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This is the Sharenet company blog where we will bring you the latest news and events on the go at Sharenet, together with tips on using our site and our products.

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    Seed Weekly - Making Retirement Annuities Work

    We’ve all heard the line ‘remember the tax benefits of investing in a Retirement Annuity (RA)’ somewhere before. This is true but doesn’t quite explain how you are supposed to approach your investment in an RA. The most obvious benefit is that you can contribute 15% of your income, after contributions to pension and provident funds have been deducted, to your RA and deduct this from your gross taxable income. This is a great tool to reduce you tax burden. Another benefit to investing through RA’s is that no Capital Gains Taxes (CGT) are levied on switches made between funds, a massive benefit if you have a long time before retirement. The downside of RA’s is that only 1/3rd can be taken as a lump sum at retirement while the balance needs to be invested into either an investment linked living annuity (ILLA) or a guaranteed annuity from which an income has to be drawn. This income from the annuity is taxed according to the income tax table.

    In a previous article I mentioned that income from discretionary investments are in most cases taxed at a lower rate than annuities but are only more tax efficient after retirement. Investors are therefore left with the headache of choosing how to make best use of the various vehicles available to them to reach certain financial goals.

    The reason why discretionary assets tend to last longer when you start drawing an income after retirement is because the tax benefit remains within the investment. This is not always the case when building up a retirement annuity, the tax deductible benefit is more often than not consumed instead of being invested. Consuming the tax benefit of your RA will lead to reduced benefits available, compared to what could have been achieved had a similar investment been made of a discretionary nature. To show the massive impact this would have on your assets consider an example of a 45 year old person who has 20 years to go to retirement, has R 6 000 a month to invest and earns R 750 000 per year. If he/she doesn’t contribute to a pension/provident fund R 112 500 can be contributed to a RA per annum and then deducted from taxable income. According to some basic calculations R 6 000 a month into an RA results in a tax saving of R 28 759 per annum. If this tax saving is not invested the below graph shows a possible future value of the investment in real terms:

    The value estimated through Seed’s retirement calculation tool is +- R 2 500 000.

    Now if the extra R 28 759 is invested annually into the existing RA the below graph shows the benefit that can be attained:

    The difference estimated is a massive R 1 million, or 40% more for the investor that reinvested the tax benefit received.

    The charts above should be used as a reference to show the possible downside of consuming the tax benefit of your RA. It should also serve as a reminder to ‘top up your RA’ and be disciplined in your approach to building assets. The best way to stay on track is to get a long term advisor who can help you navigate through the pitfalls and opportunities on your journey to financial freedom.

    Kind regards,

    Stefan Keeve

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2014-02-26, 11:08:53, by Mike Email , Leave a comment

    Seed Weekly - Making Retirement Annuities Work

    We’ve all heard the line ‘remember the tax benefits of investing in a Retirement Annuity (RA)’ somewhere before. This is true but doesn’t quite explain how you are supposed to approach your investment in an RA. The most obvious benefit is that you can contribute 15% of your income, after contributions to pension and provident funds have been deducted, to your RA and deduct this from your gross taxable income. This is a great tool to reduce you tax burden. Another benefit to investing through RA’s is that no Capital Gains Taxes (CGT) are levied on switches made between funds, a massive benefit if you have a long time before retirement. The downside of RA’s is that only 1/3rd can be taken as a lump sum at retirement while the balance needs to be invested into either an investment linked living annuity (ILLA) or a guaranteed annuity from which an income has to be drawn. This income from the annuity is taxed according to the income tax table.

    In a previous article I mentioned that income from discretionary investments are in most cases taxed at a lower rate than annuities but are only more tax efficient after retirement. Investors are therefore left with the headache of choosing how to make best use of the various vehicles available to them to reach certain financial goals.

    The reason why discretionary assets tend to last longer when you start drawing an income after retirement is because the tax benefit remains within the investment. This is not always the case when building up a retirement annuity, the tax deductible benefit is more often than not consumed instead of being invested. Consuming the tax benefit of your RA will lead to reduced benefits available, compared to what could have been achieved had a similar investment been made of a discretionary nature. To show the massive impact this would have on your assets consider an example of a 45 year old person who has 20 years to go to retirement, has R 6 000 a month to invest and earns R 750 000 per year. If he/she doesn’t contribute to a pension/provident fund R 112 500 can be contributed to a RA per annum and then deducted from taxable income. According to some basic calculations R 6 000 a month into an RA results in a tax saving of R 28 759 per annum. If this tax saving is not invested the below graph shows a possible future value of the investment in real terms:

    The value estimated through Seed’s retirement calculation tool is +- R 2 500 000.

    Now if the extra R 28 759 is invested annually into the existing RA the below graph shows the benefit that can be attained:

    The difference estimated is a massive R 1 million, or 40% more for the investor that reinvested the tax benefit received.

    The charts above should be used as a reference to show the possible downside of consuming the tax benefit of your RA. It should also serve as a reminder to ‘top up your RA’ and be disciplined in your approach to building assets. The best way to stay on track is to get a long term advisor who can help you navigate through the pitfalls and opportunities on your journey to financial freedom.

    Kind regards,

    Stefan Keeve

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2014-02-24, 16:47:37, by Mike Email , Leave a comment

    Seed Weekly - Emerging Markets - Starting to Show Value?

    As multi managers we are tasked with determining which asset classes are showing the most value and then finding those managers that are best placed to capitalise on the opportunities presented – thereby generating satisfactory risk adjusted returns for our clients.

    Asset class, in this context, is an extremely wide term and can be defined as any asset class in any region (or grouping thereof). A few examples include, South African banking companies, global equity, European property, emerging market debt, precious metals, small cap equity, Asian technology companies, etc. As can be seen from the above, asset classes can either be very broadly (global equity) or narrowly (South African banking) defined. We typically allocate into broader asset classes, allowing the underlying manager to find the best opportunities, but there will be times when we’ll make a special allocation to a more tightly defined asset class where we see a special opportunity.

    Making these kinds of decisions requires a fair amount of research into the relative performance and valuations of the various asset classes, how the returns are correlated with other asset classes in our Funds, prospects for the asset class, whether there are any managers that have shown a proven ability in the specific asset class, etc.

    Over the past few years, for instance, our global equity allocation has been allocated purely to high quality, globally branded companies that have delivered excellent – market beating – returns. While the returns have been great, we understand that all good things come to an end, and valuations of these companies are not as attractive as they were in 2011. We are currently in the process of reducing our allocation to high quality companies in favour of more a more cyclical allocation. Also on the radar is whether to move a portion into Emerging Market (EM) equities.

    The chart below shows the relative performance of Developed Market (DM) and EM equities since the inception of the EM index (both in US$). The line going up represents EM outperformance and the line heading down represents DM outperformance.

    Emerging Market equities have outperformed Developed Markets by 3.6% per annum over this period, but have been underperforming since October 2010. The underperformance has been a combination of high starting relative valuations (in local currency) being de-rated to more normal levels and the vast majority of EM currencies weakening against the US$ over the past 3 years or so. There naturally is risk that Emerging Markets can continue to underperform over the next couple years, but the entry point is getting more attractive both on a currency and a valuation viewpoint.

    We are busy with the process of identifying a suitable EM manager and determining when the correct entry point will be, so that when the time is right we are ready to invest!

    Take care,

    Mike Browne

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2014-02-18, 11:19:45, by Mike Email , Leave a comment

    Seed Weekly - Retirement Annuities

    The end of February marks the end of the 2013/14 tax year. As described in the article below, retirement annuities should play an important role part in your retirement planning. SARS offers excellent tax benefits for individuals when saving through retirement annuities.

    Seed offers a cost effective retirement annuity fund for individuals. Any individual can invest directly in the Seed Flexible and Seed Absolute Return Funds through a retirement annuity without paying additional commission.

    The minimum monthly contribution is R500 and the minimum lump sum investment is R10 000. For more information, please send Myrna Collins (myrna@seedinvestments.co.za) an email requesting to open an account for you.

    Retirement Annuities

    Every February I write an article about why people should use Retirement Annuities as part of their investment portfolio, but if I could get R 1 000 for every time a client, family member, friend, or acquaintance has told me that “Retirement Annuities are a waste of money”, I would be retired now and not writing this article. I have heard many stories about Mr X or Mrs Y, whose retirement annuities were inadequate to fund their retirement despite the fact that they had been contributing to them for many years.

    Unfortunately many people use these stories as an excuse not to make any retirement provisions at all.

    What are the main reasons for Retirement Annuities not giving sufficient Retirement Capital:

    • The first and most obvious reason is that people do not put away enough money each month. If you worked for a big corporate, the total of your contributions and the employer’s contribution to retirement is often in excess of 15%. This means that somebody earning R 10 000 pm has a monthly retirement contribution in excess of R 1 500. As his salary increases, his retirement contributions also increase. People working for themselves, or for smaller companies, rarely spend this much on their retirement annuities. The problem is exacerbated when people have “traditional retirement annuities” which have life cover and other risk benefits attached to them. These risk costs radically reduce amounts available to the retirement fund.

    • The second problem is the length of time people invest for. It is not uncommon for people to only start saving when they are 40 and then want to retire when they are 55. This does not leave much time for the wonder of compound interest to weave its magic.

    The above problems are best illustrated by the following example. We have a client who started saving for his retirement 30 years ago into two policies – one of R 116 pm and the other R 35 pm. At that time, the contributions were probably close to 15% of his taxable income. The premiums remained unchanged until December 2007 when the client increased the R 35 pm policy to R 2 500 pm and has increased it by 10% pa since then. The total premiums paid on the R 116 policy to date are R 42 224, while the fund value is a staggering R 702 114. This equates to a return of 14.2% pa. The other policy has total premiums paid to date of R 295 516 but, because the real effects of compound interest are yet to kick in on the increased contributions, the fund value is R 574 706. This still equates to a return of 12.98% pa. It must be borne in mind that the huge tax advantages (up to 45% at one stage) have not been taken into account.

    One of the major drawbacks of the “traditional” retirement annuity is the fact that it is costed upfront, i.e. your first number of premiums go towards the payment of costs and you only start increasing your retirement value after a while. Now days we have many products available where no upfront fees are accrued and very low ongoing fees are paid.

    One of the major advantages of Retirement Annuities that people tend to forget is that your tax rate is usually higher pre-retirement than post retirement. Remember that post retirement you usually have lower income, higher rebates (after 65) and all medical expenses are allowed as a deduction (after 65). So the tax savings generated by the contributions are higher than the future liability created.

    Do I think retirement annuities are the alpha and omega of retirement planning? Definitely not. You also need property, equities and offshore exposure in discretionary savings products, but retirement annuities definitely have their place and are ignored at your peril.

    Kind regards,

    Barry Hugo

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2014-02-17, 10:49:10, by Mike Email , Leave a comment

    Seed Weekly - Retirement Annuities

    The end of February marks the end of the 2013/14 tax year. As described in the article below, retirement annuities should play an important role part in your retirement planning. SARS offers excellent tax benefits for individuals when saving through retirement annuities.

    Seed offers a cost effective retirement annuity fund for individuals. Any individual can invest directly in the Seed Flexible and Seed Absolute Return Funds through a retirement annuity without paying additional commission.

    The minimum monthly contribution is R500 and the minimum lump sum investment is R10 000. For more information, please send Myrna Collins (myrna@seedinvestments.co.za) an email requesting to open an account for you.

    Retirement Annuities

    Every February I write an article about why people should use Retirement Annuities as part of their investment portfolio, but if I could get R 1 000 for every time a client, family member, friend, or acquaintance has told me that “Retirement Annuities are a waste of money”, I would be retired now and not writing this article. I have heard many stories about Mr X or Mrs Y, whose retirement annuities were inadequate to fund their retirement despite the fact that they had been contributing to them for many years.

    Unfortunately many people use these stories as an excuse not to make any retirement provisions at all.

    What are the main reasons for Retirement Annuities not giving sufficient Retirement Capital:

    • The first and most obvious reason is that people do not put away enough money each month. If you worked for a big corporate, the total of your contributions and the employer’s contribution to retirement is often in excess of 15%. This means that somebody earning R 10 000 pm has a monthly retirement contribution in excess of R 1 500. As his salary increases, his retirement contributions also increase. People working for themselves, or for smaller companies, rarely spend this much on their retirement annuities. The problem is exacerbated when people have “traditional retirement annuities” which have life cover and other risk benefits attached to them. These risk costs radically reduce amounts available to the retirement fund.

    • The second problem is the length of time people invest for. It is not uncommon for people to only start saving when they are 40 and then want to retire when they are 55. This does not leave much time for the wonder of compound interest to weave its magic.

    The above problems are best illustrated by the following example. We have a client who started saving for his retirement 30 years ago into two policies – one of R 116 pm and the other R 35 pm. At that time, the contributions were probably close to 15% of his taxable income. The premiums remained unchanged until December 2007 when the client increased the R 35 pm policy to R 2 500 pm and has increased it by 10% pa since then. The total premiums paid on the R 116 policy to date are R 42 224, while the fund value is a staggering R 702 114. This equates to a return of 14.2% pa. The other policy has total premiums paid to date of R 295 516 but, because the real effects of compound interest are yet to kick in on the increased contributions, the fund value is R 574 706. This still equates to a return of 12.98% pa. It must be borne in mind that the huge tax advantages (up to 45% at one stage) have not been taken into account.

    One of the major drawbacks of the “traditional” retirement annuity is the fact that it is costed upfront, i.e. your first number of premiums go towards the payment of costs and you only start increasing your retirement value after a while. Now days we have many products available where no upfront fees are accrued and very low ongoing fees are paid.

    One of the major advantages of Retirement Annuities that people tend to forget is that your tax rate is usually higher pre-retirement than post retirement. Remember that post retirement you usually have lower income, higher rebates (after 65) and all medical expenses are allowed as a deduction (after 65). So the tax savings generated by the contributions are higher than the future liability created.

    Do I think retirement annuities are the alpha and omega of retirement planning? Definitely not. You also need property, equities and offshore exposure in discretionary savings products, but retirement annuities definitely have their place and are ignored at your peril.

    Kind regards,

    Barry Hugo

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2014-02-11, 09:46:22, by Mike Email , Leave a comment

    Seed Weekly - Multi Asset Class Flexible: A Forgotten Category?

    Unit trusts in the South African Multi Asset Class Flexible category are often overlooked for possible investment. The average retail investor typically invests into balanced or equity funds. Flexible funds are generally positioned between balanced and equity funds. Due to the wide investment mandates of these funds, a like for like comparison is fairly difficult.

    The biggest advantage of the wider investment limits is that managers are able to better express their investment views. Where equity managers need to always be relatively fully invested (+80% in equity) flexible managers are able to reduce exposure should market conditions warrant the move.

    Flexible funds usually represent a manager’s best view. They are able to allocate to asset classes where they see value and take away from asset classes that are facing headwinds. In theory a flexible fund should fare better in a bear market, but lag in a bull market.

    This category is typically where hedge fund managers list their unit trust funds as they have the flexibility that is a hallmark of hedge fund managers.

    Naturally the major risk of a wider mandate is that a manager has a greater scope to make poor calls, it is therefore more important in this category to have a solid understanding of what kind of return profile the manager is attempting to achieve than in other more restrictive fund categories.

    How have flexible funds fared against other categories?

    The Multi Asset Class Flexible category is a catch all category containing a wide range of funds, with different risk and return targets. For example there are equity, allocation, income, and property funds. The analysis below was done on 5 equity centric flexible funds where the managers actively manage the asset allocation and have similar risk and return targets.

    From the chart above you can see the big dispersion of returns in the category. 2013 returns ranged between -2.5% and 35%, but almost half of all of the funds were able to outperform the average equity (green outlined square) and balanced (pink outlined circle) fund manager. Over the past 5 years only the top quartile were able to beat the average equity manager mainly as a result of the lower equity exposure during a period of strong equity returns.

    The chart below show the draw downs of these funds compared to the ALSI and the average equity manager. As would be expected, most of the managers were better able to protect capital than the average equity manager.

    From the end of 2007 – i.e. before the last market crash – until now, these managers were able to outperform the ALSI with lower levels of risk (below represented as volatility, but the same holds true using other risk measures). On a risk adjusted basis these funds therefore delivered handsomely to their investors.

    The major drawback of this category – and hence why it doesn’t attract perhaps as much assets as it otherwise would – is that flexible funds generally aren’t Reg 28 compliant and they thus can’t be used for compulsory investments (life annuity, pensions, or retirement annuities). With markets currently in expensive territory, this is perhaps a category to look at for investors that have a long time horizon.

    Seed clients are currently invested with a few of the highlighted managers across our various fund solutions – they have been rewarded for giving the managers broad mandates. As the multi managers we keep a close eye on both the managers’ positions as well as their outlook on the markets.

    Kind regards,

    Gerbrandt Kruger

    www.seedinvestments.co.za
    info@seedinvestments.co.za
    021 914 4966

    Permalink2014-02-04, 11:53:13, by Mike Email , Leave a comment