July is savings month in South Africa. This is an initiative that is meant to encourage us all to be more serious about putting away money for our futures.
The premise is obvious. South Africa’s savings rate is abysmal and we need to do something to fix that.
However, many of the messages coming from financial services companies this year have not focused on the country’s savings habits. They have rather been about our spending habits.
Sanlam, for instance, has collaborated with rapper Cassper Nyovest and actress Pearl Thusi on a project called #ConspicuousSaving. The two, who are usually known for their big spending, have been posting on social media about doing things like home facials, clothes swapping or a haircut at a roadside barber to save money.
At a media luncheon in Cape Town on Thursday, Liberty also looked at ways in which South Africans might try to moderate their spending. Based on the findings of a survey conducted by Alltold, Liberty showed where consumers look to cut back to make their money go further.
The primary lesson from the study, entitled The Frugality Report, was that South Africans don’t like to compromise on their lifestyles. Even when they are spending less, they don’t want to cut anything out. They just look for more cost-effective ways of doing the same things.
This suggests that South Africans are probably too attached to the kinds of lifestyles they want to lead. They aren’t willing to seriously assess what they spend their money on and how much of it is really necessary.
In isolation, there is nothing wrong with highlighting these issues and questioning our spending habits. The first step towards financial freedom is always spending less than you earn.
However, it is only that – a first step. Only encouraging South Africans not to spend so much doesn’t really address the key issue of savings month, which is how to get more people to save more of their income.
Even if one of Thusi’s Twitter followers does heed the message and saves money by doing her own nails, buying second-hand clothes and turning down the temptation to buy a new handbag, what then? What does she do with the extra money that she now has?
This is where the financial services industry itself needs to do some serious introspection. It is simply not doing enough to make it easy and cost-effective for South Africans to save and invest.
Even acknowledging that this is not a simple thing to do, it doesn’t feel like too many companies are really trying very hard. The level of innovation in building simple, appropriate and appealing products is poor.
Even some firms that already have options that could be used to attract first time investors don’t market them as such. For instance, the Stanlib Equity Fund may be the only unit trust in the country that accepts debit orders of just R50 per month, yet I am not aware of any advertising from the company that has ever centred on this fact.
Easy Equities is a rare exception trying to make investing exciting and accessible, but why has it remained an outlier? Why aren’t more companies looking at ways to do similar things?
Many of them will say that it’s not easy when faced with the amount of regulation involved, and there is truth to that. However, this is not insurmountable. There are already online platforms that allow an investor to complete, sign and submit all the documentation they need for an investmentment online and simply upload their Fica documentation. It’s a process that needn’t be burdensome on the consumer.
South Africans often don’t see the need to draft a will, especially when they are relatively young or don’t have a significant asset base.
It is estimated that at least half of the estates reported at the Master’s Office each year are of people who died intestate (without a will).
In celebration of Women’s Month, the Fiduciary Institute of Southern Africa (Fisa) discusses some financial planning considerations women should take note of.
You need your own will and have to understand the implications of your partner’s estate planning
Chairperson Ronel Williams, says in practice, Fisa often finds that where a woman does not have a lot of assets, or leads a busy life, proper estate planning is neglected.
This could have far-reaching consequences.
Where estate planning is done, it is important to not only consider current circumstances, but to plan for the future, should the situation change, she says.
One example is in cases where a woman’s husband passes away, leaves the bulk of the estate to her and she dies shortly thereafter.
“So then suddenly she does end up with having quite a sizeable estate and her will actually doesn’t reflect the position for her changed financial circumstances.”
She could for example have provided in her will that her estate devolves on her children. If they are still minors (under 18 years) and inherit small amounts, this does not necessarily pose a problem. If, however, her estate is sizeable, the children’s inheritances have to be paid to the Guardian’s Fund unless her will provides for a trust.
While the law allows parties to have a joint will, Fisa usually advises against it, Williams says, mainly for practical reasons. There have been isolated instances where the surviving spouse dies and the Master’s Office battles to trace the original will that also applies to the surviving spouse.
Men and women living together are not automatically treated as ‘married’ under the law in case of intestacy
The Intestate Succession Act applies to every South African who dies without a will and stipulates that the estate should be divided according to a specific formula. If the person was involved in a relationship other than marriage, the type of relationship will determine whether the partner will be allowed to inherit.
Williams says in terms of the Act partners need to be regarded as a “spouse” in order to inherit in the case of intestacy, but the term is not defined in the Act. As a result, other legislation and court cases have to be consulted for an explanation.
Historically, a marriage entered into in terms of the Marriage Act was the only recognised spousal relationship, but with the introduction of the Constitution, the legal system acknowledged that people in other types of relationships were entitled to protection.
Williams says as a start, legislation was passed in the form of the Customary Law of Succession Act and parties to traditional marriages under black customary law are now regarded as spouses when dealing with an intestate estate.
Court cases have also extended the definition of a spouse in this context to include monogamous Muslim and Hindu marriages and polygamous Muslim marriages.
In terms of a Constitutional court ruling, same-sex partners are also regarded as spouses for purposes of intestate succession.
While men and women who live together without getting married often assume that the law treats them as married, this is not necessarily the case.
“Partners in such relationships do not automatically qualify for spousal benefits.”
Advisors are frequently asked this question. This often has more to do with personal risk preference than with economic rationality. To answer this question, however, certain assumptions must be made, and I specifically won’t look at tax to keep the answer succinct.
The rational answer
Let us assume that the interest rate on the bond is at the prime lending rate. That is currently 10.50%
The second assumption we need to make is about what the risk level of the unit trust in question is. A money market unit trust has a very different risk and associated return goal than an equity unit trust.
A low-risk money market or income fund aims to beat inflation and offer a real return of 1% per annum. Thus, if the R100 000 is in an income unit trust only yielding 7% to 8%, it would be rational to secure the higher guaranteed return of 10.5% and transfer the funds into the bond.
However, if the money is in a balanced fund which generally targets a 5% real return, it would be more rational to remain invested as the real return is in excess of the bond interest rate.
It is also important not to fall into the trap of looking at the short-term underperformance of equity linked funds in a time like now and compare this to a resilient prime rate. This may result in the wrong decision to sell out at the wrong time. Every situation is unique and the best course of action is to get advice from a financial advisor who will look at the big picture and your individual circumstances.
The subjective answer
The other way I would advise a client on this is a more subjective approach – the sleep test. Quite simply, what makes you sleep better at night? Would that be a bond balance of R100 000 lower than it is now with no funds invested, or the same outstanding bond balance but R100 000 invested?
The answer will be different for each individual and there are a lot of factors that influence one’s financial decision making such as your view of debt as either toxic or as an enabler. For some people having R100 000 invested offshore, for example, gives them comfort. Therefore, because the economic rationality argument is often such a close contest, considering the subjective approach may help make the final decision easier.
A proposal by National Treasury, that aims to address the avoidance of estate duty by moving assets to a trust, could have significant tax implications for individuals involved.
The draft Taxation Laws Amendment Bill that was published for public comment in July, includes a provision that aims to make it detrimental for an individual to sell assets to a trust to which he or she is a so-called ‘connected person’ (typically family of the founder or beneficiaries of the trust) and extending a low- or interest-free loan to the vehicle.
Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa (Fisa), says National Treasury has for some time held the view that South Africans move assets into trusts to avoid estate duty.
A common practice has been for individuals to sell their assets to a trust they have set up, but instead of the trust paying for the assets, the individual extends an interest-free or low-interest loan to the trust to enable the trust to finance the transaction.
Up until now, there have not been any problems with this type of structure. The common law position has always been that no loan bears interest unless interest is explicitly specified, he says.
But Treasury has argued that this makes it too easy for people to divest themselves from their assets by transferring it to a trust. This practice allows the assets to increase in value outside the estate of the original owner. When the individual eventually dies the only asset in the estate is the outstanding loan.
Van Vuren says this effectively pegs the value of the assets at the date of the sale, as there is no further growth of those assets in the estate of the founder.
“So what Treasury and the minister are saying is that this robs the State of estate duty, because those assets would have stayed in the estate and at death would potentially be susceptible or liable for estate duty,” he says.
The draft legislation proposes to curb this practice by charging income tax on deemed interest.
Should the new provisions take effect in their current form on March 1 2017 as proposed, any individual who sells assets to a trust in relation to which he or she is a connected person and finances those assets by way of a loan at an interest rate that is less than the official interest rate (currently 8% in terms of the Seventh Schedule of the Income Tax Act), will be subject to income tax on the deemed interest.
The deemed interest will be the difference between interest on the loan at 8% (the official rate) and the actual interest rate charged (in the case of an interest-free loan this will be 0%).
Thus, if an individual sells assets to the value of R10 million to a trust that he sets up and extends an interest-free loan to the trust to finance the assets, the individual will be taxed on R800 000 of deemed interest (8% of R10 million) even though this is a fictitious amount. This is the result of a proposed new section 7C of the Income Tax Act.
There are a number of important issues that someone in this position would need to consider.
Firstly, South Africa and most of the world is in a low-yield environment at the moment. Some countries are actually providing a negative yield on cash investments for the first time in history.
This has forced investors into higher risk asset classes like equities and property for the relatively higher yield they provide. At the same time, however, this has pushed up the valuations of these asset classes and many are now considered expensive. In turn, the relative yield on these asset classes have come under pressure as the prices have increased.
Secondly, even the current situation notwithstanding, equities are considered high risk compared to other asset classes. It is therefore important to establish what percentage exposure to equities is appropriate based on an investor’s risk profile and income requirements.
There are periods when equities do not perform and one must be able to stay invested for the long term and not be a forced seller for income purposes. This will ensure that one derives the full upside and value.
Thirdly, the dividend yield on South African equities is currently approximately 3%. That means that a R7 million equity portfolio would yield around R210 000 per annum. That is a shortfall of R490 000 every year on the R700 000 income required.
There are certain equities that provide a higher yield, but making changes will potentially incur capital gains tax and brokerage charges, which will lower the overall value of the investment. One must also consider the 15% tax on dividends when calculating the income that one will be receiving.
Fourthly, other asset classes like preference shares and bonds provide a higher income yield, however, their potential for capital growth is generally more limited than equities over longer periods. Bonds (fixed income) are also taxed at the investors’ marginal rate (potentially 41%) as opposed to the 15% tax on dividends for preference shares and equities.
Lastly, clients that have built a large capital base need to be realistic about the income these assets can provide. In this case R7 million might sound like a lot, but it is not enough to provide a sustainable income of R700 000 a year. To do that comfortably, one would need almost twice as much.
Investors in this or similar positions should therefore consider whether they might need to extend their working lives or lower their retirement expenditure.
It is also important that clients who are approaching retirement do not sell down all their equities, which provide long-term inflation-beating returns. People are living longer in their retirement years and must ensure their capital and income keep up with inflation. Meeting with a professional and gaining investment advice is a sound start in gaining direction and hopefully peace of mind.
To answer this question, we need to take a step back. Before you can decide what you want to do with your money, you need to know what you want to do with your retirement.
One person’s retirement dreams are very different from another’s. For some it is to slow down, but for others it is to do the things that your working life never allowed you to do.
At your age a financial plan should support your remaining life plan and lifestyle. Your financial plan is one component of a flexible life plan that will need to see you through from your mid 60s into your late 90s.
Bear in mind that if you manage your investments yourself, you need to set aside the time to monitor your portfolio and be disciplined to adjust to different market conditions. You also have to keep your emotions in check when markets are volatile. These demands and complexities of successful investment management can prove challenging, even for the most informed individual investor.
People everywhere are also living longer. You therefore have to consider the long-term implications of managing risk, your money, tax and liquidity.
In addition, we live in very uncertain times. The IMF has cut South Africa’s 2016 growth forecast to 0.1%, foreign investment in the country has dipped to its lowest in ten years, a credit downgrade is still on the horizon, and there are still uncertainties around Brexit and Chinese growth, to name only a few. Getting the right financial advice to manage these risks is more important than ever.
A professional advisor will help you set up different investment strategies to achieve certain financial goals and provide assistance and guidance with retirement and estate planning. Competent financial advisors are knowledgeable about financial markets, investing landscapes and tax implications.
At your age there’s much more to consider than saving roughly 0.5% in fees. It is vital to ensure that you’ve planned appropriately so that your flow of retirement income suits your life expectancy, while at the same time taking into consideration factors such as inflation increases and the need to tick off some of the items on your bucket list. Financial planners assist in managing your financial risk to a level of comfort and help making decisions that are in line with your long-term financial objectives.
Bear in mind that the savings you are looking to invest are your hard-earned cash. This represents your reward after many years of working. They can be used to sustain your desired retirement lifestyle on a month-to-month basis, fulfil your dreams of travelling or taking on new hobbies and be sufficient to take care of those unexpected emergencies. You therefore owe it to yourself to look after this money as best you can.
There are several options available for investing our cash. A financial planner will help you to decide on the most tax-efficient option available, not only from an investing point of view but also when withdrawing. They will also consider different vehicles for different goals, and will also plan for liquidity during your life and on death.
For South African investors, the headline news at the moment is almost universally bad. Politically and economically, the country is facing very challenging times.
These difficulties aren’t limited to South Africa either. Global economic growth is still tepid and geopolitical tension is high.
“It’s very much at the top of everyone’s mind that there are very high levels of uncertainty both on the political and macro economic fronts,” says the manager of the PSG Equity Fund, Shaun le Roux. “As far as politics is concerned we have what’s going on inside the ANC, a very divisive US election, and Brexit and its consequences. On the macro economic side, there are big questions around the South African economy, which is going through a very tough patch and may be looking at a recession.”
Of these, the local political landscape is perhaps the most concerning. However Le Roux says that while the stakes are high and the outcomes unpredictable, investors shouldn’t make hasty decisions based on noise alone.
“What one needs to bear in mind is that when a story is dominating all the newspaper headlines the market knows about it and the market tends to be quite efficient at pricing in bad news,” he argues. “In this regard our analysis shows that something like a sovereign debt downgrade is pretty much priced in by the market already.”
Although there could still be a crisis caused by a successful attack on the integrity of treasury and the Reserve Bank, this is not PSG’s base case. Nevertheless it’s important to be diversified to be protected against even the worst possible scenario.
“The main pint that we try to make to clients is that when the world is this uncertain and the range of outcomes is this wide, we think you gain very little by trying to forecast exactly what is going to happen,” Le Roux says. “Brexit is the best example of how futile this can be. What we are rather focusing on is trying to make decisions that give our clients the best chance of achieving their objectives.”
This requires taking a long-term view and seeing opportunities beyond the market noise.
“When there are this much uncertainty and fear, we typically find that the market will give you some good opportunities,” says Le Roux. “But you need to be able to take a long-term view backed up by a long-term process. We are prepared to be patient, but we also can’t dismiss the risks out of hand. We just have to make sure that our clients are adequately protected.”
This means ensuring that they aren’t exposed to assets that could incur permanent capital losses. At the moment, Le Roux believes that there is a very real risk of this in certain assets.
“The anomaly is that even though there is all of this uncertainty and fear, at the same time there is a backstop to global financial markets in the form of ridiculously low developed market bond yields,” Le Roux says. “A consequence of this is that asset classes that are deemed to be related to bonds, specifically the highest quality equities are trading at very elevated valuation levels. We would argue that ownership of inflated assets poses the biggest risk to future performance for investors.”
At the same time, there are other parts of the market where the uncertainty has given rise to attractive asset prices.
“This includes domestically-focused business in South Africa such as banks, where the tough economic conditions and the recent spike in bond yields have had a dramatic impact on share prices,” Le Roux says. “In the last six to nine months we have been buyers of financial stocks and have also been adding South African bonds to our multi-asset portfolios.
“It’s important to note that we hadn’t been invested in South African bonds for a number of years before this,” he adds. “ It’s only in recent times that we think we can buy them at a margin of safety and at levels that lock in attractive real yields on a long-term view.”
Ultimately, he argues that the only safe way to negotiate times like these that are so uncertain is to focus on the fundamentals as much as possible.
“We think its time for clear heads,” Le Roux says. “It’s very noisy at the moment and when it’s this noisy, people do have a tendency to allow the headlines to throw them off course as far as their long-term investment objectives are concerned. But you need to think in an unemotional way about what you are trying to achieve from a return perspective and make sure you’re not taking on too much risk to achieve that.”
A lot of people who get a bonus or once off additional income for whatever reason, tend to ‘blow it’ as you have pointed out. It is therefore a very good idea to try to think of better things to do with the money. I would, however, suggest that you consider not only your immediate or short term needs but also the long term potential of any extra income you receive – no matter how small.
If you have a need for extra monthly income, which might be the case if you are currently using a credit card or overdraft because your expenses are close to or more than your current monthly income, then I support your idea of putting the money in a vehicle that will allow you to supplement your income for the next two years.
A two year term, however, is a very short time horizon for an investment and I assume you intend to be drawing the full amount over the two years. In other words, you will be left with nothing at the end.
If so, you will need access to the money and very little, if any, risk. With these constraints in mind, I would suggest either multi-asset income unit trusts – the top funds produce between 8% and 10% per annum historically – or a bank savings, call or money market account with cash immediately available. These bank accounts produce between 5.5% and 7.5% per annum, depending on the amount.
Let’s use an example and say the amount is R50 000. If you can achieve returns of 10% per annum for the next two years, this will produce an income of R2 307 per month for 24 months before being depleted. At 7% per annum, the monthly amount will be R2 194 per month, so there is only a small difference, which means it is probably not worth taking the extra risk.
The question is whether you actually need additional income or if you are just going to be spending it over 24 months instead of one month. If you don’t really have a requirement for the additional income, you may want to consider investing the amount for a longer term so that it can produce even more for you.
You could consider putting the money into a tax-free savings account or retirement annuity (RA). By contributing to an RA, you would be reducing your taxable income. This means you could get something more back from the South African Revenue Service next year, depending on what retirement contributions you are already making.
Let’s use the same R50 000 we used for the example above and assume that you are below the maximum deductible contributions to your retirement funding. This is currently 27.5% of your remuneration or taxable income, or R350 000 per annum, whichever is lower.
Let’s also assume that you are in a 36% tax bracket. If that is the case, you would get an additional R18 000 back from SARS or have to pay in R18 000 less for income tax when you submit your next return. In other words, you receive your R50 000 dividend, you invest it into an RA which results in you having an extra R18 000 next year, and the R50 000 also grows until you retire. You can only access the money in an RA once you turn 55.
In the wake of the #DataMustFall campaign, it seems that the data revolution might have a valid and legitimate plea. The campaign founders made a presentation before the Parliamentary Communications and Postal Committee on September 21 on the costs of data in the country. According to the soon-to-be launched findings of the FinScope South Africa 2016 consumer survey, the results show that the average South African spends about 9% of their purse on airtime and data recharge, cellphone contracts, telephone lines and internet payments. The average person spends approximately R700 a month for communication-related expenses.
Parallel to the #DataMustFall campaign, which is gaining traction, is the #FeesMustFall (reloaded) campaign, which is also resurfacing in light of the announcement of an up to 8% fee increase made by the Higher Education Minister Blade Nzimande. While university students would like to see a 0% increase, universities are requesting increases to sustain operations and fund research.
Therefore, in light of these developments and expenses, how does the purse of the South African consumer fair? The preliminary results of the FinScope 2016 survey shows that South Africans spend R688 per month on average on education.
The FinScope findings further show that South Africa’s total personal monthly consumption (PMC) expenditure in 2016 is estimated at R220 billion (monthly). On a monthly basis, the average individual spent approximately R5 400 during the period of conducting the FinScope 2016 survey. The results show that the main components of expenditure are on food (21%), transport (11%), utilities (11%) and communication, which amount to 9% of the spending purse.
Overall, individuals’ spending on education is 6% of their purse (estimated monthly spend of R12.2 billion). Further demographic analysis of the data per race showed that black communities still bear the greatest brunt of the education costs. For the average black South African, education expenses constitute 7% of their purse – this is higher compared to other races for which the purse composition for coloured, Asian, Indian and whites are at an average of 4.3% of their purse.
I am regularly asked for advice by younger people looking for a sure-fire way to build their wealth. They are often surprised when I tell them to invest more time and money in themselves and their human capital. Historically, people who do this are likely to create significantly more wealth over their lifetime than those who don’t. It is obvious that you need to accumulate investment assets but you also need to ensure that you earn income at an increasing rate over your career. The best way to do this is by investing in yourself.
What is human capital?
Human capital is the combination of skills, knowledge and abilities you have that will enable you to generate income over your working life. Nearly all of us have an ability to generate some income but very few people consistently invest in themselves so that they can increase their earning potential over time. According to the Federal Reserve of San Francisco, university graduates generate R16 million more income over their careers than non-graduates. This might give some context to the #feesmustfall campaign in South Africa.
If you choose to invest in yourself, you need to ensure that your skills and knowledge remain relevant and adaptable to changing economic conditions and an evolving business environment. You should regularly review whether you need to add to your skills or knowledge-base. Additionally, you need to be honest enough with yourself to be able to decide if you need to change careers if you are in a dead-end street. For instance, I would not consider newspaper printing as a long-term career option!
Specialise but not too much
Some careers reward those who specialise but one should always be careful of becoming too narrowly focused in your career. For example, deciding on an academic career researching the mating habits of albino penguins in the Southern Cape might not ensure a long-term income. However there might be less risk in being the orthopaedic surgeon who specialises in surgery of the shoulder in South Africa. Many young people strive to be a manager in a large corporate. This might be the most risky career choice one can make. Managers are essentially generalists and are often the first people to be fired in a merger or downsizing. If you plan to work in a corporate, you might do better focusing on being a revenue generator or product specialist.
Not only for academics
If you are not academically inclined or you have no interest in tech, you could always consider specialising in old world industries. There is a massive shortage of plumbers, electricians and general handymen. Now that more people work in services industries, there are many fewer people who can work with their hands. This provides an ideal opportunity for reskilling yourself if you have the inclination.
In the age of mass production and “mass specialisation” provided by the internet of things, it should not be surprising that there is a major shortage of people who can build or create objects with their hands. I believe craftsmen who can make handmade items such as furniture or master builders are in big demand. It does not surprise me that craft beer, artisanal baking and coffee are becoming major industries. More people are becoming interested in where their food and drinks are made and this includes where the ingredients are sourced. This is the type of trend that is likely to suit those with old world skills and when skills are limited and demand is increasing, your earning ability increases rapidly.