken as a cash payout less tax and

are used immediately to either settle debt or used to

start a new business or buy an existing business in

which the person has little experience or acumen.

The consequences are usually disastrous and years

of retirement provision are lost when these business

ventures fail.

To counter this depletion of funds, punitive taxes

were introduced to prevent the early withdrawal of

funds, but this has had very little effect when

individuals face very trying economic times and the

lure of that money “just sitting there” is more difficult

to resist than that apple was to Eve. Treasury is thus

looking at further deterrents such as pension funds

directing accumulated benefits into funds to which

the employee would not have access prior to

retirement. Bear in mind though that vested rights

appear not to be under scrutiny and these reforms

would target future employees.

Of more importance though to the majority of

contributors to retirement funds will be the proposals

put forward to rationalise the differences between

pension, provident and retirement annuity funds.

Each of these has been treated differently with

regard to deductibility of contributions and

withdrawal on funds either on death, disability or

retirement. National Treasury appears to be moving

towards a position of treating these all in the same

manner, a proposal that will not be welcomed by

most provident fund members. Cosatu has, in fact,

threatened to take to the streets if these changes

are implemented regarding Provident funds as they

are particularly annoyed at not having been

consulted during this process. The underlying reason

for this is that funds were available in total upon

retirement to provident fund members, less tax of

course, whereas the other two vehicles provided for

a maximum of one third being taken in cash, less tax,

with the remaining two thirds being used to purchase

a compulsory annuity.

Treasury has noted that since 2003 retirees

electing to purchase a compulsory annuity

guaranteeing an income stream until the death of

the retiree (or their partner) have dropped from

approximately 50% down to 14% whereas the

annuities market has grown from a level of R8 billion

in 2003 to R31 billion at the end of 2011. Treasury

obviously favours a compulsory annuity with a

guaranteed income for life as the likelihood of these

annuitants looking to the State for financial

assistance is less likely than retirees who elect to

purchase a living annuity in circumstances that are

unsuitable to that option. The statistics showing the

drop-off in income upon retirement can be

manipulated any number of ways to suit any

viewpoint, but it is fair to say that most retirees'

income will drop by approximately 50% upon

retirement, with an income level of 40% on average

being one that is most often quoted. The obvious

downside to the living annuity option is that it gives

the annuitant the ability to draw an income level at

a far higher rate than what can be reasonably

achieved in terms of after cost investment returns.

What does Treasury envisage?One of the proposals from National Treasury is

that the first R1 500 000 be used to purchase a life

annuity which guarantees an income for life and any

funds over and above that amount be utilised in a

living annuity type vehicle with funds similar to unit

trusts, but called retirement investment trusts. The

choices available to those entering the living annuity

market now are much wider than the envisaged

options down the line should these proposals be

implemented. Realistically, though, our legislation

regarding retirement funds and the financial

planning environment closely follows the UK and

Australian models. The provision enforcing the

purchase of a compulsory annuity with 75% of the

retiree's available funds fell away in the United

Kingdom at the end of 2011 as it did not end up

adequately addressing the reason for its

incorporation into applicable legislation. It thus

follows that this particular provision will probably not

see the light of day in the South African environment.

A further concern for National Treasury is that the

living annuity is not always properly understood by

the purchaser of the product, particularly in the case

of where the annuitant's exposure to financial

products may have been rather limited prior to

retirement. The underlying funds used are not always

understood by the purchaser in instances where the

advisor may not have taken the time to explain the

selection of funds and the manner in which they

complement each other to achieve the

requirements set by the client. Treasury feels the wide

array of options is confusing and unnecessary. The

retirement investment trusts being mooted will be far

fewer in number than the current selection of funds,

but one needs to question where this intervention by

government might end. Some readers of this article

may well remember the days under the Nationalist

government where pension funds were forced to

invest in certain assets such as government bonds

that were used to fund projects of the state and it

may well be the case that this is where we may end

up too. First world countries are not immune to this

kind of scenario. Japan, for instance, requires that

the vast majority of pension contributions find their

way into government bonds as a means of financing

its debt. One should note, however, that whenever

new bonds are issued by government they tend to

be over-subscribed so perhaps this scenario will not

be relevant in SA.

Practical questions to considerSo where does this limitation of choice and

government intervention in options leave you in

terms of future contributions? Do you reduce your

contributions to the retirement fund vehicles and

increase your discretionary savings to move as much

money as possible out of the government's net? The

tax advantages are significant in terms of an impact

on investment returns within a retirement vehicle, but

this must be weighed against fund choice allowed in

discretionary savings which is not subject to

Regulation 28 (Prudential investment guidelines for

retirement funds). Your desire for personal control

over your money may outweigh the afore-

mentioned tax advantages. Additional

considerations are that there is no taxation on

interest, dividends, estate duty, executor fees or

Capital Gains Tax issues to consider with retirement

funds which may well sway the argument in your

particular case.

Financial planning is not a one-size-fits-all science

so it is important that you consult with your advisor as

to the best option for you once clarity is reached on

the proposed amendments and how they affect

your existing or future options.

Ima

ge

cre

dit:

123R

F St

oc

k P

ho

to

Retirement Reform: what it means to you

National Treasury has recently tabled

d i scuss ion papers on leg i s lat ion

surrounding retirement reform. Why are

they seeking to int roduce these

changes? By Glen Wattrus, NFB East

London, Private Wealth Manager

GRADUATES AND THE IDEA OF

SAVING

A licensed Financial Services Provider

Johannesburg Office:

NFB House 108 Albertyn Avenue Wierda Valley 2192,

P O Box 32462 Braamfontein 2017, Tel: (011) 895-8000 Fax: (011) 784-8831

E-mail: nfb@nfb.co.zaWeb: www.nfbfinancialservicesgroup.co.za

East London Office:

NFB House 42 Beach Road Nahoon East London 5241, P O Box 8132 Nahoon 5210,

Tel: (043) 735-2000 Fax: (043) 735-2001E-mail: info@nfbel.co.zaWeb: www.nfbec.co.za

Port Elizabeth Office:

110 Park Drive Central Port Elizabeth 6001, P O Box 12018 Centrahil 6001,

Tel: (041) 582-3990 Fax: (041) 586-0053E-mail: info@nfbpe.co.za Web: www.nfbec.co.za

or a 20-something saving for such a distant

Ftime in the future does not seem such a great

priority; buying a new car, clothes, etc. seem

far more attractive. But it's worth noting that

the very fact that you're young gives you a huge

edge if you want to be rich in retirement. The reason

being is because in your 20's, you can invest

relatively little for a short period of time and wind up

with far more money than someone who is much

older and is saving more.

As I am a 20-something I can relate to the fact that

saving is not the easiest thing to do; we prefer to

spend on clothing and entertainment. I have,

however, taken my own advice and put a small

amount away every month into a retirement annuity

to subsidise my employer provident fund. Institutions

have minimum amounts that can be invested per

month. For example, Allan Gray has a minimum

investment amount of R500.00 per month; Investec

has a minimum of R1 000.00 per month. In the grand

scheme of things this is a small piece of your pay

cheque and if you start this from the first month you

won't notice the contribution as you have never had

a monthly income before.

Being in your 20's you have less financial

commitment and minimal expenses, and therefore

you have a greater savings capacity. Once we start

a family and buy a home there is less money to put

into a savings/retirement vehicle. Often individuals

look back and wish they had started saving when

they were younger, but were ignorant to the power

of compound interest and time value of money,

which can grow the small monthly saving to become

a substantial amount during retirement. Each month

that you put off saving in favour of spending, either

increases the amount that you will have to save in

the remaining months, or pushes out the date at

which you will reach your goal.

An additional savings would also be a good idea,

in the form of a separate bank account or even a

unit trust investment. This way you can set aside for

that “rainy day” and not have to overextend yourself

and go into debt. Ideally, an amount equal to 3

months living expenses should be available for

emergency circumstances; having this will hopefully

eradicate unnecessary expenditure on credit cards

and falling into debt. Once we start paying off debt

there becomes little or no room for saving in any

form.

Once you make the decision to start saving, your

ability to make the most of it depends on whether

you are able to remain committed for long enough

to benefit from the potential returns, ride out the

short-term ups and downs and allow the power of

compound interest to increase the value of your

money.

Should you be young and starting out in your

working life and need advice or assistance in

planning out your financial future, please contact an

NFB advisor.

That time of the year is here again: exams

are being written and graduates are

planning to go into the working world.

Whether you are graduating from school

or from University, and going straight into

the workforce, it will be of great benefit to

you to kick start your retirement savings. By

Nicole Boucher, NFB East London,

Paraplanner

GRADUATES

Ima

ge

cre

dit: 1

23

RF

Sto

ck P

ho

to

AND THE IDEA OF

SAVING