Investment Newsletter (and related info)
April 2009
Investment Newsletter (and related info) 04/2009
If you want financial freedom in your retirement years, you have to start saving as early as possible. Although there are many possible investment vehicles available for this purpose, but there are strong arguments in favour of including retirement annuities in an investment portfolio.
There are attractive tax advantages for RA’s:
- Contributions are deductible from taxable income up to 15% of non-pension providing income, which could be a significant amount, especially for self-employed persons who do not belong to other retirement funds
- Returns generated by RA funds are exempt of tax, which means that they grow faster than endowment investments invested in the same assets
- The tax dispensation on lump sums was recently reviewed and is now an attractive incentive to provide for retirement investments in registered retirement funds. The first R300 000 of the one third lump sum is tax free. The next R300 000 is taxable at 18%, the next R300 000 at 27% and the next at 36%
- Contributions disallowed for tax deductions during the lifetime of the RA, can be added to the statutory tax free amount at retirement, provided that proof of such payments is provided
- When a person changes from one employer to another, retirement fund credits can be transferred to a RA free of tax
- Another application for a RA is that it can be a tax efficient way of prefunding medical aid contributions after retirement
- RA’s can be taken out at any time from birth
No reports have ever been recorded of anyone complaining about making too much provision for retirement, but there are regular reports on the lack of retirement provision and the hardships as a result thereof. The present financial climate emphasizes the need to provide for the unexpected. Why not start saving for your retirement today?
(Courtesy of FA News www.fanews.co.za)
Read more on retirement annuities
Below-inflation increases for with-profit pensioners
These are tough times for pensioners. Consider:
- Inflation has risen, eating away at pensioners' often fixed incomes, particularly in the case of pensioners who have what are called level guaranteed annuities.
Take, for example, the hard-done-by pensioners of the Transnet Second Defined Pension Fund, whose pension increases every year have been pegged at two percent. These pensioners are being impoverished.
- Interest rates have been falling, affecting pensioners who supplement their pensions with, or who live off, bank investments.
- Stock markets have crashed, affecting pensioners with investment-linked living annuities who have also been affected by lower interest rates. They will have to reduce their pensions to protect their retirement savings.
I bring this up because Metropolitan Life, Old Mutual and Sanlam have reported the 2009 increases for their with-profit annuities.
Thousands of retirement fund members have transferred into with-profit annuities in recent years, particularly because defined benefit pension funds have been closed down and, before they became defunct, the funds had to find new providers of pensions.
A with-profit annuity is guaranteed by a life assurance company, with the pension increases linked to the returns earned on the money you used to buy the pension in the first place.
Other features of with-profit annuities are:
- Once a pension increase has been granted, it becomes part of your guaranteed pension for life.
- With-profit annuities are similar to smoothed/stable bonus investments in that when investment markets are providing solid returns, a portion of those returns is held back for the poorer investment years.
Trevor Pascoe, the head of investment services at Old Mutual Corporate, says: "This means that in years when market returns are high, increases tend to be lower than market returns, with the difference being put into the bonus-smoothing reserve.
"When market returns are poor, increases tend to be higher than market returns, with the difference being made up from the bonus-smoothing reserve."
- You can choose the initial level of the pension within a range based on what is called the initial discount purchase rate, the pricing interest rate or the post-retirement interest rate. The higher the rate, the higher your initial pension, but you can expect the annual increase to be lower.
It works like this: you purchase a with-profit annuity with a discount rate of, say, four percent. The return on the fund is a gross 10 percent. You get an increase of six percent (10 - 4 = 6 percent).
If you had selected a discount rate of six percent, you would get an increase of only four percent, but your initial pension would have been higher than one with a discount rate of four percent.
A low discount rate favours people who live longer, as eventually they will receive a larger pension than those who started off with a higher pension but received lower increases.
Lower than before
Pascoe says that even though the FTSE/JSE All Share index returned minus 23 percent for the year ending December 31, 2008, pension increases were still possible this year for its 90 000 with-profit pensioners because of the smoothing based on the good investment returns in previous years.
The long-term average returns and the average inflation rate are the important factors. A pension that grows at an average rate that is higher than the inflation rate is a boon for pensioners.
Over the five-year period to December 31, 2008, the average inflation rate has been 6.2 percent, so only those who bought the highest-possible initial pension have received increases below the inflation rate. Most retirement funds increase their pensions at a rate of only 75 percent of inflation - to say nothing of that awful Transnet Second Defined Pension Fund.
Examples of Metropolitan's increases for its 6 000 with-profit annuitants for this year are:
- Golden Growth product. An increase of 6.04 percent (five-year average increase of 8.88 percent) for its lowest discount purchase rate of 3.5 percent; and 2.4 percent (five-year average of 5.25 percent) for its highest purchase discount rate of 6.5 percent.
- There was no bonus increase for its multi-manager product managed by Investment Solutions because the product was launched in 2005 and has not had time to build up reserves.
Old Mutual, on its older Platinum Pension product, declared an increase of eight percent for this year (five-year average of 9.5 percent) for its lowest discount purchase rate of 3.5 percent; and 6.5 percent (five-year average of six percent) for its highest purchase discount rate of 6.5 percent.
The annuitants of Old Mutual's newer Platinum Pension 2003 product fared less well. Those in the lowest purchase discount category of 1.5 percent will receive an increase of 3.5 percent. Pensioners in the highest discount category of five percent will receive an increase of 1.5 percent, well below the inflation rate of 9.5 percent for 2008.
The 1.5 percent category has not yet built up a five-year average increase, but the five percent category has a five-year average increase of 5.1 percent, which is below the average five-year inflation rate of 6.2 percent.
In the newer range, the median discount purchase category of 3.5 percent received a 2.5-percent increase, but it has a five-year average of 6.9 percent.
Pascoe says the increases for the newer product are lower than those for its older counterpart because it has had less opportunity to build up a smoothing cushion for adverse times.
Examples of Sanlam's increases for its 23 540 with-profit annuitants for this year are:
- Sanlam Quantum Pension. An increase of 4.5 percent (five-year average of 5.8 percent) for its lowest discount purchase rate of three percent; and 1.5 percent (five-year average of 2.8 percent) for its highest purchase discount rate of 6.5 percent.
- Sanlam Bonus Pension. An increase of 4.5 percent (five-year average of 5.8 percent) for its lowest discount purchase rate of three percent; and zero percent (five-year average of one percent) for its highest purchase discount rate of eight percent.
Courtesy of Bruce Cameron Editor: Personal Finance
This article was first published in Personal Finance, a publication of Independent Newspapers, published in The Saturday Star, The Saturday Argus, The Independent on Saturday and the Pretoria News Weekend."
Read more: Level or Living Annuities
Buy Gold Bullion now via Absa Capital ETFs Investment Plan (monthly debit order or single lump sum)
Absa Capital's NewGold ETF (NewGold) is the simplest and most cost-efficient method for investors to invest directly in physical gold bullion. NewGold continuously tracks the gold price and enables investors to invest in a listed instrument (structured as a debenture) in which each security is equivalent to approximately 1/100 ounces of real gold held in a secured stockpile of gold bullion.
NewGold ETF debentures are listed on the JSE (JSE Limited) and are easily obtained through a JSE member stockbroker or through the Automated Outsourcing Services (AOS) Investment Plan.
Although only launched in 2004 the NewGold ETF has grown rapidly due to its attractive returns and recently passed Satrix 40 to become the biggest ETF listed on the JSE.
NewGold is the first and still the only product in South Africa through which institutional and retail investors can securely invest directly in gold bullion, with the added benefit of minimal administrative fees.
When listed on the Exchange Traded Fund Sector of the JSE in November 2004, NewGold was only the third commodity ETF in the world (first two in Australia and the UK) and to date remains the only commodity ETF on the JSE.
Certified Shari’ah Compliant
The NewGold ETF is a non-interest based product investing directly in gold bullion.
In March 2008 the Shari’ah Supervisory Board, made up of specialised jurists in Shari’ah Islamic Law, issued a ruling stating that the NewGold ETF complies with Shari’ah. As such it is in line with Islamic principles of ethical investing.
The issuing company, NewGold Issuer Pty (Ltd), was incorporated for the sole purpose of issuing securities backed by gold bullion and is not involved in any activities that are not permitted under Shari’ah Law.
NewGold opens the way for Muslim investors to gain exposure to gold through investing in a listed ETF.
Benefits of investing in NewGold securities
- Research shows that gold securities should constitute between 5% and 10% of an optimal investment portfolio
- Historically gold has always retained value. Over the long term gold has delivered inflation-beating returns
- Over the years investment in actual gold has proven to be relatively low-risk and notably less volatile than the returns on gold equities
- Gold is an excellent South African Rand hedge as well as a hedge against US Dollar depreciation
- Gold is a proven safe haven investment in unsettled times
- Investing and withdrawing funds is straightforward
- Investment values can be determined at any time.
Read more on Absa Capital ETF NewGold
What can you do to protect yourself from rising medical costs?
In his column Tax Talk published weekly in the Business Times, Professor Mathew Lester, professor of taxation studies at Rhodes answered this question by saying that people should save lots, and then some, for medical expenses in retirement.
He wrote that he receives lots of letters from South Africa’s pensioners and their most frequent gripes revolve around understanding the benefits of medical schemes. Lester says that South Africans should prepare to pay for their own medical expenses in retirement because unless the public sector “makes the biggest comeback since Lazarus’ retirees are on their own.
‘Medical products will still have to be imported and paid for in foreign currency even if China and India master generic geriatric medicines. In addition, if exchange rates against the rand decline, medical costs will continue to increase above the inflation rate,’ he wrote.
The answer? Lester says that the only employer independent tax deductible savings plan available in South Africa is a retirement annuity (RA). Because retirement funds tax has been withdrawn, savings can accumulate tax free. But he caution that the downside to an RA is that the annuity draw down is taxable. On the other hand, medical expenses become fully tax deductible for tax payers over 65 years old. So the taxable annuity is neutralised by the medical expense deductions.
Source: Health Care in South Africa 2009 Author: Liz Still
Read more on retirement annuities
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