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NFB FINANCIAL UPDATE Issue 73 April 2014



rom the get-go I wondered just how effective the Public Protector's report on Nkandla would be. It seems that she has delivered on her mandate and it is now up to the ANC, the State and the body politic to decide on the correct course of action. Most of us are simply disappointed, disgusted or just plain dejected by the scale and audacity of these actions. For as long as I can remember, certain politicians have been guilty of actions unbecoming of their station, and certainly not in the mandate afforded them by their constituencies. However, like the murder trial running concurrently, it is more about the consequences than anything else. Never mind the spin doctors, the bully boy tactics, or who can afford the most expensive counsel, this one can be decided by the casting of hard fought democratic votes in a few weeks time. The politicians will be watching the mood of the public very carefully and, I


Mike Estment CFP professional BA / CEO - NFB Financial Services Group

financial services group

trust, behaving accordingly. If this happens, Clem Sunter's High Road outcome remains a possibility. If it doesn't, the Afro-skeptics, who I have repeatedly ridiculed, will start becoming self-righteous and their predictions of us being on a slippery slope will prevail. This is a very important time for South Africa. It is further coloured by some rather interesting political developments, which give me hope. Firstly the ANC pushed three contentious and Labour (read COSATU) unfriendly issues through parliament. These are the E-toll system, the Youth Wage Subsidy and the NDP (National Development Plan). This is rather reminiscent, says Political Analyst and erstwhile ANC stalwart, Nic Borain, of Maggie Thatcher taking on the unions in the UK. The ANC have compromised the comfortable tripartite alliance and have also fired the young looneys, who have rallied around Julius and created a right wing thorn in the ANC's side, in the form of the EFF. Whilst not a serious threat, Borain says they might get serious support from a reasonably substantial part of the younger vote, disenfranchised by the ANC and highly irritated by Nkandla, Gupta-gate and favours for pals. He reckons COPE and Agang are marginal, but together with a fair improvement for the DA (notably in Gauteng) and the EFF, the ANC majority could slip to a tad over 60% - nowhere near the outright majority needed to unilaterally start amending the Constitution. There is hope, but the world is watching. On to markets, investments and other slightly less confusing realities: I would note that one certainty is nothing stays the same for too long. Recent feedback shows previously underperforming funds doing superbly. These include John Biccard's Value Fund, which is right back up there over short-term measurement periods. The currency bet taken by most managers we support has paid off over the last year, as is born out in the recent performance of some of our “global” industrials, which have stormed ahead and are leading the JSE higher. It is important to remember that

even the mighty fall and rational thought and action is needed to protect profits, or simply value. NFB and similar serious wealth management businesses keep beating the drum of appropriate diversification. Now is as important a time as ever to recognize this approach, and more importantly, act on this advice to ensure portfolios remain appropriately exposed to assets that fairly price in the current reality and market risk. One of the key leading indicators of equities is interest rates. The world is going to have to get used to a less accommodative approach from Central Banks, and, accordingly, economies will have to once again stand-alone and resume the ebb-and-flow typical in these markets. Risk will return to markets and investors won't be in for a free ride as has been the global reality for the last few years. In South Africa, we have seen one small increase in rates of 0,5%. Economists have predicted a few more of these during coming months, but technical research says the likelihood of a steep increase is lessening. The South African economy is challenged by a great number of material issues. These include a vast under- or un-employed labour force, poor standards of education, crazily restrictive labour laws, crime and other socio-economic maladies. However, these are more than matched currently by a never-say-die attitude, a world class financial infrastructure, including amongst the world's best rated exchange, banking and assurance sectors and certain parts of an otherwise lackluster public service. The standouts here are SARS, Treasury, the Department of Finance and a few others. It's a pity that the leadership don't have the political will to use these as the trend setters. Mediocrity is NOT an option for our budding democracy. We need change and not for change's sake. Please engage with your Wealth Managers at NFB for more insight into some of the technical observations in this editorial.

fortune favours the well advised

Consider your lifestyle inflation when saving for retirement

Whilst we typically publish our own thoughts there are times where we come across external content that we strongly feel you will both enjoy and benefit from. In this instance the article from Allan Gray below discusses lifestyle inflation.


hile most investors seem to understand the need to contribute consistently to their retirement funds, and to start saving as early as possible, many investors fail to understand the impact of their 'lifestyle inflation' on their ability to save enough to maintain their standard of living during retirement.

in your standard of living over time. When investing for retirement, it is important to plan for future increases in prices (i.e. price inflation) and future increases in your standard of living (i.e. lifestyle inflation).

What do we mean by lifestyle inflation? Price inflation is a general increase in prices and a corresponding fall in the purchasing power of your money. Salary increases that keep pace with price inflation allow you to maintain a fixed standard of living over time. However, salary increases that exceed price inflation may increase your standard of living and therefore also your cost of living. You can think of this as lifestyle inflation, which is the increase

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Larger salary, easier retirement? Promotions and salary increases late in your working life are probably the reward for hard work and commitment. It doesn't take long to get used to the better lifestyle that comes with these pay increases and when you retire, it is your new lifestyle that you will be trying to match. If this new lifestyle was not allowed for when calculating how much to save in previous years, your increase may have a dramatic impact on how long your existing retirement savings are expected to last and what you need to save moving forward. To illustrate this, consider someone who started working at 25, is now 45, and is looking to retire at 65. They receive salary increases linked to price inflation throughout their working life, and contribute 10% of their salary to their retirement savings. If we assume inflation of 6%, a return of 11% and a salary replacement ratio at retirement of 70%, they would maintain their pre-retirement standard of living to age 94. But many people progress through their careers. To illustrate the effect of this, assume that the person above works hard and gets a big promotion and a once-off increase of 60% at age 45. Changing nothing else, they could now be expected to maintain their pre-retirement standard of living to only age 79. The 'lifestyle inflation' introduced by the 60% increase reduces the impact of their savings to that point compared to their (new) standard of living. To maintain their pre-retirement standard of living to age 94 following the increase, they would need to increase their retirement savings by more than 8% or defer their retirement by four years, since they are now saving to reach a more demanding goal and they have less time to reach it. A more consistent and gradual increase in the standard of living may seem more realistic than a large once-off increase. However, whether gradual or once-off, the results are similar. For example, if the person in our example were to receive increases of price inflation + 1% throughout their working life, instead of price inflation increases, changing nothing else, they could be expected to maintain their preretirement standard of living to age 81 instead of age 94.

Allowing for lifestyle inflation The message is simple: if your income is rising ahead of inflation you need to increase your retirement

savings even faster to keep up. Each rand that you spend on a better lifestyle is a rand you will get used to spending, and thus need to fund from your retirement income when you stop working. By prudently allowing for future increases in your standard of living, looking in the rearview mirror at each increase and matching your return requirements and risk appetite with an appropriate asset allocation, you are more likely to achieve your retirement goals. If you already contribute the maximum allowed to enjoy tax incentives, don't let this be a deterrent. The government provides further tax incentives at retirement.

New tax break for retirement fund investors The government encourages us to save for retirement by offering various tax incentives if we invest in a registered retirement fund, such as a retirement annuity fund (RA). RA's are structured to encourage saving. Fifteen percent of non-retirement funding income can be contributed to an RA to reduce your taxable income and any investment income (including interest and dividends), as well as capital growth, is tax free. In addition, at retirement the tax exemptions and subsequent tax rates are favourable. As of 1 March 2014 a new incentive is being introduced. The Income Tax Act will allow all nondeductible contributions, irrespective of the retirement fund to which the contributions were made, to be pooled, and be exempt from income tax, on a first-come-first-served basis against any lump sum taken or annuity income received at retirement. Example: Mr X belongs to a retirement annuity fund. He has R200 000 in non-deductible contributions accumulated when he retires from the fund. He decides not to take a lump sum and acquires a living annuity with the R1 000 000 retirement interest at retirement. The first R200 000 received in annuity payments from the living annuity will be exempt from income tax. Should you wish to make use of the tax concession that RA's offer, please contact your NFB financial advisor.




ver the past two years there has been a progressive change from a 'medical expense deduction' to a 'tax credit' system used when calculating an individual's income tax returns. The implication of this change is that a medical deduction lowers an individual's taxable income while a tax credit reduces an individual's tax liability. The effect of this change is that a medical tax credit allows all taxpayers the same benefit, whereas a medical expense deduction is more beneficial to a taxpayer with a higher marginal tax rate. In considering these changes it is noted that individual taxpayers are categorized into two categories for the purposes of calculating medical tax credits: = Taxpayers below 65 years of age; = Taxpayers of 65 years of age and above. These medical tax credits fall into two categories, namely the contributions to medical aid schemes and additional medical expenses (“out-of-pocket” medical expenses). The tax credits on medical fund contributions was introduced from March 2012 with application to taxpayers below 65 years of age, but it has now been extended to all individual tax payers who contribute to a medical aid.

Additional medical or 'out of pocket' expenses: Up until the end of the 2014 tax year taxpayers were entitled to a deduction for 'out of pocket' medical expenses. For taxpayers under 65 years of age this amount claimed is limited to the extent that it exceeds 7.5% of taxable income before this deduction. For taxpayers, 65 years and older, medical aid contributions and other qualifying medical expenses or out of pocket expenses could be claimed as a deduction against taxable income. For the 2015 tax year: = Taxpayers of 65 years of age and older will be on the

'tax credit' system for medical aid contributions and 'out of pocket' expenses. These are calculated using the following formula: {[Medical aid contributions – (medical scheme fees tax credit X 3)] + other qualifying medical expenses}, dividend by a factor of 3. This means the medical tax credit for 12 months will be multiplied by three and subtracted from the total medical aid contributions for the year. All qualifying medical expenses will be added to this amount. This total will be multiplied by 33.3% to derive the medical

expenses credit. The effect is that taxpayers who earn more than about R400 000 per year will pay more tax. For example, assume the following: " Medical scheme contributions: R67 891 for the year; " Non-recovered medical expenses: R20 000; " Taxable income: between R528 011 and R673 100 a year and " Marginal tax rate: 38%. The tax saving on the 'medical expenses deduction' system would have been R33 398 and on the 'tax credit' system this tax saving would be R29 274, notably this taxpayer is R4 124 worse off. = Tax payers below 65 years of age will continue to be on

the 'tax credit' system for medical aid contributions, but 'out of pocket' expenses are calculated by the following revised formula: {[Medical aid contributions – (medical scheme fees tax credit X 4)] + other qualifying medical expenses}, divided by a factor of 4. This means a tax credit of 25% of the total medical scheme contributions that exceed four times the tax credit and unrecovered expenses, but only to the extent that the combined total of these amounts exceeds 7.5% of your taxable income. The effect on a higher taxpayer is shown in the following example: " Taxable income: R550 000; " Non recovered medical expenses: R20 000; " Medical scheme contributions: R91 642 for the year (family of 4); " Marginal tax rate: 38% and " Tax credit for contributions: R10 296. The tax saving if the 'medical expenses deduction' system had remained in place is R11 133 and with the 'tax credit' system of excess contributions and expenses this savings is R7 325.50 This shows that for a higher tax payer, as in this example, that on the new 'tax credit' system, R3 807.50 more in tax would be payable. For further clarification on how the medical tax credits will affect you, please contact an NFB Financial Advisor at one of our offices in Johannesburg, East London, Port Elizabeth, Cape Town or Stellenbosch.

By Paul Jennings CFP



SF Fin (Australia) B.Com (Hons), PDFP

Private Wealth Manager NFB Gauteng

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