the wealth perspective - PSG

THE WEALTH PERSPECTIVE FOURTH QUARTER 2015

FOURTH QUARTER 2015 | 1

By considering it all, PSG sees the bigger picture, which gives you the advantage.

Contents Introduction - Corrie de Bruyn

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Investment update - Adriaan Pask

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Industry views - Lizé Visser

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From our trading desk - Shaun van den Berg

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Estate matters - Willie Fourie

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Quarterly insight - Rupert Giessing

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Feature: TV advert - Tracy Hirst

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INTRODUCTION Corrie de Bruyn CEO PSG Wealth

In this edition, Adriaan Pask, Chief Investment Officer, looks back on the tumultuous end to 2015 and shares his insights on what to expect from the markets in the year ahead. In light of the ongoing market uncertainty, Lizé Visser, Executive Director Sales and Client-centricity, explains the benefit of having a range of investment options available from one place via an investment platform. She specifically provides an overview of how you can meet all your investment needs through the comprehensive range of local and offshore investment products and instruments available on the PSG Wealth investment platform. Shaun van den Berg, Head of Client Education, sets out the differences between investing, trading and speculation to help you make informed and sensible decisions. Willie Fourie, Head of Estate and Trust Services, practically illustrates the importance of using particular wording when drawing up a will. Finally, as the tax year-end approaches, Rupert Giessing, Head of Product Development, illustrates the attractive tax benefits offered by retirement annuities and tax free investment accounts. As a special feature for this edition, we share the story behind PSG’s new television advert.

Welcome to our first quarterly newsletter for 2016

Tax year-end reminds us of attractive opportunities for tax savings

We hope that you enjoyed a happy and safe festive season and wish you every success in 2016. With the year already in full swing, we trust that you will find the insights we share in this publication interesting and useful as you continue to grow and protect your wealth.

As Rupert Giessing sets out in his article, the end of the tax year is a good time to consider the significant tax benefits available from certain investments. He specifically focuses on retirement annuities and tax free investment accounts, both of which offer favourable tax incentives that can boost investment growth.

A new year brings with it new aspirations

With the option to make lump sum or low monthly debit order contributions, the PSG Wealth Retirement Annuity (RA) and PSG Wealth Tax Free Investment Plan are easily accessible. It’s important to consider the characteristics of each one to make the right choice for you, such as the benefit of tax rebates in RAs or the fact that a tax free investment plan allows you to access your money before age 55.

For many, 2016 would have brought a fresh (or in some cases a recycled) set of new year’s resolutions. Certain resolutions tend to crop up time and time again: Lose weight. Quit smoking. Get fit. There are also many who use the start of the new year to re-consider their finances: Save more. Reduce debt. Draw up a will. In these cases, we can help you with the tools to reach these goals or point you to a financial adviser for professional, customised advice.

The convenience of accessing a wide range of investment options in one place According to LISPA (the Linked Investment Service Providers Association), PSG recorded the third largest net new flows in the industry in the third quarter of 2015, which is a new record for us. In her article, Lizé Visser shares some of the reasons why more and more investors are choosing the PSG Wealth investment platform. Through this platform, you can access the broadest range of local and offshore investment products and instruments, complemented by the advice and tools to help you navigate these. The wide range of solutions on the PSG Wealth platform can play an important role in helping you meet your needs in the current uncertain, low-return environment.

The inspiring story behind PSG’s new television advert We are excited to share the news that PSG has launched a brand-new television advert, positioning us as the bigger picture thinkers. The advertisement tells the story of the 1955 Mille Miglia race in Italy. By moving beyond mechanics and realising the critical importance of navigation, legendary British racing driver Sir Stirling Moss and his navigator, Denis Jenkinson, focused on the bigger picture. They used an innovative new navigational approach and set a race record that remains unbeaten today. Read more about this in the feature article we’ve included in this edition, and please share the story and advert.

We welcome your feedback We hope you enjoy this edition of our newsletter. Please send us any feedback you might have – we always look forward to hearing from you.

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INVESTMENT UPDATE Investment strategy for 2016 Adriaan Pask CIO PSG Wealth

Political and financial events across the globe in 2015 created a volatile market. Uncertainty about China and a pressurised South African economy suffering from the effects of a weak rand, drought and the threats of increasing inflation are two of the key factors still casting a cloud over investment prospects. However, all is not doom and gloom – the US is strengthening, Europe is showing signs of a moderate recovery, and recovery in the UK is still stable. Despite ongoing volatility, we believe there are still rewarding investment opportunities in the markets. The strategy for 2016 will be to carefully navigate these markets to exploit these opportunities.

Expect the market volatility of 2015 to continue The year 2015 was an eventful one in the markets, with events in countries such as Greece, Russia and China reminding investors how quickly seemingly calm seas can turn choppy and how swiftly currencies can stumble. On the domestic front, the rand weakened significantly to R16/$ after President Jacob Zuma replaced former Finance Minister Nhlanhla Nene with a relatively politically unknown candidate, David van Rooyen. In addition, two rating agencies downgraded South Africa’s sovereign credit rating. There were, however, a myriad of highlights for PSG Wealth in 2015. These include a Morningstar award nomination for our multi-management team, another solid result in the Intellidex Wealth Manager of the Year competition, the expansion of our investment research capabilities, and the launch of our new, consolidated online viewing and transactional platform, which offers access to your entire PSG portfolio via a single log-in. National Treasury also introduced tax free savings accounts last year, and PSG Wealth launched our own Tax Free Investment Plan. This development in the domestic savings landscape sends a very positive message from policy makers, showing that they are actively adopting a solution-focused mindset around the need to create a savings culture in South Africa. This was a small but significant step forward. In 2016, we expect that the usual economic players will continue to dominate the global and domestic marketplace. These include the world’s largest economy, the US, and South Africa’s largest trading partner, China.

US rate hikes indicate an increasingly healthy US economy On the face of it, the US economy looks healthy. Unemployment, which peaked at 10% of the workforce in 2009, was down to about 5% by the end of last year and economic growth for 2015 was expected to come in at a relatively solid 3%. The Chair of

the US Federal Reserve (Fed), Janet Yellen, obviously feels that the economy is strengthening sufficiently to cope with higher borrowing costs, as evidenced by the 0.25% interest rate hike announced in December. Historically, initial US interest rate hikes have been followed closely by more hikes. In 2009, for example, rates rose by two percentage points in just twelve months. Although Fed increases will affect asset class returns in 2016, the longer-term story remains positive in that these Fed hikes stem from an increasingly healthy US economy, which is good news for the global economy.

China’s economic performance for 2016 is both uncertain and a great concern The Chinese economic growth train that powered ahead for almost three decades slowed down significantly in 2015. At 6.9%, GDP growth last year was at its lowest since 2009. Many leading economists were at one stage predicting that China was on the brink of a recession. However, despite the lowered infrastructure spend, Chinese economic growth remained reasonably strong during the country’s continued transition towards becoming a consumer-led economy. Although many professional economists and investors maintain that obtaining accurate economic information about China is close to impossible, there is no doubt that there were a few hiccups in 2015. In one instance, regulators allowed investors to borrow heavily to trade on the stock market. This created a substantial bubble, which duly burst (leading to the biggest one-day loss ever on the Chinese stock market) and prompted the government’s arguably misguided and unsuccessful effort to prop up the falling market. The central bank then took the unexpected step of devaluing the yuan to boost exports, leading to further speculation that China’s economy was in worse shape than the supposed 7% growth rate implied. A further indicator that all was not well on the Chinese economic front came from the global fall in demand for commodities.


INVESTMENT UPDATE

In November, the cost of shipping commodities fell to a record low as Chinese demand for iron ore and coal slowed. The huge construction and mining equipment manufacturer, Caterpillar, also posted its 35th consecutive month of falling sales last November, confirming a worldwide slump in construction and mining activity. This slump can largely be attributed to China, which cut back heavily on commodity imports and construction activity. The prediction is that China’s growth rate for 2016 will be 6.5%, but the actual figure is anyone’s guess. China’s performance during the rest of this year is not only uncertain, but of real concern to the global economy. What is a lot more certain is that Chinese demand for South African commodities will be well below the levels seen in 2013 and 2014. Worse still, the fall in demand seen in 2015 is likely to worsen in 2016 as China introduces structural reforms and looks to move its economy towards services and away from a reliance on manufacturing and infrastructure spend.

We are optimistic but cautious about Europe’s moderate recovery Europe has finally exceeded the GDP levels achieved before the financial crisis, even though this feat took twice as long as in the US. A belated quantitative easing (QE) programme has aided the process, weakening the euro during 2015 and boosting exports. Prospects for 2016 look mildly positive, with the economic tailwind produced by the QE programme set to blow throughout the year. European equity valuations remain generally attractive and the generous stance on QE programmes should underpin a moderate recovery in the Eurozone. Investment risk remains material and, although we are optimistic about return potential over the medium to longer term, we proceed with caution when selecting investments in the Eurozone.

Economic recovery in the UK since the financial crisis is still stable The UK performed relatively well in 2015, with growth of around 2.5% and rock-bottom inflation. Economists predict that this will continue in 2016. Low levels of government investment and low labour productivity are material concerns, but these are largely priced into existing growth forecasts. Similar to the US, UK economic recovery has been reasonably stable since the financial crisis and we expect this trend to continue at a moderate pace in 2016.

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South Africa’s 2016 outlook looks dire, but the market has already priced in bad news Although there are a few export-driven positives, South Africa faces a host of economic challenges in 2016 that could derail the economy. The weaker demand for commodities and falling commodity prices will reduce profits in the mining industry and cut government tax revenues. While the weak rand is beneficial for exports, it makes imports more costly. This is not good news for a country that will import substantially more than it exports in 2016. It will also put upward pressure on the inflation rate. Inflation expectations are therefore rapidly increasing, and managing inflation will be an enormous challenge for the South African Reserve Bank’s Monetary Policy Committee (MPC) this year. The committee seems well aware of the fact that the economy is struggling and that most of the inflation is supply-side inflation. Hiking rates may do little to decrease supply-side inflation, and demand-side inflation is already under pressure. Subsequently, we expect the impending rate hikes to be more successful in getting real rates in sustainably positive territory than in substantially lowering inflation. Nonetheless, the hikes are probably needed to normalise monetary policy going forward. The South African forward rate curve (FRA) is pricing in a total rate hike of 0.75% over the next two MPC meetings. Cash is also starting to offer value, with a three-month fixed deposit currently expected to yield close to 8% in nine months’ time. Since domestic economic conditions are under pressure, these hikes will undoubtedly be extremely unpopular. To make matters worse, manufacturing Purchasing Managers’ Index (PMI) numbers are signalling an increasing likelihood of a local economic recession. The South African manufacturing PMI was recently revised downwards from a weak 48.10 to a dismal 43.30. The outlook for our economy is not great. That said, market sentiment is very low and the market is pricing in a lot of bad news already. This does provide investors with opportunities if some bad sentiments do not materialise. More realistically speaking, prices seem to be compensating investors for the prevailing risks.

Our product positioning in light of the state of the local and global economy In light of the above, our local equity positioning remains as follows: • underweight interest rate-sensitive stocks and asset classes • underweight companies whose earnings rely heavily on domestic drivers • overweight multi-national, rand hedge stocks with low non-emerging market exposure • underweight companies that are heavily reliant on improving commodity spot prices, like resources firms • overweight companies with strong balance sheets and healthy cash flows • overweight firms that are expanding their operating margins and gaining market share With regards to property, we remain of the view that the interest rate cycle will affect domestic economic strength, affordability and sentiment. In addition, other income-generating assets with positive correlations to interest rates will become increasingly attractive, placing further downward pressure on listed property. Where we are required by mandate to hold listed property, we prefer to hold shares with the following characteristics: • low price-to-book ratios • low levels of debt/gearing and strong credit ratings • a globally diversified portfolio, or shares that generate earnings abroad (such as New Europe Property Investments plc, Rockcastle, New Frontier, Capco, Intuprop, MAS, Sirius, Redefine International and Investec Australia) • utilisation of structures that offer superior liquidity, such as Real Estate Investment Trusts (REITs) • superior distribution growth track records We maintain our view that offshore equities remain attractive on a relative basis. We are cautiously optimistic about developed market equity returns and remain overweight this asset class. We are, however, underweight offshore fixed interest as we believe that most of these asset classes do not sufficiently compensate investors for the inherent risks. We expect the Fed rate and bond yields to normalise rapidly during the course of the year.

Expectations for 2016 • MPC reverts back to 0.50% rate hikes on the back of accelerating inflation. • Organisation of the Petroleum Exporting Countries (OPEC) meets before their current scheduled meeting date in June to discuss lower prevailing oil prices and their pricing strategy for 2016. • The rand strengthens against other major currencies. On our assessment of purchasing power parity, the rand is currently oversold. • Commodity prices move lower and bottom in 2016. As smaller producers are flushed from the industry, decreased supply improves the outlook for supply/ demand dynamics in 2017. • Growth underperforms value as expensive stocks lose momentum. • South Africa fails to avoid a recession. Leading indicators point toward much tougher economic conditions for local manufacturers. • Inflation breaches the 8% level as the pass-through effects of a weaker currency take effect. • Prime rates move above 11% as the MPC attempts to combat higher inflation. • The full-term budget informs us that everyone will be subject to higher taxes through higher income taxes, company taxes and VAT. • Investors lose money in the perceived safety of offshore bonds as yields normalise. • The World Bank revises their global growth outlook upwards for 2017 and onwards. • European Central Bank (ECB) stimulus is more favourable than generally expected, as the ECB does whatever it takes to kick-start the Eurozone’s economy. • China makes the most of a buyers’ market in commodities and strengthens ties with Saudi Arabia and Iran. • The S&P 500 surprises with stronger-than-expected returns as the US economy marches on. • Japan continues to struggle regardless of current stimulus measures. More fundamental changes to the economic structure will be needed.

Conclusion Considering all of this, it is likely that 2016 could be another rollercoaster year. However, our products are designed to weather these storms and we believe there are still opportunities that can deliver favourable results for your investments over the long term. FOURTH QUARTER 2015 | 5

INDUSTRY VIEWS PSG Wealth’s investment platform: choice, flexibility and transparency on costs

Lizé Visser Executive Director Sales and Client-centricity PSG Wealth

There has been tremendous growth in the use of investment platforms by investors. In addition, according to industry statistics for the third quarter of 2015, PSG recorded the third-largest net new flows in the industry. This means that more and more investors are choosing to invest via an investment platform, and of these, many are choosing the PSG Wealth investment platform. In this article I explore why this is the case.

When you are considering where to invest, the following factors can play a crucial role in your investment outcome: • the choices you have available to you • the price you pay • the online tools and support • the flexibility to adapt and change your investments as your needs and circumstances change so that your investments remain relevant and appropriate

An investment platform gives you access to a range of investment options in one place Through the PSG Wealth investment platform, you can access a whole universe of investment options. Many investment

providers and platforms only offer a limited range of options. This presents a challenge, as you may not know if you are making the best choice to meet your needs from an inherently limited range. In contrast, PSG Wealth is truly independent when it comes to investment choices. Through the PSG Wealth investment platform, we offer the award-winning PSG funds, but we also offer the widest range of local unit trusts from other investment management companies. In addition to this, we make the broadest possible range of local and offshore investment products and instruments available to investors, complemented by the advice and tools to help navigate them.

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Hedge funds

Exchange traded funds

Personal share portfolios

Corporate cash solutions

Call and notice deposits

Scriptfin

Tax free investment plan

Endowments

Structured products

Single stock futures

Contracts for difference

Currency futures

Exchange traded funds

Asset-swop unit trusts

Local equities Offshore investments

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What about flexibility to change your choice easily, conveniently and affordably?

Most PSG clients invest with the benefit of a trusted and professional adviser

If you are investing for the long term, chances are, as markets or your needs change, you are likely to want to be able to change your portfolio or products. You also want access to the latest innovative instruments. As one example, recent industry statistics show that many investors are looking for innovative ways to improve their return without taking on more risk. Market volatility is creating a greater demand for less ‘risky’ investment options and, at the same time, the lower-return environment is putting pressure on investors to find alternative ways to meet their investment objectives. Many clients are in search of investments that offer a cash risk profile, but potential for inflation-beating returns. This isn’t a trivial ask, but they do exist and have the rather gimmicky name of ‘smart-beta’ solutions. These solutions tend to offer a more conservative risk profile than the asset class they are benchmarking themselves against, but the potential for improved returns. Many investors are also looking for shares and derivative instruments to hedge the risk of owning these when the market is volatile.

Through PSG Wealth, you can invest without an adviser. However, we believe that you should ideally make financial decisions with the benefit of sound advice if you aren’t comfortable to choose the best option for your needs on your own. At PSG, we have a rich history built on the value of financial advice. But we understand and accept that some investors want to make their own choices, which is why our business respects and accommodates this.

The good news is that if you invest via our platform, these options are available and it is easy and convenient to access them.

And what about fees?

PSG Wealth offers investors diverse solutions for personalised wealth management PSG Wealth provides: • the necessary physical footprint and online capabilities to reach and service our clients in the way that you wish to be serviced • the skills, expertise and range of products to meet all your financial planning needs over time • the flexibility to invest with us in a way that suits you • the independence and value for money that gives you peace of mind about your wealth structuring, wealth protection and capital growth needs

Just as investment returns compound over time, so does the negative impact of fees on your investment outcome. We disclose all fees and we are transparent about who is paid a fee (and for what service) so that it is easier for you to pay attention to the details. We know that paying lower fees means higher potential returns, which is why we also focus on improving our business efficiency and reducing fees.


FROM OUR TRADING DESK Investing versus speculating: is it worth the risk? Shaun van den Berg Head of Client Education PSG Wealth

If you like to dabble in the markets, it pays to have a firm foundation and understanding of the difference between investing, trading, speculating and gambling. These terms are often confused, so we have provided a helpful summary of the main differences. Apart from understanding the differences, it always pays to get prudent financial advice to ensure that you stick to the approach that you choose and don’t take unnecessary risks with your money.

Investing or trading – it comes down to your time horizon and your behaviour The main difference between investing and trading is the time horizon chosen. A trader prefers a short time horizon (anything less than three years), while an investor looks at anything over three years. Although both approaches attempt to profit from a financial transaction, they are very different. The main objective when investing is to build wealth over the long term by buying and holding a diversified portfolio. Many share investors lean towards fundamental analysis by concentrating on financial ratios such as price-earnings (P/E) ratios, return on equity and interest cover to help them find undervalued, quality shares with manageable risk. Investors aim to grow their capital over time, supplemented by reinvesting profits and dividends. They will typically hold their shares through inevitable market fluctuations (with the expectation that the market will recover) and invest consistently year-in and year-out. A trader, on the other hand, buys and sells shares more frequently to try and make (and take) quicker profits. They either buy low and sell higher, sell high to buy back at a lower price (when trading derivatives such as single stock futures) or buy high and sell higher (momentum trading). Traders also prefer to use technical analysis to find high-probability trading setups. When a trade goes against them, disciplined traders exit the trade quickly to minimise losses by using protective stop-loss strategies.

Trading is not the same as speculating The main difference between trading and speculating is the amount of risk you take. Typically, high-risk trades that are similar to gambling are classified as speculation, whereas lower-risk trades based on technical analysis fall into the category of trading. Trading can result in significant financial loss if you do not know what you are doing. Disciplined traders use stop-loss strategies and position-sizing techniques to manage the risk on each individual trade. They also hone their skills by reading technical analysis books or attending trading seminars. Ultimately, prudent traders look for situations that present high rewards but low risk.

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When it comes to speculating, the risk of significant loss is offset by the possibility of a huge gain. Speculators are aggressive traders who take big risks – especially when anticipating future price movements – in the hope of making quick, large gains. As such, speculators must have expertise in the instruments they are trading. These usually include highly leveraged investments such as single stock futures and contracts for difference.

Speculating and gambling While often confused with gambling, speculation involves a calculated risk and is not dependent on pure chance. Gambling, however, depends on random outcomes. Speculators make an educated decision on the direction of a trade, but the risk inherent in the trade tends to be significantly above average.

A long-term approach is always an asset There are generally two types of people: those who seek short-term or immediate gratification, and those who seek long-term gratification. A novice investor may achieve a quick profit on one or two shares over a short period of time. However, the chances of making these kinds of profits consistently without properly understanding the mechanics of the market or having an investment strategy are very slim. In fact, this approach is reliant on hope and luck as a strategy, which isn’t very different from putting all of your money on black at a roulette table. On the other hand, a prudent investor is patient and disciplined. They understand that success is nurtured with hard work over time. This investor is always on the path of continuous improvement: learning about successful investment strategies, researching companies that interest them and staying on top of what is happening to the shares in their portfolio. Their efforts are rewarded by long-term success, which takes skill and dedication.

Achieve your wealth objectives prudently Irrespective of whether you like to invest or speculate, you will undermine your wealth if you take unnecessary risks or make ill-informed decisions. It pays to have a prudent approach, or to get advice if you need guidance on how to make the best decisions to meet your financial objectives.

ESTATE MATTERS What you say in your will may have unintended consequences

Willie Fourie Head of Estate and Trust Services PSG Wealth

We all understand that a will is important because it gives direction about how we wish our accumulated assets to be distributed to our beneficiaries when we aren’t around to do so. But how we express our wishes and instructions is as important as expressing them in the first place. Wills must be very carefully worded to avoid misunderstandings and misinterpretation.

Ambiguity in wills can cause confusion The nominated executor of an estate is appointed to carry out the directions contained in the testator’s will. Unfortunately, the executor, heirs to the estate and the Master of the High Court of South Africa (who must confirm the validity of the will) often have conflicting views about the will’s provisions. In these instances, they look to the executor for a decisive interpretation of any contentious clauses. Based on this interpretation, the assets within the estate are transferred to the heirs. While heirs may formally object to the executor’s interpretation, such challenges draw out and complicate the settlement of the estate. It is therefore important to ensure that your will is written so that it will be interpreted as intended.

Unclear property provisions We recently came across a will where the interpretation of one of the clauses relating to the bequest of a residential property caused some doubt about the true intention of the estate owner. When it comes to property, you can assign several different rights to heirs. In our example, the executor’s decision would have resulted in either a usufruct or a fideicommissum being created. A usufruct is a limited or temporary right to use and enjoy a property, but does not constitute full ownership of the property. A fideicommissum transfers property to another person on the condition that the property be passed on to someone else at a given time. The clause in this particular will read as follows: ‘My parents shall have a life right to my residential property.’ This clause seems fairly straightforward and unambiguous at first. The question that comes to mind, however, is what exactly the testator meant by a ‘life right’. Was it a limited real right to use the property or did it mean that the parents would obtain ownership of the property?

General interpretive rules To answer such questions, three general rules and principles apply: 1. The ‘plain meaning rule’ states that the contents of a will should be taken at face value, using strictly literal interpretations.

2. The second rule of interpretation qualifies the ‘plain meaning rule’, stating that one must consider the testator’s intention in using particular words, and not merely the meanings of the words themselves. The reason for this is that wills are often drafted by laymen, who may not understand that particular words and phrases could have a particular technical meaning. 3. A third important rule is to read the word or phrase that is contentious within the context of the overall will.

Reading the phrase in the context of the will Continuing with our example above, the following clause added to the confusion: ‘My brother shall inherit my property after my parents’ death. He may, however, rent out or sell the property at their request if the money is needed for their maintenance or general wellbeing.’ If the estate owner intended that a usufruct be created for her parents (without transferring ownership to them), her brother would become the legal owner of the property. He could then sell the property, but only subject to the rights of his parents’ usufruct. In the context of the will, there are two indications that this is not what the estate owner had in mind: 1. The wording of the will clearly states that the brother will only inherit the property after the parents’ death. 2. The property may only be sold with the parents’ consent. This clearly points to the creation of a fideicommissum, where successive rights to the property are created as opposed to the simultaneous real rights the usufruct would create. Furthermore, there is a presumption in our law in favour of a fideicommissum over a usufruct. This is because a fideicommissum is less onerous than a usufruct.

Always be as clear as possible Use plain language to avoid ambiguous words and phrases so that your true intention is reflected in your will. Limit the use of legal terminology to an absolute minimum, and only to instances in which you or your will drafter have a thorough knowledge of the practical implications and legal consequences. For qualified, professional assistance in ensuring that your will accurately reflects your final wishes, please consult a financial adviser who has access to specialist PSG fiduciary expertise for guidance. FOURTH QUARTER 2015 | 9

QUARTERLY INSIGHT How to maximise tax breaks to improve your investment outcomes

Rupert Giessing Head of Product Development PSG Wealth

The end of the tax year on 29 February is just around the corner. This makes it a good time to consider taking advantage of the tax benefits that certain investments offer. Specifically, the benefit of making additional contributions to your PSG Wealth Retirement Annuity (RA) or PSG Wealth Tax Free Investment Plan.

Your retirement annuity contributions are tax deductible

Investing RA tax rebates can boost your investment growth

RA contributions for the tax year ending 29 February 2016 are tax deductible up to the greater of: • 15% of non-retirement funding income (income not used for contributions to a pension or provident fund); • R3 500 less pension fund contributions; or • R1 750

For example, if you are self-employed and earn an income of R800 000 per year, you can make a maximum tax-deductible RA contribution of up to R120 000 (15% of non-retirement funding income) for the tax year ending 29 February 2016. If we assume a marginal tax rate of 41%, this contribution would potentially provide you with a tax rebate of approximately R48 000.

Any excess contributions can be carried forward to the following year of assessment.

If you choose to reinvest the tax rebates you receive, you can add to your retirement savings without any additional outlay. If you refer back to the example above, and assume an annual increase in income (and therefore also in RA contributions) of 5%, you can save an additional R2.1 million by reinvesting the full rebate you receive over a 25-year term (assuming that the same tax rebate continues unchanged).

Contribution limits will change in March Current contribution limits will change from 1 March 2016, when the Taxation Laws Amendment Act is implemented. In a nutshell, what this means is that contributions to pension funds, provident funds and RAs will be consolidated from 1 March. These consolidated contributions will then be deductible up to 27.5% of the greater of remuneration or taxable income. There will be an annual cap of R350 000 on contributions.

If the annual growth rate on the investment was 10%, this could potentially boost the amount available to you at retirement by almost R7 million in nominal terms. Of course, this is just an illustration (with assumptions that could turn out to be valid or not), but it certainly does show the value of using tax breaks and reinvesting the money saved.

The value of cumulative annual contributions from tax rebates at the end of a 25-year term

Accumulated rebate contributions

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RAs offer additional tax advantages

Tax benefits compound over the long term

RAs offer further tax benefits, as investment returns generated within these products are not subject to tax. This means that no capital gains tax (CGT), income tax or dividend withholding tax (DWT) is applicable.

You can invest a maximum of R30 000 each year and R500 000 over the lifetime of the investment in a tax free investment plan. It is important to remember that these investment limits remain fixed, regardless of any withdrawals made (in other words, you cannot ‘replace’ any amounts you have withdrawn).

Tax free investment plans offer tax benefits with more flexibility

In addition, to really get the additional savings benefit resulting from the tax break, you should remain invested for a period of ten years or longer. That is when you will really start seeing the compounding effect on the additional returns resulting from the tax savings, as shown in the graph.

If you invest in an RA, you must remain invested until age 55 (although exceptions do apply under certain circumstances). In addition, these investments are subject to Regulation 28 of the Pension Funds Act, which prescribes certain asset class limits.

We have compared an investment in a tax free investment plan to a standard taxed investment. For the purposes of our example, we have assumed that the investor makes an annual lump sum contribution of R30 000 at the beginning of each year (up to the R500 000 lifetime limit). This is invested with a 50/50 split between equity and interest-bearing instruments (with a dividend yield of 3% and an interest rate of 8%). During this time, the investment achieves an annual growth rate of 12%. The savings advantage is illustrated over periods of two, five, ten, fifteen and twenty years for investors with marginal tax rates of 18% and 41% respectively.

As with an RA, investment returns in a tax free investment plan are not subject to income tax, CGT and DWT (although contributions are not tax deductible). However, these products do not prescribe a set investment term and there are no restrictions on when you can access your money. In case of an emergency, you will therefore have immediate access to your savings. Furthermore, there are no prescribed asset class limits within the investment as Regulation 28 does not apply to these products. This allows you greater equity and offshore exposure, amongst others.

The graph shows that the real benefit of investing in a tax free investment plan is achieved over a period of 10 years and longer. However, returns can be improved over shorter investment periods as well. Outperformance of a tax free investment compared to a taxed investment 30%

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13% 9%

10% 7% 5% 0

3% 2% 2 years

6%

3%

5 years

10 years

15 years

20 years

Number of years 41% tax rate

18% tax rate

Source: PSG Wealth


QUARTERLY INSIGHT

The PSG Wealth Retirement Annuity and Tax Free Investment Plan: a quick comparison PSG Wealth Retirement Annuity

PSG Wealth Tax Free Investment Plan

Lump sum

R20 000

R6 000

Recurring

R500

R500

Flexibility to stop contributions

Yes

Yes

Maximum annual contribution

Tax deductible to the greater of*: • 15% of non-retirement funding income • R3 500 less current deductions to a pension fund • R1 750

R30 000 a year R500 000 lifetime contribution limit

Investment choices

Unit trusts Private share portfolio

Unit trusts

Investment restrictions

Governed by Regulation 28 of the Pension Fund Act. Asset class limits include: • 75% equity exposure • 25% property exposure • 25% in foreign assets

No unit trusts with performance fees. No asset class limits apply.

Minimum investment period

Until investor reaches age 55 (certain exceptions apply in exceptional circumstances).

No restrictions

At retirement

Up to one third can be taken in cash (subject to tax). The balance must be used to purchase an annuity.

Not applicable

Protection from creditors

Yes

No

Estate duty exemption

Yes

No

Minimum contributions

* From 1 March 2016, combined tax deductible contributions to a pension fund, provident fund and retirement annuity will be the greater of 27.5% of remuneration or taxable income, capped at R350 000 a year.

RAs and tax free investment plans – When to use which An RA is a good investment vehicle to use if you are investing with the long-term objective of saving for retirement. RAs have numerous tax advantages over discretionary investments.

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Tax free investment plans can be appropriate for supplementing your retirement savings, investing towards your children’s education or saving for post-retirement medical expenses.

FEATURE: TV ADVERT Our new television advert – the power of being bigger picture thinkers

Tracy Hirst Head of Group Marketing PSG

PSG recently launched our new television advert. It tells the story of the 1955 Mille Miglia motor race and the record win by Sir Stirling Moss and his navigator, Denis Jenkinson. Moss and Jenkinson secured their win by taking a broader view: they realised the importance of the driver/navigator partnership, used an innovative new navigational technique and spent hours mapping their route ahead of the race. In doing so, they set a record time that remains unbeaten. Similarly, as bigger picture thinkers, PSG considers every detail to ensure the best possible results for our clients.

A momentous event in motor racing history The scene is set in the northern Italian city of Brescia, at the finish line of the 1955 Mille Miglia. British racing car driver Stirling Moss and his navigator, Denis Jenkinson, are celebrating a historic win. They have just completed the close to a thousand mile open-road endurance race in the fastest time ever recorded – indeed, a record that still stands today. Cameras flash furiously around them, the crowd clamours for a closer look and journalists lean in for a shot at the inside scoop. Exactly how did the duo manage this extraordinary feat?

The benefits of adopting a unique approach Our story moves to the build-up to the win. Moss and Jenkinson are racing along the hazardous route. Moss’s eyes are fixed determinedly on the road but Jenkinson’s attention is focused elsewhere. On his lap, Jenkinson holds a Roller-Map, a new navigational device on which they have recorded every twist and turn of the course. Using the Roller-Map, Jenkinson knows exactly what to expect from the stretch of road ahead and he can communicate this to Moss, enabling him to navigate the route quickly and confidently.

Applying a broader perspective While other race entrants focused primarily on optimising the performance of their cars, Moss and Jenkinson took a broader view. Their approach was to consider all the factors that could influence their racing time, both mechanical and otherwise. By recognising the importance of how well they themselves – and not only their car – could navigate the route, they went a step further than their competitors. They were more thorough in their planning, more innovative in their approach and more collaborative in securing a successful partnership. Ultimately, this gave them the edge.

PSG are the bigger picture thinkers in financial services We have used the story of Moss and Jenkinson to highlight how PSG embraces a similar approach. At PSG, we consider all the factors that can affect the end results for our clients across each of our three divisions: PSG Wealth, PSG Asset Management and PSG Insure. We offer access to a full suite of financial products to meet all of your financial planning needs – from investments to insurance and all wealth management services in-between. This is backed by access to high quality advice,


FEATURE: TV ADVERT

available from a broad network of advisers that spans across South Africa and also reaches into Namibia and Mauritius. To provide the best possible support to both our clients and advisers, we continuously focus on enhancing our operations and technological capabilities, ensuring that we remain ahead in a fast-paced, ever-changing and competitive environment. We know that the best result can only come from seeing the bigger picture, and having the courage to act on it.

How our advert conveys our brand positioning Part of creating value for a brand includes consistently communicating the brand values to the public. Our advert differentiates PSG and communicates our unique selling proposition as the bigger picture thinkers in a number of different ways. 1. Just like Moss and Jenkinson, PSG has the vision of a positive, ambitious and successful end result. We have the desire to achieve great results for our clients, even if it means challenging the norm and doing things differently. 2. PSG takes a rigorous and thorough approach in all that we do. There is no substitute for proper preparation. 3. There is a close analogy between the driver/navigator relationship and the relationships PSG and our advisers have with our clients. With the right direction and guidance, we foster successful partnerships with our clients along their financial journeys. 4. Using well-known icons gives the advert an international flavour, showing that PSG can compete with our professional

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product and service offering on a global scale. In addition, the time period and setting is glamourous and aspirational, which encourages positive emotions. 5. We have given a lot of thought to the treatment of the advert to ensure it underpins our brand image: a. The colour grading fits in with our recently established corporate identity – a warm palette that highlights the importance of our relationships with our clients. b. Because we want the advert to have a long lifespan, we have created intrigue by combining footage moving both forwards and backwards, as well as slow-motion interspersed with moments of speed and power. c. We have included actual stock footage from the event at the end of the advert, which speaks to our authenticity and integrity. 6. The advert will be relevant to many audiences. There are few who can say they have never been in a race before. There are even fewer who can say that winning is not satisfying. 7. The timing of the advert launch supports its messaging. In uncertain and volatile times, it helps to have someone to steer you through difficulty. Good navigation will get you there quicker and safely.

View the advert online and help us spread the message We are delighted to share our new advert with you. To view it online, follow this link: https://www.psg.co.za/about-us/PSG-Bigger-Picture-Thinkers/. Please feel free to leave a comment and to share this link with your contacts, family and friends.

Notes


Notes

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Disclaimer PSG Wealth is a brand underneath PSG Konsult Ltd, which consists of the following legal entities: PSG Multi-Management (Pty) Ltd, PSG Securities Ltd, PSG Fixed Income and Commodities (Pty) Ltd, PSG Scriptfin (Pty) Ltd, PSG Invest (Pty) Ltd, PSG Life Ltd, PSG Employee Benefits Ltd, PSG Trust (Pty) Ltd, and PSG Wealth Financial Planning (Pty) Ltd. Affiliates of the PSG Konsult Group are authorised financial services providers. The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG Konsult Group and do not constitute advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken on information in this document. Should you require further information, please consult an adviser for a personalised opinion. Collective Investment Schemes in Securities (CIS) are generally medium- to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is not a guide to future performance. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A fund of funds is a portfolio that invests in portfolios of collective investment schemes, which levy their own charges, which could result in a higher fee structure for these portfolios. Fluctuations or movements in the exchange rates may cause the value of underlying international investments to go up or down. A schedule of fees and charges and maximum commissions is available on request from PSG Collective Investments (RF) Limited. Commission and incentives may be paid and if so, are included in the overall costs. Forward pricing is used. The portfolios may be capped at any time in order for them to be managed in accordance with their mandate. Different classes of participatory interest can apply to these portfolios and are subject to different fees and charges. Figures quoted are from I-Net, Stats SA, SARB, © 2015 Morningstar, Inc. All Rights Reserved for a lump sum using NAV-NAV prices net of fees, includes income and assumes reinvestment of income. PSG Collective Investments (RF) Limited is a member of the Association for Savings and Investment South Africa (ASISA) through its holdings company PSG Konsult Limited. Conflict of Interest Disclosure: The fund may from time to time invest in a portfolio managed by a related party. PSG Collective Investments (RF) Limited or the Fund Manager may negotiate a discount on the fees charged by the underlying portfolio. All discounts negotiated are reinvested in the fund for the benefit of the investor. Neither PSG Collective Investments (RF) Limited nor the Fund Manager retain any portion of such discount for their own accounts. PSG Multi-Management (Pty) Ltd (FSP No. 44306), PSG Asset Management (Pty) Ltd (FSP No. 29524) and PSG Collective Investments (RF) Limited are subsidiaries of PSG Group Limited. The Fund Manager may use the brokerage services of a related party, PSG Securities Ltd.


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