NFB Sensible Finance Magazine Issue 18

Eastern Cape's Community...

PERSONAL FINANCE

A FREE publicationdistributed by NFB Private Wealth Management

p r i v a t e w e a l t h m a n a g e m e n t

Issue 18July 2011

NFB

PERSONAL FINANCEMagazine

Eastern Cape's Community...

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WIN A WEEKEND STAY ATBUSHMAN SANDS

Forming a base casescenario on which to base

future expectations ofinvestment returns

YOURFINANCIALADVISOR

Is he/she “fit &proper”?

RISK AND LIFEINSURANCEA necessaryevil or aninvestment inpeace ofmind?

CRYSTAL BALL?

“The best way of preparing for the future is to takegood care of the present, because we know that ifthe present is made up of the past, then the futurewill be made up of the present.

Only the present is within our reach. To care forthe present is to care for the future.”

- Buddha


East London tel no: (043) 735-2000 or e-mail: [email protected]

Port Elizabeth tel no: (041) 582-3990 or email: [email protected]

Johannesburg tel no: (011) 895-8000 or email: [email protected]

Web: www.nfbec.co.za

NFB is an authorised Financial Services Provider

contact one of NFB's private wealth managers:

fortune favours the well-advised

Providing quality retirement,

investment and risk planning

advice since 1985.

a sensible readWe certainly live in interesting times!

There is said to be a Chinese Curse which goes along the lines of

“may you live in interesting times”. Although the origin of the saying

is actually uncertain, it is said to possibly come from the Chinese

saying, “it is better to be a dog in peaceful times than a man in

chaotic times.” Now I think times would have to be very chaotic for

me to want to come back as a dog (although some do lead pretty

cushy lives), but times they are a changing and I am very pleased to

be a witness to it.

What is interesting is that I think we are reaching a time where

people, wherever they may be, are tired of leaders who do not

have the best interests of the people at heart. The change may be

a slow one and there are certainly still many leaders who use their

position to line their own pockets (recent warnings by Zwelinzima

Vavi of the dangers of SA becoming a Banana Republic come to

mind), but happenings in Syria, Libya, Egypt and even in South

Africa, if we look at the results of the municipal elections where the

DA won 24% of the vote, indicate a mind shift. The DA has

traditionally been a “white” and “coloured” party, however, if all the

white, coloured and Indian people in the country are aggregated,

they only form 20% of the population – so some kind of cultural

convergence seems to be appearing. I believe the shift will come

from the youth of the country who are increasingly educated and

finding themselves with little opportunity for economic

advancement and no real voice. But their vote will make them be

heard! The days of blind loyalty are numbered and politicians

everywhere need to beware as the vote will be one based on

delivery and accountability and not congeniality and skin colour.

Personally, I am happy to support anyone who has the best interests

of South Africa and its people at heart and look forward to the day

where all people are open-minded enough to judge on merit.

Brendan Connellan - Editor and Director of NFB

editor

Advertising

layout and design

Address

Contributors

Brendan Connellan

[email protected]

Stephen Katzenellenbogen (NFB

Gauteng), Travis McClure (NFB

East London), Shaun Murphy

(Klinkradt & Assoc.), Grant Berndt

(Abdo & Abdo), Patrick Sheehy

(Glacier by Sanlam), Debi Godwin

(IE&T), Natalie Dillion (Old Mutual),

Robert McIntyre (NVest Securities),

Robyne Moore (NFB East London)

Robyne Moore

[email protected]

The views expressed in articles by

external columnists are the views

of the relevant authors and do not

necessarily reflect the views of the

editor or the NFB Private Wealth

Management.

©2011 All Rights Reserved.

No part of this publication may be

reproduced in any form or

medium without prior written

consent from the Editor.

Jacky Horn Design

[email protected]

NFB Private Wealth Management

East London Office

NFB House, 42 Beach Road

Nahoon, East London, 5241

Tel: (043) 735-2000

Fax: (043) 735-2001

E-mail: [email protected]


a sensible read

sensible finance ED’SLETTER

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Email your full name to [email protected] to subscribe to

NFB's free economic electronic newsletters.

another aspect of our comprehensive service

sensible finance july11

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SENSIBLE CONTENTSPhoto BigStockPhoto.com

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A LOOK INTO THE NEW COMPANIES ACT

A BRIEF GUIDE TO BUYING OR SELLING YOUR HOME

CRYSTAL BALL?

TESTAMENTARY FREEDOM

A TAX DEDUCTION IS NOT THE ONLY REASON TO

PURCHASE A RETIREMENT ANNUITY

RISK AND LIFE INSURANCE

SHOULD YOU BE HOLDING ANGLOS IN YOUR

PORTFOLIO?

Q&A. YOU ASK. WE ANSWER

WIN A WEEKEND STAY AT BUSHMAN SANDS

How it impacts on Close Corporations.

A brief overview of the duties of the two principal parties involved.

Forming a base case scenario on which to base future expectations of investment

returns.

The reasons for possibly challenging a Will.

A look at some of the other benefits.

A necessary evil or an investment in peace of mind?

A compelling investment at current levels.

Advice column answering your investment, personal finance, life and/or risk

insurance questions

Stand in line to win an awesome weekend stay for two, compliments of Harvey

World Travel, East London

YOUR FINANCIAL ADVISORWhat does it mean that they are “fit and proper”?

By Shaun Murphy, CA (SA), Partner -

Klinkradt & Associates.

By Grandt

Berndt - Abdo & Abdo.

By Stephen Katzenellenbogen, Private Wealth Manager – NFB, Gauteng.

By Debi Godwin, Director -

Independent Executor & Trust.

By Natalie Dillon, Senior Legal Advisor - Old

Mutual Broker Division.

By Patrick Sheehy, Head of

Product Management - Glacier by Sanlam.

By Rob McIntyre, Portfolio Manager -

NVest Securities.

with Travis McClure, Private Wealth Manager – NFB, East

London

By Robyne Moore - NFB, East

London.

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A LOOK INTO THE NEWCOMPANIES ACT:

4

How it impacts on Close Corporations.By Shaun Murphy, CA (SA) Partner -

Klinkradt & Associates

A LOOK INTO THE NEWCOMPANIES ACT:

71 OF 2008

Ahotly debated topic in financial circles of

late has been the long awaited

introduction of the new Companies Act,

which although had a slightly delayed introduction,

has been welcomed as a new era in South African

business unveils itself.

Close Corporations

Less than 100 points

Between 100 and 350 points

350 and above

between 100 and 350

The first point of interest is the impact that the

new Companies Act has on .

The initial indicators leaned towards a phasing out

period, during which all close corporations would

be converted to Proprietary Limited's or private

Companies. This was to take place over a ten year

period during which time no new Close

Corporations would be able to be registered. This

provision was changed somewhat in that Close

Corporations may be registered up to the date

that section 13 of the Companies Act, 2008 comes

into effect and all those registered up to that date

will continue for the foreseeable future. This may

have placed a premium on the cost of shelf Close

Corporations available as the numbers will slowly

dwindle over time.

Although Close Corporations that are

registered at the effective date of section 13

coming into being, there are still provisions within

the Companies Act, 2008 that are applicable.

Firstly, the requirements surrounding the

preparation of financial statements are the same

for both forms of entities; secondly, the persons

eligible for membership of a Close Corporation

must satisfy the same criteria as if they were being

appointed as a director of a company. The third

item is the most interesting: it is that of whether or

not the financial statements of the close

corporation are required to be audited or not; this

is based on a Public Interest Score (PIS), which is

derived as follows:

1 Point for every R1 million of turnover generated

in the financial year

1 point for every shareholder / member

1 Point for every employee of the company /

close corporation

1 point for every R1 million of unencumbered

debt of the company / close corporation (this

excludes secured debt over assets like installment

sale agreements)

The points are totaled and evaluated in three

brackets:

1. , a basic compilation of

financial statements occurs which is much the

same as the current situation for a Close

Corporation.

2. , an independent

review of the financial statements must be

conducted by an independent accounting

professional.

3. requires a full statutory audit

4. The last bracket, which is probably not

applicable, is where the PIS is

and the entity prepares its own annual financial

statements; this type of entity is required to have a

full statutory audit.

It is our understanding that the above

introductory guidelines for the audit criteria are at

present being reviewed and there may well be

some changes to the thresholds depicted above

as the powers that be deliberate the matter further.

The above is a very brief introduction and in

next issue we will elaborate on one or two of the

items mentioned above that require further

explanation.

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For more detailed advice and insight

into how this may help you please feel free to

contact me on 043 – 7269555.


SENSIBLE ADVICEPhoto BigStockPhoto.com

A BRIEF GUIDE TOBUYING OR SELLING

YOUR HOME

A brief overview of the dutiesof the two principal parties

involved. By Grandt Berndt -

Abdo & Abdo

A BRIEF GUIDE TOBUYING OR SELLING

YOUR HOME

SENSIBLY LEGAL

The buying or selling of property is usually the

largest investment most people make during

their lives. In this article we will attempt to

give a brief overview of the duties of two of the

principal parties involved, namely the estate agent

and the conveyancing attorney.

As a purchaser, one needs to know how much

you can afford and the cost involved in the

registration of the property, any mortgage bond

and relocation costs. Most estate agents and

attorneys will be able to give an indication of the

transfer and bond costs, which are dependent on

the value of the property or mortgage bond.

The seller is usually liable for the payment of the

estate agent's commission and will mandate the

agent/s to sell the property. In terms of the Estate

Agency Affairs Board Code of Conduct, estate

agents have a duty to protect the public's interest

and to protect their client's interests at all times,

with due regard to the interest of all other parties

concerned.

The estate agent is to disclose to any purchaser

or prospective purchaser all facts relating to a

property which are, or could be, material to such

purchaser or prospective purchaser, and further,

has a duty to explain the meaning and

consequence of the material provisions of any

offer.

No estate agent is, without good and sufficient

cause to encourage or influence any party or

potential party to a transaction, to use or not to

use, as the case may be, the services of any

particular conveyancing attorney or firm of

attorneys or financial institution. Accepted practice

is that the estate agent is to enquire from the seller

whether he has an attorney who is to attend to the

conveyancing, and if not, to make a

recommendation of approximately three attorneys

or firms of attorneys, leaving the choice thereof to

the seller.

As in most cases, the conveyancer is

nominated by the seller, and the conveyancer's

primary duty is to protect the seller's interests. The

conveyancer, however, still has a duty to the

purchaser and must advise the purchaser if there is

any abuse of rights by the seller. If a dispute arises,

the conveyancer will usually attempt to mediate

an amicable resolution, bearing in mind his primary

duty lies in protecting the seller. In the event of

being unable to resolve any dispute, the purchaser

should be advised to consult his own attorney.

Attorneys may have estate agents as their

clients, but the conveyancer's duty is to effect

registration in terms of the deed of sale. If conflict

arises, the conveyancer may be torn between his

duty to the seller and his estate agent client, in

which event, he must disclose this conflict, and if

necessary withdraw from the transaction. If any

seller or purchaser requires clarity on any aspect of

an offer to purchase, this should be raised with the

estate agent or referred to an attorney of such

party's choice, prior to the signing of any offer.

In conclusion, both the estate agent and the

conveyancing attorney have codes of conduct to

be adhered to in order to ensure that the

consumers' (both the seller and the purchaser)

rights are protected. Any transgression thereof can

be reported to the Estate Agency Affairs Board in

respect of an estate agent and the Law Society in

respect of the conveyancing attorney.

9sensible finance july11

SENSIBLE ADVISOR

Consumers are frequently reminded to only

deal with financial advisors who comply

with the regulatory requirements as set out

by the Financial Services Board (FSB), and who

conduct themselves in a professional manner.

Honesty and integrity:

Competency requirements:

Operational ability requirements:

Financial soundness:

This

issue has been highlighted once again with the

recent collapse of a property syndication, in which

a financial advisor has been ordered by the

Ombud for Financial Services Providers, Noluntu

Bam, to compensate his client for the loss. There

have been a number of such cases since June last

year.

With the introduction of more stringent “Fit and

Proper” requirements in terms of the FAIS Act in

2008, the bar was raised for any individual wanting

to operate as a Financial Advisor.

As one of the largest, independent brokers in

South Africa, NFB not only strives to be fully

compliant at all times with all regulatory

requirements, but also aims to service our clients

with the utmost professionalism.

Regulatory requirements include the following:

your financial advisor's

personal characteristics become critical factors

when considering to hand over your financial

dealings to him/her. As a client, you expect your

financial advisor to advise you honestly and openly

with regard to financial services and products.

According to the Fit and Proper requirements an

FSP (Financial Services Provider) may not appoint a

representative if they have been found guilty by a

court of law, a regulatory or supervisory body of

dishonesty, negligence, fraud, acting

unprofessionally or dishonourably, or in breach of

their fiduciary duty. Honesty and integrity is an

ongoing process and financial advisors currently

have to declare on a quarterly basis to the FSP,

that their status has not changed.

before a financial

advisor is appointed by an FSP, they are required to

satisfy specific competencies; the minimum

experience and qualifications a representative

must meet are prescribed by the Fit and Proper

requirements. In order to standardise the minimum

competency requirements in the financial services

industry, it is now a requirement of the FSB, that

every representative pass the Regulatory 1 and 2

examinations. The RE1 exam will test the

representative's factual knowledge and

understanding of relevant legislation and the SA

regulatory framework eg. Code of Conduct, FAIS

Act and FIC Act. The RE2 exam will test the

knowledge financial advisors have of specific

financial products in which they provide advice.

Once financial advisors have passed the relevant

RE exams, they would need to take part in

Continuous Professional Development (CPD) in

order to develop and maintain a certain standard

of professional competence. They are at all times

required to act with due skill and diligence, and in

the best interest of the client.

this

requirement applies to all categories of Financial

Services Providers. There are a number of

requirements/conditions which need to be in place

at all times in order for an FSP to remain operational

and to fulfil the responsibilities imposed on them by

the FAIS Act.

this requirement is

applicable to the FSP itself and not the financial

advisors. The FSP must at all times be holding assets

which exceed their liabilities, and depending on

the category of the FSP, they must maintain liquid

assets at a set level.

At NFB we pride ourselves on our strong

compliance focus, and in the professional, expert

manner in which our financial advisors deal with

their clients. We are committed to keeping abreast

of any and all changes within the financial services

industry, thereby constantly offering you, our client,

our best attention at all times.

So is your financial advisor “Fit andProper”?

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What does it mean that they are “fitand proper”? By -

NFB, East London.Robyne Moore

YOUR FINANCIAL

ADVISOR

10

THE BASE CASEThis article will breakdown and then rebuild an

investment return in order to gain some insight as

to what we could expect from our investment

portfolios in terms of future returns. Before we get

going, it should be noted that the content to follow

will be based on equity returns in South Africa.

Secondly, there are some inputs that are variable

and, as such, assumptions or analysis needs to take

place alongside these. We would ask that you

apply your own views to these variables and, in so

doing, challenge our thinking.

If you happen to own or pick up some form of

theoretical investment book you are likely to come

across a section describing the components of an

investment return. It is these components that we

will look at individually and then try to decide

whether historical averages are likely to remain

true or, if untrue, whether we have entered a new

phase of economic and investment cycles.

When building an investment return from the

bottom up, we use, based in part on the textbooks

mentioned above, the following components:

Inflation (CPI) – an investment needs to match

CPI to maintain its purchasing power.

Risk Free Rate (STEFI Call Deposit) – this is the

minimum return you would expect from a risk free

asset. In other words: for anything other than risk

free cash you would demand a higher return.

Dividend Yield - it is quite easy to forget the

importance of a dividend yield, alternatively

known as cash flow, but when looking at long term

total returns from equity you will see that the

reinvestment of dividends accounts for the majority

of your overall return.

X-factor – this would be very difficult, if not

impossible, to predict as this is the positive or

negative return enjoyed by investors after

deducting CPI, STEFI and dividend yield from the

total return of the JSE All Share Index. The x-factor is

our complete unknown.

If you take the above 4 factors and add them

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In order to know the outcome of the nextDurban July horse race or which market willperform best over the next year, would it notbe handy to have a crystal ball? I think weall understand that this type of foresight orforecasting is not possible with anysemblance of accuracy. However, we dothink that through the analysis ofhistorical information we may be ableto form some type of base casescenario on which to base futureexpectations of investmentreturns. Unfortunately, wecannot help with horses!Written by StephenKatzenellenbogen, NFBGauteng, Private WealthManager


CRYSTAL BALL?CRYSTAL BALL?

together you should then get the total return on the

All Share Index for the corresponding period. This

works better for longer-term periods (i.e. ten years)

than it does for shorter periods.

The average inflation rate, using CPI, for the

last ten years has been 5.84%. This should also be

placed in the context of the South African Reserve

Bank's target range of 3% - 6%. Inflation has a vast

number of interrelated components than can

positively or negatively affect the final number. We

will not make an attempt at predicting these

variables, but rather give a broad synopsis. We do

think that the Reserve Bank will, on average, keep

inflation within the target range. It is also likely that

global authorities will continue to pursue a positive,

but controlled inflation environment, thus

impacting South Africa's inflation environment.

The above graph depicts the downward trend

in interest rates. We do think that going forward we

will continue to be in a lower interest rate, and

lower inflation rate, environment. As such, the ten

year risk free return, measured by the STEFI Call

Deposit rate of 8.93%, is likely to average down

over time.

When you buy a share you are buying a part of

that particular business and, as such, will

participate in the profits and losses of that entity. If

a business has excess profits it can either apply

these within the business to fund future expansion

projects or, alternatively, these profits can be

distributed to shareholders in the form of a

dividend. Very often a combination of these

options is used and shareholders enjoy a dividend

to reward them as loyal owners of the company.

We have discussed the importance of dividend

reinvestment and long term returns and, as such, it

is worth noting that the average dividend yield of

the JSE All Share Index over the last ten years has

been 3.49%.

(We must not forget that a quality company

may not always pay a dividend, with Anglo

American being top of mind during 2010).

We mentioned above that the final and fourth

component of total equity return is:

JSE ALSI Total Return minus (inflation + risk-free

rate+ dividend yield)

The net result of this sum gives us an average

ONE STEP AT A TIME

X-FACTOR

INFLATION

RISK FREE RATE

DIVIDEND YIELD

SENSIBLE INVESTOR

11sensible finance july11

continued overleaf...

return of -1.61% over the last 10 years.

Let us begin by looking at a graphical

representation combining the different

components of investment return.

At a glance we can see that historically both

the dividend yield and risk-free rate have been

positive, with inflation and the x-factor moving

between positive and negative territory.

The average yield of the above components

can be summarized as follows:

Risk Free Rate (STEFI Call Deposit) 8.93%

Inflation (SA CPI) 5.84%

Dividend Yield (JSE All Share Index) 3.49%

X-Factor (JSE Total Return minus CPI,

STEFI & Dividend Yield) -1.61%

What we have achieved so far is identifying,

describing and quantifying the different

components of total return. The next and final step

is to determine how this affects us as investors. For

the purposes of our discussion let us assume the

following going forward:

Inflation 4.5% This is in the middle of the

target range

Risk Free rate 6.5% Common belief is for

interest rates to

remain lower than those

enjoyed historically

Dividend Yield 3% Increased competition

may lead to lower profits

X-Factor 0% We have given this the

benefit of the doubt

against its historical track

record of -1.61%

Due to a lack of space please forgive us for

making some assumptions with little explanation in

'Table 2'. Nevertheless, if we can in principal agree

with these numbers we then could expect long

term returns to be around 2.6% lower than those

enjoyed historically. Put another way, future

expected returns could be approximately 15.5%

lower than historical averages.

Throughout this article we have focused on equity

returns. A balanced portfolio should have a blend

of cash, bonds, property and equity in accordance

with the appropriate risk-profile. Expected returns

would thus need to be modified based on the

overall asset allocation. In some instances you may

have inflation plus (e.g. CPI + 5%) targets and can

adjust your sights accordingly.

An unfortunate consequence of a lower return

environment is the need to save additional funds

for retirement or other investment goals. Always

remember to, as far have possible, have a well

thought out investment plan constructed in

conjunction with a professional advisor to ensure

prosperity and peace of mind.

WHAT IS THE 'BOTTOM LINE'?

THE END GAMETable 1

AVERAGE TOTAL RETURN 16.65%

Table 2:

TOTAL 14%

*All graphs courtesy of NFB Asset Management


SENSIBLE INVESTOR

...continued from page 10

CRYSTAL BALL?CRYSTAL BALL?

13

SENSIBLE PLANNING

The phrase "testamentary freedom", i.e. the

freedom to leave your property to whomever

you wish in your Will, is well known, but what

can you do if you have been written out of a Will or

want to challenge the wishes of a recently

departed family member?

It is surprisingly common for individuals to try to

disinherit their families and leave it all to the

proverbial cats' home. The more unusual cases

make the papers – remember the case of Golda

Bechal, an 88-year-old widow living in the UK,

whose relatives challenged her Will after she left

most of her £10m fortune to the owners of her

favourite Chinese restaurant.

As people are now living longer many often

decide to change their Wills later in life without the

assistance of a professional. This can lead to family

members suspecting foul play if they have been

written out of the Will. Challenges to Wills are costly

and difficult to win, not least because the principal

party one might want to obtain evidence from is

no longer with us!

Legally-speaking, it is possible to challenge a

Will for one or more of the following reasons:

Lack of proper formalities

Lack of testamentary capacity

Lack of knowledge and approval

Undue influence and fraud

A Will must be made in writing, preferably not

handwritten, and signed by the testator on every

page, in the presence of two witnesses who must

each also attest and sign the Will in the presence

of the testator. If any of these requirements are

missing the Will is invalid.

To make a valid Will the testator must have the

requisite mental capacity. The testator must be

capable of understanding that they are making a

Will and disposing of their assets on death. The

testator must also be capable of understanding

the extent of their estate and appreciate the

claims on that estate to which he ought to give

effect.

The difficulty with proving this ground is that

you must produce evidence of the testator's

capacity after their death. When a Will is drawn up

by a professional and if there are doubts about a

person's capacity, the professional should ask a

doctor to assess capacity before a Will is made.

A testator must know and approve the contents of

the Will. If a Will has been properly executed, it is

presumed that the Will is valid on this ground and,

generally-speaking, you will have to prove (on the

balance of probabilities) that the testator did not

know and approve the contents of the Will.

A presumption of Undue Influence usually arises

when the beneficiary had actively participated in

the preparation and execution of the Will and had

disproportionately benefited from it. Undue

influence means coercion, but no physical force is

necessary. This is not the same as persuasion.

Reminding the testator of their family obligations or

what you have done for them in the past is not

undue influence. It is essentially down to the person

alleging undue influence to show that the testator

was coerced into making the Will. Given that the

testator is no longer around and that they have

often been isolated by the person against whom

undue influence is alleged, it is one of the most

difficult allegations to sustain - there may be lots of

suspicion, but relatively little hard evidence!

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Lack of proper formalities

Lack of testamentary capacity

Lack of knowledge and approval

Undue influence and fraud

49 Beach Road, Nahoon, East London, 5241 | PO Box 8081, Nahoon, 5210

e-mail:Telephone: (043) 735 4633 Fax: 086 693 3356 / (043) 735 3942 | [email protected]

The reasons for possibly challenging a Will.By , Director - Independent Executor &Debi Godwin

At Independent Executor Trust we are committed to personalized service and

individual attention. With combined experience of 65 years, we specialize in the

Drafting of Wills, Administration of Estates Testamentary Trusts.

&

&

TESTAMENTARY

FREEDOM


15

SENSIBLE ADVICE

Most people are advised to purchase a

retirement annuity because of the tax

concession allowing a deduction, in

respect of that contribution, for an amount of up to

15% of a person's taxable non-retirement funding

income.

1. Protection against creditors

2. Protection against insolvency

3. Protection against Estate Duty and Executor's

fees

Don't lose sight of the fact that the primary

reason for purchasing an RA, however, is to

accumulate capital towards your retirement. The

tax concession certainly is a benefit, but is merely a

pat on the back from SARS for planning for your

retirement.

Besides these obvious benefits, there are

several other benefits to owning a retirement

annuity. Let's look at a few…

The Pension Fund Act provides that a member's

benefit and any annuity purchased by the fund for

that member, may not be reduced, attached or

subject to any form of execution under a court

order. An exception to this is a reduction in respect

of a housing loan from an employer or damage

caused to the employer by a member's theft or

fraud.

This means that if someone obtains a

judgement against you in respect of a debt that

you owe that party, the funds in your retirement

annuity cannot be laid claim to by such parties.

If a person's estate is sequestrated, a benefit under

a retirement fund is excluded from being an asset

in that person's insolvent estate.

The trustee of the insolvent estate or a creditor

of that estate may not attach or appropriate the

retirement benefit i.e. the retirement annuity is

effectively disregarded as an asset in the estate

and it can thus not be taken it into consideration

when realising assets to generate the funds

needed to repay the insolvent estate's creditors.

At death, a person's estate is subject to executor's

fees of 3.99% (incl. Vat) and Estate Duty of 20%. A

person's estate consists of all the assets that are

registered in that person's name – properties,

vehicles, cash in the bank, investments, etc., as well

as any policies on which that person is the life

assured (life policies, for example).

Retirement annuities are not regarded as an

asset in a person's deceased estate and are thus

not subject to Estate Duty or Executor's fees.

Contributing towards/purchasing a retirement

annuity is thus a very effective estate planning tool.

Effectively, the value of any contributions to a

retirement annuity will be 'removed' from a person's

estate.

For example, R1 000 000 in a money market

account will attract estate duty of R200 000 and

executor's fees of R39 900. This will leave R760 100

available to the spouse/dependants to generate

an income. Purchasing an RA with that money will

immediately remove the asset from your estate

and will leave R1 000 000 available in the RA for

your spouse/dependants to generate an income.

A retirement annuity is not just a retirement plan - it

is also a very effective estate planning tool that

should be used as such!

A look at some of the other benefits.By , Senior Legal Advisor -

Old Mutual Broker Division.Natalie Dillon

A tax deduction

Retirement Annuity

is not the onlyreason to

purchase a


“Life insurance is an investment in your family'sfuture financial security, and should not be seen

as a grudge purchase,” says Patrick Sheehy, Headof Product Management at Glacier by Sanlam.

Risk and life insurance.A necessary evil oran investment inpeace of mind?

Afamily needs to know that its finances will

be sufficient to maintain its standard of

living in the event of the death, critical

illness or disability of the main breadwinner.

Life cover

Disability

Critical Illness cover

The purpose of life cover is to protect the financial

well-being of your family in the event of your death.

Some of the many considerations when evaluating

the adequacy of your life cover include the

following:

When last your life cover was reviewed by a

financial intermediary

Changes in your family or business

circumstances, your lifestyle or occupation since

your life cover was last reviewed

If your children's future education will be

guaranteed in the event of your death or disability

How your debt will be paid off in the event of

your death

The possible reduction in your income should

you be forced to stop working due to ill health.

Inflation may also result in your cover

becoming insufficient over time. There are policies

available that automatically provide for inflation-

linked increases in cover. However, this should not

replace reviewing your cover needs on a regular

basis.

There are two main forms of disability cover,

namely lump sum or income replacement benefits.

A lump sum disability benefit cover will pay out the

sum insured in the event of you becoming

permanently disabled. Because it pays out a lump

sum it is ideally suited to covering outstanding

debts and once-off expenses associated with the

disability.

An income replacement benefit is designed to

replace any reduction in income you might suffer

as a result of disability. It covers permanent as well

as temporary disability up until your normal

retirement age.

The premiums you pay under an income

replacement benefit are tax deductible, with

benefit payments taxed as part of your income. By

contrast, no tax is payable by you on any lump sum

disability payment, but the premiums you pay are

not tax deductible.

Critical Illness cover is designed to offset the

expenses associated with a critical illness. Aside

from the direct medical costs there may well be

substantial expenses incurred during the

recuperation period. Because the costs associated

with different critical illnesses vary substantially, the

Critical Illness benefits will vary according to both

the type and severity of the illness. The amounts

paid by different companies do vary so it is

important that you understand exactly what level

of cover you're getting and what you're covered

for.

Life insurance should never be purchased on

price alone. The range of conditions covered and

corresponding benefit payments should always be

looked at. A cheaper policy may have exclusions

or limitations. In certain instances a more

expensive policy, which is more appropriate for

your needs, may be the wiser choice in the long

run.

Given the amount of information to be

considered and the complexity of the policies, it is

recommended that clients consult a qualified

financial intermediary. As stated earlier, life cover

should be seen as an investment. When seen this

way, it becomes obvious that it needs to be

planned for and adjusted continuously to ensure

peace of mind for the entire family.

�

�

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SENSIBLE ESTATE PLANNING


18

On the JSE, Anglo has the third largest

market capitalisation of R458bn as at 31

May 2011 (after British American Tobacco

plc of R620bn and BHP Billiton plc (BHP) of R585bn).

Anglo is also listed on the London Stock Exchange

where it is a constituent of the FTSE 100 index. The

FTSE 100 index comprises the 100 most highly

capitalised blue chip companies, representing

approximately 81% of the UK market.

Together with BHP and Rio Tinto plc (Rio), Anglo

constitutes the only large capitalisation,

multinational and well-diversified mining

companies worth investing in. There are a number

of other contenders such as Vedanta Resources

plc (Indian), Companhia Vale do Rio Doce

(Brazilian), Antofagasta plc (Chilian), Xstrata plc

and the recently listed commodities trader and

mine owner; Glencore International AG. However,

none of these companies have the diversity of

mining resources that BHP, Anglo and Rio do.

The recent global financial crisis was punishing

to mining companies, in particular, as demand for

its products was severely curtailed and the prices

of the commodities fell dramatically. Given its

strong balance sheet, BHP was the company that

navigated this crisis the best. This financial strength

enabled BHP to increase its dividend in US Dollars

throughout the crisis. From an income perspective,

BHP investors were therefore unaffected. Rio fared

the worst as it had taken on substantial debt at the

peak of the cycle to buy Aluminum assets.

Aluminum (given its industrial demand) was one of

the worst performing commodities and Rio was

eventually forced to pass its dividends and

undertake a substantial rights issue at a deep

discount to clear this debt. Anglo muddled through

by passing its dividend for the first time in its history

on three occasions (an interim and two finals),

however, it did not have to undertake a rights issue

and therefore avoided the consequential dilution

to existing shareholders.

Given the fact that Anglo has interests in

diamonds (through De Beers) and platinum

(through Angloplats) in its portfolio, it was badly

affected by the sharp fall in the demand and the

prices for these two commodities. Anglo had to

SHOULD YOU BE HOLDINGANGLO AMERICAN PLC (ANGLO)

IN YOUR PORTFOLIO?A compelling investment at current levels. By Rob McIntyre,

CA (SA), Portfolio Manager - NVest Securities.


SENSIBLE PORTFOLIO

19

underwrite recapitalisations in these two divisions

during the crisis.

Anglo earns its income in US Dollars and pays

its labour in the currency of the country in which it

extracts its resources. Given the weakening of the

US Dollar over the past few years, Anglo has found

that currency issues have had a negative effect on

its earnings.

During 2010 Anglo resumed the payment of

dividends as its income recovered and its balance

sheet stabilised and comments from the new

chairman, Sir John Parker, seem to indicate that

the level of these dividends has formed a new

base from which investors can expect reasonable

growth. The Chief Executive, Cynthia Carroll, has

been determinately implementing the strategy of

Anglo since her appointment and, apart from the

questionable merit of the share buy backs over

R500 per share, this strategy seems to be bearing

fruit.

For the 2010 year Anglo earned roughly R30 a

share (up 90% from 2009) and the consensus

forecasts taken from I-Net is that Anglo should earn

roughly R45 a share for 2011. At the current share

price of R340, this places Anglo on a forward price

earnings (PE) ratio of 7.5 times. By comparison, I-Net

places BHP on a forward PE of 9.5 times. We

believe that the fact that investors are prepared to

pay 27% more for BHP than Anglo is chiefly due to

the fact that BHP is seen as better managed than

Anglo and the lingering country risk ascribed to

South Africa (in which Anglo is far more

represented than BHP). However, one cannot

choose where platinum and other resources are

found, and country risk goes with the terrain! Anglo

is forecast to pay just short of a 2% dividend at its

current share price.

To some extent the PE ratios for all commodity

companies reflect the belief that the commodity

super cycle may well be over and that commodity

prices will return to a more normalised long term

trend. This is a discussion for another article, but our

view is that commodity prices should continue to

benefit from elevated growth in emerging

economies for many years to come and will begin

to also reflect the under investment in new

commodity capacity over the last few years of the

economic crisis as projects were cancelled or

scaled back.

Anglo has substantial projects in developments

on its balance sheet in iron ore (Minas-Rio in Brazil

of USD5bn coming into full production in 2014),

copper (Los Bronces in Chile of USD2.5bn coming

into full production in 2012) and diamonds

(Jwaneng in Botswana of USD3bn coming into full

production in 2024 – but already in partial

production). There are also other projects in nickel,

platinum and thermal coal. It is funding these

projects and not earning an income until these

have been commissioned. While there is a level of

execution risk in bringing these projects into full

production, we believe that such projects should

meaningfully enhance Anglo's earnings and

increase its earnings outside of South Africa. Anglo's

development record is no worse than its

competitors, so we are encouraged by its new

projects. Anglo did not get where it is now without

undertaking substantial projects in the past.

Anglo has also continued delivering against its

stated objective of disposing of assets that no

longer fit into its portfolio. The most significant

remaining asset is Tarmac in the UK and Europe

and it has taken steps to create a joint venture as a

means to extract value. Anglo has, however,

largely completed such disposals over the past 5

years.

Our view is that as its diamond and platinum

earnings recover to match its investments in these

commodities and as it brings into full production its

new projects, together with continued

performance of its iron ore, copper, nickel and

coal assets, that Anglo is a compelling investment

at current levels.

Given the US Dollar nature of its income, we

also believe that at current levels of the Rand, it is

an opportune time to be accumulating Anglo to

an appropriate weighting in any general equity

portfolio (such weighting would depend on the

investor's individual circumstances, but should be

around 10%).

So where does this leave us?


20

Q:

A:

When taking out life cover and disability cover

there seems to be a myriad of options and different

benefits and premiums. This is all rather confusing

and I would like to know what one should be

looking out for when considering taking out cover?

Most South Africans are under insured when it

comes to life and disability cover. It is often seen as

a grudge payment or one of those necessary evils.

There is no benefit paid back to you and if there is

then something bad has happened to you in order

for the benefits to be paid.

It is therefore important for you to make sure

that you are getting value for your money and

understand what options you have. One needs to

understand what you are getting for the premium

you are paying and how that premium will change.

Cheaper is not always better.

The benefits you take out will determine the

price you pay. Life cover is generally the same

across all companies. It is in the disability and

severe illness space that you may find differences

in how these benefits are paid. You have the

choice of Comprehensive cover or Core cover. We

would always suggest that you go for

Comprehensive cover as this eliminates any gaps in

your cover. You will also have the option of

choosing between having benefits at lower severity

levels or upgrading the cover to pay out a higher

amount even though the severity level is low.

Companies also offer multiple payouts and claims

while others will pay out 100% of the benefit as soon

as any severity level is obtained. This should be

discussed with your advisor and you need to ensure

that in the event of a claim that you are

comfortable with what will be paid to you. If you

have an illness that is in a low severity level stage

then you may only receive a smaller payout

initially, but should the illness get worse you could

end up with more payouts than had you just

received a full benefit payout in the early stages.

It is also important to understand, with Disability

cover, the difference between own occupation

based disability versus own or similar occupation

based Disability. Own occupation disability

protects you against you being able to perform

your nominated occupation. Own or similar will

look at whether or not you could still work and earn

a living doing something similar.

You are also able to choose your disability or

severe illness cover as an accelerated benefit or a

stand alone benefit. If it is accelerated then this will

reduce your life cover amount down by the

amount of the disability or severe illness claim.

Stand alone costs more, but a claim will not affect

the life cover amount.

The choices you make will determine the

premium you pay. You can also change the type

of premium pattern and cover increases. You are

able to choose between a level premium or a

premium that starts off cheaper, but increases

each year. You will also be able to choose what

percentage you would like your benefit to increase

by each year. A level premium will generally work

out to be cheaper in the long run, but a premium

with a compulsory increase each year will be

significantly cheaper in the shorter term.

It is important to get comparative quotes and

to ensure that you compare “apples with apples”.

Your Financial Advisor should be able to assist and

explain the differences.

“Sensible Finance - Questions and Answers” is an advice column

that will allow our readers the opportunity to write to a professional

and experienced financial advisor for advice regarding

investments, personal finance, life and/or risk cover.

Travis McClure will be answering any questions that you may have.

Travis McClure

SENSIBLE FINANCE QUESTIONS & ANSWERS

Please address all Questions to: Travis McClure,

NFB Sensible Finance Q&A, Box 8132, Nahoon,

5210 or email: [email protected]


Anthony Godwin

Gavin Ramsay

Andrew Kent

Walter Lowrie

Robert Masters

Bryan Lones

Travis McClure

Marc Schroeder

Phillip Bartlett

Duncan Wilson

Glen Wattrus

Leona Trollip

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(RFP™, MIFM) - ManagingDirector and Private Wealth Manager, 23 yearsexperience;

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(BCom Hons, CFP ), 4 years experience;

(B.Juris LL.B CFP ) – Private WealthManager, 14 years experience;

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NFB Sensible Finance Magazine Issue 18

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Transcript of NFB Sensible Finance Magazine Issue 18