Europe - Gross goverment debt (Bn's €)

How big is the debt crisis in Europe?

Information supplied by Coronation 

Timing the market or Time in the market?

Time in the market is crucial

During the market volatility of the past few years, many investors saw dramatic falls in their portfolios.  No one can predict what the market will do in the future, so don’t let short-term volatility drive your long-term investment planning.  Investors can act emotionally and as a result may sell out at or near the stock market bottom.  Successful market timing during a decline is extremely difficult, because it requires two near-perfect actions: getting out and then getting back in, both at the right time.

The opportunity cost can be substantial if you wait until you feel confident in the market.  You could miss the best days by staying on the side lines.  The main factor working against market timing is that market gains often come in quick bursts and if you miss enough of them, you could lose all of the long-term advantages of owning shares.  

The figure  illustrates the opportunity cost facing investors.  If you had invested R100 000 over the past 15 years to March 2012 in the South African FTSE/JSE All Share Index, your investment would have grown to R526 836. However, if you had decided to get out of the market during volatile periods in these 15 years and as a result missed the market’s best 10 days (that is 10 out of 3 765 trading days) your investment would have only grown to only R289 513.

Currencies

Rand vs US Dollar

US Dollar vs Euro

Debt to GDP - South Africa vs The World

Commodity prices - Orange juice vs Gold

Cooper prices also reached record highs, driven by emerging-market demand, before falling back by the end of the year. Crop prices dropped thanks to bumper harvests for cereals, oils and wheat. Concerns over the supply of orange juice have pushed prices to a record high this week. A destructive fungicide was found in an orange shipment from Brazil, the world’s largest producer of orange juice

TAX RATES INDIVIDUALS - 2013

TAX RATES INDIVIDUALS - 2013
Taxable income Rates of tax:
R 0 - R160 000                        18% of taxable income
R160 001 - R250 000             R 28 800 + 25% of the amount over R160 000
R250 001 - R346 000             R 51 300 + 30% of the amount over R250 000
R346 001 - R484 000             R 80 100 + 35% of the amount over R346 000
R484 001 - R617 000             R128 400 + 38% of the amount over R484 000
R617 001 +                              R178 940 + 40% of the amount over R617 000

TAX THRESHOLDS - 2013
Taxable income:
Persons under 65                   R 63 556
Persons 65 and under 75      R 99 056
Persons 75 and over              R110 889

TAX REBATES - 2013
Amounts deductible from the tax payable:
Persons under 65                   R11 440
Persons 65 and under           R17 830
Persons 75 and over              R19 960

Benchmark performance for the calendar year 2011

Patience

In the previous edition of Cognitio (3rd Quarter 2011), SIM commented on some investors losing patience with the low returns generated by equities during 2011 and probably more so over the past three to four years (the annualised return since the peak reached in 2008 is 3.8%).  It is invariably after a painful period for equities that investors often reduce their exposure or abandon them altogether.  This activity often occurs at precisely the wrong time.  Investors should actually feel more confident about the long-term potential of equities after a prolonged period of disappointment.  The chart below shows annualised five-year returns from 1960 to 2011.  Over this period there were a total of 8 five year periods when returns were below the most recent five year annualised returns of 8.8%.  However, during each five year period when returns were below 10%, they were followed by a better five year period (this comes with the normal health warning that past performance is no guarantee of future results).  For example, an annualised return between 1994 and 1998 of 4% was followed by a 17% average annual return from 1999 to 2003.  While we cannot say with any certainty what the next five years will hold, it is likely to be better than the previous five years.  In the shorter term investors may still endure hard times, but low valuations increase the likelihood of higher future returns.

Chart: 5yr total returns for the FTSE/JSE All Share Index

While we have had a tough year, successful investing involves the disciplined and patient execution of a long term strategy, especially when it is an emotionally fraught time.  

With thanks to SIM Unconstrained Capital Partners – from their latest Quarterly News Letter Cognitio

Tips to curb overspending during Christmas

WRITTEN BY: Samantha Matthew - Glacier Research

Christmas is a time full of excitement and cheer … we call it the season of giving but the flip side of this is that we often forget that behind all this “giving” lies a lot of excessive spending. The holiday spirit is sometimes so contagious that it can turn even the most frugal buyer into a shopaholic! There are people who plan and budget for the festive season well in advance but the plain truth is that such individuals are a bit of a rarity, with the bulk of us being swept up in Christmas shopping-meltdown frenzy, chasing bargains, trying to get the last of our gift-buying out of the way. By the 24th of December we are physically (and financially) exhausted, wondering what we spent our money on and how we are going to make it until that much awaited January salary arrives.

Irrespective of the level of income you are earning the tendency to overspend is there and is fuelled by the media, seemingly bargain buys and outside social pressures to spend. Everyone would like to enjoy the festive season and the holiday spirit but the bills at the end of it (worst still if you have bought on credit) is something that we would all like to avoid. So in the spirit of spreading not only the good tidings during this year’s festive season, let us also mention a few helpful ways to avoid being swept away by all the cheer straight into a mountain of holiday debt.

Start saving

The best and most helpful piece of advice that can be given with regards to Christmas spending is start saving as soon as possible. Although simply saving for the year end shopping may seem pointless when you could rather be investing in something long term, the simple reality is that often Christmas spending gets so out of control that if you don’t plan and save ahead of time you could find yourself paying off debt accumulated over December for rest of the year to come.

Start your shopping for Christmas earlier

Another useful tip is to start shopping for Christmas as soon as possible. This allows you to not only shop around and compare prices, but also avoids that fever of last minute buying which often leads to unnecessary spending. Be conscious that retailers are aware of the fact that along with tidings of goodwill, the festive season also brings with it the tendency to splurge; hence they employ a number of strategies to fuel this. For example have you noticed that over the festive season shops open early and close late; how we are constantly bombarded with advertisements of sales and bargains; and as soon as we hit December they start a daily countdown? All of this is done to create a sense of excitement and urgency and is something that we have grown accustomed to during Christmas – to the point where many of us feed off this energy and sometimes use it as a further excuse to spend. By being aware of the atmosphere that is created, starting early and not getting caught in the rush and panic of last minute shopping, we can actually have a much more enjoyable shopping experience and our bank balances will thank us as well.

Use cash rather than credit cards

Another practical step that we should try is to use cash when purchasing. It is also important to note that studies have shown that when people use credit cards as opposed to cash they spend significantly more. Most people will agree that when we are buying those Christmas gifts, having to part physically with cash makes the reality of your purchase hit home much harder, as opposed to simply swiping the purchases and not actually physically experiencing that dip in your disposable income right now. However we feel the pinch as soon as credit card bills come in the mail during the course of the year that follows. Sometimes one cannot avoid using credit cards all together, so when you do decide to swipe ensure that it is not on an impulse buy and that you have shopped around for the best deal. Most of all if you are increasing the amount owed on credit during Christmas ensure that when the time comes you can pay the instalments that are required.

Plan a Christmas budget

Most people have a monthly budget when it comes to the normal realities of life, but somehow when December hits we tend to forget this logic. However if we can apply the same principle to Christmas it places us in a much better position financially and on a practical level as well. It enables you to keep yourself in check and prevents you from getting overwhelmed by the hype that could contribute to spending beyond your means. Having a pre-set budget and list also means that you are aware of your restrictions and enables you to stop spending. Once you have your Christmas budget in place, another useful tip is to ensure you actually keep to your plan, is to keep track of what you have purchased. This can be done by writing it down in a book or even keeping track on your phone - basically having the list of purchases physically available and not trying to keep tally in your head.

Impulsive buyers stay away from festive season sales

If you are an impulsive buyer and if you do shop for the sheer pleasure of getting a good deal perhaps it would be best to stay away from sales over December. The thrill and excitement of getting a “bargain” or walking away from a huge sale, feeling like you have truly made a good purchase, soon wanes when you realise you didn’t actually need what you bought. Remember that in effect those little sale purchases do eventually add up to a big dent in your bank balance. Although your secret shopaholic heart may not take kindly to such advice, come mid-January when you are still financially comfortable, I don’t think you will miss those “35%-50% sale” items which you didn’t need anyway.

As the festive season starts to begin, with Christmas virtually on our doorsteps, I am sure that being prudent with regards to spending will be the last thing on many of our minds. So before we get fully swept up in the merriment and delirium of the season, I urge one and all to take a step back and think about the way they will be spending their hard earned salaries and bonuses over the holidays. Remember Christmas does indeed come once a year and we should endeavour to enjoy it to the fullest, but not at the expense of having to pay for it (sometimes with interest) for the months that follow.

Risk of drawing to much from an investment

An investor must preferably not draw more 6% of his investment as an income, otherwise he or she runs the risk of experiencing a reduction of income at an age where it is impossible to do anything about it.

From Greece to Italy

Two thousand years ago, the world was ruled by the Romans.  Across Europe, from East to West, into Africa, and even including England, it amounted to roughly 1 in 4 people alive on the Earth who lived under Roman Law.  The Roman Empire was one of the largest and most enduring.  It is not only because of this central position that Rome played that we have the saying about all roads leading to Rome.  Their engineers were in fact one of the greatest road-builders in human history, building over 80 000km of roads.

So it saddens the history-loving heart to witness what has become of this once great Empire.  Reduced to petty political squabbles, and being amongst the most indebted countries on Earth, forced to defend its best intentions and actions from the marauding bands of bond vigilantes.  To say nothing of course of the plight of their creditors, who sit quivering at the looming prospect of Italy not being able to fund itself.

Yes, in this great financial crisis, it will be in Italy that the endgame will be fought.  So perhaps it is fitting that the saying “being thrown to  the wolves” also originates from the activities held in the Roman Colosseum.  Perhaps we should rather point to another idiom, that of the chickens coming home to roost.  The famous question will perhaps one day be asked : Why did the chicken cross the (Roman) road?  “Why, to get a haircut, of course!” will be the answer.

Source: Atlantic Asset Management

Eurozone deal – the good, the bad, the ugly and the unknown

The Good

The most important aspect is that Eurozone leaders finally recognized that the current trajectory of Greece’s public debt is unsustainable, and that wave upon wave of harsh austerity measures will not change it (in fact it can only worsen it).  Bondholders (mainly banks) will thus write down 50% on their current holdings of Greek debt.  This should bring the Greek debt-to-GDP ratio down to 120%, down from roughly 160% - still high, but more manageable.  Greece will also have access to €130bn in bail-out funds to help keep government operations afloat (and, yes, to make interest payments on the remaining 50% of its bonds).  While the 50% haircut has been called ‘voluntary’, it could still trigger payouts on insurance contracts against default (credit-default swaps or CDSs), if the International Swaps and Derivatives Association deems a “credit event” to have taken place.  The complex web of CDS payments triggered by the Lehman Brothers collapse was part of the reason for the financial chaos in 2008.  So far ISDA says the deal unlikely to trigger CDS payments.  But this will also lead to many questioning the usefulness of CDSs in the first place; if they can’t protect you from a 50% sovereign haircut, when can they cover your losses?  This could lead to longer term instability in that market. 

The Bad

At €440bn, the current bail-out fund (European Financial Stability Fund) is too small to support Italy and Spain should these countries come under speculative attack (or if the market simply loses faith in their solvency).  Italy’s public debt pile alone is close to €1.9 trillion.  The EFSF relies on the AAA-rating of the countries behind it.  But these countries will not (in the case of Germany) or cannot (France’s AAA rating is already at risk) increase their contribution.  Germany has also blocked moves to allow the European Central Bank (ECB) to stand behind the EFSF (the ECB of course has unlimited firepower, since it can print money).  Thus, to increase the firepower of the EFSF leverage is required.  One option is for the EFSF to guarantee only the first 20% loss of any new government bond, effectively stretching the €440bn fivefold.  But what happens if the losses exceed 20% (as in the case of Greece)?   Alternatively, special purpose vehicles (SPVs) could be set up, where the EFSF guarantees the first ‘tranche’ while other investors (sovereign wealth funds or the Chinese for instance) buy the other tranches.  If this sounds a lot like the financial engineering that caused so many problems in 2008, that’s because it is.  Leverage can work in both ways - it can also concentrate risk and spread problems from the PIIGS back to the countries backing the EFSF (especially France).  And will other investors want to buy into these tranches? 

The Ugly

The €106bn recapitalisation of Europe’s banks will help them absorb the losses on Greek (and potentially other) write-downs.  The deal requires European banks to raise core capital reserves to 9% by June 2012.  However, while recapitalization should make banks safer, it will also lead to a reduction in lending, potentially starving Europe’s struggling economy of credit. 

The Unknown

Finally, the plan does nothing to address the fundamental imbalances within the Eurozone, and the uncompetitiveness of the peripheral countries.  Germany will continue to run trade surpluses with the likes of Greece, effectively stealing demand from them. Greece, Portugal and to a lesser extent, Ireland, remain trapped in a currency that is too strong for them, meaning that the only way to regain competitiveness is via a painful ‘internal deflation’, i.e. pushing down prices and wages.  All the while, receiving no assistance from the central bank (unlike the US or UK, where the central bank has done all it can to ease the pain.)  Italy and Spain, the third and fourth largest eurozone economies, are not bankrupt (despite their high debt loads) as long as the interest rates on their debt remain low.  If the market frets about default, it will push yields up and potentially force the very event it fears.  While the EFSF has been increased (through leverage) to prevent this eventuality, no one wants to see the EFSF tested.  Finally, while the pieces of the puzzle are starting to fall into place in terms of a long-term solution to Europe’s woes, one cannot help but be a bit skeptical.  This was the third ‘comprehensive plan’ so far this year, following the 14th summit in 21 months.  Following the 21 July summit, it took European parliaments three months to approve changes to the EFSF, because they all went on holiday!  In this market environment, a day is a year and three months a lifetime.  European leaders need to provide detail on this plan and soon.

With acknowledgement to Fairbairn Capital

How much is enough?

How much is enough?

There is a famous story about the author Joseph Heller, attending a party given by a billionaire. Another illustrious author, Kurt Vonnegut, informed Heller that the host, a hedge fund manager, had made more money in a single day than Heller had ever earned from his wildly popular novel Catch-22. Heller responded: "Yes, but I have something he will never have… 'enough".

 

What Heller is talking about is knowing what really brings you happiness. No matter how much we accumulate, there will always be someone who has more. We need to be thankful for what we already have - a job, a home, friends, family, and food on the table.

The idea of "enough" is worth thinking about. There are times where we often feel pressure to spend and accumulate more "things". We feel bad if we can't give our loved ones the gifts they want and often feel obliged to buy gifts for other people so we appear generous. Perhaps we should focus more on generosity of spirit, on giving of our time rather than from our credit cards. 

At some stage in your financial planning, you need to ask yourself how much money is enough? How much time with your family is enough? How much time to pursue your passions is enough? Also ask yourself how you can balance all this to achieve a true sense of fulfillment.

This is as important as asking how much you need to be saving because saving is the flip-side of spending. Does all that "stuff" you spend your money on actually bring you happiness? We tend to buy things to fill our home that do not bring us any real joy beyond the few minutes we spend actually buying them. We may find saving for a dream far more emotionally satisfying.

I recently came across an article in Time that really brought the "stuff" we accumulate into perspective. In the article, organizational consultant, Peter Walsh says, "It's not necessarily about the new pots and pans, but the idea of the cosy family meals that they will provide. People are finding that their homes are full of stuff, but their lives are littered with unfulfilled promises."

Take a moment when you are with your family and friends to discuss what exactly it is that brings you happiness, whether you have "enough" and what "enough" means to you. You may be surprised by their answers as well as yours.   
 
   Source: Liberty

Offshore Investments

High Volatility - Who wants to time the market?



                           

ALSI: 1 month to 12 Sep 2011

Dow Jones Ind: 1 month to 12 Sep 2011

Price of gold - From 2000

Today's chart provides some long-term perspective in regards to the gold market. As today's chart illustrates, gold has been in an extremely strong bull market since 2001. The pace of that upward trend has increased over time. There was a slight increase in slope both in 2001 and 2005. Following the financial crisis of late 2008, however, gold significantly increased the pace of its ascent. Recently, gold made new rally highs but has pulled back after approaching long-standing resistance (red line) of its current accelerated trend channel. Despite the pullback, gold currently trades for over six times what it did when the rally began back in 2001.

The Current Market Sell-off - by Coronation

The Current Market Sell-off

The ongoing sovereign debt problems of the Western world suddenly erupted into a full scale

panic in financial markets in the first week of August 2011.

The proverbial straw that finally broke the camel’s back was a combination of the problems

experienced in raising the US debt ceiling, the lack of a clear and strong enough policy

response to the Eurozone’s debt problems by the ECB and the EU, and the release of poor

economic indicators across a number of countries. Investors have lost confidence in the

authorities’ ability to support the recovery in the US and to deal with Europe’s funding issues.

In response there was a massive spike in risk aversion and indiscriminate selling of risk

assets. To top it all, rating agency Standard & Poor’s lowered the US’s credit rating from

AAA to AA+ - its first ever down-rating – adding further fuel to the fire and the extent of panic

selling.

South African equities and the rand weakened substantially as investors sold en-masse.

Safe haven plays like gold, the Swiss Franc and somewhat perversely even US treasuries

were the winners in this flight to perceived safety.

What can one expect now?

A far stronger policy response from, in particular, the EU and ECB is required. Large

countries such as Italy and Spain cannot be allowed to flirt with defaults on their bonds. If

such an event were allowed to happen it would deal a lethal blow to European banks and

may spell the end of the Euro. No matter how politically unpalatable it may be for the Italians,

Spaniards, Greeks and others, some form of greater fiscal union (or a mechanism forcing

increased fiscal accountability) in the Eurozone is likely to result from this crisis.

Coronation is in no position to predict what macro outcome will result - as events of the last

few years have taught us all that no-one can foretell what the future will bring. But what we

can say is that we will, as always, stick to our valuation based investment approach.

Preceding the crisis we found global equities to be reasonably attractively priced. We also

thought most global bonds were terribly expensive. The panic selling of good quality shares

has made the value in these stocks even more apparent, and the flight to US treasuries has

in our view only made an expensive asset even more expensive.

In the South African market the cyclical stocks such as Anglo American and BHP Billiton sold

off more aggressively than the defensive shares such as British American Tobacco and

SABMiller. The relative price moves were extreme and we used the opportunity to switch

from the defensive counters to the more cyclical ones.

We acknowledge that the loss of confidence in the ability of policymakers to steer the correct

course is a blow to growth prospects. And as commodity prices weaken, South Africa will

earn less for its exports and will run a higher current account deficit unless spending on

imports also declines.

The lower than expected economic growth does however mean interest rates will stay low for

even longer. A period of stagflation (stagnant growth combined with some inflation) is

becoming an ever greater probability for the globe and South Africa.

In such a scenario, negative real returns on cash and bonds are common. In previous

episodes of stagflation, equities proved to be the only asset class to give investors a real

return. We also remain very comfortable with our high holdings of inflation-linked bonds

across all our balanced and bond funds.

We are likewise pleased not to own conventional government bonds. Our equity holdings

have certainly suffered as prices collapsed but we view the sell-off as an opportunity to take

advantage of the compelling long-term opportunities that so often present themselves in

times of crisis.

Our funds have weathered the sell-off well so far, with price behaviour of all the funds in our

flagship unit trust range remaining comfortably within their respective risk budgets.

Karl Leinberger

Chief Investment Officer

Coronation

10 August 2011

Price of Oil

Chart of the Day

Today's chart provides some long-term perspective on the price of a barrel of crude oil with a long-term chart of inflation-adjusted West Texas Intermediate Crude. Today's chart illustrates that most oil price spikes coincided with Middle East crises and often preceded or coincided with a US recession. The logic behind this is that a Middle East crisis can potentially disrupt an already tight oil supply and thereby drive crude oil prices higher. Also, rising oil / energy prices can, among other things, increase costs within the global economy’s supply / distribution chain and thereby contribute to inflation which can in turn encourage governments to halt or reduce any plans to stimulate the economy. It’s worth noting that crude oil prices have surged over the past 10 days and are once again approaching the $100 per barrel level.

A few words on retirement

By Matthew Lester, Professor of taxation studies at Rhodes University, Grahamstown

Many South Africans are conveniently using the looming introduction of some form of social security system as a convenient excuse not to provide for their own retirement. Some say ‘By the time I get to be that old, the State will provide! I would far rather have a new set of wheels than a retirement annuity. You can’t take it with you!’

Are they right? Will it all be okay in the end? Or are many South Africans cruising towards a huge wakeup call (at best) or poverty in retirement. Or worse, will they land up living with their kids?

This year the RSA population will cross the 50 million mark. And about 2,5 million are pensioners with nothing else between them and starvation than the R1070 per month social pension. Some think that this will improve with time. No ways - before there is anything more to be done for the aged, Government is going to have to provide a better deal for: -

• The 11 million children under the age of 18 who only receive a social services grant of R270 per month. And there are nearly 100 000 new applications every month.
• The 4 million unemployed and 10 million economically inactive South Africans who, at present, receive absolutely nothing from the State.

So the prospect of an employed South African ever receiving a meaningful pension from Government is about as remote as the prospect of finding snowflakes in the desert.

There has not been much good news for South African pensioners in recent years. For starters interest rates have plummeted since 1999 when Reserve Bank Governor Chris Stals handed over to Tito Mboweni. Today, with Gill Marcus at the helm, the prospects for the return of high interest rates of the Stals era are remote. So one cannot simply hope that the pensioner will be saved by higher rates.

Add to the above that the pensioner’s shopping basket is heavily weighted to medical services, electricity and rates and taxes. These costs are rising faster than the inflation rate.

As frightening as these issues may be, they are not the biggest threats to the prospective RSA pensioner. The biggest problems are the following:

• Dads used to work to 65 and die at 70. So Dad’s retirement fund only had to last five years. Then Mom sold the house and moved in with the kids. That’s why employers provided defined benefit pension funds. Today Dads retire at 60 and die at 80. So the retirement package has to last for 20 years. And employers provide defined contribution provident funds with no guarantees to see the pensioner through to the end.
• Children used to leave home at 18 to 20. ‘Empty nest’ syndrome we used to call it. But this has been replaced by KIPPERS syndrome, i.e. ‘Kids in Parents’ Pockets Eroding Retirement Savings.’ So instead of children supporting parents, it has all turned the other way round.

Around the Millennium celebrations the futurists were predicting that our biggest problems would be associated with retirement. But then the world went off on a consumer binge that culminated in the Global Credit Crunch. So the issues got hidden away. Now, as we come back from the Global Credit Crunch the same issues are waiting for us, only much, much bigger.

Some say that they would be better off somewhere else. And that all our problems are caused by the new RSA. ‘Emigrate to America and Australia,’ are the usual calls. But when they get there they find exactly the same social problems.

In RSA today, about 1,3 million taxpayers make tax deductible contributions to pension and provident funds through their employers. Only about 18 000 bother to make any additional voluntary or top-up contributions to these funds. 1,8 million make tax-deductible contributions to retirement annuity funds. And many of them are the same lot who are already contributing to pension and provident funds. Whichever way you look at it there are less than three million South Africans with a pension plan of any sort. Out of the 12 million employed South Africans that represents only 25%. Or just 6% of the 50 million total population.

One has to wonder what will happen to the rest of them.

Again some blame the Government for not being more proactive in making all South Africans provide for their retirement. But the tax incentives for retirement savings do exist. So, it is more a case that it’s easier to blame Government than actually getting on with recognising the problem.

The government philosophy on encouraging retirement saving works on the philosophy of :


Tax-deductible Contribution

For years there have been rumours that Government would seek to restrict or even totally withdraw tax-deductible contributions to retirement funds. To date this has not happened. But the threat is now much closer.

For the tax year ending 28 February 2012 tax deductions to retirement funds will be determined as follows: -

• Employer contributions to pension and provident funds, 20 per cent of earnings. Note that tax-deductible contributions to employer owned insurance policies (sometimes referred to as Deferred Compensation Schemes) have been withdrawn with effect from 1 March 2012.
• Employee contributions to Pension Funds only - 7,5%.
• Individual Taxpayers contributions to Retirement Annuity Funds – 15% of non-retirement funding income ‘NRFI’ subject to a minimum of the greater of R3 500 – Pension Fund Contribution or R1 750.

In the 2011/12 Budget speech it was announced that there would be an overhaul of the contribution thresholds commencing from the 2013 year of assessment. The full details are not known at the time of writing this article but are anticipated as being:

• Employer contributions to pension and provident funds will be increased to 22.5% of earnings.
• Total tax-deductible contributions to retirement annuity funds will be subjected to a minimum of R12 000 and a maximum of R200 000 per annum per taxpayer.

So the High Net Worth Individual has a last chance to contribute an unlimited 15% of retirement funding income to a retirement annuity. And there is more to this opportunity than meets the eye.

Many taxpayers who have the benefits of a share participation or share option scheme contribute 15% of their scheme benefits to a retirement annuity fund. In that way they can withdraw wealth from their share incentive scheme and diversify the funds into a spread of underlying collective investment schemes without incurring taxation.

Tax free investment within the fund

In the early years of the new RSA the Katz Commission of Enquiry into the RSA tax system suggested that it would be a good idea to partially tax retirement funds. The resultant Retirement Funds Tax was a disaster and never yielded much tax to Government. So it did not last long and RFT was repealed in 2007, leaving retirement funds as tax-free institutions.

Very few South Africans appreciate that retirement funds are now virtual tax havens. Where else can one invest with up to a 40% tax incentive and thereafter the fund grows free of Income Tax and Capital Gains Tax?

But the moans still continue. ‘What happens if the Government simply nationalises all retirement fund savings?’ My answer to that is quite simply ‘if you believe that could still happen, what are you still doing in RSA. You should have emigrated years ago.’

Others argue ‘You cannot access your money until you are 55 years old.’ My answer to that is ‘that’s the whole point of the exercise. If you are going to need to draw down on your fund earlier, then invest directly into CIS schemes, life insurance policies or just a straight bank account. Nobody is suggesting that one invests everything in a retirement fund.’

Anyway, the fact that you cannot access your retirement fund also means it is safe from attack from your creditors. But please remember that this line of argument no longer includes a spouse in the event of divorce proceedings.

Some also say that the restrictions imposed by regulation 28 of the Pension Funds Act are also a negative factor. These regulations limit the exposure of the fund to equity investment of 75% of the fund and offshore investment of 25% of the fund. Personally, I think these are very well thought out conservative restrictions and it would be only in rare instances that they should be viewed as being restrictive.’

‘And what about the administration costs of retirement funds is the next complaint. The answers are quite simple: - (1). Today, all costs have to be disclosed and agreed in advance. (2). It is quite simply ridiculous to reject the potential of a 40% tax incentive because of an investment commission/cost.

So in desperation the final curved ball gets thrown, ‘well SARS will get it all back when the funds are withdrawn. That’s when all the chickens come home to roost.’

Note that the government policy is ‘partial taxation of the withdrawal benefit.’ Taxation is not imposed on withdrawal willy-nilly. There are wide ranges of procedures to legitimately minimise or control the incidence of tax on withdrawal benefits.

House prices in USA

Chart of the Day

For some perspective on the all-important US real estate market, today's chart illustrates the inflation-adjusted median price of a single-family home in the United States over the past 41 years. Not only did housing prices increase at a rapid rate from 1991 to 2005, the rate at which housing prices increased -- increased. That brings us to today's chart which illustrates how the inflation-adjusted median home price is currently 38% off its 2005 peak. That's a $100,000 drop. In fact, a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (8.5% loss). Not an impressive performance considering that more than three decades have passed. It is worth noting that the median priced home is currently in the bottom half of a price range that existed from the late 1970s into the mid-1990s

"from www.chartoftheday.com"