AGENDA• Introduction• Principle FocusState of the Retirement Industry• Why all the problems• Consequences and Facts• What you need to know• How do you plan for retirement• Retirement AnnuitiesMarket Commentary• Vunani InvestmentsQuestions and Answers
Vunani Wealth Management•1985. "Compushare". Educational institution dealing in correspondence courses designed toteach stock market investments to public. Hosted Technical Analysis courses to various stockbroking firms. Johannesburg agency for the Indexia Research Market Analyser.• 1987. Shareholder/Director National Trust Portfolio Managers.• 1990. Left National Trust and gained licenses for the First Financial Group. (FinancialServices Board).•Co- Founding member of the First Financial Group. Incorporating First Financial Equities,First Financial Futures and First Financial Technologies under the Stock Exchange Control Actand the Financial Markets Control Act.•2000. New Republic Bank approach. Executive management contract.•Managing Director - New Republic Bank Asset Management division. Built client book to R900 Million.•NRB de-listing. Bought back investment management division and reverse sold to listed PSGgroup.•Warwick Private Wealth, Senior Investment Manager – Johannesburg for two years.•November 2011. Senior Investment/ Wealth advisor Vunani Private Clients WealthManagement Division.
VUNANI WEALTH MANAGEMENT - Principle Focus•Estate planning, Retirement and Investment planning, Savings, Assurance and Insurance riskproducts.•Personal solutions engineered in conjunction with the spectrum of expertise and securityoffered within Vunani Ltd our parent, Public Company listed on the Johannesburg StockExchange. We have an experienced team consisting of :•Administration and Management.•Investment Training Specialists•Portfolio Investment Managers•Traders Equity and Derivatives•Market Research Analysts and leading technology•Public commentators•Economists•Financial planners•Associate tax experts, legal and trust advisory services - to the full spectrum of Insurance riskproducts optimising retirement solutions.
The State of the Retirement IndustryThe secret to living well is to die without a cent in your pocket however I miscalculated, andthe money ran out too early!A comfortable retirement eludes most South Africans.Start planning for your retirement when you receive your first pay cheque.Planning for your retirement should be seen as an on-going process, not a once-off event.
Why All The Problems ?Excepts of research based on +- 700 000 retirement fund members in 2011.•81 percent of retirement fund members will retire with a pension that will not be sufficientfor them to sustain their pre-retirement lifestyle.•12 percent of retirement fund members enter retirement reasonably financially secure. Theoverall number is even lower once account is taken of people, both employed and neveremployed, who contribute nothing to a retirement-funding vehicle.•most retirement fund members start off well when they begin working, but, as they getolder, they increasingly fall off the retirement bus.•low contribution rates, inappropriate investment portfolios, inappropriate switching ofinvestments, high costs, and the significant difference between actual total income anddeemed pensionable salary. (Net Replacement Ratio)•Pensioners often withdraw large lump sums at retirement and use them for non-pension-funding purposes;•Pensioners often withdraw excessive amounts as a monthly pension in their initial years ofretirement, resulting in a shortfall later.•If you change jobs and cash in your retirement savings, you can dramatically reduce yourchances of retiring financially secure, and you stand to lose money to tax and inappropriateinvestments like spending withdrawal benefits on a holiday or a new car.
• Insufficient consideration is given to the effects of inflation in retirement; and in some cases insufficient allowance is made for a spouse’s pension. In many cases, they only realise this many years into retirement, when the problem is difficult to rectify.• Changing jobs and paying large outstanding debts such as your housing bond after retirement.• Unexpected retrenchments.• Poor choice of Advisors and Fund managers.• Pensioners need to have a degree of certainty about the income they will receive as a pension. Critical drivers = the production of a reliable, stable and real (after-inflation) income flow avoiding capital erosion and an investment which achieves above average market related returns.• A million rand invested in the All Share Index in the ten years to 2011 would be worth an additional R 1 million (over and above) the +- 12% annualised growth rate the JSE All Share Index has delivered - if the dividends were re-invested. The average dividend yield over the period is +- 3%.• See Chart JSE ALL SHARE INDEX 7
• It’s not just a dividend story. Financial advisors fees, administrative fees, performance fees all result in a reduction of yield. Add this to inflation and the pensioner has no choice but to look for a higher return on investment with associated higher risk inappropriate for that time in their lives.• Quick explanation of trying to understand a fund fact sheet.• Nine out of every 100 South Africans retiring at age 65 have made adequate provision for their retirement.• Research excludes millions of people who are not members of retirement funds and will rely on the state’s old-age grant of R1 200 a month to sustain them after the age of 60 and extended family support groups. 9
The Consequences and the Facts•Effects on the Net Replacement Ratio (NRR) on surveyed fund members.•Slashing standards of living at some point in retirement; and/or•Having to stay employed, either in the current job or facing difficult prospects of finding apost-retirement job.•12 percent of fund members reach retirement with an NRR of more than 75 present of theirfinal pay cheque;•7 percent of fund members have an NRR of between 60 and 75 percent;•10 percent of fund members have an NRR of between 45 and 60 percent;•14 percent have an NRR of between 30 and 45 percent; and•57 percent of retirement fund members have an NRR of less than 30 percent of their finalpay cheque.•What actual figure of the South African population end up having to be supported orsupplemented by family, friends and charitable organisations?
What You Need To Know• A more hands on approach to managing your retirement investments.• If you are heading for an expected shortfall in your projected income plan, make plans andadjust your strategy to either save more or gear to higher returns.• If relative to a reasonable benchmark, you are expected to have a shortfall in your death,disability or other benefits, you will need to make up any shortfall by buying additional riskassurance.• Your financial security in retirement will be affected if you do not preserve your retirementsavings if you leave the fund before retirement without maintaining the investment.• Before your date of retirement, what pension you can expect based on actual investmentoptions and market projections.• If your investment option is inappropriate. For example, you may have chosen a cashportfolio while you are relatively young or have switched to a high-risk investment in thehope of earning better returns, particularly when you are close or well into retirement.• The threat posed by investment risk and return once you retire is an important factor butless serious than capital erosion caused by excessive drawdowns of the investment tomaintain pre-retirement life styles.
• Invest your retirement savings into a growth orientated portfolio that provides a consistent, realistic income, and don’t withdraw more money than your investments earn or appreciate by.• A drawdown from an investment-linked living annuity that exceeds five percent of the annual residual capital will result in an unsustainable income flow particularly if the growth (Real Rate of return) on the investment is poor (below 12%)• Retirement investment rates of return can be very poor, aggravated by misplaced asset allocations at the onset of the investment.• Fees above 2,0% per annum with inflation at 6.0% indicates required rates of return in excess of 8% to counter this erosion, before you factor in the % drawdown for income/living expenses in excess of 5%.• The JSE All Share index returned +- 11.8 % annualized R.O.R. over the past decade to 31st March 2012. Pensioners have the liberty of 2.5% to 17.5% income drawings, in order to maintain lifestyle’s but will not preserve their capital in this scenario.• Most draw well in excess of 5% and watch their capital deplete year on year until it becomes too late. This is called Capital Erosion and is one of the most significant contributors to disastrous retirements.• The truth is pensioners only pay attention to their investments when it is simply too late! 12
How Do You Plan For Retirement?• A good plan caters for the unexpected life events and helps protect the investor fromfinancial misfortunes.• At retirement, you would like to have all your debt paid off and also have no one dependenton you.• Remember that unforeseen events can have a devastating impact on your finances and yourincome and expenses can change.• The budget must be designed to be flexible at times and also be able to change investmentstrategies - this can be due to emergency medical costs, taxes, lifestyle adjustments, inflationor living longer than expected.• This also means that we need to have a suitable investment that can achieve returns aboveinflation and or adjust our income to accommodate ever increasing costs of living.• When making provision for retirement we must calculate what the value of the desiredincome should be and what the capital value of existing capital will be in the future – inflationadjusted.• When we quantify how much we need and set a date for when we need it, it becomes clearwhat the goals are for retirement and we can start with the first steps of a plan.• Important: There are different types of escalation we have to keep in mind. The amount ofhow much your contribution escalates each year. At least matching inflation and the forecastanticipated inflation rate.
• We need to forward project the interest earned and rates of return anticipated on your investments going forward.• Depending on where we invest. Past performance does not give us the security or guarantee that the investment or markets will always perform as well, so conservative estimates and predictions must be used.• Look at what you are currently providing towards your retirement savings. Determine the additional amount of capital you will need at retirement: This can be used to set aside something we call 24/7 money. When you need it, you can access the capita. When it’s not needed, it grows with interest which can also later be used to draw income from.• Time, inflation, capital erosion and personal health are your biggest threats when planning for your retirement.• Choose an investment plan that will suit your Risk profile and Investment needs suitably.• Request a financial needs analysis (FNA) to determine what lump sum is required at retirement to provide this income, and what monthly contribution is required to provide this lump sum prior to retirement.• Select the most appropriate vehicle(s) to achieve your retirement goals.• Continually monitor your investments to ensure that you will meet your retirement goals.
• Engage in a comprehensive Risk Analysis process.• Wills, including what makes a will valid and nominating an executor;• Which of your assets are included in your will and which are dealt with by way of beneficiary nominations;• Estate duty and other costs;• Estate duty roll-over;• How trusts are used in estate planning, including testamentary trusts and inter vivos trusts; and• How retirement savings are dealt with on your death.• Do something dramatic if the model is not achieving these goals! 15
RETIREMENT ANNUITIES• A retirement annuity is a tax effective retirement investment vehicle for individuals. Theprimary target market is individuals who do not participate in a pension or provident fund.Retirement annuities are appropriate for:• Self-employed people. Employees in organisations that do not provide a pension orprovident fund. Employees who earn a significant amount of non-pensionable income andwish to increase their savings towards retirement• Retirement annuities can also be used to house the proceeds of your pension or providentfund when terminating your employment by way of lump sum contributions.Important benefits:• R.A. Creditor Protection. RAs offer protection from creditors. Only a limited number ofinstitutions or people may claim money invested in your RAs. Those that can do so includethe South African Revenue Service (in the case of unpaid taxes) and a previous spouse (interms of a court-approved divorce settlement).
• The only time a creditor may lay claim to the money in an RA - or any other retirement savings vehicle - is when you retire, and then only from any lump sum amount you are paid. A creditor may also not claim money that is paid to you as an annuity bought with the benefits of an RA i.e. your income stream once the policy is converted to a living annuity.• For this reason, you cannot borrow against an RA or use it as security for a loan. A retirement annuity is therefore an important asset for business persons, who are often required to sign personal surety with banks and other creditors.• Within the most modern retirement funds options you will have a large selection of specialised, professionally managed, risk profiled funds, including property funds, local and offshore shares, government and corporate bonds, money market instruments and unlisted preference shares which can be managed in a bespoke personal portfolio.• We will cover these briefly within the Vunani Private Wealth environment later on.
RA Tax Benefits• There are three tax benefits: Contributions are tax deductible – up to a maximum of 15% of non-pensionable taxable income. If you contribute more, you may claim excess amounts in future tax years. You may also add your excess contributions to the tax-free portion of any lump sum you receive. Investment returns are tax free – there is no dividend withholding tax, income tax or capital gains taxed on the investment return earned in an RA Benefits are taxed on a favourable basis – lump sum benefits are taxed on a sliding scale with a portion of the benefit tax free.For Example:•Your non - pensionable income is R300, 000 per year. You contribute a maximum TAX-DEDUCTIBLE contribution of 15% of this income or R45, 000 per year or R3, 750 per month.•Your marginal tax rate on this contribution is 35%. That is R 1,313 per month.This is the amount that SARS is giving you back (by way of a tax-deduction) for saving into anRA.•Look at it another way, for every R1 you invest SARS is contributing 35 cents for you on eachcontribution. You are actually contributing only R 2,437 from your pocket (R 3,750 less R1,313).•The R 2,437 invested by you, YOU IMMEDIATELY GET R 3,750 invested into your RA.•An immediate return of 50% against each contribution?
When Can You Access Your Annuity ?•In general you can only access your RA at retirement. However, you can withdraw your fullRA investment in cash if you emigrate or if your RA investment is less than R7, 000.•You may retire and claim your benefit from the age of 55 onwards (unless you are in illhealth, in which case you may claim earlier). You can take a maximum of 1/3rd of yourinvestment as cash (plus any amounts invested not deducted for tax); with the balance youmust purchase an approved compulsory annuity, which will pay you a pension for life.•If your benefit is R75, 000 or less at retirement, you can elect to receive the full benefit ascash.
Can You Stop Contributing To Your RA ?•You can make your RA ‘paid-up’. This means you no longer pay monthly contributions;however you will stay invested until you retire. You may retire from age 55 onwards.•Be aware that if you make your current RA paid up, your service provider may claw back anyunrecovered broker commissions (plus accrued interest) from your investment balance.•This should not, however, be a factor in your decision to make your current RA paid up ornot, as your service provider will deduct the outstanding broker commissions anyway (eithernow or in the future). Consider this particularly if your returns have been poor. It is better totransfer your investment into a performance orientated vehicle than to leave it for yearsachieving minimal growth.
Should I Cash My RA In?•Many people get anxious when their RA matures. But the pay-out date is very flexible andmost insurance companies will enable you to keep your savings in the RA.•Legislation has recently changed and there isnt a maximum retirement age any more. Thismeans that you can leave your savings in your RA as long as you want, and that you could stillcontribute each month to the investment.•The benefit is obviously that contributions are tax free. In addition, all the costs on theinvestments will already have been discounted, which makes it a cheaper option in terms offees – any new investment will involve new costs, including commission and administrationfees.•Your savings will also be immediately available if you need them – a third can be taken incash and the rest to secure a monthly income for the rest of your life.•It is also possible to use the full amount for a monthly income if the two-thirds are notenough.•The advantages therefore include tax-free growth and access to the investment.
Growth Investment Portfolio objectivesTo provide investors with long-term positive returnsBenchmarkJSE All Share Index, or related comparable Index depending on the Investment model.Investment process - Qualitative and Quantitative Analysis.As a base, we consider the sector allocations of our group economist.We then adjust these according to our views.At a more granular, stock-specific level, we focus on companies with favourable growthprospects as well as high dividend yields – in essence, total return. The following, non-exhaustive list of factors is also considered when picking stocks:
Investment process (cont.)Focus is on future potential earnings, dividends and price/Capital appreciation potential ofstocks.Stock selection is not based soley on momentum; however, we view share price momentumas a factor that also assists us in our stock selection process. Momentum can provide anindication as to which companies, whether it is through good management or sustaineddemand for their products/services, tend to be continuous outperformers.Past performance is not a guarantee of future results. We do endeavour, however, toconsistently outperform our benchmarks through rigorous analysis and skillful execution.
Definition of Qualitative AnalysisSecurities analysis that uses subjective judgment based on non-quantifiable information, such as;Local and Global investor sentiment, Global macroeconomic conditions, equities historical rates ofreturn analysis, tracking market momentum, management expertise and consistency, industry economiccycles, strength of market positioning, company research focusing on growth development, industrycomparable labour relations analysis and consensus forecasting overviews.This analysis technique is different to quantitative analysis, which focuses on numbers. The twotechniques, however, are used effectively together.Investors and analysts rely largely on both Quantitative measures; 24
Definition of Quantitative AnalysisA business or financial analysis technique that seeks to understand behaviour by using complexmathematical and statistical modelling, measurement and research.By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically.Quantitative analysis can be done for a number of reasons such as;Measurement, performance evaluation or valuation of a financial instrument.It can also be used to predict real world events such as changes in a share price.Metrics such as the debt-to-equity and price-to-equity/earnings ratios, supplementing the analysis withqualitative analysis increases the insight into the company and its projected performance. Qualitativefactors give us an edge since key factors, such as management, investor sentiment and sector trends donot show up in quantitative analysis. 25