Financial Planning September 2010
Content
Financial Planning with Tony Scholefield
September 2010
Volume 1 Number 2 Expect interest rates to remain lower for longer The SARB reduced the prime rate by 50 basis points on Friday, the lowest in 30 years. The growth momentum of the global economy has started to slow. In the US, the rate of employment has fallen and weaker house sales are being recorded. Even the Chinese economy has lost momentum after a very strong run. In Europe the problems are even greater, with countries such as Greece, Spain, Portugal and the UK being forced to adopt tighter fiscal policies, cutting government spending and raising taxes in a bid to repair their poor financial balances. We believe that central banks will keep interest rates at exceptionally low levels for as long as necessary. While many fear deflation, we believe the risk of keeping interest rates at close to zero for an extended period of time and printing money will ultimately result in inflation coming through in future. Against this background, we believe income and growth investors are at risk if they do not have enough growth assets in their portfolios. Growth assets are the most reliable means of protecting one’s capital against the eroding effects of inflation. The last decade is not a god basis for expected return forecasts Investors in local assets have been handsomely rewarded over the past 10 years. Equities and listed property in particular have delivered very strong real returns, while cash and bonds also did well. Using the past decade’s performance as a guide for future returns therefore offers a poor basis for prudent retirement planning in our view. Global stock markets surged as investors took global surveys of manufacturing output to show that the world economy was still recovering and the chances of a double dip recession had receded. The surprise bounce in manufacturing activity in the world’s two biggest economies (US and China) in August improved sentiment as it ended the bleak run of US economic data over the last few months. A better-than-expected US labour market report reinforced hopes that the US economy can avoid sliding back into recession.
Local Markets
More bad news for money market investors
Will domestic equities continue to perform?
Trusts and Trustees Trusts developed in England at the time of the Crusades, during the 12th and 13th
Trusts
Centuries. At the time, land ownership in England was based on the feudal system. When a landowner left England to fight in the Crusades, he needed someone to run his estate in his absence. He would therefore convey his land to a friend, on the understanding that the land would be conveyed back on his return. However, crusaders would often return to find the new “owners” less than willing to hand over the property. The disgruntled crusader would take legal action and over time it became known that the court would continually recognize the claim of the returning crusader. The crusader became the "beneficiary" and the friend the "trustee". The term use of land was coined, and in time developed into what we now know as a trust. Dying wishes are sacrosanct for most people as most of us believe that we will determine who will get our assets following our death. Anomalies do pop up from time to time, such as when the benefit is distributed following the death of a retirement fund member. Legislation in the form of the Pension Funds Act controls the payment of any benefit following the death of a member of a retirement fund. It places the following three duties on the trustees of the fund. They have to: • • • identify the dependants and/or the nominees of the deceased member; decide on how the benefit will be distributed amongst them; and determine an appropriate method of payment.
If the benefit is paid to a minor, the trustees may pay the minor directly or they may pay the benefit to the child’s guardian. Alternatively, the benefit can be paid to a trust, where a monthly income is paid by the trust to the guardian of the child. A 1989 amendment to the Pension Funds Act, allows trustees of retirement funds to include trusts as one of the options available for the payment of death benefits. Umbrella trusts were developed to overcome the high expenses incurred and specialized administration needed to establish a trust for each death benefit. This is the most frequently used payment mechanism, where benefits are paid in respect of minors. Members cannot decide on a trust as this duty rests with the trustees. Trustees have to be vigilant with their choice. They should therefore take, amongst others, the following into account when choosing a company that administers umbrella trusts: • • • • • • All costs incurred for the establishment and ongoing administration of the trust. Whether the company is independent or not. The track record of the company, including years in the business, the composition of its board of directors and senior management and references from other clients. Whether investments are made according to the trust deed, the needs of the beneficiaries and sound investment principles. Whether there are any conflicts of interest. Efficiency of their administration systems.
After the money has been paid over to the trust, the trustees of the retirement fund no longer have any legal obligations towards the beneficiaries. They may however have a moral obligation. The trustees should periodically scrutinize the company to ensure that they are still the right choice. Being a trustee and making decisions that affect the lives of people cannot be taken lightly. Mechanisms such as trusts are there to protect the wellbeing of minors. Trustees have to be vigilant every step of the way and not make light of their responsibilities.
While it is rather unsettling to think of one’s own mortality, most of us underestimate the investment horizon that needs to be
planned for in retirement. Advances in healthcare technology and improvements in nutrition mean that people are living longer, and therefore life expectancy is increasing. For example, if you are a South African female retiring at 65, you can expect to live a further 20 years. But your effective time horizon may be longer as you may live beyond the average retiree. The prudent approach would therefore be to plan your affairs to have a sustainable income for at least 25–30 years. At a 6% inflation rate, this means that you will require nearly 6 times (allowing for inflation) the level of income at the end of your planning horizon than at the start, just to be able to buy the same amount of goods and services!
Retirement thinking
Tony Scholefield Limra IQA Executive Financial Planner
• • • • • •
Comprehensive Portfolio Planning Estate Planning & Wills Life Assurance & Salary Continuation Investment & Retirement Planning Medical Aid & Motor Insurance Executorship
4th floor, Meersig Building 1 cnr Constantia Boulevard & Upper Lake Lane Constantia Kloof 1725 011 991 5751 011 991 5700 086 608 1937 fax 082 901 1294 mobile [email protected]
September 2010
Volume 1 Number 2 Expect interest rates to remain lower for longer The SARB reduced the prime rate by 50 basis points on Friday, the lowest in 30 years. The growth momentum of the global economy has started to slow. In the US, the rate of employment has fallen and weaker house sales are being recorded. Even the Chinese economy has lost momentum after a very strong run. In Europe the problems are even greater, with countries such as Greece, Spain, Portugal and the UK being forced to adopt tighter fiscal policies, cutting government spending and raising taxes in a bid to repair their poor financial balances. We believe that central banks will keep interest rates at exceptionally low levels for as long as necessary. While many fear deflation, we believe the risk of keeping interest rates at close to zero for an extended period of time and printing money will ultimately result in inflation coming through in future. Against this background, we believe income and growth investors are at risk if they do not have enough growth assets in their portfolios. Growth assets are the most reliable means of protecting one’s capital against the eroding effects of inflation. The last decade is not a god basis for expected return forecasts Investors in local assets have been handsomely rewarded over the past 10 years. Equities and listed property in particular have delivered very strong real returns, while cash and bonds also did well. Using the past decade’s performance as a guide for future returns therefore offers a poor basis for prudent retirement planning in our view. Global stock markets surged as investors took global surveys of manufacturing output to show that the world economy was still recovering and the chances of a double dip recession had receded. The surprise bounce in manufacturing activity in the world’s two biggest economies (US and China) in August improved sentiment as it ended the bleak run of US economic data over the last few months. A better-than-expected US labour market report reinforced hopes that the US economy can avoid sliding back into recession.
Local Markets
More bad news for money market investors
Will domestic equities continue to perform?
Trusts and Trustees Trusts developed in England at the time of the Crusades, during the 12th and 13th
Trusts
Centuries. At the time, land ownership in England was based on the feudal system. When a landowner left England to fight in the Crusades, he needed someone to run his estate in his absence. He would therefore convey his land to a friend, on the understanding that the land would be conveyed back on his return. However, crusaders would often return to find the new “owners” less than willing to hand over the property. The disgruntled crusader would take legal action and over time it became known that the court would continually recognize the claim of the returning crusader. The crusader became the "beneficiary" and the friend the "trustee". The term use of land was coined, and in time developed into what we now know as a trust. Dying wishes are sacrosanct for most people as most of us believe that we will determine who will get our assets following our death. Anomalies do pop up from time to time, such as when the benefit is distributed following the death of a retirement fund member. Legislation in the form of the Pension Funds Act controls the payment of any benefit following the death of a member of a retirement fund. It places the following three duties on the trustees of the fund. They have to: • • • identify the dependants and/or the nominees of the deceased member; decide on how the benefit will be distributed amongst them; and determine an appropriate method of payment.
If the benefit is paid to a minor, the trustees may pay the minor directly or they may pay the benefit to the child’s guardian. Alternatively, the benefit can be paid to a trust, where a monthly income is paid by the trust to the guardian of the child. A 1989 amendment to the Pension Funds Act, allows trustees of retirement funds to include trusts as one of the options available for the payment of death benefits. Umbrella trusts were developed to overcome the high expenses incurred and specialized administration needed to establish a trust for each death benefit. This is the most frequently used payment mechanism, where benefits are paid in respect of minors. Members cannot decide on a trust as this duty rests with the trustees. Trustees have to be vigilant with their choice. They should therefore take, amongst others, the following into account when choosing a company that administers umbrella trusts: • • • • • • All costs incurred for the establishment and ongoing administration of the trust. Whether the company is independent or not. The track record of the company, including years in the business, the composition of its board of directors and senior management and references from other clients. Whether investments are made according to the trust deed, the needs of the beneficiaries and sound investment principles. Whether there are any conflicts of interest. Efficiency of their administration systems.
After the money has been paid over to the trust, the trustees of the retirement fund no longer have any legal obligations towards the beneficiaries. They may however have a moral obligation. The trustees should periodically scrutinize the company to ensure that they are still the right choice. Being a trustee and making decisions that affect the lives of people cannot be taken lightly. Mechanisms such as trusts are there to protect the wellbeing of minors. Trustees have to be vigilant every step of the way and not make light of their responsibilities.
While it is rather unsettling to think of one’s own mortality, most of us underestimate the investment horizon that needs to be
planned for in retirement. Advances in healthcare technology and improvements in nutrition mean that people are living longer, and therefore life expectancy is increasing. For example, if you are a South African female retiring at 65, you can expect to live a further 20 years. But your effective time horizon may be longer as you may live beyond the average retiree. The prudent approach would therefore be to plan your affairs to have a sustainable income for at least 25–30 years. At a 6% inflation rate, this means that you will require nearly 6 times (allowing for inflation) the level of income at the end of your planning horizon than at the start, just to be able to buy the same amount of goods and services!
Retirement thinking
Tony Scholefield Limra IQA Executive Financial Planner
• • • • • •
Comprehensive Portfolio Planning Estate Planning & Wills Life Assurance & Salary Continuation Investment & Retirement Planning Medical Aid & Motor Insurance Executorship
4th floor, Meersig Building 1 cnr Constantia Boulevard & Upper Lake Lane Constantia Kloof 1725 011 991 5751 011 991 5700 086 608 1937 fax 082 901 1294 mobile [email protected]
