NFB FINANCIAL UPDATE

Issue67 April2013

FROM THE DESKCEO’s

The recent weakness shown by our currency warrants

a little attention. Much has been written about the

exceptional relative strength of the rand over the

last decade which, when added to the strength of

local equity and property investments, has had

commentators gushing about this tip of Africa's superb

performance when compared to those dastardly

developed, big braggarts such as the USA and Europe.

They are correct, but I hasten to add, every dog has its

day! I have said in recent publications of this editorial that

without crystal ball gazing, my view is that the elastic band

was stretching a little too far for my liking and a correction

was (and still is) due. In my opinion, this is taking place and

to some extent has already happened. In simple English,

the world's investors have been starved of returns in cash in

their home bases. Like some other faraway places, SA has

offered good yields on our bonds and even cash.

The trick always is the volatility of the rand. As long as it

behaves, typically because of such issues as government

policy, balance of payments, muted inflation, etc... , um,

well-mannered and predictable labour and industrial

relations, all is well. Should these, or any combination of

them, go out of kilter, those fickle foreigners, having

enjoyed the so called "carry trade" run away. In so doing,

they do two things: firstly, they exit our bonds or shares;

secondly, they sell the rand to buy something "safer". What

this is, I don't know, but run they do. Depending on whether

this is a localized SA event or alternatively, a global

emerging market event, will determine the impact. The

former might be over in a jiff, the latter might have seismic

impact. What this means, is the weakening of the rand,

and possibly the rapid increase of interest rates to help

soften this. It would also bedevil the government's efforts to

finance the deficit they need to fill as announced in the

budget and in terms of the medium to long term strategic

plans of the state. This is important - ask any self-respecting

central bank governor.

The issue is the current and sustained low cost of

borrowing which enables treasuries around the world to

issue debt (read bonds) and enjoy sub-inflationary interest

rates. Should this reverse we start a slow spiral into trouble,

where the interest bills swallows more and more of the

revenue the economy and taxes generates for the

government. Interestingly, SA is not over-borrowed in

international markets. There has been sustained appetite

for our bonds. This represents a double edged sword. It has

been attractive for us to issue debt and we have taken

advantage, but the danger is the reversal of this trend, just

when our Treasury is getting ready to finance the

government's spend.

We are also witnessing the negative effects of the

rand's weakness and the unprecedented and ridiculous

wage settlements negotiated in the recent past; both in

the mining sector and in the general economy. Our wage

bill relative to productivity is shocking and this will have an

impact in the form of added inflationary pressure in time to

come.

So where does this leave us as investors? Notably,

when analyzing the makeup of local unit trust portfolios,

one notes that all of the portfolios we support are heeding

these trends and are all pretty fully invested; in some cases

even slightly over the limits allowed. We also think that

taking advantage of the now generous annual foreign

allowance we are entitled to is smart.

What we do with these funds once overseas is

dependent on one's appetite for risk. Importantly, if time is

on your side and income or even access to funds isn't

required, a quality portfolio of top global shares (preferably

with higher dividends) or a well managed balanced

portfolio, is bound to have a positive impact. Cash should

be avoided given that interest rates are negative in real

terms. Property overseas is also attractive. The probability,

given the unprecedented worldwide issuance of money, is

a resurgence of inflation in years ahead. This inclines us to

promote, whenever possible, growth assets in portfolios.

Property in a commercial sense has not returned to favour

with legacies of the meltdown of 2007/8 still clear in the

memories of investors and borrowers alike. It requires a

cautious approach, but is certainly enjoying a lot of

attention and research at NFB, given the positive cash

flows and longer term capital growth these investments

enjoy. Once again, we like a multi management approach

where we entitle either our Asset Management team, or

top managers the right to switch monies between asset

classes.

Either way, the key message istrying, where possible and wheremonetary and risk budgets permitthe luxury, to allow your wealthmanager the mandate to createinflation beating returns, bothlocally and, importantly right now,globally.

The risk of loss is ever-present when investing in growth

assets. This risk is diminished by time on the block. The risk of

running into troubled water is unavoidable where riskier

growth assets are avoided, for fear of short-term losses

being incurred. This statement does not promote wholesale

commitment to risk. It does, however, strongly promote

detailed engagement with your wealth manager to review

your needs, understand risk, inflation, and to adapt

portfolios if necessary.

In conclusion, recent developments in the retirement

savings space has created a very effective and flexible

opportunity in the space of Estate Planning. Your NFB

wealth manager is aware of these developments. I would

promote this being discussed as Estate Duty and

associated costs are very significant and can often be

moderated.

IN THIS ISSUE

Front Page:EOF C drom the ’s esk

Center Page:Budget 2013/2014 -Boring?

Back Page:Rewards programs -are you making themost of them?

f i n a n c i a l s e r v i c e s g r o u p

Mike Estment BA, CFP®

CEO - NFB Financial Services Group

fortune favours the well advised

Budget 2013/2014

Boring?

Finance Minister, Pravin

Gordhan, does not seem to

agree with Mr Keynes and

delivered a budget that did

not offer much incentive to taxpayers.

In fact, most commentators cited the

budget as a non-event with little to

discuss.

When assessing the budget more

closely there are a number of items

discussed that are of interest to us

and we will in the course of this article

endeavour to touch on these.

Retirement andRetirement AssetsThe Taxation Laws Amendment Act

2012 was promulgated on 1 Feb 2013

and included Section 10C which is

effective from 1 March 2014. It is this

Section that will provide some

fantastic investment planning

opportunities going forward through

the use of retirement annuities. Before

we get to Section 10C lets summarise

the basics of a retirement annuity:

� Your contributions are tax

deductible up to 15% of your non-

retirement funding income. This will

change effective from 1 March

2014 with a capped Rand value of

R350 000 for contributions to

pension, provident and retirement

annuity funds.

� At death there is NO

# Estate Duty (save 20%)

# Executor's fees (save 3.99%)

# Capital Gains Tax (save 13.3%)

� Within the retirement annuity itself

tax is applied at

# 0% Income Tax

# 0% Capital Gains tax

# 0% Dividends Withholding Tax

The above detail in itself makes a

compelling case for the inclusion of a

retirement annuity in your portfolio. In

addition to these factors Section 10C

states that any non-deductible

contributions (contributions over and

above the maximum allowable

deductions) can be used to reduce

tax in respect of income from

compulsory annuities. The following

examples illustrated the potential

benefit:

Susan belongs to a pension fund with

a current value of R10m. She retires

from the fund, transfers to a living

annuity, and has R2 000 000 in

accumulated non-deductible

contributions.

Option 1: Susan does not take a lump

sum at retirement.

The first R2 000 000 of income from the

living annuity will be exempt from tax.

Option 2: Susan takes a lump sum

withdrawal equal to R315 000

Section 10C exemption only applies

to taxable annuity (not the R315 000

taxed at 0%)

R315 000 – R2 000 000 = -R1 685 000.

Therefor there is no tax on the lump

sum. The lump sum is first set off

against the non-deductible

contributions and does not in this

scenario form part of the lump sum

retirement tax table. The amount of

R1 685 000 will be set off against the

income from the living annuity.

Option 3: Susan take a lump sum of

R2 315 000

R2 315 000 – R2 000 000 = R315 000

The R315 000 is then subject to the

lump sum retirement tax table, where

the first R315 000 is taxed at 0%, so

Susan gets R2 315 000 tax free at

retirement.

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“The avoidance of taxes is the only intellectual pursuit thatcarries any reward” ~ John Maynard Keynes.

In addition to the examples above,

should you pass away while you are

still invested in a retirement annuity

and the beneficiaries elect to

commute their portions, they can

then take a combined tax free lump

sum equal to the deceased's

accumulated non-deductible

contributions. Said another way, your

beneficiaries would get an amount

that is free of Estate Duty, Income Tax,

Capital Gains Tax, Executors fees and

any tax on retirement lump sum

benefits.

Boring budget? (we have used

some poetic license here as 10C was

part of the recently promulgated

Taxation Laws Amendment Act and

not the budget itself).

Income ProtectionThe landscape of income protection

benefits will be changing. It was

discussed in the Budget that

premiums towards income protection

will no longer be deductible,

however, pay-outs will be exempt

from tax where they were previously

taxable. We will be keeping a keen

eye on this development and inform

you accordingly. Boring budget?

Taxation of RetirementfundsEarlier we touched on proposed

changes to deductible contributions

in respect of a retirement annuity from

15% of non-retirement funding income

to a capped value of R350 000.

Developing this subject a bit more it

was proposed that contributions to

retirement funds (to now include

pension and provident funds as well

as retirement annuities) can be

deducted up to 27.5% of the higher of

your remuneration or taxable income

capped at the R350 000. Employer

contributions to your retirement

benefits will be treated as a fringe

benefit, however, they should be

deductible later on in the tax

calculation. All of these changes are

in an effort to harmonise the tax

treatment of all types of retirement

fund contributions. Boring budget?

Pre-RetirementPreservation and Post-Retirement AnnuitisationThere are a few proposals discussing

pre-retirement preservation and post

retirement annuitisation all in an effort

to get consumers to retain their

accumulated retirement benefits:

� From a date still to be determined

(P-day) upon resignation from a

provident or pension fund a

member's benefit will go to a

default preservation fund or a

preservation fund of their choice

upon request.

� Currently you can make one full or

partial pre-retirement withdrawal

from a preservation fund.

Withdrawals from new

preservation funds, after P-day, will

be capped at one withdrawal per

year with each withdrawal limited

to 10% of fund value.

� After P-day provident fund

withdrawals at retirement will be

limited to one third of fund value

with the balance used to

purchase an annuity. This ruling will

only be applicable to contributions

made after P-day.

� At retirement accumulated

benefits will go to a default annuity

product unless the member

requests a fund of their choice.

� The rules surrounding living

annuities will also get revised

incorporating new age-related

drawdowns and prudential asset

requirements.

It is very important to make an

informed decision when retiring or

resigning. Boring budget?

Taxation of TrustsThe propositions put forward by

Minister Gordhan regarding the

taxation of trusts have caused many

frantic e-mails and phone calls.

Before we get to the detail it is always

important to consider your rationale

for using a Trust, and then only after

this, determine whether your

objectives may or may not be

compromised by any potential

changes. The Minister is concerned

around the use of trusts to avoid

Estate Duty and also plans to limit the

use of Trusts as flow through vehicles.

The bottom line of his proposal is that

all income will be taxed in the Trust

and any capital that is distributed out

will be taxed as income. If the

aforementioned proposals are

promulgated Trustees will no longer

be able to reduce the Trust's tax rate

by distributing income and gain to

beneficiaries with lower tax rates than

the Trust; although there will be

certain 'deductible contributions'.

Please note that this is just a

framework put forward by SARS and it

is fraught with existing legal

precedent that will make for an

arduous process to reach enactment.

Through the appropriate use of

product when making investments

into unit trusts or direct equity

portfolios it is possible to reduce the

income tax on trust income to 30%,

from 40%, and capital gains to 10%

from 26.6%. Please speak to your NFB

advisor for more detail. Boring

budget?

ConclusionWe have strayed from the norm of the

traditional content of our articles into

an area that is both confusing and

technical. It is essential for us that our

clients are well informed and our

advisors on the cutting edge of

market and legal advancements. The

majority of the detail above still has to

be promulgated (and is subject to

interpretation) and will likely be

panelbeaten and change form along

the way. We will keep you informed of

progress and continue to ensure that

your portfolios are positioned to best

suit your requirements alongside the

prevailing investment environment.

Stephen Katzenellenbogen B.Com (Hons),

CFP , Adv PDFP®

Private Wealth Manager - NFB Gauteng

Rewards programs

A licensed inancial ervices roviderF S P

Johannesburg Office:

NFB House 108 Albertyn Avenue6Wierda Valley 219 ,

P O Box 32462 Braamfontein 2017,Tel: (011) 895-8000 Fax: (011) 784-8831

E-mail: nfb@nfb.co.zanfbfinancialservicesgroup.co.zaWeb: www.

East London Office:

NFB House 42 Beach RoadNahoon East London 5241,P O Box 8132 Nahoon 5210,

Tel: (043) 735-2000 Fax: (043) 735-2001info elE-mail: @nfb .co.za

ecWeb: www.nfb .co.za

Port Elizabeth Office:

110 Park Drive Central Port Elizabeth 6001,P O Box 12018 Centrahil 6001,

Tel: (041) 582-3990 Fax: (041) 586-0053info peE-mail: @nfb .co.za

ecWeb: www.nfb .co.za

So you go to the gym, have

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Besides the reduction in your life

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For example if you are on

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Having a baby? The Baby benefit

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If you belong to Momentum

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your flight? While on a business trip or

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Looking for a great gift? Utilize the

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Wellness programs really do offer

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Remember thatincreasing andmaintaining your statuson the various wellnessprograms is not difficultto do:

1. Do a few onlineassessments

2. Have your healthcheckups and

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Besides all the discounts and savings,

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Contact your Private Wealth

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Rewards programs

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are you making the most of them?

Julie McDonald B.Com, CFP®

Financial Paraplanner - NFB East London