issue 33 - quarter 1 - january 2015 jan.pdf · 2017. 3. 14. · financial'planning! james...

Issue 33 - Quarter 1 - January 2015

Financial'Planning!James Vickers +27 11 803 8105 [email protected]

Ian Peters +27 11 803 8158 [email protected]

Graeme Holt +27 11 803 7642 [email protected]

Jacqui Nolan +27 11 803 7782 [email protected]

Marinda Combrink +27 11 803 7399 [email protected]

Tracy Tan +27 11 803 7393 [email protected]

Yolandi Perold +27 11 803 6519 [email protected]

Tinks Hichert +27 11 803 7689 [email protected]

Roxy Geel +27 11 234 2902 [email protected]

Robyn Molenaar +27 11 803 7399 [email protected]

!Employee(Benefits!Chris Ellis +27 11 803 3663 [email protected]

Guy Peters +27 11 803 7379 [email protected]

Mark Lumley +27 11 803 7379 [email protected]

Peliswa Mzondo +27 11 234 6682 [email protected]

!Ampers&nd!Tom Barlow +27 10 595 1336 [email protected]

Tarryn Keogh +27 10 595 1337 [email protected]

Tiaan Fourie +27 10 595 1338 [email protected]

!

The$merits$of$not$withdrawing$from$your$pension$assets$ Often retirement funding becomes the target of regular raiding to fund short term needs. This often leaves little or nothing to provide an income for retirement. Therefore it’s important to see these funds as sacred and untouchable until retirement, despite their accessibility that allows a once off withdrawal from a Preservation Fund or a full withdrawal on termination of employment, prior to retirement. Reasons why you should not make a pre retirement withdraw • Firstly, you will be taxed on any pre-retirement fund withdrawal. The tax liability

will be calculated based on the pre-retirement tax table illustrated in table 1 below. • Secondly, the withdrawal value will reduce your retirement tax free entitlement

(currently R500k) proportionally. If for example you withdraw R300k, your tax free amount at retirement will be R200k (R500k- R300k).

• On average, employees change employment seven times prior to retirement and fail to preserve their fund benefits, preferring to use the withdrawal benefit for current needs or speculative investing. This has led to a shortfall in their retirement funding and a drop in their standard of living at retirement. In extreme cases relying on family members to fund their retirement shortfall.*

• Retrenchment leads to a premature termination of contributions to retirement funds which diminishes the projected amount of retirement capital available.

• If employees are close to retirement age when they are retrenched they may receive an early retirement package, causing them to rely on their pension income earlier than expected. The “extra years” in retirement causing a shortfall in capital.

• You lose the tax incentives provided by retirement funds, namely, interest, dividend and capital gains tax free returns.

• The most crucial compounding growth, which takes place in the last years before retirement, is lost. By way of an example I would like to highlight this often overlooked but invaluable principle of investing:

Example: Assuming two employees (employee A and employee B) have the same fund value of R1m within their respective employer retirement funds. Both funds are invested in the same investment portfolio and achieve a 12% annualized return. Both employees have 10 years before retirement age – please see Table 1 below. If employee A withdraws the full R1m he will net R779 050.00 after tax. If he invests this amount at 12% he’s retirement value will be R2 545 709 after 10 years - please see blue line in Graph 1 below. By comparison, if employee B does not make a withdrawal and continues to invest at 12% he’s retirement value will be R3 267 709 after 10 years. Employee B will therefore have an additional R722k at retirement compared to employee A - please see red line in Graph 1 below. In order for the employee A to catch up (post withdrawal) and retire with the same amount as employee B, he will either have to save an extra R3000.00pm or invest at a higher level of risk and try and achieve a 15% annualized return - please see green line in Graph 1 below.

If we extrapolate this example over 20 years plus, it almost becomes impossible for employee A to catch up to employee B, needing to rely on both a higher return (>15% annualized return) and up to 10x more in monthly contributions. Table 1

Graph 1

Source: Vickers & Johns Financial Planning (Pty) Ltd

Assumptions Capital Amount % annual return Withdrawal

Employee A R 1,000,000.00 12% R 1,000,000.00

Employee B R 1,000,000.00 12% R 0.00

Pre Retirement Tax on Lump Sum Benefits

Under Limit Base Amount Tax Rate Amount over

R0- R22500 R 0 R 0 0%

R22501- R600000 R 22,500 R 0 18% R 22,500.00

R600001-R900000 R 600,000 R 103,950 27% R 600,000.00

R900001+ R 900,000 R 184,950 36% R 900,000.00

Employee A Employee B

Amount taken in cash R 1,000,000.00

Amount taken in cash R 0.00

Less tax free portion R 22,500.00

Less tax free portion R 0.00

Taxable portion R 977,500.00 Taxable portion R 0.00

Tax paid R 220,950.00 Tax paid R 0.00

Tax percentage rate 22.60%

Tax percentage rate 0.00%

After Tax amount R 779,050.00 After Tax amount R 1,000,000.00

Ways$to$safeguard$your$retirement$funding$from$the$need$to$make$an$early$withdrawal$

• Set up a savings routine on a contractual basis. Retirement savings should be treated as a recurring monthly payment. This ensures the amount is saved regularly, making it easier to add to your fund. In addition, retirement vehicles such as a Retirement Annuity which legally do not allow a pre retirement withdrawal automatically eliminate the possibility of dipping into your savings and making the dreaded taxable withdrawal.

• Have a financial plan that not only sets out your retirement savings and objectives, but also sets out an emergency fund where money can be accessed with ease at short term notice. A Flexible Investment Option is an excellent voluntary savings vehicle for this purpose

• Have a budget which allows for a voluntary savings contribution to be made, whether on a monthly basis or annually when money is available. Then aim for a minimum fund value which is topped up to this level whenever a withdrawal is made – never depleting the full fund value.

Retirement funds are often the only source of retirement savings for many. For this reason and the reasons highlighted above, it’s important not to be tempted to access your funds prior to retirement. It’s also advisable to supplement your retirement funding with other forms of liquid asset investments to fund short term liquidity requirements and safeguard your retirement nest egg against raiding. Notes: *Old Mutual retirement survey

Good$news$for$investors$in$2015$

1. Tax-free investment

Treasury has introduced a new tax-free investment which is effective from March 2015. A tax-free investment, as envisaged by the Income Tax Act, can only be held by a natural person or a deceased or insolvent estate of a natural person.

Tax exemptions This investment will be exempt from income tax (dividends, interest, rental income) and capital gains tax and any capital gains or losses realised by the investor when disposing of this asset will be ignored. Contributions Contributions to the tax-free investment is limited to R30 000 per year of assessment, must be an amount in cash and limited to an overall life time maximum of R500 000. • If a person exceeds the R30 000 annual contribution, an amount equal to

40% of that excess is deemed to be an amount of normal tax payable by that person for that year of assessment.

• The same ‘penalty’ will apply if a person contributes in excess of the overall limit of R500 000.

Liquidity In terms of the regulations, the tax free investment must be liquid as it determines that any amount in respect of the investment must be payable in cash to the investor within 7 days after the request is made. Transacting capabilities A tax free investment cannot be used as an account: • Against which debit orders or stop-orders may be debited, • From which credit or debit card payments are made, • Where transfers can be made to any other persons. • It may also not be accessible at any automatic teller or similar device.

No risk benefits No existing investment or account may be converted to the tax free investment. The tax free investment will not provide any risk benefits (life cover, disability dread disease). It is a pure investment vehicle. For further information please contact your VPFP financial advisor.

2. New retirement date definition

A new retirement date definition is being introduced in the Income Tax Act and will be effective from March 2015. At the moment the retirement date of a member is when:

• a member of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund, in terms of the rules of that fund, becomes entitled to an annuity or a lump sum benefit on or subsequent to attaining normal retirement age; or

• a nominee or dependant of a deceased member of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund, in terms of the rules of that fund, becomes entitled to an annuity or a lump sum benefit on the death of the member.

The new proposed definition changes the retirement date to when:

• a member of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund, elects to retire and in terms of the rules of that fund, becomes entitled to an annuity or a lump sum benefit contemplated on or subsequent to attaining normal retirement age.

The amendment provides for more flexibility for a member to decide when he retires from a fund for income tax purposes. The rules of the fund will also still dictate the retirement date. The member will choose when to access their funds following the fund retirement date.

How$to$calculate$your$Medical$Scheme$Tax$Credits$for$2014/2015$$Taxpayers younger than 65 Medical scheme tax credits may be claimed for medical aid contributions. The tax credit is calculated by taking the following monthly amounts (determined by SARS) over an annual basis:

• The member and first dependant, R257 each, and • R172 for each additional dependant.

All excess medical scheme contributions and qualifying medical expenses may be claimed as an additional tax credit, which is calculated as follows: 25% × (((Medical aid contributions – (4 × medical scheme costs tax credit)) + actual qualifying medical expenses paid) – 7,5% of taxable income) Note – Taxable income will include taxable capital gains. Taxpayers over the age of 65 and those (under 65 with a family member with a Disability) Medical scheme tax credits may be claimed for medical aid contributions made as above; All excess medical scheme contributions and qualifying medical expenses* may be claimed as an additional tax credit, which is calculated as follows: 33.3% x (((Medical aid contributions - (medical scheme costs tax credits x 3)) + actual qualifying medical expenses paid). *Qualifying medical expenses are: Actually paid for by the taxpayer which have not been covered by the medical scheme and that appears as ‘claims not covered by scheme’ on the medical tax certificate and the necessary receipts can be produced as proof of payment. Example 1: John is 30 years old and married to Kathy. They have two minor children, Pete and Ruth. John contributes R3 800 per month to a medical scheme and the whole family is on the medical scheme. He also incurred additional allowable medical expenses of R58 000 for the year of assessment. John’s taxable income is R467 000 for the year of assessment. John’s medical tax credits will be calculated as follows: Step 1: Medical scheme tax credits The monthly amount is prescribed by SARS based on the number of beneficiaries on the scheme. For this family the total amount is R858 per month so a total of R10 296. Step 2: Additional medical tax expenses 25% x (((R45 600 – (R10 296 x 4)) + R58 000) – (7.5% x R467 000)) 25% x ((R4 416 + R58 000) – R35 025)) R6 848

Step 3: Total tax credit = R10 296 + R6 848 = R17 144 Example 2: Assume John is now 67. Only John and Kathy are still on the scheme. Assume all the figures are exactly the same as above. Step 1: Medical scheme tax credits The monthly amount is prescribed by SARS based on the number of beneficiaries on the scheme. For John and Kathy the total amount is R514 per month so a total of R6 168. Step 2: Additional medical expenses 33.3% x (((Medical aid contributions - (medical scheme costs tax credits x 3)) + actual qualifying medical expenses paid) 33.3% x ((R45 600 – (R6 168 x 3)) + R58 000) 33.3% x (R27 096 + R58 000) R28 337 Step 3: Total tax credit = R6 168 + R28 337 = R34 505

Around$the$Table$–$2014$in$review$Market Overview Many equity markets around the world have continued to surprise investors – both bullish and bearish – over the last 18 to 24 months, yet most markets have continued to grind higher. The SA market is no exception. The JSE Allshare Index (JSE ALSI) has produced positive returns for 15 out of the past 18 calendar years (looking at data from 1996 to 2014) and is up another 10.01% for 2014. The cumulative return over this period has also been very strong, with the market generating a total return of 1412% or 15.40% per annum. This return translates into a cumulative return of SA Headline Inflation plus 9.4% p.a., which is significantly above the long-term achieved return of SA Headline Inflation plus 7.5% p.a. When we analyse the discrete return of the JSE ALSI over various periods we get a similar picture. Here we illustrate a summary of the JSE ALSI over various periods, looking back to the start of 31 Dec 1995 to 31 Dec 2014. We include various assets and SA Headline Inflation (CPI) as reference.

Source: Moneymate, Ampersand Asset Management What is evident from the graph is that SA equity has performed exceptionally well over the longer term, and has actually managed to outperform global equities for most periods, except for the last 5 years. The outperformance of SA equities versus other SA assets and Headline CPI was also very consistent and comprehensive over time, which reinforces the view that equity assets should provide real returns and outperformance of fixed income over the longer term. It is, however, critical to have an understanding of how SA assets have performed in a global context and for that reason we look at the performance of SA assets in USD terms:

Source: Moneymate, Ampersand Asset Management When we look at the JSE ALSI and other assets in USD terms, the annualised performance generated (in percentage terms) is significantly different, yet the overall trends are similar: the long-term performance numbers look very attractive, while the shorter term numbers start to lag. Much of this move occurred in the last 3 years. This correlates directly to relative performance of Developed Market Equities versus Emerging Market Equities. We use the following graph to illustrate the trend:

Source: Ampersand Asset Management, I-Net BFA We have discussed this graph in detail over the past 24 months at each of our feedback sessions. The graph illustrates the relative performance of Developed Markets as compared to that of Emerging Markets since 1988. What is clear from the graph is that neither segment dominates all of the time – the performance moves in cycles. In certain

cycles, Emerging Markets have the upper hand while in others Developed Markets take pride of place. We believe this is strongly influenced by valuation and portfolio flows. Valuation is driven by fundamental factors, while portfolio flows tend to be driven by sentiment and emotional factors. Valuation can be tested methodically with math, while sentiment is much more difficult to gauge and anticipate. For this reason we tend to focus our attention on valuation, while managing the risk associated with sentiment shifts by looking at long-term trends and, in many ways, moving counter to some of the shorter term indicators. I will try to explain this using a specific example from the not-too-distant past. Sentiment toward Emerging Markets was extremely positive at the start of 2011 and was based on numerous factors. The most significant was the strong performance seen from Emerging Market economies – especially the BRICS. Conversely, Developed Market Economies were struggling to recover from the strain of the Great Financial Crisis in 2008 – this was especially true in Europe, which was gripped by a Sovereign Debt crisis (think back to the Greek debt issues and those of the other Southern European States). Most investors were very pessimistic on future performance from Developed Markets while Emerging Markets were flying high. When we look at valuations, the sentiment was clearly reflected. Valuations (based on Price-to-Earnings Ratios) were stretched in Emerging Markets, while Developed Markets appeared quite attractive based on historic numbers. Sentiment, however, was the dominant driver of flows. Investors continued to flock to Emerging Markets while Developed Markets remained unpopular. Investors continued to embrace Emerging Markets while shunning Developed Markets based on sentiment rather than fact. Emerging Market Economies have continued to outperform Developed Markets over the past 3 years when looking at GDP growth; however, the performance achieved was lower than investors anticipated. Similarly, Developed Markets did struggle, especially in Europe and Japan, but the US and Germany surprised many. As a result of 2011 investor sentiment – too negative towards Developed Market Equities and too positive towards Emerging Market Equities – stock markets in Developed Markets have massively outperformed those in Emerging Markets since then. We have recently seen investment flows into Emerging Markets reduce and even turn negative (especially in Russia and South America) but we believe this is only the beginning of a multi-year move. The move started in 2011 could continue well into 2015 and even extend beyond that. We would expect speculative investors to periodically invest in emerging markets – we would, however, consider these investments as short-term and this should not impact the longer-term trend materially. We will keep a very close eye on these sentiment-driven moves. Sentiment is not grounded in fact, but rather driven by emotion. It provides methodical and disciplined investors with clear warning signals and massive opportunities. For now – we remain focused on the facts – our decisions are driven by valuations. Both Developed and Emerging Market Equity valuations appear stretched. Developed Markets have structural advantages (more diversified economies and better internal budget dynamics to name but two) over Emerging Markets that could support excessive valuations for some time. The major drivers do, however, remain very low interest rates and credit cost, supported by Developed Market Central Bank policies that remain highly accommodating. These will continue to fuel valuation premiums and support economic growth. In Emerging Markets, the picture is very different and divergent. Some economies are struggling due to commodity price volatility (especially Russia and other commodity exporter nations) while others (India, South Korea and Singapore) are finding some support from lower fuel import costs and food inflation. Unfortunately, sentiments towards Emerging Markets are continuing to decline and will put further pressure on the economies and stock markets.

Performance – what added and what detracted? 2014 was a time to reflect as volatility returned to the market. This was evident in almost all asset classes as we experienced significant swings from various asset classes during the year. This is, however, not unique and reiterates the importance of persevering with a specific strategy – as long as the particular strategy is aligned with the specific investor. In the end, the divergence between asset classes over the year was still skewed towards growth assets – in particular, South African listed property and offshore assets. SA equities continued to perform well, while South African fixed income assets (especially longer-dated bonds and more illiquid instruments like preference shares and inflation-linked bonds) performed well versus inflation and money market instruments. The portfolios benefitted from our bias toward offshore assets as the Rand weakened by 10.45% in 2014. The portfolios also benefitted from SA listed property exposure, which ended the year as one of the top performing asset classes, producing a return of 26.6% for the year. The JSE ALSI generated 10.88% but this included significant volatility and sector divergence with Financial (27.3%) and Industrial (7.0%) counters performing well while Resources (-14.7%) counters struggled. The picture was very different up and till 31 July 2015 when Resources (19.2%) was the top performing sector. In the last 5 months of 2014 Resource (-28.5%) counters lost almost 30% of their values while Financials (10.0%) performed strongly and Industrials (1.1%) stayed positive. The JSE ALSI peaked in July 2014 but managed to recover well of its October 2014 lows.

Source: MoneyMate, Ampersand AM, I-Net 31 December 2014 (A Class, ZAR) The CPI Fund Range managed to capture significant market performance while substantially reducing the overall volatility. The portfolios remain well diversified and, although we had some resource exposure, the overall impact was manageable. Recent volatility currently presents interesting opportunities and we remain cautiously optimistic.

Cumulative Fund Performance for the Period Ending 31 December 2014

3"Months 1"Year 2"Year 3"Years" 4"Years 5"Years 6"Years

Return Return Return Return Return Return Return

Ampersand"CPI"+"2%"FoF 2.48% 8.91% 20.50% 37.32% 50.00% 65.22% 75.96%

Portfolio(Objective((CPI(+(2%) 0.68% 7.91% 15.90% 24.84% 35.19% 42.70% 54.14%





(CPI%Benchmark%as%at%30%November%2014)

Fund"and"Objective

Source: MoneyMate, Ampersand AM, I-Net 31 December 2014 (A Class, ZAR) Position going forward In our local portfolios we continue to prefer growth-orientated assets, especially SA listed property and offshore equities. The portfolios are, however, well diversified and we have substantial low-risk exposure through enhanced cash instruments, both locally and abroad. We believe that a cautious attitude is appropriate at present, given the uncertainty surrounding valuations, geopolitical risks and the interest rate environment. During 2015, whatever exciting and intimidating changes may influence the market, we aspire to keep our analyses rational, our reasoning clear and our decisions profitable.

issue 33 - quarter 1 - january 2015 jan.pdf · 2017. 3. 14. · financial'planning! james...

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