NFB Sensible Finance Magazine Issue 36

A FREE publication distributed by NFB Private Wealth Management

NFB

Issue 36 July 2017

Eastern Cape's Community...

PERSONAL FINANCE Magazine

offering more certainty in unpredictable times

rocket science or A, B, C‌?

is it time you considered cyber insurance? private wealth management

“Based on my calculations, I can retire about 5 years after I die.”

Anonymous, 2014

Are you this “guy”?

Don’t be. Talk to an NFB Private Wealth Manager today to plan your financial future. fortune favours the well advised

Contact one of NFB’s financial advisors: East London s tel no: (043) 735-2000 or e-mail: info@nfbel.co.za Port Elizabeth s tel no: (041) 582-3990 or e-mail: info@nfbpe.co.za Cape Town s tel no: (021) 202-0001 or e-mail: info@nfbct.co.za

web: www.nfbpwm.co.za NFB is an authorised Financial Services Provider

private wealth management

SENSIBLE READ Editors Brendan Connellan bconnellan@nfbel.co.za

layout and design Jacky Horn TA Willow Design jaxx@at-media.co.za

Photos used in this magazine - 123rf.com

Contributors Phomolo Moreng (NFB East London), Pieter Hugo (Prudential Unit Trusts), Bryan Ridley (NFB East London), Michelle Wolmarans (NFB Insurance Brokers), Travis McClure (NFB East London), Kim Doolan (Klinkradt Chartered Accountants), Glen Wattrus (NFB East London), Liam Graham (NVest Securities), Zukiswa Sonjica (NFB East London), Glacier by Sanlam, Grant Berndt (Abdo & Abdo), Nathan Carr (NVest Holdings East London), Debi Godwin (IE&T), Lonwabo Simbi (NFB East London), Nonnie Canham (NFB East London).

Advertising Robyne Moore rmoore@nvestholdings.co.za Address East London Office NFB House, 42 Beach Road Nahoon, East London, 5241 Tel: (043) 735-2000 Fax: (043) 735-2001 E-mail: info@nfbel.co.za Port Elizabeth Office Ground Floor, Building 6, Ascot Office Park, Cnr. Ascot and Conyngham Rds, Greenacres, 6045 Tel: (041) 582-3990 Fax: (041) 586-0053 Email: info@nfbpe.co.za Web: www.nfbpwm.co.za The views expressed in articles by external columnists are the views of the relevant authors and do not necessarily reflect the views of the editor or NFB Private Wealth Management. Š2017 All Rights Reserved.

No part of this publication may be reproduced in any form or medium without prior written consent from the Editor.

FROM THE

C

hoosing the topic for this editorial was not an easy decision considering everything that has happened over the past few months since our last edition. Another Cabinet reshuffe, South Africa's credit rating downgrades to junk status, 'Gupta leaks', nationwide shutdowns in protest of our government, further motions of no confidence in Zuma, General Motors pulling out of the country, the Western Cape being declared a disaster area as a result of the drought, the Cape Town storms and the fires that ravaged much of the area from Knysna to Port Elizabeth, Helen Zille's suspension from DA activities‌the list just goes on.

Throughout all this though, observing human behaviour and their reactions to occurrences such as the above is certainly interesting.

Some people find opportunity in adversity whereas some people are simply blatantly opportunistic. Most stand together, while others are divisive. Many show amazing acts of love and kindness whereas an ugly, hateful and angry side of others can emerge.

The over-riding response of people though, at least in my view, tends to be positive. Though people do tend to live in their own bubbles in the country, tragedies such as the storm and fires do tend to bring out the best in most people with outpourings of donations and random acts of kindness taking centre stage in recent news stories. The vast majority of people on social media, and in general, expressed sadness and empathy toward those that had lost their homes and/or lives. It is a pity though, that the people that seem to get the most reaction, are those that are simply hateful and angry and take enjoyment from the suffering of others. My appeal to you though, is to remember that those individuals are the exceptions to the rule and when confronted with those exceptions who will do their best to invoke a negative reaction, respond directly to that individual and not to the group that they purport to represent.

All these unexpected events should remind us of how uncertain life is and how we need to, as far as possible and practical, protect ourselves from the uncertainty and potential disasters lurking. The protection may come in the form of insurance or assurance (which is where NFB comes in) or it may simply be ensuring that extra checks and balances are in place to prevent the foreseeable from occurring. Whatever the best solution though, it's always a good idea to put some time aside occasionally and give some thought to risks that you could possibly avoid with a bit of planning; and where you are not good at identifying them, there are specialists out there who can help you.

Brendan Connellan Editor and Director of NFB sensible finance July17

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SENSIBLE CONTENTS JULY 2017

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4

10

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26

EMIGRATION Tax consequences to consider.

Liam Graham, Portfolio Manager/Trader -

By Phomolo Moreng, Financial Paraplanner -

NVest Securities.

NFB East London.

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CHASING LAST YEAR'S WINNERS - A LOSING STRATEGY By Pieter Hugo, MD, Prudential Unit Trusts.

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HEDGE YOUR LIFE Taking your life cover offshore. By Bryan Ridley, Private Wealth Manager - NFB East London.

18 THE GOVERNMENT EMPLOYEES PENSION FUND Understanding the retirement benefits.

By Zukiswa Sonjica, Financial Paraplanner NFB East London.

19 GLACIER BY SANLAM'S CAPITAL ENHANCER OFFERS MORE CERTAINTY IN UNPREDICTABLE TIMES Contributed by Glacier by Sanlam.

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LATEST RANSOMWARE MAKES YOU “WannaCry” Is it time you considered cyber insurance? By Michelle Wolmarans, MD - NFB Insurance Brokers.

11 Q &A. You ask. We answer. Advice column answering your investment, personal finance,

21 THE MUNICIPALITY'S RIGHT TO ALLOCATE PAYMENTS Ensure tenant's accounts are up to date! By Grant Berndt - Abdo & Abdo.

22 BUSINESS STRATEGY - ROCKET SCIENCE OR A, B, C…? By Nathan Carr, Head: Group

life and/or risk insurance questions with Travis

Legal and Strategy - NVest Holdings East

McClure, Director/Private Wealth Manager -

London.

NFB East London.

24 WHEN CRIME DOESN'T PAY Make further 12 NEW REGULATIONS CLASSIFYING NONEXECUTIVE DIRECTORS AS INDEPENDENT CONTRACTORS VAT implications as of 1

enquiries if you have concerns about a will's validity. By Debi Godwin, Managing Director Independent Executor & Trust.

June 2017. By Kim Doolan, Tax Consultant Klinkradt Chartered Accountants.

25 ASKING THE PERTINENT QUESTIONS A journey to reach your financial goals. By

14 THE POST RETIREMENT LANDSCAPE IN SOUTH AFRICA Income offered by life

Lonwabo Simbi, Financial Paraplanner - NFB East London.

annuities seldom meet the income needs and expectations of the client. By Glen Wattrus, Private Wealth Manager - NFB East London.

26 THE LONGEVITY CONUNDRUM Living comfortably until the age of 100. By Nonnie Canham, Financial Paraplanner - NFB East

16 JUNK STATUS Not the end of the world…. By 2

sensible finance July17

London.

SENSIBLE TAX

EMIGRATION Tax consequences to consider. By Phomolo Moreng, Financial Paraplanner - NFB East London.

I

n the midst of the current economic climate and the political uncertainty we find ourselves in, more South Africans are asking themselves if they should emigrate. There are a number of considerations one needs to take into account prior to making a final decision to emigrate, such as tax. This article will cover some of the tax consequences which should be taken into account

by South Africans who hold local investments.

Pre-retirement investments such as Retirement Annuities (RA's), are strictly regulated and access to the retirement benefits in these funds is restricted. A member can only gain access to these funds at retirement (after age 55) or if they choose to officially emigrate. Should you choose to emigrate, tax based on the following withdrawal tax tables will be levied.

Lump Sum Withdrawn

have to wait until retirement to withdraw the remaining value or either transfer to an RA and then do the emigration withdrawal from there.

Unlike the pre-retirement investments a member of a living annuity investment will not be able to withdraw from the investment on the basis of emigration. According to the Income Tax Act 58 of 1962, other than in the instance of death, the full value of the assets in the living annuity may only be paid as a lump sum when the value of the assets at any time become less than an amount prescribed by the Minister. Currently this value is R75,000 if no commutation was made prior to transfer to the living annuity (R50,000 if commutation was made).

Therefore, one cannot withdraw from the living annuity on emigration; the only option available would be to remit the annuity income offshore.

Tax rate

R0 - R25 000

0%

R25 001- R660 000

18% of the amount over R25 000R

660 001-R990 000

R114 300 +27% of the amount over R660 000

R990 001+

R203 400 +36% of the amount over R990 000

Based on their nature, it becomes easy for residents to dispose of their voluntary investments upon emigration. Depending on the type of investment it is, Capital Gains Tax (CGT) might be payable in the instance of a withdrawal/disposal of the

As current legislation governing retirement funds makes no provision for the transfer of a local retirement investment to an offshore one, it will therefore be difficult for one to transfer your retirement investment to one overseas. This restriction leaves investors with no choice but to just cash out their money and pay SARS the often hefty tax amount.

investment.

The same principles apply for Preservation funds, however, if one has already utilised their one partial pre-retirement withdrawal within the fund, they will

Any donation made by a non-resident to a South African resident is free of donations tax in the hands

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Although an individual can make a decision to emigrate, there is a great chance that they might still have family members in South Africa. In those cases, it is important to take note of the tax that might be incurred should a non-resident wish to leave a benefit to these family members.

continued on page 28

SENSIBLE LONG-TERM INVESTMENT VIEWS

By Pieter Hugo, MD, Prudential Unit Trusts.

R

esearch done by Prudential Investment Managers into South African investor behaviour and local unit trust performance has revealed the surprising – and counterintuitive – fact that chasing last-year's bestperforming fund doesn't pay off over time. In fact, switching to the previous year's worst performer can bring you higher returns. This highlights the cyclicality of financial markets and fund returns, as well as the importance of investors adopting a long-term investment view so as not to undermine their own returns.

The graph shows the relatively lower investment growth that would have been achieved by a “performance-chasing” portfolio over the past 10 years to 31 December 2016. The gold line depicts a portfolio where, at the beginning of every year, the investor switched into the fund that had the highest absolute return over the preceding three-year period in the ASISA South African Multi-Asset High Equity category (typical “balanced” funds). For comparison, the red line shows the growth of an investment in the Prudential Balanced Fund over the full 10-year period, while the black line represents a portfolio where, at the beginning of every year, the investor switched into the balanced fund that had the worst absolute return over the preceding three-year period. This is quite close to the average performance of the ASISA category, illustrated by the dashed grey line.

We can see that the investor would have been worst off in the performance-chasing portfolio, while they would have been significantly better off had they adopted a “buy-and-hold” strategy and remained consistently invested in the Prudential Balanced Fund for the full 10-year term.

Interestingly, the strategy of switching into the worst performing fund at the beginning of each year also delivered a better return than switching into the best performing fund. Additionally, it's worth noting that the growth of the performance-chasing portfolio ignores any potential fees and taxes incurred when switching between funds, which would have further decreased the overall return.

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Unfortunately, the ASISA data on net fund flows demonstrate that this damaging short-term performance-chasing behaviour does dominate the investment flows into and out of South African unit trusts. Funds recording strong one-year performance relative to their peers attract positive net inflows in the subsequent periods, but these reverse into net outflows as soon as their one-year relative performance drops into the bottom half of their peer group. Importantly, the data also show that investment flows do not follow longer-term performance: even if a fund is a consistent top performer over longer periods, flows closely follow the most recent one-year performance.

This fund flow data highlight that investors are in fact relying on short-term performance far too much in their choice of funds. Rather, you should do your homework to identify fund managers and funds that have solid track records that demonstrate they are able to deliver consistently to your investment goals over the long term. Besides performance, consider the managers' philosophy and process, longevity of their team of experts, and fees, among other factors. Then you should stick with these funds over the long term, since all funds experience periods of underperformance in line with market cycles. Of course, accepting that your fund will underperform from time to time can be difficult, which is where a financial adviser can help ensure you stay the course.

SENSIBLE DIVERSIFICATION

Taking your life cover offshore. By Bryan Ridley, Private Wealth Manager NFB East London.

W

e hear a lot in the news today about the rand hedge and that you need to hedge your investment against a weak rand etc.

If you are going to hedge your investments then why not hedge your life cover and have some, or all, of your life cover offshore?

Contrary to popular belief, you don't have to have assets overseas or children in university overseas to have the need for offshore life cover. The process is virtually the same as normal life cover. With the exception of one additional form and with a minimum premium of $50, it is thus affordable to many people. The benefit of this is that it gives you the opportunity to have a portion or all of your life cover in dollars. In the event of a weakening rand against the dollar, you and your family will be protected.

So how does it work? Essentially it is exactly the same as a normal life insurance product except in dollars. The life cover amount and premium is depicted in dollars and this means that the premium in rands can fluctuate monthly, depending on the prevailing exchange rate, but the premium in dollars will remain the same until your annual yearly increase. The premium will be paid from your South African bank account and uses your annual discretionary allowance so you don't need any special clearance from the reserve bank. If you have already used your annual discretionary allowance then you will need to get clearance from the reserve bank. You need to be a South African resident with a South African bank account. Currently there is one provider in SA that offers this product.

You can have life cover made payable to a beneficiary of your choice or to your estate, the proceeds of which are tax free. The life cover will pay out a dollar amount into an offshore bank account or a nominated bank account anywhere in the world. If your beneficiary doesn't have an offshore bank account then one can be set up for them at claim stage. The proceeds can also be paid into a South African bank account, but then the prevailing exchange rate at the time will apply.

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With regards to the estate duty implications on your estate: each case will need to be looked at individually, but as a general rule the life cover will form part of your estate as a deemed asset. This will need to be taken into account when determining the level of cover you need and the purpose of the cover.

Is it more expensive than ordinary life cover? It all depends on the current exchange rate and on your age and circumstances. At the moment, for a 35 year old male professional, non-smoker you can get $300,000 worth of cover for a premium of $50.40 The benefits can be increased annually in line with US inflation which is currently around 2.5%.

In summary the advantages are:

= Protecting the longevity of your life cover

by having it in dollars; = Hedging your life cover against a weak

rand; = Providing global assets for your family in the

event of your death; = Diversifying your risk portfolio; = Small minimum premium making it

affordable to most.

If you speak to any financial advisor they will generally say that your investment portfolio needs to be diversified. In South Africa's current economic and political environment, why not diversify your life portfolio too?

Should you find this article of particular interest and require further information, please give one of our financial advisors a call on one of the following numbers: EL 043-735 2000 PE 041-582 3990 CT 021-202 0001 JHB 011-895 8000.

SENSIBLE INSURANCE

LATEST RANSOMWARE MAKES YOU

“WannaCry”

Is it time you considered cyber insurance?

By Michelle Wolmarans, MD - NFB Insurance Brokers.

O

th

n the 12 of May the “WannaCry” ransomware virus raced across the globe impacting almost 150 countries and 300,000 victims. The UK's National Health Service, telecoms giant Telefonica, FedEx in the USA and Renault in France were some of the large companies that were crippled by this virus.

Many individuals and smaller companies are under the misguided belief that they will not be affected by this sort of virus and that cyber criminals target large multi-national corporations.

This is definitely not the case with this type of ransomware. Almost all “WannaCry” victims were running Microsoft Windows 7, and cyber criminals utilized a flaw in the software to gain access to the computer.

The cyber criminal does not seek out the victim – the process is automated and completely random. The malicious software is downloaded onto the victims' computer by clicking on a link on the internet, opening an e-mail attachment or using a USB device. Once downloaded the “WannaCry” encrypts the files on the computer making them inaccessible to the user. A pop up will appear demanding a ransom be paid in order to restore the files. The criminals often demand the ransom be paid in Bitcoins, as this digital currency is decentralized, unregulated and practically impossible to trace. There is no guarantee that once the ransom is paid that your files will be restored.

Often the ransom demanded is not exorbitant – in the case of WannaCry it was $300 Bitcoins, however, it is the consequential damages and resultant costs that can destroy a business. Loss of production, reduced earnings, cost of employing experts and forensics to try and recover the data, the cost of crisis communication and implementing a public relations strategy to minimize reputational damage are some of the increased costs that are incurred after a cyber attack.

that it is updated regularly. = Run back-ups on a regular basis and save them

on a completely separate system. = Be vigilant when opening e-mails and browsing

the internet.

A cyber insurance policy is an effective risk management tool which provides the following cover when a cyber attack occurs: = Cost of security and forensic specialists to determine if your data can be recovered without paying the ransom. = If recovery is not possible and there are not adequate back-ups, the policy should go as far as covering the actual ransom demand. = Insurance should also cover the costs of determining how the ransom ware got into the environment and how to prevent it from happening again. = The policy should extend to cover loss of earnings and increased cost of working. = There should be an option to extend cover for public relations and crisis communication to contain reputational damage. = Cover may also have to be extended to cover the defence and settlement of third party liability claims particularly if your network contains confidential information such as bank details and ID numbers of clients.

Our personal and business lives depend on, and are inextricably linked to, technology and computer systems. Cyber criminals are becoming more sophisticated and we are all at risk of a cyber attack – taking out a Cyber Insurance policy is a proactive means of managing this risk and ensuring that the damages to your business are minimized in the event of an attack. In order to obtain a quotation or more information on this product please contact our offices and one of our marketers will gladly assist you. Our office telephone number is: 043-735 2460.

How can individuals and companies minimize the risk of an attack? = Ensure that you install anti-virus software and 10

sensible finance July17

insurance brokers (border)(pty)ltd.

An advice column that will allow our readers the opportunity to write to a professional and experienced financial advisor for advice regarding investments, personal finance, life and/or risk cover. Travis McClure will be answering any questions that you may have.

Travis McClure

Q

There are certain staff members in my business that are key to its success. Instead of just paying them more, are there ways of incentivising these staff members that will be both beneficial to the company's continued success as well as the to the individual employee?

A

We have found that the most important factors to the success of our business are the people that work for us. It is essential for the continuity and success of a business to keep key staff and incentivise them. Outside of giving up shares in the business or giving a share of profit, there are other ways of looking at ensuring that key staff stay with the business for longer. In this modern world loyalty is often overlooked as people jump from job to job looking for a quicker and better outcome. The problem with this is that it affects the business they are leaving and also affects their own back pocket as it often costs to move. Chasing a higher salary or access to your pension does not mean that you may be better off as you may be giving up on certain benefits.

Companies these days do not provide the benefits like they did in the past. This is a shame as the individual is often focussed on their take home amount and not on what benefits he/she receives.

The take home pay is more important than the cost to company and benefits that they receive. If one has to include these benefits, the majority of the time the employee is often better off and then also better off in the long run from a retirement planning and risk point of view.

One option, which is often forgotten, is a preferred compensation plan. This allows the employer to put aside funds for a selected employee to be paid out after a selected period of time. Should the employee leave before the selected period then the funds are kept by the business. An agreement is drawn up between the employer and employee.

The employer takes out the investment in the name of the employee and increases the employee's

salary to make up for the premiums. You need to ensure that the employee is in no worse a position from a net tax position. The employee then cedes this investment back to the employer using a security cession. If the employee sticks out the term as agreed then the employer will cancel the cession and the employee then owns the investment. If the employee leaves before the agreed term then the employer can claim the proceeds. The employee receives the proceeds tax free and the employer will get the increased salary payment as a section 11(a) tax deduction. If the employee passes away then the policy proceeds are deemed property in his or her estate.

Employers can also offer up individual Retirement Annuities (RA) or Corporate RA's. The traditional pension or provident fund is often not viable or too expensive for a small company. This is often seen as a bit of give and take, but all for the benefit of the employee. Instead of just giving a salary increase the employer can agree to pay a certain percentage (say 5% of salary) towards an RA provided the employee does the same. This ensures that the employee is at least planning for retirement (10% of salary as a contribution) and is not totally reliant on the company to do it for him.

Medical Aids are one of the highest expenses in anyone's budget. The company could agree to pay a portion towards the employee's medical aid.

Group Life and Disability Cover is often included in larger pension funds. For smaller businesses this can still be added on as a benefit over and above the retirement benefits. This may include some level of life and disability cover or funeral cover. It is the responsibility of the individual employee to ensure that his own affairs are in order, but most of the time they are underinsured for death or disability and no employer wants the burden of dealing with a grieving family who have not been left anything.

The Group cover rates are often more affordable continued on page 28

sensible finance July17

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VAT implications as of 1 June 2017. By Kim Doolan, Tax Consultant - Klinkradt Chartered Accountants.

N

on-executive directors could face onerous tax obligations after the South African Revenue Service (SARS) issued two binding general rulings, numbers 40 and 41 on the 10 February 2017. Certain aspects were clarified by SARS and issue 2 of binding general ruling 41 was published on the 4 May 2017. These rulings confirm the application of the law in connection with whether a non-executive director is considered to be an employee or an independent contractor.

Binding general ruling 40 concludes that a nonexecutive director is not considered to be a common law employee and that any directors fees paid or payable to them is not regarded as “remuneration” as defined. This is based on the view that the services must be supplied independently and personally by the nonexecutive director. No control or supervision is exercised over the manner in which non-executive directors perform their duties or their hours of work.

Binding general ruling 41 states that based on the conclusion reached in binding general ruling 40, it follows that for VAT purposes, a non-executive director is treated as an independent contractor and therefore meets the definition of an “enterprise” in the VAT Act. As a result, all non-executive directors who earn more than the annual R1 million threshold for registration of an enterprise under the VAT Act are required to register for, and charge, VAT with effect from 1 June 2017. This applies regardless of whether the fees earned by non-executive directors were previously subject to Pay As You Earn (PAYE).

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However, non-executive directors will not be required to account for VAT in respect of directors' fees received prior to 1 June 2017, provided that the fees were subject to PAYE. On a positive note, as a result of the amounts received by nonexecutive directors not being regarded as “remuneration” as defined, the prohibition under section 23(m) of the Income Tax Act will not apply and non-executive directors can now deduct their expenses incurred in the production of their income.

It is quite a process to register for VAT with SARS and in addition to this, non–executive directors who are liable to register for VAT will now need to submit VAT returns and pay over VAT to SARS every two months, add 14% cost to their services and keep accurate records of all the expenses incurred in the production of their income.

We can assist with determining whether you have a liability to register for VAT, the VAT registration process as well as applying for VAT rulings if required. In addition, we can also assist with the calculation of the deductions which you will be entitled to claim against the fees received.

References: SARS Binding General Ruling (Income Tax 40) dated 10 February 2017 SARS Binding General Ruling (VAT) 41 (Issue 2) dated 4 May 2017

“Managing success into the future” Our services include: Accounting • Auditing • Taxation Planning Estate Planning • All Statutory Registration • Business Structuring Concessions • Due Diligence • Business Succession Planning

Contact us on 043 726 9555 for all your queries.

SENSIBLE PLANNING

THE POST RETIREMENT LANDSCAPE IN SOUTH AFRICA

Income offered by life annuities seldom meet the income needs and expectations of the client. By Glen Wattrus, Private Wealth Manager - NFB East London.

O

lder members of our society fondly cast their minds back to an era when the word INFLATION was mostly to be found in dictionaries instead of being faced with its nasty effects on a day-to-day basis, most notably in vital needs such as food and medical aid which takes massive chunks out of their monthly income provision. I well remember my own first encounter with inflation in the midseventies when a small packet of Simba chips and a Coke after a round of golf went up from 10 cents to 12 cents and I could not understand why this could be so. For pensioners, their daily concerns are how to stretch the rands and cents to meet expenses that are avalanching out of control.

Income provision sources have also changed significantly with the times. Gone are the days when employees stayed with the same company for their entire career and retired on a DEFINED BENEFIT pension where their retirement income was based on a formula taking into account their number of years of service, along with an average of their income in the years immediately preceding their retirement date. Most pension funds came to realise that the light at the end of the tunnel was in fact an oncoming train, and incentivised their members to move to a DEFINED CONTRIBUTION, where the risk of funds being depleted shifted from the pension fund to the individual member.

One would thus automatically think that defined benefit schemes are preferable to defined contribution ones, but this is not necessarily always the case. There have been rumblings for a while 14

sensible finance July17

from various quarters that state controlled retirement funds will be forced to invest in certain assets reminiscent of the National Party policy in this regard. Strange how the more things change, the more they stay the same. The likelihood is that private pension funds may also be subject to the same prescriptive investment protocols, but that is a story for another article and another day. We certainly hope that this regressive policy will not see the light of day.

Another very real problem facing defined benefit funds is clearly highlighted in the ongoing plight of members of the Transnet Pension Fund and the Transnet Second Defined Benefit Fund in litigation that has been dragging on for years in the highest courts in the land. Members of this have been impoverished over the years where these particular retirement funds have increased the pensions of the members by a rate of a mere 2% per annum.

The Class Action suit by members of the fund against the two afore-mentioned funds relates to the stripping of assets by the decision makers of the fund by selling off prized assets at values well below market rates. Such assets would also have been in a position to increase revenues at an anticipated much higher rate than that of the assets purchased to replace them; in this case shares that often did not pay a dividend or that were later sold at prices significantly less than the original purchase price.

Spare a thought for some pensioners who are said to receive an income of R1 ONLY (Legal Brief 08 May 2017). One can only hope that judgement will be delivered soon in favour of the estimated 62 000 pensioners affected by these actions.

SENSIBLE PLANNING

Most readers of this article will probably not fall into the category of defined benefit funds, but will either be existing members of defined contribution funds, Retirement Annuity funds or will already be invested in Living Annuities or the similarly named life annuities (which offer fixed or increasing incomes as long as the client lives, but the income terminates either on his/her death or that of their spouse if applicable). Whilst the latter offers certainty on income, the loss of the opportunity to leave a legacy to one's descendants often makes this a rather unpalatable option to most retirees.

Another problem that we as financial advisors are forced to deal with is that income offered by life annuities seldom meet the income needs and expectations of the client or potential client.

Ideally, we prefer to have our clients in a situation where the income drawdown from an Investment Linked Living Annuities (ILLA) is at 4-5% per annum in order to allow the capital values and units invested in to grow over time.

For the purposes of this article I want to focus on important aspects relating to Investment Linked Living Annuities (ILLA's). It is true that we are living in turbulent times and occurrences in the Global Village in which we find ourselves have a significant impact on the capital values of these ILLA's. Noone likes to see the capital value of their retirement provision being eroded due to seemingly irrelevant incidents taking place in countries far away or due to investor confidence being eroded by rampant corruption and incompetence of elected officials. I always ask clients to not merely focus on the capital value, but more specifically on whether the units that they hold in the funds themselves are being increased, maintained or eroded.

The analogy that I like to draw is that the ILLA is compared to a herd of dairy cattle and the client is the dairy farmer dependant on the milk production of the herd. Farmers, as we all know, face many challenges on a day-to-day basis such as drought and the pricing of their product being determined to a large extent by other entities amongst other things. As long as your herd is producing sufficient milk to meet your needs and your herd numbers stay constant or increase over time, all is well.

Unfortunately though, we are often faced with a situation where the values/herd that has been accumulated in the pre-retirement years is insufficient and we have to consider selling off part of the herd to meet the income requirement. That is a slippery slope, but as the Americans are fond of saying, “it is what it is”. Rather than labelling ILLA's as an evil object, I try to place this in context by comparing the defined benefit and defined contribution options. ILLA clients can become

fixated on the idea of leaving a legacy by way of their capital balances, but it is true to say that defined benefit funds were based on the life expectancy of the members and, once they passed away, any unused capital would have been used from those whose lives ended prematurely to fund the needs of those who lived beyond their expected mortality date. Similarly, one should view the ILLA in the same context although the investor would obviously do all within their power not to deplete the capital along the same lines.

Key to one's approach with ILLA's should be the awareness that the potential loss of capital is a realistic possibility if the pre-retirement provision has not been sufficient. If sufficient provision has not been made, then the only realistic option would be to go the route of a fixed income or one that escalates at a certain percentage over the course of one's life if the “sleep at night factor” is the overriding concern. If you do choose the ILLA route, or it is already the option you have chosen, it is vitally important that you do not lose sight of the primary reason you elected that option in the first place. Events such as the destruction of the Twin Towers, the Global Financial Crisis of 2008 and the turbulence that has evidenced itself in the past two years will have an impact on the valuation of those units. While the underlying funds would most likely be biased towards income producing assets, there would likely also be exposure to, amongst other things, offshore asset classes if there is scope to try and grow the capital within the structure of the investment. Such exposure makes sense as inflation by itself is an important factor to consider. Our currency loses, on average, 6% per year to inflation, whereas hard currencies such as the dollar depreciate at a far slower rate, making such inclusion within the ILLA an important consideration.

It has often been said that diversification within an investment portfolio is your only free lunch and it should rightly be considered an essential part of the consideration when structuring the components of the ILLA. One should, however, never lose sight of the fact that the primary purpose is to make sure that the capital lasts for the duration of your life and you may just have to opt for funds within the portfolio that are not as “sexy” as you'd like them to be in order to achieve that goal.

For more information on this subject or other aspects relating to retirement or investment planning, please contact your nearest NFB office at EL 043-735 2000 PE 041-582 3990 CT 021-202 0001 JHB 011-895 8000.

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SENSIBLE ANALYTICS

NOT THE END OF THE WORLD…

By Liam Graham, Portfolio Manager/Trader - NVest Securities.

S

o Moody's downgraded our debt to the lowest investment grade rating and placed us on negative watch, still one notch above S&P and Fitch (S&P rates our foreign debt sub-investment grade, while Fitch rates both our Foreign and Local Debt to Sub- Investment grade.)

In times like this it is easy to let emotions take over and distract from reality and distort the facts. Let's take a step back and look at some of the issues.

FOREIGN INVESTORS DO NOT HAVE TO SELL SA ASSETS YET

SUB-INVESTMENT GRADE DOES NOT MEAN ASSET MARKETS ARE SET TO COLLAPSE Historically, the moment a country has had its ratings reduced to “Junk” has marked the bottom of the markets. Looking at both Brazil and Russia, 10yr government bonds and their respective currencies sold off significantly in the 26 weeks prior to the official downgrade, which marked the bottom. Subsequently they all rallied. See table 1 below.

Russia & Brazil

Contrary to what some have been suggesting, South African bonds will only be removed from International Bond Indices if the country's local debt rating is rated Sub-Investment grade by at least 2 ratings agencies. Fitch is currently the only rating agency with our local debt at SubInvestment. S&P and Moody's have us one notch above Sub-Investment grade. So, for the time being we should not expect to see massive forced selling on SA government bonds.

SA BUSINESS IS NOT GOING TO COLLAPSE The reality of the matter is that SA Corporate has already been operating as if SA was SubInvestment grade for the last 18 months. The interest rates that they have been able to borrow at have been in line with other Sub-Investment grade countries. South Africa has some of the best management teams in the world, with 60% of JSE listed company revenues generated outside of SA, they have been diversifying their risk for years.

SA NOT RUSSIA OR BRAZIL Russia, Brazil & SA downgrades were all finally motivated by political events. While, the economies of Russia and Brazil were steadily deteriorating prior to the downgrade, in SA's case our economy looked to have turned the corner.

Both Russia and Brazil were already in recession and inflation was increasing at double-digit rates at the time of the downgrades.

Table 1

Change in Indices 26 wks before D/G to D/G

Change in Indices 26 wks after D/G

10yr Yield

Currency vs USD

Equities

10yr Yield

Currency vs USD

Russia

50%

-45%

-17%

-22%

10%

0%

Brazil

20%

-18%

-11%

-11%

8%

11%

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Equities

SENSIBLE ANALYTICS Date of First Downgrade to Junk

Country

Brazil

At time of Ratings downgrade Rating Agency comments GDP growth

- 2Q16 -1.5% Est FY16 -2.5

Debt/GDP

59.00%

09-Sep-15 Budget Deficit

-8.00%

Inflation

8% (Peaking at 11% in Jan16)

26-Jan-15

South Africa

2Q15 -4.3%

GDP growth

1.20%

Debt/GDP

53.00%

Budget Deficit

-3.40%

Inflation

6.3% (peaked at 6.8% in Nov 16)

3-Apr-17

General Comments - •Brazil in in deep recession, Brazil deep recession, FY15 GDP - 3.5% FY15 GDP - 3.5% - •Primary deficit Primary deficit

-Flexibility of of monetary policy • Flexibility monetary limited policy limited Debt/GDP 16.30% -Weakening Rouble driv ing • Weakening Rouble inflation driv ing inflation Budget Deficit -2.00% - •weak GDP growth weak GDP growth Prospects Prospects >10% (peaked - •Rising External Pressures (US Rising External Pressures Inflation at 17% in (US Sanctions) Sanctions) Mar15) GDP growth

Russia

- •Gov Govbackpedaling backpedalingon on budget deficit targets budget deficit targets - •PetroBras Corruption PetroBras Corruption Scandle Scandle - •Delma Rouseff Delma Rouseff Impeachment Impeachment

- •Concerns ofof Cabinet Concerns Cabinet Reshuffle and its effect on Reshuffle and its effect fiscal discipline & SOE & SOE on fiscal discipline govgov ernance ernance

- •OilOil prices had collapsed prices had collapsed and thethe West had and West had implemented sanctions on implemented sanctions Russia dt inv asion Ukraine on Russia dt invof asion of - CBR increased interest Ukraine rates nyincreased 750bps tointerest 17% in • CBR ratestonydefend 750bpsthe to 17% in Dec14 Rouble Dec14 to defend the Rouble -GDP is forecasted to to bebe • GDP is forecasted significantly higher than significantly higher than FY16 FY16 - •Inflation falling to within Inflation falling to within MPC tgt tgt range MPC range

SOUTH AFRICAN MARKETS HAVE BARELY BUDGED While many have exaggerated the sell-off in government bonds and the ZAR over the last week, the reality is overall our markets have barely moved from the preceding 26 weeks.

Change in Indices 26 wks before D/G to D/G SA

10yr Yield

Currency vs USD

Equities

3%

1%

2%

South Africa

IT IS NOT IN ZUMA'S BEST INTERESTS TO COLLAPSE THE ECONOMY Mark Twain wrote "It isn't what we don't know that gives us trouble, it's what we know that ain't so.”

Write off Jacob Zuma as unintelligent at your peril. I read an interesting article last week by Frans Cronje, Institute of Race Relations, which resonated with me. Ultimately, it is in Zuma's best interests to keep the economy on solid footing, preserving existing fiscal policy and confidence in the economy; dramatic short-term reversals in policy are unlikely.

The JSE All Share index was up almost 5% over the 3 weeks before the first downgrade, driven primarily

by Resources and Rand Hedge stocks. Hardly a market being shunned by investors.

All eyes will be on Malusi Gigaba and his interactions with the SOE's (SAA, SABC, Eskom, continued on page 27

sensible finance finance Nov16 July17 sensible

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SENSIBLE BENEFITS

THE GOVERNMENT EMPLOYEES

Pension Fund Understanding the retirement benefits. By Zukiswa Sonjica, Financial Paraplanner NFB East London.

T

he Government Employees Pension Fund (GEPF) is Africa's largest defined benefit pension fund. The assets are worth more than R1.6 trillion as at the 2015/2016 audited financial information provided on the Government Pensions Administration Agency website. Currently 1.2 million members are active on the fund, and 400,000 are pensioners and beneficiaries.

Unlike a Defined Contribution Benefit fund where the contributions made by the employer and employee determine the retirement benefit of the employee, when the employee leaves the defined benefit fund, the retirement benefit (Gratuity) of the employee is calculated using a formula that takes into account the employee's years of service, final salary and a multiplier factor as stipulated in the rules of the fund.

When it comes to the GEPF's unique fund rules, there is sometimes clarity needed as to the benefits of retiring within the Fund or whether to transfer the benefit to an external fund or investment, where the employee will have more control of their retirement monies in terms of the annuity they will receive and how long the funds will last.

Retirement benefits within the GEPF are dependent on the length of service.

in the Consumer Price Index. The GEPF Board of Trustees granted a 6.6% pension increase to pensioners with effect from 1 April this year.

Medical benefits after retirement are also dependent on the length of service. = Retirees with less than 15 years of service receive a once-off medical benefit. = For retirees with 15 or more years of actual service – the government pays a portion of the monthly medical aid membership of all the qualifying members for the rest of the pensioner's life as long as the pensioner remains the principal member of a medical scheme.

WHAT HAPPENS TO THE BENEFITS AFTER DEATH? For retirees who die within 5 years of receiving the monthly pension, their nominated beneficiaries or their estate will receive the balance of the annuity payments up to the end of the five year period as a cash lump sum. The spouse will receive a spouse's pension equal to 50% of the annuity which the pensioner received on the date of the deceased's death. At retirement, the retiree has the choice of accepting a reduced lump sum or monthly pension in order to increase the spouse's pension to 75% when they die. The spouse will receive the said annuity for life, even if they choose to remarry.

= Employees retiring with less than 10 years of

pensionable service receive a once off lump sum cash payment equal to their actuarial interest, which is calculated according to the formula: 6.72% x final annual salary x years of pensionable service. The amount received can be invested. No monthly pension is awarded. = Employees retiring with more than 10 years of pensionable service receive the once off lump sum cash payment, as well as a monthly pension calculated according to the formula: (1/55 x final annual salary x years of pensionable service) + 360.

For those retirees who receive the monthly pension, the pension amount will be increased on 1 April yearly by at least 75% of the year-on-year increase 18

sensible finance July17

Please feel free to contact one of our financial advisors for any information on GEPF benefits and they will be able to assist. Our office numbers are: EL 043-735 2000 PE 041-582 3990 CT 021-202 0001 JHB 011-895 8000.

SENSIBLE STRATEGY

Contributed by Glacier by Sanlam.

The need to stay invested Glacier by Sanlam supports investing for the long term and staying true to your investment strategy.

When looking at the research it is clear that over the long term real asset classes, such as equity, have outperformed cash in most scenarios. We also know that it is practically impossible to time the market, and that the cost of getting it wrong can be significant.

It is unfortunately also evident, and again quite logical given our human nature, that in uncertain times like these, many investors start to focus on the short term and make emotional decisions. As a result we are seeing investors flock to lower yielding fixed interest alternatives for 'safety', yet underestimating the danger of not earning sufficient real returns (after tax and inflation).

Growth asset classes have proven to produce attractive returns in excess of inflation over the long term, but the volatility and potential loss of capital over the short term makes this a tough option for nervous investors.

Amid all this, there are investment options, such as Glacier's recently launched Capital Enhancer, which can provide certainty as well as attractive returns to investors.

Diversify offshore – without the currency risk “In designing the Glacier Capital Enhancer, we wanted to give investors the opportunity to invest in equities, but to do so without the typical volatility and potential risk of losing capital that are associated with this asset class”, says Roenica

Roenica Tyson, Investment Product Manager - Glacier by Sanlam.

Tyson, Investment Product Manager at Glacier by Sanlam. “With the minimum investment horizon of five years for equity investments in mind, we also designed the Capital Enhancer to have a five-year term.”

Roenica explained that the Capital Enhancer provides exposure to a portfolio of blue chip stocks in Europe and the UK through the Euro Stoxx 50 and FTSE 100 indices. This allows investors the opportunity to diversify their exposure away from local markets - where uncertainty and risk is high to developed equity markets offering good value and growth prospects.

“We also tried to keep it simple for investors by removing the currency risk from the performance.

So investors can easily track how these markets are performing without having to worry about the impact of the volatility in the rand over the next five years,” she said.

Equity exposure without the downside risk With Capital Enhancer investors don't have to be concerned about market corrections, as their gross investment amount is protected. Investors will further benefit from the tax-efficiency of the investment as well as enhanced performance in a low return environment.

“Glacier's Capital Enhancer really tries to offer investors the best of both worlds – the growth of equity markets and fully participating in that upside, but with capital protection on their full investment amount,” said Roenica.

Please speak to your financial intermediary for more information. sensible finance finance Nov16 July17 sensible

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THE MUNICIPALITY'S RIGHT TO ALLOCATE PAYMENTS Ensure tenant's accounts are up to date! By Grant Berndt - Abdo & Abdo.

S

ometime back we wrote about the right of the Municipality to allocate payments received to charges of their choice and that the consumer has no right to choose or inform the Municipality which of the charges on their account they are paying and which they are not.

The Supreme Court of Appeal has recently passed a Judgment which allows the Municipality, even where there are different owners of property, but the same tenant, to transfer credits from one account to another, thereby increasing the one owner's liability and decreasing the other owner's liability.

Section 102(1)(b) of the Municipal Systems Act, No. 32 of 2000, states that a Municipality may credit a payment by a person against any account of that person. In the matter before the Court, the tenant company rented a property from two different landlords, namely P and C. The Municipality had allowed the tenant company to open accounts in its name for the services at these two properties.

The tenant paid approximately R1,400,000 into its account with the Municipality for the property owned by P, leaving an outstanding balance of approximately R1,700,000.

The tenant owed the Municipality approximately

R1,400,000 for outstanding services incurred on the property owned by C. The tenant company went into liquidation and the day after the liquidation, the Municipality transferred the payment made by the tenant from its account for P's property to its account for C's property, resulting in the settling of the tenant's full outstanding balance for services at C's property. However, the outstanding balance on the tenants account for P's property now was increased to approximately R3,100,000. P was understandably most disgruntled with the Municipality's unilateral transfer of this substantial payment by the tenant. P refused to pay the R1,400,000 to the Municipality and so the Municipality disconnected its electricity supply. In order to reconnect the electricity, P paid the R1,400,000 under protest.

The Court had to decide whether the Municipality was entitled to the payment from P after transferring the tenant's payment from its account in respect of P's property to its account in respect of C's property. Section 118(3) of the Municipal Systems Act provides that an amount due for Municipal services is a charge upon the property and so from a reading of both Sections 102(1) and 118(3), the Court held that the services supplied to the tenant company were a charge against the property and that in terms of Section 102(1) the Municipality could transfer the payment to the tenant's other account. The fact that this increased P's liability to the Municipality for services it never incurred had no bearing on the lawfulness of the Municipality's conduct in demanding this increased amount from P. The Court accepted that this was unfair, despite it being legal, but added that this unfairness was tempered by the fact that the money transferred was that of the tenant and not P. It is thus important, particularly where your tenant has their own Municipal account, and where they rent more than one property, that you ensure their Municipal accounts are up to date. sensible finance July17

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SENSIBLE STRATEGY

BUSINESS STRATEGY

By Nathan Carr, Head: Group Legal and Strategy - NVest Holdings East London.

Nathan was previously the Chief Operating Officer and Head of Strategy at Barclays Indian Ocean, based in Mauritius. He is now Group Head of Legal and Corporate Strategy at NVest Financial Holdings Limited and a part time lecturer on Strategic Management at the NMMU Business School. In this first instalment, Nathan unpacks what business strategy is all about and why it is critical to success, or even just survival for now...

L

et's face it - times are tough, and they seem to be getting tougher, especially for small to medium businesses. Recent confirmation that the South African economy has moved into recession on the back of a decline of 0.7% in GDP during the first quarter of 2017, and a 0,3% contraction compared against the fourth quarter of 2016 tells us all we need to know about the business climate of the day.

So, what does this challenging operating environment have to do with business strategy? In my view – everything. Whether your business is riding the tail winds of a new supply contract or facing the head winds of credit downgrades, a volatile rand and languid demand levels – a clearly articulated, broadly supported and efficiently executed strategic plan is like gold dust.

In a recent survey conducted by PwC (2016), a well-defined strategic plan was identified by the majority of respondents as the single most important determining factor for business success and sustainability.

When it comes to business strategy it seems as if some (or many?) people have been pulling the proverbial…. Stroll into any bookstore and you will find dozens of books on the topic, with buzzwords, jargon, case studies and acronyms often adding mist to mystery and swelling the burgeoning academic archives of knowledge.

Research has its place, for sure. But at the end of the day, strategy is not rocket science. As

22

sensible finance July17

nationally acclaimed strategist Tony Manning suggests: “strategy is about listening to customers, asking some pretty simple questions, making some choices, and getting people to support your decisions”. Practiced for centuries, strategy is about coming up with a clear plan to achieve what is typically a long-term objective, and ensuring that the plan guides your decision making and behaviour along the way. The simpler and more concise the plan, often the better.

The danger is that, without a clear business strategy in play, management decisions are often made to address short-term opportunities, risks or issues in a vacuum – without any considered point of reference as to what the intended long-term objectives are. Cutting marketing budgets, downsizing resourcing numbers or similar cost rationalisation initiatives are never far from the flip charts in challenging times. They may well be appropriate considerations, but without an overarching strategic plan as a point of reference, how can you be sure they are the right calls? As Howard Schultz, the founder and driving force behind the global growth of Starbucks, has said: “Cutting prices or putting things on sale is not sustainable business strategy. You can't cut enough costs to save your way to prosperity”.

A properly crafted business strategy, sufficiently long-term in time line (at least 5 years +, preferably longer), but under-pinned with tangible milestones and outcomes, can make all the difference in terms of riding out the tough times and fully capitalising on the good times.

SENSIBLE STRATEGY

Unlike operational plans and annual budgets, which are focused more on the here and now, strategic plans are expressed visions of the desired future state of an organisation and provide a clearly defined picture of the “end game”. A business strategy, therefore, is a documented plan on what the long-term purpose and vision are and how an organisation intends to achieve those goals.

Whilst there is no “one-size-fits-all” formula when it comes to developing an appropriate strategy for your business, there are certain non-negotiable ingredients for the plan to be effective. These include the following:

1. STRATEGIC DIRECTION: The plan should set a very concise and clear direction for the business – often referred to as the organisation's “strategic intent”. This direction should be bold and stretching to ensure the sustainability of your business.

2. ACTION PLAN: A detailed action plan should under-pin the strategic direction, setting out the detailed steps and actions necessary to achieve the long-term objectives.

3. PRIORITIES:

6. FRAMEWORK FOR ONGOING DECISION MAKING: Finally, the strategic plan should provide a framework and coherent point of reference against which all management decisions can be assessed. This should strengthen decision making and ensure alignment of day to day decisions against the long-term plan of the business.

So where does one start in formulating a business strategy? The first step is to identify who the respective stakeholder groups are for your particular business. These would typically include one or more of the following: shareholders/owners, management, staff, clients and customers, the community in which you operate and any regulatory bodies that have an impact on your business operations. This is an important first step as the interests and roles of each stakeholder group should be considered and – to varying degrees – engaged in formulating the plan.

Once you have clearly defined your stakeholders I would suggest that you consider the following questions illustrated in the “business strategy pyramid” below, which are fundamental in shaping any business strategy.

1. Why

= Over-arching Business Purpose

There is inherent danger in simply coming up do we with a long “to do” list and leaving it at that. exist?

Strategic planning is about making choices, 2. How do we establishing priorities, allocating resources = Business Plan make money? to strategic initiatives and coordinating 3. What kind of those resources and efforts to achieve = Values and Behaviour organisation do we want to be? the desired results. Your plan should clearly demarcate those priorities 4. What must we do and Priorities, Milestones and = and align them to the overhow will we make it happen?

Actions - with accountability arching vision and purpose.

5. How will we win the Engagement with = Therefore, agreeing on what support of all our stakeholders? all stakeholders should be left out of the plan is just as important as what goes into it.

In considering questions 1 and 2 – be sure to define

4. ACCOUNTABILITY: Without accountability there is very little prospect of anything actually getting done. Each action should have a designated action owner with time lines to ensure traction.

5. TRACKING EXECUTION: This is critical. There needs to be a shared commitment to regularly and thoroughly track progress (or lack thereof) against the plan to bring the strategy to life. At the end of the day “what gets measured gets done”.

what your “point of difference” is? In other words, what makes your business unique and value adding against the competition, bearing in mind the adage: “If you don't make a difference, you don't matter”.

The clearer you are in answering these questions the better, and this base should provide a strong platform from which to start building your strategic plan.

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SENSIBLE WILLS

Make further enquiries if you have concerns about a will's validity. By Debi Godwin, Managing Director - Independent Executor & Trust.

T

he High Court in the United Kingdom has recently held that an accountant forged his late mother's will in an effort to obtain a share in the family business which is reported to be worth in excess of ÂŁ160 million. Girish Dahyabhai Patel was found to have created a will, dated 2005, around a blank document which his mother had previously signed. This will named him as sole executor and beneficiary.

Under an earlier will made in 1986, Mr Patel's brother was due to inherit the entire estate. The later will was apparently produced in an effort for Mr Patel to obtain a controlling share of the family's business in Malaysia.

Mr Patel's brother challenged the later will and a forensic analysis of the document showed that there were indentations of the mother's signature which might indicate that she had signed other documents at the same time as the will. Printer ink was also noted to appear on top rather than underneath the signature, which may suggest that the signature was on the document before the text was added.

The court held that Mr Patel had used a blank document which had been pre-signed by his late mother in order to forge the will. Therefore, though the signature was genuine the contents of the will were not and the 1986 will was upheld.

In addition to fraud, there are other ways in which wills can be challenged. For example, someone may lack the legal capacity required to make a will or might be coerced into making the will. It is important to check that the will was signed and

x witnessed using the correct procedure. If it was not, the will can be invalid.

If there are any concerns about the will's validity further enquiries should be made, for example medical, forensic and witness evidence should be obtained to show what may have happened when the will was prepared and signed.

At Independent Executor & Trust we are committed to personalized service and individual attention. With combined experience of 65 years, we specialize in the Drafting of Wills, Administration of Estates & Testamentary Trusts.

49 Beach Road, Nahoon, East London, 5241 | PO Box 8081, Nahoon, 5210 Telephone: (043) 735 4633 Fax: 086 693 3356 / (043) 735 3942 | e-mail: info@iet.co.za

Port Elizabeth clients can call 041-582 3990 and you will be re-directed accordingly 24

sensible finance July17

SENSIBLE ADVICE

ASKING THE PERTINENT QUESTIONS A journey to reach your financial goals.

By Lonwabo Simbi, Financial Paraplanner - NFB East London.

I

recently accompanied a family friend to an appointment with a financial advisor that had been referred to her. She is somewhat of a novice when it comes to financial products, but is highly qualified in her field of endeavor and very inquisitive. What caught my attention were her responses (or lack thereof) to the advice and recommendations she was receiving which were not addressing her situation. She was agreeing to everything even though she clearly did not understand a single word her financial advisor was saying.

This made me wonder‌ Why was she not asking questions if she didn't understand? More importantly, why was she not asking the pertinent questions about the products recommended and the consequences of unforeseen events? Did she not know what type of questions she should be asking? Was she feeling insecure or threatened?

It comes as no surprise that this seems to be a major problem that faces a significant number of South Africans who are seeking financial advice, and granted, financial products and jargon are complicated and may be hard to understand for the layman.

Financial professionals have a responsibility of communicating information to their clients in a way that the client will understand; they need to act with integrity, honesty and with a high level of competency.

journey which they take together with the objective of reaching the client's financial goals.

Undesirable financial advisors are the reason so many individuals have developed trust issues and shy away from seeking advice from even the most ethical and qualified advisors.

The introduction of Retail Distribution Reform (RDR) is aimed at increasing the transparency within the industry so consumers know what services they are paying for. This increased level of transparency should eliminate most of the industry participants who joined to exploit the layman/ordinary consumer.

The financial planning profession has become more sophisticated over the past few years and requires in-depth knowledge in order for a financial advisor to provide holistic financial planning suited to an individual client's needs and objectives.

Here are some important points one should consider when consulting with a wealth manager/financial advisor.

1. Independence Ask the question of whether or not the advisor can act independently. Advisors that are not limited to offering financial products from specific companies are better suited than those who have a limited scope of product houses or are mandated to offer financial products from a specific company.

Independence will ensure that client specific objectives are addressed with appropriate and necessary financial products.

2. Fee structure and transparency The interaction between financial advisor and client is not one that should be based on product pushing or “trying to make the sale�. It should be a

It is of the utmost importance for clients to continued on page 28

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SENSIBLE RETIREMENT

Living comfortably until the age of 100. By Nonnie Canham, Financial Paraplanner NFB East London.

W

hen I was studying retirement planning I always felt that my process was sound, and based on what I watched more experienced advisors do, I was certain that the correct choice was always to be more cautious or conservative with the investments of those people nearing retirement. It always baffled me when my mark was a lower pass than I expected. When I eventually asked the lecturer why my mark was lower than my pride required it to be, I was told that I was making the mistake of being too conservative with the investments of people over the age of 60 because the latest research shows that people are living longer. Although I still felt there was a case to be made for being conservative, I did what I needed to do to be able to coax a better mark from the lecturer (but it didn't have to mean I agreed with her).

I later attended a presentation where the speaker informed us that if a person is currently below the age of 50, there is a 90% chance that he or she will live to be 100 years old (barring tidal waves and wild fires); and if a person is younger than 35, then there is a 120% chance that they will live to be 100 years old. At a different presentation we were educated on the number of 75 year olds reentering the work force in the USA in order to supplement their pension income. And at still another presentation we were told that the first person who will live to be 150 years old has already been born... I thought back to retirement planning and marvelled at this poor person who would retire at 65 and needs to figure out how to live for another EIGHTY FIVE years on whatever they had accumulated prior to retirement. I thought of my lecturer... Maybe she was a little right.

Money managers used to use Life Phases to plan for clients' retirement monies, but this apparently no longer makes sense. The idea that there is a phase of accumulation, building, consolidating then defending no longer works. It is also no longer advisable to start aggressively and then reduce the risk as you near retirement, eventually managing a very conservative portfolio into retirement while the bull market leaves you in its dust. If success means remaining in equities over time, then that is the approach that should be followed, albeit with the 26

sensible finance July17

appropriate understanding that markets will fluctuate.

Some retirees will withdraw and spend a significant portion of their retirement savings on repaying debt, buying a new vehicle or going big on the holiday of a lifetime and luxuries. I joke with friends and colleagues about too much month being left at the end of our money. The urge to splurge may lead to retirees with a significantly increased lifespan having too much life left at the end of their money.

Some countries are acknowledging this change in life expectancy by increasing the retirement age, however, this will be a slow process that will see the retirement age in the UK for example, increased to 70 by the year 2050. A single additional year of work will go a long way. Five will result in exponential positive results for a retiree. Financial planning should, in the meantime, aim to make it possible for clients to live comfortably until the age of at least 100.

This is where your financial advisor will step in to assist you. He will ascertain your current position, come up with a plan if you do not already have one, make necessary changes to an existing plan and meet with you regularly to see whether your retirement goals are on track.

Should you require assistance in this regard, please contact one of our financial advisors on one of the following numbers: EL 043-735 2000 PE 041-582 3990 CT 021-202 0001 JHB 011-895 8000.

SENSIBLE ANALYTICS

continued from page 18

Denel). Make no mistake Zuma's cronies will get their payouts, but to be fair, what's changed? It doesn't mean the economy is going to collapse this time - it hasn't yet.

ANALYSTS PRONE TO THE DRAMATIC Many analysts we see and hear on TV and in the media tend to be a bit dramatic.

Here's an example: I heard a frequent talking head note, that given the ratings downgrade he expects the ZAR to plunge to R14.50-R15/USD by 2018, the CNBC host gasps……. The reality, at the beginning of the year when analysts were more optimistic than today, the average forecast for ZAR was to exit 2017 at R14.00; using a simple inflation differential of 5% you get a 2018 exit rate of 14.75.

Now all of a sudden, the analyst's shock forecast just looks in line with current consensus.

A second focal point has been inflation and what to expect going forward. The ZAR remains 17%

stronger than last year's levels and food inflation is falling at a rapid rate, so the momentum in the current deflationary trend will continue.

INTEREST HIKES CURRENTLY OFF THE TABLE At the beginning of the year one of our catalysts for the stock market was a potential cut in interest rates in the back half of the year, providing some breathing room for consumers and stimulus for the economy.

Forward Rate Agreements (FRA) are pricing a small chance of a rate cut. The MPC continues to sit on its hands noting fears of potential currency depreciation.

Given consistent rand strength, inflation within their stated range, persistent low oil prices and weakening GDP growth, a rate cut may be closer than markets think.

STOCK BROKING ● PORTFOLIO MANAGEMENT ● OFFSHORE INVESTMENT

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SENSIBLE TAX

EMIGRATION

continued from page 4

of the donor irrespective of whether the asset being donated is a South African asset or not.

Should the non-resident wish to donate foreign property to a resident, no donations tax will be payable should the donee wish to subsequently donate this property to someone else.

with CGT being payable by the non-resident.

As far as Estate Duty is concerned, estate duty will be incurred on any assets the non-resident owns in South Africa at the time of death. This will, however, be subject to any double tax agreements South Africa has with other countries.

According to section 9H of the Income Tax Act, a South African resident is deemed to have disposed of all their South African assets (except immovable property) for their market value, the day prior to becoming non-resident. Should the non-resident therefore wish to donate his immovable property to a family member in South Africa, no donations tax will be incurred, but this will trigger a CGT event

From the above, it is clear that a decision to emigrate should not be considered in isolation - all the tax consequences that ensue as a result of emigration should be well considered. For further advice on emigration please contact one of our financial advisors on one of the following numbers: EL 043-735 2000 PE 041-582 3990 CT 021-202 0001 JHB 011-895 8000.

SENSIBLE QUESTIONS

continued from page 11

than the individual rates one would get.

that they are key to the business' success.

Other areas which give employees some certainty are Buy and Sells and Keyperson cover. Buy and Sell agreements ensure the partners or key individuals in a business are able to purchase the shares of the business of one of the main shareholders/partners should they pass away. Life cover policies would be taken out on the lives of these individuals to make the funds available for the purchase of these shares in the event of death.

Keyperson cover on the key individuals would benefit the business in the event of one of these employees dying. This gives the business the funding to find a replacement. This does not benefit the employee, but would highlight the fact

You could also offer your staff access to financial advice and education. You could get an investment specialist in to speak to the staff and assist them with their own personal financial planning. Your financial advisor should be able to do a Financial Needs Analysis for them. Consistent feedback on their Pension or Provident Fund also goes a long way in ensuring that they feel they are being looked after.

For more information or options, contact your NFB financial advisor on one of the following numbers: EL 043-735 2000 PE 041-582 3990 CT 021-202 0001 JHB 011-895 8000.

SENSIBLE ADVICE

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understand the fee structure and fees being charged for any financial product which they purchase. Legislation requires advisors to disclose fees and explain them to clients in a language which they understand.

consulting a financial advisor, clients should not shy away from asking for proof of their qualifications and credentials as it could have a significant effect on their future if they decide to action the advice received.

3. Qualification

Should you require assistance or advice in this regard, please do not hesitate to contact one of our NFB Private Wealth Managers on one of the following numbers: EL 043-735 2000 PE 041-582 3990 CT 021-202 0001 JHB 011-895 8000.

The time of advisors having minimum qualifications are fast coming to end with the FAIS Act requiring advisors to acquire the necessary qualifications to give proper, adequate and holistic advice. When 28

sensible finance July17

Anthony Godwin RFP™ | MIFM – Executive Director and Private Wealth Manager, 28 years experience; Bryan Lones AFP™ | PGDFP, MIFM - Private Wealth Manager, 25 years experience; Gavin Ramsay | B.Com, MIFM - Managing Director EL and Private Wealth Manager, 23 years experience; Glen Wattrus CFP® | B.Juris, LLB, PGDFP – Private Wealth Manager, 19 years experience; Jaco de Beer RFP™ │ National Certificate: Financial Services Wealth Management, Private Wealth Manager, 21 years experience; Juanita Niemand | National Certificate in Wealth Management – Healthcare Consultant, 2 years experience; Julie McDonald CFP® | B.Com, PGDFP – Financial Advisor (Risk Assurance Specialist), 5 years experience; Leona Trollip RFP™ | Divisional Manager – Employee Benefits, 40 years experience;

Healthcare Advisory Services, 19 years experience; Mikayla Collins CFP® | B.Com (Hons), PGDFP Private Wealth Manager, 5 years experience; Nicky Sass | National Certificate in Wealth Management – Apprentice Healthcare Consultant, 1 year experience.

Phillip Bartlett CFP® | BA LLB, PGDFP, MIFM Executive Director and Private Wealth Manager, 15 years experience; Robert Masters AFP™ | MIFM - Private Wealth Manager, 31 years experience; Travis McClure CFP® | B.Com, PGDFP, MIFM – Executive Director and Private Wealth Manager, 18 years experience; Walter Lowrie | Private Wealth Manager, 31 years experience; Bryan Ridley CFP® | PGDFP – Private Wealth Manager, 4 years experience; Bonisa Ngcongca CA(SA) | B.Com (Acc) – Private Wealth Manager, 1 year experience;

Leonie Schoeman RFP™ | Divisional Manager –

Alex Grunewald CFP® | PGDFP – Managing Director PE and Private Wealth Manager, 10 years experience;

Andrew Duvenage CFP® | B.Com (Hons), PGDFP Advanced Investments – Managing Director NFB Gauteng and Private Wealth Manager, 12 years experience; Grant Magid CFP® | B.Com, PGDFP - Executive Director Gauteng and Private Wealth Manager, 15 years experience; Jeremy Diviani CFP® | B.Com, PGDFP Advanced Investments - Private Wealth Manager, 11 years experience; Laurie Wiid | B.Com, ILPA - Executive Director Gauteng and Private Wealth Manager, 23 years experience; Mike Estment CFP® | BA – CEO Gauteng and Private Wealth Manager, 31 years experience;

Paul Jennings CFP® | B.Com (Hons), PGDFP - Private Wealth Manager, 44 years experience; Philip Shapiro CFP® | B.Acc, H.Dip Tax, Admin of Estates, PGDFP – Financial Director Gauteng and Private Wealth Manager, 22 years experience; Stephen Katzenellenbogen CFP® | B.Com (Hons), PGDFP Advanced Investments – Director and Private Wealth Manager, 13 years experience; Terrance Janse Van Rensburg | B.Econ - Director and Private Wealth Manager, 22 years experience; Xintol Schoeman | Higher Certificate in Wealth Management - Financial Advisor (Life Specialist), 4 years experience.

RAGING BULL

AWARDS

RAGING BULL AWARD Winner: Best South African MultiMulti-asset Asset Equity Fund: NFB CI Cautious Fund of Funds RAGING BULL CERTIFICATE Winner: South African MultiMulti-asset Asset Low-Equity Fund: NFB CI Cautious Fund of Funds

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