Investment Newsletter (and related info)
March 2009
Budget 2009 in a nutshell
Budget 2009 in a nutshell
Manuel went to great lengths to explain the impact of the global economic crisis on local companies and employees. “When a global motor company cuts back on making cars, it cancels its orders for catalytic converters,” he said. And proceeded to tell the audience that the factory they should worry about was “not in Detroit or in Shanghai” but in the Eastern Cape. The workers threatened by recent events weren’t in America or China; but the factory worker in Uitenhage and the mineworker in Rustenburg.
The minister warned that South Africa’s GDP growth for 2009 would fall to around 1.2%, the lowest rate since 1998. This was due to consumer weakness, an expected decline in private sector investment and lower exports from the commodity sector. The country’s latest manufacturing figures (showing a 7% decline year-on-year to December 2008) certainly confirm Manuel’s fears. The challenge for National Treasury is to deliver a budget that balances the hopes and needs of the individual within the constraints of contracting revenue.
Manuel went to great lengths to explain the impact of the global economic crisis on local companies and employees. “When a global motor company cuts back on making cars, it cancels its orders for catalytic converters,” he said. And proceeded to tell the audience that the factory they should worry about was “not in Detroit or in Shanghai” but in the Eastern Cape. The workers threatened by recent events weren’t in America or China; but the factory worker in Uitenhage and the mineworker in Rustenburg.
1. Protecting the poor
As expected the latest budget includes many steps to assist the poor. Manuel added R25bn to provincial budgets (earmarked for healthcare and education), R13bn for social assistance grants, R4bn for school nutrition programmes and R2.5bn to municipalities for basic services. We appreciate the minister’s “it’s what the money buys that matters” sentiment in this section; but don’t find much in the speech that suggests the intended recipients of these monies will better served going forward. South Africa’s ‘bang for buck’ performance in the health and education departments is abysmal. And billions of rand intended for the poor evaporates in the hands of tender recipients each year.
2. Sustaining employment growth and expanding training opportunities
Treasury says that government “will work with business and organised labour to protect work opportunities and accelerate skills development” in the next year. Additional funds have been made available to Working for Water and Working on Fire programmes and Manuel also announced R1bn for the Umsobomvu Youth Fund and R3.7bn for low-income housing projects. Our main concern under this heading is the R4.1bn allocation to Phase II of government’s so-called expanded public works programme. Government’s responsibility in this area is to establish an environment that encourages business (both local companies and international investors). They should leave the actual job creation to the private sector. Public works programmes don’t create sustainable job opportunities and there’s no honour in placing picks and spades in the hands of the poor and claiming victory as a skills facilitator.
3. Building economic capacity and promoting investment
A country that hopes to grow fast enough to ensure better lives for all its citizens must have the capacity to do so. We’ve witnessed, for example, the hardship caused by Eskom’s woes in January 2008. Thus Manuel’s third pillar is a major ramp-up in infrastructure investment. Treasury has allocated a number of additional amounts as part of the longer-term R787bn plan. “R6.4bn is added for public transport, roads and rail networks, R4.1bm for school buildings, clinics and other provincial infrastructure projects, and R5.3bn for municipal infrastructure and bulk water systems.” The numbers look great on paper; but in reality they’re way too small to make major inroads into existing backlogs. We only hope the systems are in place to ensure this money is fully applied to the intended projects.
4. Addressing the barriers to competitiveness that limit an equitable sharing of opportunities
A competitive economy is essential if South Africa hopes to win the battle with international companies. Manuel increased the budget allocations by R1.6bn for the “industrial development and small enterprise support programmes” and R1.8bn for “rural development and small farmer support.” Recent developments in agriculture are a major cause for concern. We’ve heard some interesting proposals to enhance the subsistence farming to contribute to the sector in coming years.
5. And, in doing these things we must maintain a sustainable debt level so that our actions today do not constrain our development tomorrow.
The fifth column in Manuel’s plan supports all the others. Parliament was left in no doubt that government’s ability to provide massive assistance to the poor hinged on prudent fiscal strategy. “In the present global uncertainty, our task is to respond to the economic downturn without putting our long-term financial position at risk,” said Manuel. Although he hikes the budget deficit to 3.8% of GPD in the 2009/2010 year he notes the “debt service costs” remain reasonable at 2.5% of GDP.
And finally, the news you’ve been waiting for
Manuel once again announced significant reductions in the personal income tax burden. He provided inflation relief (by moving income tax brackets) and some additional respite to the so-called low and middle income classes. This would ‘cost’ Treasury R13.6bn in the 2009/2010 year. The income threshold for income tax is moved to R54 200 for taxpayers under 65, and R84 200 for those over 65. If your income is less than this amount you won’t pay income tax at all.
We were really enjoying the budget speech until Manuel sneaked in the following shocker. He announced a 23c to 24c per litre increase in the government fuel levy from 1 April 2009 and a 17.5c increase in the Road Accident Fund (RAF) levy. It’s common cause that the country’s roads are in a shocking state – and that the RAF is pathetically managed. This decision places an additional inflation burden on the entire economy. And our last rant on the topic is that no-one objects to paying additional taxes if the promised improvements are delivered; but they seldom are!
(Courtesy of FA News www.fanews.co.za)
Are you retiring from a Pension Fund, Preservation Fund, Provident Funds or Retirement Annuities?
Depending on the type of retirement fund you belong to, you may withdraw up to one third of your total retirement benefits as a cash lump sum (a portion of which could be tax free), with the remainder you have to buy a pension.
Conventional Life Annuity vs. Living Life Annuity
| Feature | Convertional Life Annuity | Living Life Annuity |
| Annuity Instalment | Level or increasing instalment | May be from 2,5% to 17,5% of the fund value - may only be adjusted once per year on fund anniversary date |
| Flexibility | May normally not be transferred to a living life annuity | - Undelying asset composition may be changed by swithching between funds and/or portfolios. -May be transferred to conventional annuity at any time. |
| Investment Risk | No risk for investor. Instalments are guaranteed for the life time of the annuitant(s) | The balance of the fund depends on the return achieved on the underlying assets, as also on the size of the annuity instalment. Poor investment performance and /or a too high instalment level may deplete the fund over time. |
| Guarantees | Instalments are guaranteed and is at least payable until the expiry of the guaranteed term ( if selected). | Portion of investment capital may be guaranteed by selecting underlying investment funds that offer guaranteed options |
| Situation At Death Of Annuitant | Instalment ceases at death of last surviving annuitant, unless within guaranteed period. | Balance of fund is transferred to nominated beneficiaries, who may proceed with life annuity of fund may be paid out over 5 years to nominated beneficiaries. |
Read more on conventional and living annuities
Don't resign in a panic for your pension
Do not, don't resign from your job to get your hands on your retirement money. It's likely to be the silliest thing you could do.And don't be taken in by anyone who encourages you to resign with scare stories about government wanting to "nationalise" your savings or any similar nonsense.
A growing number of unscrupulous intermediaries and financial services companies have been spreading unfounded stories about the government's reform of the retirement industry so that they can gain short-term advantage.
For example, an article I wrote more than a year ago has been bastardised to imply that government wants to steal your retirement savings, and it's being widely distributed by email. I have proof that it's being distributed by financial services companies and their agents.
The situation has reached such acute proportions that Finance Minister Trevor Manuel, some of his colleagues in Cabinet and representatives of several trade union federations last week held a media conference to assure workers that the government does not intend to attach anyone's retirement savings.
Remember that one of the major reasons for retirement fund reform is to protect us from the way many companies (not the government) have plundered our retirement savings. Recent examples of this include the Alexander Forbes secret profits affair, surplus stripping, the Fidentia debacle and the exceptionally high costs of life assurance retirement products with unfair contract conditions, including the confiscatory penalties that life assurers apply when you are unable to keep paying premiums.
It's very important that you understand the implications of accessing your retirement savings before you retire and of spending this money on anything but retirement.
Some of the consequences of resigning now to get hold of your retirement savings include:
1 Hard times: If you resign now you may find it very difficult to find new employment or to be re-employed on the same conditions. The reason is that the economy is slowing on the back of extraordinary energy price hikes (petroleum and electricity) and the international credit crunch.
2 Costs: If you take your retirement savings before retirement, you will incur enormous costs, including taxation costs.
3 You will retire poor: Saving for retirement is a life-long affair. Most people retire with insufficient funds because they cash in their retirement savings along the way to retirement. Study after study has shown that the best way to retire financially secure is to save 10 percent of every rand you earn for retirement. And this begins with your first day at work. If you delay saving for retirement, or cash in your retirement savings, you put yourself at an enormous disadvantage.
If you delay saving or cash in your retirement savings at age 35, you will then need to start saving at least 15 percent of your income if you want to retire financially secure.
If you delay saving or cash in your retirement savings at 40, then you will need to save at least 20 percent of your income until you retire. If you don't maintain these saving levels you will simply not have enough money on which to live when you retire.
Ask yourself whether you could live on the government social old age grant of R940 a month, or if you could live on less than 30 percent of your current salary (excluding any allowances) if you cashed in your retirement savings at age 35 and then only saved 10 percent of your income until retirement.
Government's aim is to help you and protect your rights
The government's intention behind reforming the retirement fund industry is to ensure that you have sufficient money on which to retire. Nothing is being decided autocratically. Many outside experts are giving their input and the proposals will be debated by government, business and the trade union movement.
The government has given repeated assurances that nothing will be done to undermine your existing rights. This means that you will still be able to:
So don't rush into any rash decision to resign. You will be doing yourself a great disservice.
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."
How to avoid sure-fire ways to lose your money
When investment markets run into trouble and returns start to tumble, unscrupulous people flogging high-risk products and scam artists come out to play. And their main targets are too often pensioners and people on fixed incomes.
Pensioners are the main target because most retire without sufficient cash and start to feel the pressure when markets turn, as they have, and they also experience the effects of negative real interest rates (nominal rates less inflation).
Let me remind you about Jack Milne, the fraudster who spent a year in jail for his scam PSC Guaranteed Growth Fund. Milne launched this so-called investment in 2001 when markets were volatile, claiming that only he could provide decent returns. The rest of the investment industry, he implied, was useless.
And Milne falsely claimed that everyone's investment would be guaranteed by then listed company Tigon, headed by Pietermaritzburg-based Gary Porritt, who still faces criminal charges for his alleged part in the scam.
Pensioners who do not have guaranteed pensions are particularly vulnerable to scamsters. They may have discretionary investments or an investment-linked living annuity in which they take all the investment risk. If these investments have a high exposure to shares, a pensioner could be in trouble in the current turmoil.
One of the temptations is to seek out investments that "promise" better returns. The problem is that too often they do not deliver.
Next week I will cover in more detail how pensioners who do not have guaranteed annuities should deal with the current meltdown. This week I will concentrate on how to spot a scam.
It is not that a whole lot of new scams and high-risk products have suddenly sprung up. But they will come and people will be suckered. The purpose of this column is to warn you that you need to be wary.
Most of these high-risk and/or scam products take the legal form of unlisted companies.
Hard-sell tactics are employed and you will be promised much, including guarantees on your capital. You will be told by slick sales people the offer is limited both in time and in the number of people to whom it is offered. You will be asked about how badly your current investments are doing.
Increasingly, high-risk and scam investment products are structured through dubious offshore jurisdictions, which have lax regulations.
These are all signals that the product is high risk.
So here are some simple rules:
1 Do not deal with someone who is not registered with the Financial Services Board (FSB) as a financial services provider (FSP) or an agent of an FSP. Although this is not a guarantee that you will not be given bad advice, at least action can be taken if there is a problem.
You can check with the FSB by going to its website, www.fsb.co.za, clicking the "FAIS" link at the top right-hand side of the page and then clicking "Search for financial services providers". You can also phone the FSB's call centre on 0800 110 443 or send an email to info@fsb.co.za.
You must always check, because a scamster will merely claim to be registered.
2 Ensure that the product or product provider is regulated by the FSB.
3 Always insist that you receive everything in writing. This rule applies particularly to any guarantees on your capital and your returns.
4 Be extremely wary if the promised returns are above the prime interest rate (currently 15.5 percent).
5 Never be rushed into anything and never invest if you are not permitted to take away documents to study at your leisure or to refer to an expert, such as a lawyer.
6 Always insist on receiving in writing a list of all costs, as well as commissions or any other payments the person who sells you the product will receive.
Treat with great care any pro-duct in which the costs, including commissions or fees paid to the sales person, are more than six percent initial and two percent annual. Be highly suspicious if the commissions or fees are more than three percent a year.
7 If you still wish to invest in an unregistered product, such as one that is structured through an unlisted company, invest no more than five percent of your money. In that way you will not lose your all.
8 Be wary of unlisted companies. An unlisted company is the quickest way to get around the many protections provided for investors. It is not that all unlisted companies are duds. Many successful companies start as unlisted companies. But they are given a bad name by those people who wish to separate you from your money.
If you invest in an unlisted company, you must:
- Ensure the company is registered in South Africa. Have your lawyer or accountant check for you. Avoid foreign-registered unlisted companies like the plague.
- Insist on receiving a copy of a prospectus, which should contain all the details of the company and its products. If you do not understand the prospectus, don't invest.
- Check the details in the pros-pectus, and determine whether the banks or brokers listed exist and if they are involved with the company.
- Be careful of grandiose, vague generalisations and jargon, such as shares in a company that is developing alternate energy resources for global sustainable development projects.
- Regard promises that your returns will dramatically improve because the company will list in the near future as a warning sign that a scam is afoot.
- Check whether the company has a track record.
9 Be wary of property syndication schemes. Many schemes being marketed nowadays have very complex, unlisted company structures that separate you from having any direct claim on the property if things go sour.
Most have extremely high costs and pay excessive commission and fees to sales people. Such costs could be camouflaged relatively easily while property prices were increasing by 20 percent a year. However, now that property is in the doldrums, the riskiness of property syndications is likely to be exposed rapidly.
In the end, if it sounds too good to be true, it will be too good to be true.
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."
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