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 DESK successfully 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, CFP What NFB continues to strive towards, is the CEO, NFB Financial Services Group correct 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
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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
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
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Graph 1
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