FPI June - July 2011

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The Financial Planner June/July 2011 1 Financial Planner Supporting Excellence in Financial Planning Official Journal of the Financial Planning Institute of Southern Africa June/July 2011 R30.00 (incl. VAT) The Sustainable growth opportunities Your client’s bucket list Employer owned policies FPI members can claim 2 CPD points for this issue How much risk can your client take? Risk proÀling may not provide the answer

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FPI June - July 2011

Transcript of FPI June - July 2011

Page 1: FPI June - July 2011

The Financial Planner June/July 2011 1

Financial PlannerSupporting Excellence in Financial Planning

Official Journal of the Financial Planning Institute of Southern Africa

June/July 2011R30.00 (incl. VAT)

The

Sustainable growth opportunities Your client’s bucket list Employer owned policies

FPI members can claim 2 CPD points

for this issue

How much risk can your client take?Risk pro ling may not provide the answer

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The Financial Planner June/July 2011 2

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The Financial Planner June/July 2011 1

The words spoken by Sir Winston Churchill ring true, not only when it concerns the societal nature of na-tions, but also in reference to the structures within

nations. It strikes at the heart of industry and commerce, and

try and commerce.

Fit and Proper requirements and concepts such as “honesty”

It is with this in mind that we start a year in which the FPI

If Sir Winston Churchill was right, and our conscience should fuel our soul in order to let us live, then let us gear our con-

Phillip KrugerFPI Standards Manager

Foreword

“A nation without a conscience is a nation without a soul. A nation without

a soul is a nation that cannot live.”Sir Winston Churchill

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Contents

Momentum’s Dr Kaniki explores the effect of the recession on the financial industry and clearly shows the important role it plays in stabilising the economy and in creating sustainable growth.

Employer owned policies

Employer owned policies have an as important a role to play as ever. Tiny Caroll, Glacier, explains the changes brought about by the Taxation Laws Amendment Act 7 of 2010. This is an area most misunderstood by Financial Planners and it will definitely benefit every planner to study this article.

Your client’s bucket list 21

You might remember the wonderful movie, Bucket List, which rang true for most people. Kim Potgieter, Chartered Wealth Solutions, provides and interesting view on your clients’ own bucket list and how to go about using this concept in your planning process.

Andrew Bradley, CEO of acsis, tackles a subject that has caused quite a bit of controversy in the past. He debates the question whether risk profiling actually provides any worthwhile information on a client’s appetite for risk and comes to the conclusion that it doesn’t.

Contents

Sustainable growth opportunities

Perils of profiling

09

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Contents

PublisherCOVER Publications

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The Financial Planning Institute Tel: 011 470 6000

Financial PlannerThe

Foreword 01Editorial 02New exam will be beneficial for business and customersRaimund Snyders 06Bubbling along and PIIGS flyingArno Lawrenz 07Investors continue to avoid equitiesLeon Campher 13Big offshore opportunitiesMichael King 15A bit about propertyIan Brink 16SA life and disability insurance shortfallPeter Dempsey 19The elusive professionJohann Maree 26Lack of financial planning puts SA families at riskJustus van Pletzen 28Business valuation – Mind the gapRicardo Texeira 29Regulatory exams – are you ready yet 31Why settle for 70%Hamish Leppan 32Special Trusts – an overlooked tax planning toolDavid Warneke 33Working longer than our parentsWillem Loots 34Breaking trustsFrancois van Gijsen 36Business Assurance concernsHarry Joffee 37Social Media marketingDr Estelle v Tonder 38Insurance and the Consumer Protection ActPatrick Bracher 40Offshore markets for Pretirement savingsRalph Mupita 41Process driven adviceColin Long 42Divorce and compulsory purchase annuitiesMichelle Human 44FPI celebrates its 30th year of existence 46Annual Financial Planning Convention 48

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Dr Sheshi Kaniki,Senior Economist Momentum

Tindustry). In 2010 this industry accounted for 19.2% of GDP. Among the important functions it plays are providing payment systems for economic transactions, mobilizing savings, channelling these resources to productive investment opportunities, disbursing credit to households and providing employment to about 1.6 million workers. Given its key role in the economy, it is important to assess the effect the recent recession has had on this industry.

levels

much faster than the economy as a whole. For instance, in the

of the credit boom that took place during this period. Rising disposable income, low interest rates, loose credit conditions, and the resultant high growth rates in the property market contributed to the strong performance of the industry.

During the post-recession period, the industry has

because households are struggling to reduce their debt, banks are hesitant to lend and more people are without jobs.

However, a repeat of the negative growth registered by the

territory.

GDP expanded quite rapidly. However, its low growth rate during the post-recession period has led to a decline in its

suggests that its growth prior to the economic downturn was somewhat separate from economic fundamentals.

Figure 2: Finance industry (% of GDP)

Source: Statistics South Africa

Economy

Recession presents sustainable growth

“Prior to the recession

industry was growing much faster than the economy as a whole.”

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the retail banking industry dropped to a level of 20 in the

This is the lowest level since Ernst & Young started measuring

increased mainly due to bad debts, demonstrating that although the economy is recovering, households are still in

covered by the Ernst & Young survey – investment banking, life

These industries are less affected by household debt than

income, which has contracted as a result of historically low

Source: South African Reserve Bank and Ernst & Young

There is some concern among economists about the

particular, low levels of credit extension dampen consumption

While these concerns are valid, there are also positive aspects

led by excessive credit is harmful to the economy in the

Second, the subdued credit conditions mean that households

a tightening of lending criteria may impede spending in the short term, it can have a positive long term impact by

Third, banks will have to strengthen and/or explore other

h greater capacity to respond to the needs

The recent recession had a disproportionate negative impact

experience the rapid expansion it attained prior to the recession

Economy

“Before the recession the share of the

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Raimund Snyders, Executive General Manager of Tied

Distribution at Old Mutual

The current low rate of savings and continued debt crisis in South Africa provide a further opportunity for intermediaries to

Thus it becomes even more important for intermediaries to write the FSB’s regulatory examinations as it would empower them to deal more effectively with clients’ needs and provide them with

Practice Management

New exam will be good for the business and customers

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Arno Lawrenz, a Founder and Director of Atlantic and Chief

There are many who question, having seen where global bond yields have fallen to, whether we are not currently in the midst of the greatest bubble the

bond market has ever seen? After all, in mid -2007, the US 10 year bond yield was trading a touch above 5%,and now, barely three years later, it trades at around 2,6%, having already made a turn close to 2% in the immediate aftermath of the Lehman Brother’s collapse. By comparison, of course, Japanese Government 10 year bond yields have been mired at low levels for more than a decade, having never traded above 2% since 1999.

What does this all mean, then, for the state of the global bond market? After all, Nouriel Roubini, now commonly known as Dr Doom for having correctly forecast the massive implo-sion in the US housing market as well as the subsequent ef-

fects on the state of health in the US banking system, recently termed Japan “an accident waiting to happen.”

With a public debt to GDP ratio of around 200%, it has a debt burden higher even than that of Greece, Italy, Portugal, Ireland and Spain; and these countries are collectively called the PIIGS! The problem here is that Japan has probably been an accident waiting to happen for, at least, the last 10 years. Prior to that, in the late 1980s, it was also an accident waiting to happen, and the accident did happen – the Nikkei Dow at the time traded to a peak above 39000.

Today, 20 years later, it is mired below 10000.

ing to happen, should one get out of the way now already? Secondly, whereto for the USA, whose debt dynamics, while not quite as burdensome as that of Japan’s, also beggars be-lief in its sheer size?

Perhaps the key to understanding this is to recognize why Japan, if it is a problem, still has bond yields trading below 2%, with no end in sight. We are all familiar with the fact that

This makes a nominal bond yield of 2% a pretty good real

of close to -1% per year. If that were the case, bond investors end up with a 3% real yield!

In addition to this, we need to understand that Japan, too, has tried using Quantitative Easing in order to resurrect their

cal stimulus all through the latter part of the 1990s and into the 2000s– leading, of course, to the incredible expansion in

What we need to point out here is the reality of a Balance Sheet Recession there. The term, made popular by Richard Koo, an economist from Nomura, is based on the understand-ing that, in the case where the private sector, having over-

paying down of debt rather than being channelled into either consumption or investment. The multiplier effect of that means a potential implosion of economic growth. Here, of course, in a classical Keynesian response: it becomes the public sector’s responsibility to replace this lost private sector growth and

stimulus – hence, the rapid increase in debt: GDP.With this stimulus comes the increasing burden – debt ser-

viceability becomes an increasing problem over time. But,

tion, and in so doing eroding the real value of debt over time; and, secondly, by keeping government bonds yields – also known as the government’s cost of capital – as low as possi-ble. So, while Japan has managed to maintain bond yields at

Economy

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super low levels for so long, it remains Roubini’s assertion that it is a matter of time before the burden becomes too great and debt investors force yields higher over time, lead-ing, of course, to a predictable end.

seems to remain easier said than done. In a deleveraging eco-

route would be for them to devalue their currency, but when your major trading partner is the USA who is desperately try-ing to do the same, it become well nigh impossible to do so.

-

Let us then move on to the US, where we will keep the

too, is faced with a Balance Sheet Recession, coupled with the commensurate deleveraging in the private sector. Correctly so, the public sector response in the form of a huge expansion

have collapsed, as indicated earlier. The likelihood is there,

out a way to get through the deleveraging phase without see-ing their banking system destroyed.

In the same way as Japan though, the debt burden over time accumulates to the extent that similar solutions are required, and, in addition, a similar requirement of maintaining a low cost of capital for an extended period of time is an absolute necessity in order to keep debt service burdens at manageable levels. Un-fortunately, the longer the Recovery takes, the higher the burden over time as the debt: GDP ratio expands. So yes, most certainly

the likelihood of a rapid rise in bond yields over the short- to medium-term is not a strong possibility. Of course, markets do have a strange way of surprising, and if we are surprised in this respect, all we can say is, it will not be pretty. So, in a strange way, to answer the question of whether we are faced with a

Economy

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Tiny Carroll, an Estate Planner at Glacier by Sanlam

Introduction

The Taxation Laws Amendment Act 7 of 2010 (the Act) was promulgated on 2 November 2010. The Act introduces a new dispensation for “employer owned policies”, typically used to fund keyperson assurance and deferred compensation schemes. The bulk of the amendments apply with effect from 1 January 2011.

While the Act introduces a totally new regime for new “em-ployer owned policies” entered into after 1 January 2011, it

for some existing “employer owned policies”.The impact of the changes on existing policies and the impli-

advisors and their clients.At a high level:

deductibility of premiums. The current section is deleted and replaced with an entirely new section 11(w). The amend-ments apply to both new and existing premiums with effect from 1 January 2011. A new provision, paragraph (mA) is introduced to tax the proceeds of certain policies’ proceeds on receipt instead of on cession of the policy.

o The R30 000 exemption catered for in section 10(1)(x) is abolished but only with effect from 1 March 2011.

o Section 7A (4A) which created the ability to apply the aver-age rate formula to the taxable portion of the lump sum re-ceived by an employee is abolished. This is also with effect from 1 March 2011.The technical amendments are attached as Annexure A to

this circular.The practical implication of the amendments set out above

will be discussed against the background of the more typical employer owned policy arrangements.

1. Application to Keyperson assurance

Keyperson assurance refers to policies taken out on the life/lives of key individuals in the organisation to protect it-self against losses it would sustain in the event of the sudden death, disability or severe illness, of that individual. When dealing with Keyperson assurance, it is necessary to distinguish

between conforming and non-conforming policies.1.1 Conforming policiesConforming policies are structured so that they conform to

forming policy the premiums would be tax deductible for the employer. Because the premiums were deductible the pro-ceeds will be taxable.

After 1 January 2011 the premiums will only be deductible

11(w)(ii).Where an existing keyperson policy does not meet the re-

tions will be lost. This will typically happen where:

value, or(b) where the employer agrees to cede the policy to the

employee on his/her retirement, because the employer no lon-ger has a need for the cover.

The concern with this situation is that, despite the fact that the premiums will not be deductible after 1 January 2011, the proceeds will still be taxable because the premiums were deductable in the preceding tax years.

1.2 Non-conforming policiesBecause of the potentially enormous tax bill on the receipt

of the proceeds of a conforming policy, it became common practice to structure keyperson assurance on a non-conform-ing basis. This was achieved by incorporating a provision in the policy contract which breached the provisions of section 11(w); for example, the contract would allow for the substitu-tion of the life insured. Because the premiums were not de-ductible, the proceeds were tax-free.

For keyperson assurance entered into after 1 January 2010, it will still, in theory, be possible to create a non-con-forming policy merely by adding a cash or surrender value of R1 to the policy – as contrived as this may seem.

The concern for existing non-conforming keyperson policies is that, while the policy may still be non-conforming in terms of the old section 11(w), it may now inadvertently comply with the new section 11(w)(ii), causing the premiums to become tax deductible. This would mean that the proceeds of the erstwhile non-conforming policy will become taxable on receipt by the employer.

Example

be illustrated by the following example:Company X recognises that it will be detrimentally affected

Estate Planning

A new dispensation for employer owned policies

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by the death of their chief rocket scientist, Dr Know. In order to protect itself, the company takes out a policy for R2 000 000 on the life of Dr. Know. The policy is a pure life policy, but structured on a non-conforming basis. Prior to 1 January 2010, no premiums were deductible. The company pays one premium after 1 January 2011, being R750. Dr Know dies two days later. The proceeds of the policy are now included in the company’s gross income. The company pays R560 000 in income tax. Because of the unanticipated tax bill, the compa-

2. Application to deferred compensation schemes

Deferred compensation schemes were popular as arrange-ments in terms of which employers offered to reward certain key employees whose services the wished to retain. The R30 000 tax-free lump sum (discussed earlier) was never updated

-sation schemes lost their attractiveness over time to the extent that they have been virtually extinct for a number of years now. The motive behind the sudden plethora of legislation aimed at deferred compensation schemes now, instead of in its heyday, is therefore questionable.

Deferred compensation schemes after 1 January 2011

The employer’s positionPremiums will no longer be deductible for the employer un-

less the employee is taxed on the equivalent value.The policy proceeds will be included in the employer’s gross

income in terms of paragraph (m).The payment to the employee of the proceeds will not be

tax deductible for the employer because of the new section 23(p).

The employee’s positionThe tax consequences for the employee will differ depend-

takes the form of a lump sum or cession of the policy.

Where the lump sum is received prior to 1 March 2011, it

will qualify for the R30 000 tax-free concession provided for in section 10(1) (x). The balance, to the extent that it complies with the requirements of section 7A(4A), may be taxed in terms of the average rate formula.

Where the lump sum is received after 1 March 2011 the lump sum will be taxed at the recipient’s marginal rate without

Where an existing deferred compensation policy is ceded prior to 1 January 2012 the tax position of the employee will

Where an existing deferred compensation policy is ceded after 1 January 2012, the policy’s cession value will be ex-empt from tax in the hands of the employee on taking cession. The receipt of the policy by the employee is exempt in terms of the new exemption created in terms of the new section 10(1)(gF).

the policy proceeds will be taxable in the hands of the recipi-ent - on the date of receipt, without any tax concessions. The amount will be taxed at the recipient’s marginal rate.

(The cession value will be included in the employer’s income in terms of paragraph (m) as a disposal. The employer will not be able to claim any relief on the disposal to the employ-ee).

3. Certain buy and sell arrangements

While not that common, companies sometimes structure buy-and-sell arrangements on the basis of so-called share buy-backs. Provided that the requirements of the Companies Act are met, the company undertakes to buy the deceased share-holder’s shares on death. When the company acquires its own shares, those shares are cancelled and the value of the issued shares in the hands of the surviving shareholders is increased proportionately.

Life assurance taken out in order to fund the purchase of the deceased shareholder’s shares will usually be structured as non-conforming keyperson assurance. Where this is the case, the premiums on these policies will remain “non-deductible” after 1 January 2010. The reason for this is that there is an arrangement in terms of which an amount under the policy will be recoverable by the deceased’s estate, being the purchase price paid for the shares. The proceeds should thus remain tax free.

On the other hand, where the policy has been structured as a conforming policy so that the employer may claim the tax deduction on the premium, the premium will not be deductible after 1 January 2011 because it will not meet the require-ments of the new section 11(w)(ii). The proceeds will, however, remain taxable.

4. Certain unapproved group life schemes

Group life schemes structured outside the retirement fund

Estate Planning

“The impact of the changes on existing policies

and the implications for new policies will require

advisors and their clients.”

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environment will possibly be caught up in the new tax dispen-sation.

Typically, these “unapproved” arrangements provide cover on the death or disability of an employee. The employer usu-ally funds the contributions and claims a tax deduction. After 1 January 2011, the employer will not be able to claim a de-duction unless the employee is taxed on an equivalent amount.

Where the employee is taxed on the premium and the pro-ceeds are payable to:o an employee/director or a connected person of that em-

ployee/directoro the estate of the employee/director, oro any person who is wholly or partially dependant on the em-

ployee/directoro the proceeds do not fall within the parameters set by para-

should thus be tax-free.

Comment

It is understandable that there should be a matching of -

sequence of the deductions. In this regard, the amendments have merit; however, the retrospective nature of the amend-ments, and the serious implications they have for arrange-ments which have been common practice for many years, seem unduly harsh. Financial advisors will have to take cognisance of the amendments in order to assist their clients who, in many instances, will have arranged their affairs in accordance with the then prevailing tax practices. In many instances, the addi-tional taxes will create shortfalls in life cover and/or retire-ment provision.

Annexure A

The technical amendments1. Section 11 (w) : Tax deductibility of premiumsSection 11(w) as we currently know it is deleted and re-

placed by an entirely new section 11(w). The new section comes into effect on 1 January 2011.

In future, premiums on employer owned policies will ony qualify for a tax deduction in two situations:

Section 11 (w) (i) : Where the employee is taxed on the premium

A premium will be deductible for the employer where the expense incurred by the employer in respect of the premium is included in the employee/director’s income. There is no limit on the deduction.

Section 11 (w)(ii) : Pure life cover policies where only the

A premium will also be deductible where the policy meets with all of the requirements of section 11(w)(ii). In terms of this section premiums will only be deductible where:

(a) The employer is insured against any loss occasioned by the death, disability or severe illness of the employee/direc-tor.

(b) The policy is a pure, risk policy with no cash or surrender value.

(c) The policy is not the property of anyone other than the

employer at the time of premium payment. The policy may, however, be ceded as security for a debt of the taxpayer. This is subject to the condition that the creditor is not one of the following:- an employee/director or a connected person in relation to

that employee/director,- the estate of the employee/director or- any person who is wholly or partially dependant on the em-

ployee/director.(d) No transaction, operation or scheme exists in terms of

which any amount recoverable under the policy or an equiva-lent amount or in place of that amount will be made over by the employer, to- an employee/director or a connected person in relation to

that employee/director- the estate of the employee/director or- any person who is wholly or partially dependant on the em-

ployee/director.Again there is no limit on the amount that may be deducted

as a premium.2. Proceeds : Taxable (Paragraph (m) and (mA) of gross

Income)Under the new regime the rule that where a premium is de-

ductible, the proceeds will be taxable still applies in the case of:- old section 11(w) policies, and- policies where the premiums are deductible or become de-

ductible in terms of the new section 11(w)(ii).It appears as though the proceeds of policies in respect of

which the premiums are deductible under the new section 11 (w)(i) will be tax free provided that they accrue to the em-ployee/director etc. and not the employer.

To give effect to this new dispensation, paragraph (m) has been amended slightly, and a new paragraph (mA) is intro-

Act.Because the new section comes into operation on 1 January

2011 it means that the rules will apply to existing policies, both conforming and non-conforming from that date. It is the application of these provisions to existing policies which is most concerning.

2.1 Paragraph (m) : “Proceeds” received by the employer will be taxable

Where any premium paid, in respect of a policy owned by an employer on the life of an employee/director, is or was deductible in any year of assessment, then any amount re-ceived by or accrued to the employer:

disability)- upon surrender of the policy- disposal of the policy, or- by way of any loan or advanced granted by the insurer on

the strength of the policywill be included in the gross income of the employer in terms

of Paragraph (m).This provision is subject to the following. Provided that:(i) The amount included in the employer’s gross income may

be reduced by any loan or advance on security of the policy

Estate Planning

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previously included in the taxpayer’s gross income(ii) Where a paid-up policy has been issued in place of a

terminated policy they will be regarded as being the same policy

(iii) Where a lump sum is paid to the employer the lump sum can be reduced by the premiums paid by the taxpayer but which did not qualify for a deduction, and

(iv) Paragraph (m) does not apply to amounts received by persons other than the taxpayer (employer) subsequent to the cession of the policy to that person, if the policy is- A pre-1 January 2011 section 11(w) policy, or- A post-1 January 2011 section 11(w)(ii) policy.

(These policies are covered by paragraph (mA) below)2.2 Paragraph (mA) : Proceeds of policies ceded to an em-

ployee/director etc.Paragraph (mA) includes, in the gross income of any person

other than the employer, any amount that is received by or ac-crued to that person, subsequent to the cession to that person, of a:- pre-1 January 2011 section 11(w) policy, or- post-1 January 2011 section 11(w)(ii) policy.

This amount may be reduced by the amount of deductible premiums which were not deducted because they exceeded the allowable deduction in a year of assessment.

This provision comes into operation on 1 January 2011 and applies to all amounts received or accrued after that date.

3. The abolition of certain tax concessions3.1 Section 10(1)(x): R30 000 tax-free lump sumSection 10(1)(x) is abolished with effect from 1 March

2011. This section allowed for a R30 000 tax-free conces-

employer under certain conditions.3.2 Section 7A(4A) : Application of the average rate for-

mulaSection 7A(4A) is abolished with effect from 1 March 2011.

Section 7A(4A) allowed for the application of average rate -

tain conditions.

Comment

Taken together, the abolition of sections 10(1)(x) and 7A(4A) means that lump sums received from an employer will, in future, be taxable in full at the employee’s marginal rate.

-dance with the scales applicable to retirement fund lump sum

3.3 Section 23(p): No deduction in respect of lump sum pay-ments to employees

After 1 January 2011 an employer will not be able to claim deduction in respect of an amount paid to- an employee/director or a connected person in relation to

that employee/director- the estate of the employee/director, or- any person who is wholly or partially dependant on the em-

ployee/directorwhere that amount was funded, directly or indirectly by a

long-term assurance policy.

Comment

Deferred compensation schemes were based on the premise that lump sums received by the employer and paid over to the employee would be tax neutral. On the one hand the amount would have been included in the employer’s gross income in terms of paragraph (m). While on the other, the employer would have been able to claim a tax deduction in terms of

an employment contract or established practice. Section 23(p) now blocks the tax deduction in respect of the lump sum paid to the employee.

3.4 Section 23(q): No deduction in respect of policies ceded to employees

An employer will not be able to claim a tax deduction in respect of a pre-1 January section 11(w) policy ceded to:- an employee/director or a connected person in relation to

that employee/director- the estate of the employee/director, or- any person who is wholly or partially dependant on the em-

ployee/director.This section comes into operation on 1 January 2011 but

only applies to policies ceded after 1 January 2012.

Comment

The effect of this provision on the employer is the same as in the case of section 23(p) above. For the employee the tax consequences will differ depending on the date of the policy cession. In this regard see the discussion of section 10(1) (gF) below.

3.5 Section 23B(4): No deduction for premiums other than in terms of section 11(w)

This new section makes it clear that an employer will not be able to claim a deduction in respect of policy premiums under section 11(a) (general deduction formula) where:

(a) the employer is the policyholder, and(b) the employer is insuring itself against any loss occa-

sioned by the death, disability or severe illness of the employ-ee/director.

4. A new exemption : Section 10(1)(gF): Employee exempt on receipt of ceded policy

The Act introduces a new exemption in the form of section 10(1)(gF). The exemption applies where a pre-1 January 2011 section 11(w) policy is ceded, to:- an employee/director or a connected person of that em-

ployee/director- the estate of the employee/director, or- any person who is wholly or partially dependant on the em-

ployee/director.The receipt of the policy by the cessionary will be exempt

from tax.The exemption comes into effect on 1 January 2011 but

only applies to policies ceded after 1 January 2012.Note: This provision does not mean that the proceeds on the

policy will escape tax. The proceeds will fall into the gross income of the cessionary in terms of paragraph (mA) of the

Estate Planning

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Leon Campher, CEO of the Association for Savings and

Investment South Africa

P The bulk

Investment

Investors continue to avoid equities,

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The Financial Planner June/July 2011 14

funds, the CIS industry through its equity portfolios holds ap-

Best of both worlds for investors

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Offshore versus domestic

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need to do it for the right reasons, not only

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The number of foreign currency denominated funds on sale in South Africa dropped from 372 funds at the end of 2009 to 336 at the end of 2010.

Investment

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The Financial Planner June/July 2011 15

Michael King,Director: Sales (Africa)

S New Reserve Bank rules allow South Africans to invest up to R4 million per person per year offshore. The new dis-pensation comes during a period of prolonged rand strength, creating a timing opportunity should the rand lose ground in the year ahead.

Franklin Templeton Investments South Africa reports an in-crease in offshore business, with business volumes positioned for long-term growth. We believe new South African Reserve Bank rules could prompt a wide-ranging reappraisal of off-

sors looking to develop a strong offshore product offering.The local team of analysts and investment professionals is

close to investor sentiment on international markets as it fo-

cuses exclusively on the parent company’s extensive suite of offshore funds.

As advice professionals are aware, many retail inves-tors remain cautious about offshore exposure following past disappointments; however, the old reticence has begun to recede. Now we’ve witnessed a major relaxation of foreign exchange controls by the Reserve Bank, de-facto acceptance

to prompt an offshore rethink by many members of the invest-ing public.

We view the Reserve Bank announcement as a tipping point with important implications for advisors who are concerned about the narrow focus of many client portfolios. A new client mindset is becoming apparent and believes clients are in-creasingly receptive to the business case for offshore expo-sure.

Many investors now acknowledge the inherent risk of total

than 1% of global market capitalisation.At the same time, we see growing interest in Asian equities,

concerns about a sudden market correction.The investor rethink has only recently begun and that advi-

sors will have to engage in continued market education. After a period of neglect, offshore products have become a potential growth area. Rand strength underlines the opportunity, whether in Asia, the BRIC countries, the USA or Europe. But this is much more than a currency play. It’s a strategic opportunity – for advi-sors as well as their clients.

Investment

Big offshore opportunities for advisors

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The Financial Planner June/July 2011 16

Ian Brink, Glacier by Sanlam

For many of us, investing in property refers to the purchase of a home to live in, or for the more fortunate, a second or third property to rent out or use

as holiday accommodation. Purchasing property is an integral part of wealth creation. Yet owning physical property is only one means of gaining exposure to this unique asset class, and essentially only exposes the homeowner (or the investor) to a

residential property market. Moreover, the returns derived from owning a home, which presumably is appreciating in value over time, are unrealized unless the property is sold, and even then, usually the return derived from selling one’s

simply to realize a capital gain!For those who purchase secondary properties or speculate

together with the general illiquidity associated with physical property can make this type of investing particularly

not least of which is the fact that residential rental rates can

that real estate agents usually facilitate the managing of the property on the owner’s behalf, it is the owner who ultimately remains responsible for the upkeep and maintenance of the property, and also shoulders the burden of any unrecoverable damage which may be incurred.

Like with all other markets, prices of residential properties

property has been kind to investors with decent returns over the past decade and a bit. Between the beginning of 1997 and the middle of 2007 median property prices as measured according to Standard Bank’s mortgage book increased by 330% in nominal terms. Median house prices according to ABSA’s mortgage book over the same period increased by 415%.

The performance of the residential property market is, to a large degree, a function of the interest rate environment,

Investment

A bit about property…

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The Financial Planner June/July 2011 17

When individual balance sheets are strong and there are expectations of strong economic growth going forward, individuals are more inclined to take on extra debt which translates into extra demand for residential property and higher prices. Similarly, when interest rates are low or there are expectations of declining interest rates going forward, individuals will be more inclined to take on debt in order to purchase new or more expensive homes.

Albeit that investing in residential property is implicit to most of us who aspire to owning our own homes, investing in listed property does provide another means of getting exposure to the property market. The listed property universe may be divided into three broad categories, namely PUTs (Property Unit Trusts), PLSs (Property Loan Stocks) and Property Companies.

PUTs, like all other local unit trusts, are registered under CISCA – the Collective Investment Schemes Controls Act of 2002. Where they differ from ordinary unit trusts is that

which jointly have a market cap of approximately R30bn. Since inception in 1969, the legislation surrounding PUTs has become more relaxed, especially with regards to gearing levels. Gearing levels in a PUT are dictated by its trust deed

the fund’s holdings. The gearing levels in local property unit trusts are much lower than their international counterparts.

however, with the loosening of the legislation surrounding PUTs,

(listed property) as well. Only retained income is taxed inside

taxed in the hands of the unit holder. As a consequence of this tax legislation, all income is paid out to the investor either biannually or quarterly. Income distributions from PUTs are regarded as interest – and taxed accordingly.

PLSs were born during an era when PUT legislation was still fairly restrictive. Unlike PUTs at this time (early 1980s), PLSs were allowed to borrow funds, and could also invest in listed property. PLSs are companies which invest exclusively in property. Like all other companies, they are subject to the Companies Act of 1973. There are 13 PLSs which jointly

comprise a market cap of approximately R90bn. Each unit of a PLS is essentially comprised of a portion of equity in the underlying property portfolio together with a portion of debt (a loan to the company). The investor earns interest on his/her loan to the company which is funded from the rental collections on the property portfolio net of the administration, maintenance and other running costs. Dividends paid out on the equity portion of the unit are usually small in comparison to the debenture (loan) interest payments. Similar tax rules apply to PLSs as to PUTs, and as such, the interest earned on the investment is taxed in the hands of the investor and not the company.

Listed Property companies differ from PUTs and PLSs in a

and their distributions. Secondly, listed property companies are not compelled to distribute all their net income. Lastly, listed property companies are allowed to buy shares in other listed property companies and are not forced to invest directly in physical assets. Listed property companies are also subject to the Companies Act of 1973. Listed property has distinct advantages over residential property when used purely for investing purposes. Listed property companies are listed on the JSE, and trade similarly to ordinary equities. As with equities, one is able to gain exposure to a property portfolio without purchasing the properties in their entirety. This means that the investor does not need to lay out large amounts of capital (as in the case of purchasing a residential property) nor does the investor need to raise a mortgage

Since there is an active market for listed property shares, they are a lot more liquid than physical property and may be disposed of a lot quicker without incurring large transaction costs or paying high sales commissions. Listed property also

as the property portfolios are usually comprised of a mixture of property types (retail, industrial and commercial) and also

out over a fairly large area unlike a residential property

Historic performance is usually a poor indicator of future performance. That said, listed property has historically

provided investors with handsome rewards. Since inception (April 2002) till the end of September 2010, the listed property index has delivered a return of 726% (28,3% annualized) compared to the ALSi which delivered a return of 238% (15,4% annualized) and the ALBi which delivered a return of 168% (12,3% annualized).

The returns derived

Investment

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The Financial Planner June/July 2011 18

from listed property are twofold. Like shares, the value of the underlying property portfolio may appreciate (or depreciate) over time. This increased (decreased) value in the underlying portfolio in turn contributes to an increase (decrease) in the value of the property units. It’s important to note that, like with equities, there may be irrational periods of over and under pricing of the units. The second source of the return on listed property is the yield which is derived from the portfolio. This yield is essentially funded by the rental stream derived on the properties as well as interest earnings. A major advantage which listed property has over other asset classes is the relative stability of the yields which they provide (see the graph below).

This stability results out of the fact that the rental incomes are usually tied down by lease agreements which lock in tenants over a period of time. Moreover, these lease agreements usually have a built in escalation clause which ensures that the collected rental stream escalates at a

and maintenance of the property portfolios are delegated to specialized property management companies, which means that the listed property investor is not burdened with the administration and maintenance of the properties.

illustrated by looking at its correlation to other asset classes –

period from the inception of the listed property index (April 2002) till the end of September 2010, the correlation of the

listed property total return index with the ALSi and the ALBi was 30% and 60% respectively. This speaks to the usefulness

it’s interesting to note that the volatility of listed property over the same period was marginally less than the ALSi, despite having outperformed both equities and bonds.

This observation is by no means attempting to make the case for listed property as an alternative to investing in other asset classes, since the results of such analysis are usually subject to end-point bias. Rather, what does become apparent, is the importance of this unique asset class when

References

1) Moodley-Isaacs, N., 2009. How to invest in listed

index.php?fSectionId=&fArticleId=5152692 [Accessed 22 September 2010].

2) Brown, M. 2010. Listed property: The fourth asset class, [online] Available at: < http://www.mg.co.za/article/2010-05-07-listed-property-the-fourth-asset-class> [Accessed 20 September 2010].

3) Catalyst, 2010. Listed property sector monthly overview, [online] Available at: < http://www.catalyst.co.za/domestic/reports/reports2010/monthlyreportSep2010.pdf> [Accessed 30 September 2010]

4) Botha, J., 2010. South Africa: Residential Property Report, [online] Available at: < http://ws9.standardbank.co.za/sbrp/LatestResearch.do> [Accessed 20 September 2010]

5) Association of Property Unit Trusts, 2010. Property Unit Trusts, [online] Available at: www.put.co.za [Accessed 20 September 2010]

Association of Property Loan Stocks, 2010. Property Loan Stocks & Tax Information, [online] Available at: http://www.propertyloanstock.co.za/ [Accessed 20 September 2010]

Investment

Name: Performance Annualised Performance

Annualised Standard Deviation

Standard Deviation (Monthly)

FTSE/JSE Africa SA List Prop (SAPY) J253T 729.99% 28.26% 17.561 5.069 FTSE/JSE Africa All Share J203T 238.93% 15.44% 18.758 5.415 ALBI Total Return - Beassa (ALBI) 168.44% 12.32% 6.669 1.925

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The Financial Planner June/July 2011 19

Peter Dempsey,the deputy CEO of ASISA

During the course of next year, approximately 160 000 South African income earners are expected to die, while an estimated 52 000 earners will suffer

total and permanent disability. This means that, in addition to grappling with the loss of these income earners, more than

year, brought about by South Africa’s massive life and disabil-ity insurance gap.

New research conducted on behalf of the Association for Savings and Investment South Africa shows that the average South African income earner is underinsured by R600 000 in the event of death and by R900 000 in the event of disabil-ity. On average South African earners are underinsured by 62% for death and 60% for disability. This means that the

if the main earner of a household dies or becomes disabled. Apart from a general belt-tightening exercise, this may also

tion for the children.

How big is the gap?

rica’s life and disability insurance shortfall was conducted in

were grossly underinsured by an estimated R10-trillion.For the 2010 study, again conducted by True South Actuar-

ies & Consultants, but, this time, in partnership with the UNISA Bureau of Market Research, more detailed data was avail-able on personal income than in 2007. It was also possible to eliminate individual earners with no need for insurance. As a

than those in 2007.The 2010 Life and Disability Insurance Gap Study shows

that South Africa’s 12,4-million income earners between the ages of 16 and 65 are underinsured by R18,4-trillion. The insurance gap was calculated separately for death and dis-

need and the actual cover. The death insurance gap is R7,3-trillion and the disability insurance gap is R11,1-trillion.

Given the fact that it was possible to interrogate data in much greater detail this year and factoring in the growth in earnings over the past three years since the last study was conducted, we conclude that the insurance gap has not neces-sarily widened.

The insurance gap is likely to have remained static in real terms over the past three years, which is positive given the tough economic conditions that South Africans had to endure for the past couple of years.

What this means is that consumers did not rush out and increase their levels of life and disability insurance since the last study was done in 2007. This is understandable given the

also means that people held on to the life and disability pro-tection cover they had. This is positive and consistent with the lower policy lapse rates we have seen in the industry.

Where is the biggest gap?

While the R18,4-trillion life and disability insurance gap shows that South Africans are in trouble as far as life and dis-ability protection is concerned, the number is so large that it becomes meaningless unless it is unpacked and made relevant to individual consumers.

Planning

South African life and disability insurance shortfall remains critical

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The Financial Planner June/July 2011 20

Especially middle- to high-income earners are usually quick to dismiss these statistics, believing mistakenly that low-income earners are likely to be the only group hard hit by the loss of an earner due to death or disability.

that consumers earning more than R16 700 a month will leave

or become disabled. The higher an earner’s income bracket, the more life cover is required to maintain living standards.

The Life and Disability Insurance Gap Study also shows that while consumers earning less than R3 000 have a life cover shortfall, the reverse is true for disability insurance. This is because of the Government disability income grant which, due

income in the lower income brackets.

Monthly net income for each of the segments: Segment 1 R0-R3 000;

Segment 2 R3 000-R5 800; Segment 3 R5 800-R8 300; Segment 4 R8 300-R16 700;

Segment 5 R16 700+-

cording to the study are high income earners older than 55. This is because this group has generally saved enough money and

The following offers a snap shot of the life and disability insurance gap for individual earners, segmented per income group.

Disability

Closing the gap

Closing the life and disability insurance gap would require South African earners to spend on average an additional 2,4% a year of their personal income on life cover (R35-bil-lion) and 1,5% a year on disability cover (R15-billion).

If earners do not close the current insurance gap, the aver-

third should the earner die or become disabled. The alterna-tive would be to increase the monthly earnings of the house-hold after the death or disability of an earner by an average of R3 177 on death or R4 696 on disability.

For many families this will present a challenge. In addition,

income bracket of the earner whose income has been lost due to death or disability.

About the Gap Study

and Consultants, says the study only considered data relevant to South Africa’s 12,4-million citizens between the ages of 16 and 65 who were earning a regular income.

He points out that the study took a conservative approach, taking into consideration only the levels of life and disabil-ity cover required to maintain ongoing household spending after the death or disability of an earner and then only for

-

The primary source of information for determining the insur-ance need was household income, household expenditure and personal income data as provided by UNISA’s Bureau of Market Research (BMR). Additional information was sourced from life companies, which provided statistics of total payouts should all policyholders with life cover die and should all policyholders with disability cover become totally and permanently disabled.

Planning

Personal Income per month a er tax

Insurance Need Actual Cover Insurance Gap

R0-R3 000 R133 372 R7 318 R126 054

R3 000-R5 800 R483 301 R65 628 R417 674 R5 800-R8 300 R800 628 R167 138 R633 490

R8 300-R16 700 R1 408 200 R431 635 R976 565 R16 700+ R3 325 942 R1 802 173 R1 523 768

Personal Income per month a er tax

Insurance Need Actual Cover Insurance Gap

R0-R3 000 R235 744 R284 346 - R48 602

R3 000-R5 800 R777 277 R325 728 R451 548 R5 800-R8 300 R1 270 763 R385 047 R885 716

R8 300-R16 700 R2 227 830 R621 934 R1 605 896 R16 700+ R5 309 603 R2 103 374 R3 206 229

“The only group of people who have

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The Financial Planner June/July 2011 21

Kim Potgieter,Chartered Wealth Solutions

A Bucket List is a list of all the goals you want to achieve

Bucket List

A Bucket List

last six months and do you know what goals you will achieve

Bucket List is not to create some

Bucket List is to maximise every moment of

a reminder of all the things we want to achieve in our time on

Bucket List will give

Bucket List

Bucket List

items on the Bucket List

Guidelines for helping clients make their Bucket List

Many clients resist making a Bucket List

Planning

Your client’s Bucket List

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The Financial Planner June/July 2011 22

French at a local language school followed by a summer spent living in the South of France. Goal accomplished!

Some questions clients can ask themselves to get the ball rolling are:

I advise clients to listen to their heart if they are struggling

Every person’s Bucket List is unique. It is a living document that clients should constantly be adding new ideas to and hopefully also regularly crossing off achievements. It is also vital that clients actually write down their Bucket List.goals down is a proven technique for turning goals into real-ity. Sharing them with others will also help cement a commit-ment to the goals and helps bring others into the process if necessary.

You may also want to advise clients to have public and private goals. Suggest that they keep quiet about the private ones. Financial goals are often ones that are wise to keep

do not have to have ‘matching’ Bucket Lists as everyone is an

Bucket List. By going through

ing the process is and how the creation of a Bucket List can be a great tool in uncovering hidden goals and dreams. They can then start introducing the concept of a Bucket List into their practice. The creation of a Bucket List should ideally be part of the initial discovery meeting with new clients but it can also be introduced during annual update meetings with established clients.

Finally, keeping a Bucket List alive

Once your client has presented you with his or her Bucket there are several things you can do to ensure the Bucket

list is kept alive.Bucket List where

as wallpaper on their computer or pinned to a notice board above their desk.

By sharing their list they also create accountability for making their list happen.

Bucket List regularly.Bucket List can bring a

The saying goes the best way to predict your future is to in-vent it – and a Bucket List can help you do just that!

Planning

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The Financial Planner June/July 2011 23

Andrew Bradley, acsis Chief

The global war on terror has given rise to some contentious

licit whimsical answers that will change as regularly as the

Practice Management

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The Financial Planner June/July 2011 24

as aggressive. Similarly, when markets are declining, more

reading anything meaningful into these kinds of questions is pointless. In fact, these perceptions will drive an investor to do the wrong thing at the wrong time.

It is abundantly clear that risk questionnaires do not estab-lish anything meaningful about clients’ investment risk ap-

planners continue to use the results from these questionnaires to categorise their clients and then invest their money into

tive, balanced/moderate or aggressive portfolios, to name but a few categories). Each of these portfolios has very spe-

investor will achieve over time. In this way, an investor’s return is actually dictated by his/her risk category. The sad reality is that this has no relevance to the investor’s needs. Worse still,

idea of what level of returns they can expect. This does not leave clients any the wiser or better off for having completed

To illustrate the point, acsis conducted research with over 1000 people and recently updated this research among an

additional 200 individuals who attended a presentation at a

lated issues. Those who attend are interested in their personal

they had to indicate whether they considered themselves to be either aggressive, balanced or conservative in their investment approach. They were then asked to write down the annual re-turn that they would expect to earn from an investment strat-egy that was managed according to their selected investment

The answers to these questions were interesting and ex-tremely diverse. The ‘aggressive’ investors expected returns from as low as 4,5% to as high as 25%. ‘Balanced’ investors expected returns ranging from 3% to 25%, while the so-called ‘conservative’ investors expected returns from 3% to 20%.

The results show that there is very little realism and even less logic in these expectations. In all instances, the returns at the top end of the scale are far too high. Although these returns could possibly be achieved in an exceptional year, they are

ary environment of about 6%. It is clear that most of these investors do not have a realistic investment framework upon which to base their expectations and will almost certainly be disappointed by their investment returns. This proves that

has no meaningful framework or frame of reference for inves-tors.

This is not a trivial matter and has far-reaching consequenc-es when combined with the fact that the prevailing invest-

during bull markets and conservative during bear markets. So when markets are running, many ‘conservative’ investors could become disappointed with the returns generated from their portfolios compared to the returns from the market. Similarly, when markets decline, ‘aggressive’ investors may not be prepared for the negative returns they might experience. Inevitably, these situations result in investors constantly moving between the various risk categories and portfolios. This only guarantees ongoing underperformance as investors move in and out of markets at the wrong times by buying high and selling low. This strategy only succeeds in destroying wealth.

In conclusion, one of the greatest indictments against risk

cial planners to take heed of this and ensure that their clients’

Practice Management

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The Financial Planner June/July 2011 26

Johann Maree,The Institute of Practice Management

In troubled times such as we are experiencing, clients

This

Why study?

Practice Management

The elusive profession

Page 29: FPI June - July 2011

The Financial Planner June/July 2011 27

Life is about making choices .... choose a Post Graduate Programme at the Faculty of Law Potchefstroom Campus of NWU, South Africa in the Research Unit: Development in the South African Constitutional State!

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Contact [email protected] Tel: +27 18 299 1952

integrity and their ability to act in the best interests of clients. For employers, the designations of both current and future employees are an objective measure of their professionalism

planning.

received and maintained through continuous learning activities.

cial services industry. The professionalisation of the industry through establishing common standards and norms across the board will help address the real concerns of consumers about the security of their money and the soundness of the advice they are given. Along with technical knowledge, the standards

must recognize their duty to their clients and the integrity of

consumers expect the standardisation and professionalisation

advice. Research at The Institute of Practice Management indicates

that the majority of these advisors above have not progressed

sion.

nancial advisers, but for employers and clients as well. For

and the improved industry reputation and consumer trust.

Practice Management

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The Financial Planner June/July 2011 28

Justus van Pletzen, COO at the Financial Intermediaries

Association of Southern Africa

A According to a new study conducted on behalf of the Association for Savings and Investment South Africa, South Africa’s 12,4-million income earners between the ages of 16 and 65 are underinsured for life and disability cover by a huge R18,4-trillion. This is up from R10-trillion in 2007, though ASISA says this can be at-tributed to growth in earnings and the fact that more detailed date was available rather than a widening gap.

are major issues when it comes to insurance, a lack of regular

son why so many South Africans have inadequate cover in the

event of death and disability. “To the majority of consumers insurance is often still regarded as a grudge purchase. Many consumers are still of the opinion that the unforeseen such as death, disability and dread disease only happen to others.”

This is illustrated by the fact that the study shows that con-sumers earning more than R16 700 a month will leave their

gap between the level of cover they have and the level of cover their families would need to maintain their lifestyle, of R1,52m for death and R3,2m in the event of disability.

People often assume that higher income earners will be

of life and disability cover in place in the event of a tragedy; however, this study shows that this is simply not the case.

Often we see clients taking out cover at the start of their career, but forgetting to update it in line with their changing circumstances. We can go through many life changes in just a few years – salary increases, marriage, having children – and these are all stages at which consumers should review their

priate level of cover in order to maintain their lifestyle or that of their family in the event of death or disability.

The recent ASISA study found that more than 212 000 fami-

year due to the death or disability of a breadwinner.

consequences are frightening. The last thing a grieving spouse wants to do is think about downsizing their home, selling their car or having to remove their children from a good school and

While the study is a shocking reality check for many South Africans, it is positive news that consumers didn’t appear to

cover is hugely positive and indicates that people are aware of the importance of having this cover in place.

Financial intermediaries play an important role advising

huge responsibility for the industry to ensure that consumers do, in fact, have the necessary cover. We also welcome the Consumer Education Initiatives that the National Treasury is

try in closing this huge gap.

advisor and identify exactly how much cover they should have in order to support their families should the worst happen.

Planning

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The Financial Planner June/July 2011 29

Ricardo Teixeira, acsis Head of Business Management

I You don’t know where you are and, worse yet, no one else knows where

you are or if you’re ever coming back. Now when you think

continue to service your clients in a way that is consistent with

absence. Continuity is a key business risk faced by many inde-

tinuity, there seems to be a great deal of talk, but very little

as there is very often a mismatch between how much a seller

subjective.

the client book (that is, total ongoing commissions and fees)

the future (that is, the basic costs of maintaining, not grow-

However, it gets tricky when determining the number of

stream. A seller, therefore, needs to be aware that there will

Determining the number of years forward is easy for a busi-

art. So, in an effort to bring objectivity to the basis of deter-

Practice Management

Business valuations:mind the gap

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The Financial Planner June/July 2011 30

value in the eyes of a buyer is required. In essence, there are certain areas within a business that buyers will attach value to. Once they review these areas, they will either pay a premium or expect a discount based on a benchmark compar-

-

Consider two houses in a security complex. They are built

Both were built in 1990 and the only difference is that one was refurbished in 2010. Part of the refurbishment included a

If both of these houses were up for sale, it would be obvious

-

understand what aspects within a business would drive its value. Far too often, many business owners overcapitalise

an example of this. While it is important for any business to -

ents, buyers may want to establish their own brands once they take ownership of the business so they will not see the value

owners to understand which factors drive the value of their businesses so that they can successfully focus their efforts on

-

seller, on a relative comparison basis to other businesses, will

or discount should be paid for the business or client book be-

Client relationships

The transferability of these relationships is therefore a key is-

book.To maximise value, sellers will need to demonstrate that

clients are not solely dependent on them for advice. They will need to prove that their clients are able to have relationships

more likely to be retained after the seller exits the business.

Client quality

We all believe that we have the best clients. While quality can be assessed on various scales of qualitative and quanti-

-locate for client quality.

For example, all clients may receive a premium level of

-

fore stands to reason that the buyer would place a discount to value based on the quality of the client base since in his/her

result, these clients are likely to leave when they receive infe-rior service to that to which they have become accustomed.

Planning process

experience the clients have come to expect. This does not

process that is consistently applied from client to client (albeit

-ent book or business.

Client management processes

whether there is a premium or discount on a valuation relative to a comparable business.

Management information

-

-

information.Ideally this would include the number of clients on record,

the services they have received, how much the seller earns for these advice services, the revenue mix from the various advisory services offered (life, investments, EB, health, for ex-

-tive contribution to overall value, the quality of this informa-

In conclusion, it is clear that sellers can actively drive the capital value of their businesses by focusing on each of the above core business areas. The key to addressing the valuation gap lies in understanding how a buyer will value the business, assessing the trade-offs and avoiding over-capitalising on those areas that do not drive value. In this way, the gap between a seller’s expectation and a buyer’s perception of value can be successfully bridged. This, in turn, will help many business own-ers overcome the biggest stumbling block to implementing a business continuity plan.

Practice Management

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The Financial Planner June/July 2011 31

By now, everyone in the industry seems to know about the Financial Services Board’s (FSB) regulatory examinations and is aware that they have to pass an

requirement. This awareness is obviously a positive state of affairs. However, these same people seem to view their awareness as the only positive aspect, and a widespread sense of negativity towards this examination prevails.

In an attempt to try and understand this negativity, I tried in my own way to explore the piece of subordinate legislation from which this need arises. The legislation is, in its intent, designed to ensure that both consumer and the industry are protected. The legislation means to overhaul and

registration in common with other recognized professions including medical and allied health services, legal practitioners, engineers and accountants. There is no question that the professionalization of the sector will ensure that its

the public in the future. Professionalization of the sector will also elevate the status of the individual practitioner working in the industry and will ensure that these true professionals will attract others aspiring to join it.

This cycle of status and attraction certainly seems to apply across all other sectors with professional registration requirements. Status and esteem do not come easily however, and have to be worked for. Doctors, lawyers, engineers and accountants study for up to seven years and several write board exams to reach that stage.

are almost there – you may only be one examination

should take the focus off the examination itself and shift it rather onto giving ourselves the best chance to be successful at the regulatory exam/s ahead and to contributing to the enhancement and development of the sector as a whole.

This is not as daunting as it may seem. You can achieve success in these exams by following the steps below:

1. Get the course material. Milpark Business School has

It is also available for free and can be downloaded from the INSETA website or purchased at a minimal cost from Milpark directly.

2. Work through the course material. The FSB advises candidates to spend at least three months preparing for the examination, so start as soon as possible. The good news is

that you will no doubt already be familiar with some of the legislative content. Start making notes and tackle the book chapter by chapter.

multiple choice questions (MCQs) and pass marks of 65% and 66% respectively are required. Practise answering MCQs to develop the skills needed. MCQ papers are not guessing

questions at the end of each chapter in the book. You may also purchase practice papers from MBS for extra practice. Practising is studying and may also be fun.

4. If you still believe that you require additional assistance due to the legislative technical nature of the content, you have the option to attend a workshop. A workshop may be just what you need to hone your studying and exam skills and

You have two hours for 50 MCQ’s in the representative exam. Make sure you plan accordingly and leave time at the end to focus on the tough questions. Answer the questions you are

Give this exam your best shot. Achieving success in this examination is a sure way of securing your future as a professional in this fascinating and rewarding sector.

Ismail SadekExecutive DirectorMilpark Business School

About Milpark Business School

Milpark Business School is an independent, private, registered provider of Higher Education (HE) and Further Education and

the niche areas of management and leadership, banking and

Regulation

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Hamish Leppan,HLC Financial Services

I’ve been told I should plan to live on 70% of what I was earning when I retire. Does this ring a bell? Is it real?

Why 70%? “Well,” I’m told, “your house will be paid for by

just to get around the town, but also for that round-the-world

And who was it said I had to retire at 65, anyway?

I was told that “the norm” is for members of a pension fund won’t suffer if the markets take a turn for the worse for a year

If you are reading this as a retired person, please tell the

I won’t settle for 70%!

Retirement

Why settle for

70%?

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David Warneke, Tax Director at BDO South Africa

Trusts are often used by estate planners in planning for

However, a much overlooked vehicle is the ‘special trust’, which has all of the advantages of

A ‘special trust’ is a regular trust for all purposes other than

of a ‘special trust’- namely, a trust set up in terms of the will

youngest of whom is under the age of 21 on the last day of

his or her spouse to the third degree of consanguinity, that is,it

separation of assets and ease of administration that are af-

directs that, on his death, a trust be established for the ben-

compound capital growth rate per annum, when the youngest

trust’, it does not have to be terminated – it can continue in

My advice is that serious consideration should be given to the use of a ‘special trust’ when doing any estate planning exercise. As the majority of laypersons are not versed in issues relating to the taxation of trusts, this is especially the case for those in the

of a ‘special trust’ should be standard item on the due diligence checklist.

Investment

Special Trusts: A much-overlooked tax planning tool

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Willem Loots, Actuarial Manager at Liberty Corporate Consultants

and Actuaries

We live in an age and culture where the concept of retirement is taken as given. Less than 150 years ago, the concept of retiring as we know it today did

not exist. Indeed, most people happily worked until death or

Worldwide, health improvements directly affect the number of years people are expected to live in retirement, and this is also the case for South Africa. We can therefore expect to likely have to work longer than our parents did or save much more to provide for a longer retirement.

Improvements in life expectancy

Life expectancies have been increasing dramatically in all OECD countries over the last four decades, as demonstrated by Table 1:

Table1: Life expectancy at birth, in years,men and women, in 1960 and 2006

Source: OECD (2008), OECD Health Data 2008

While retirement ages are slowly adjusting for these chang-es, it is clear these are not keeping pace with improvements in longevity. So, an increase in retirement age to 65 by 2050 from 62 today still means a longer period of retirement, based on data of the OECD countries. To illustrate, by 2050,

years in retirement. This group of individuals will spend longer preparing for work and in retirement than they actually will be working.

Impact on South Africa

Longevity and the related ageing of populations experi-enced across the world are problems we tend to ignore in South Africa mainly due to the incidence of HIV. Although HIV dramatically affects the average life expectancy at birth, the reality is that those who remain HIV-free during their working lifetime do have an increased life expectancy post retirement

compared to previous generations. Furthermore, these retiring individuals are healthier than previous generations.

An increase in the average retirement age, to compensate for longer retirements, has not been seen in South Africa. It is not surprising in a country with a critically high youth unem-ployment rate that the retirement age is kept low. However, one must ask with a dire skill shortage whether this is sustain-able.

Another problem facing South Africa is the large number

to save for retirement. In addition, many underestimate the amount of money required to secure a comfortable income after retirement. As a very broad guideline, an annual retire-ment income of 75% of pre retirement salary may be consid-ered comfortable. Of course, this income would be expected

It is possible to estimate the level of savings required at retirement to secure a comfortable level of income post retire-ment. This level can be expressed as a multiple of pre-retire-ment salary.

Using this concept, Table 2 illustrates the required multiple of pre-retirement salary based on average life expectancies at retirement (using data of OECD countries). Furthermore, the table illustrates how this required multiple has been chang-ing since 1960, and how it is projected to change to the year 2050.

Table2: Estimated required multiple ofsalary at retirement (1960 – 2050)Sources: OECD Data, Liberty Corporate

From Table 2, it can be seen that due to the longer ex-pected time in retirement the estimated required multiple of salary has increased from 8,1 in 1960 to 10,5 in 2010 for males of average retirement age. This multiple is expected

Retirement

Why we all will need to be working longer than our parents

OECD 1960 2006 Di erence2006-1960

Women 70.8 81.7 10.9

Men 65.8 76.0 10.2

6

8

10

12

14

Es mated required mul ple of salary at re rement

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The Financial Planner June/July 2011 35

to increase to around 11,3 by 2050. For a male who delays

The case for a higher retirement age

sider increasing their retirement age?The reality is that many South Africans will not have the luxury

to choose to work past normal retirement age. For many, work-ing longer means deferring receipt of a state old age grant. For others, employers do not provide the option of working longer. Therefore, those needing or electing to work beyond traditional retirement ages will need to be inventive in terms of how they are able to secure employment. A semi retirement stage of a working lifetime which includes a scaled down workload is prob-ably the ideal solution. To enable this, the labour market will,

Retirement

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Franscois van Gijsen®,

BProc; LLM (Tax Law); Dip. Legal Practice; Post Grad Dip. Financial Planning; Adv Post Grad Dip. Financial

Planning, Director Legal Services at Finlac Risk and Legal Management.

Whilst analysing a trust deed for a client recently I started wondering why so many individuals who use trusts in their estate planning, and their advi-

sors are so intent on “breaking” their trusts. Why would a planner go to the trouble of creating a trust, the expense and effort of transferring assets to a trust and of administering

versatile estate planning tool offers him? The answer, it would seem, is the result of forgetting why the trust was created in

a vested right in trust assets.

usually tell you about the “advantages” to be had from using a trust. Trusts, we are told, can be used to save on income tax, postpone capital gains tax and save estate duty. It can also serve as a way in which to safeguard assets from attach-

of spouses during divorce proceedings. These are also the reasons that clients most often tell me, and indeed that was the reason my aforementioned client told me for which he de-cided, to use a trust as an estate planning tool.

An trust can be either a discretionary trust or a vesting trust. In this article we are dealing with discretionary

pertains to trust assets.1) According to the case of

1 a right can be said to vest in a person when he owns it. Secondly, the case tells us, the word vested can be used to draw a distinction between “what is certain and what is conditional: a vested right is distinguished from a contingent or conditional right.”

3) The case of Goliath v Estate Goliath2 points out another interesting aspect of vested rights, namely that the right is “im-mediate”, but “the enjoyment thereof may be postponed.” A right can be said to be “immediate” if it is not dependant on

to a given age or the death of a given person.3

4) It is also clear, from the case of Jowell v Bramwell Jones4, that once a right is vested in this sense it is transmissible to

estate at death.The one way, more often than any other, that I see trusts

paid to him yet, and a loan account is created in his favour in

on his behalf.

capital gains tax by means of the conduit pipe effect created by section 25B(2)5 and Paragraph 80(2)6. These sections allow trust income or capital gains to be taxed in the hands of a

case only if the allocation is done within the tax year in which it accrued to the trust. In this way the trust acts merely as a

allocated.

ous consequences that are usually lost sight of by advisors and their clients in their eagerness for tax savings. This is the case even if the date of delivery is still entirely at the discretion of the trustees.

Such allocations, as was shown, create vested interests in

3) exposes the asset to potential attachment by creditors,

quences the estate planner above was trying to avoid.It should also be borne in mind that there will always come a

time when such amounts will in fact have to be paid out, either

settle all such claims and their failure to do so could lead to per-

Lastly it should also be mentioned that clients and their advisors often attempt to circumvent these negative effects by including all manner of clauses in their trust documents purporting to say that these assets are excluded from attach-ment until such time as the assets have been paid over to the

prior to receipt of such assets, that the asset will revert to the

Planning

Breaking Trusts

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The Financial Planner June/July 2011 37

trust. Unfortunately for them any such attempt or pretence, as can be seen in the well known cases of Vorster v Steyn7 and Du Plessis v Pienaar8, contained in any trust deed is a nudum praeceptum or naked condition and is invalid.

I would suggest that any trustees and their advisors, when

sulting from the receipt of such income or capital gain, should

was originally created. Remember that an individual’s assets will be repeatedly hit by estate duty, and executor’s fees. First upon his death and repeatedly thereafter in the estates of his heirs as they in turn pass on and leave the assets to their own heirs. By keeping the income and the capital gains in trust it will not be liable for estate duty and executor’s fees in the

ecutor’s fees will keep repeating itself through the generations

for as long as the trustees do not allocate the income, capital gain. The same goes for allocating other trust assets.

I am of the opinion that if you consider the potential savings

sets, prior to being allocated to and vesting in an individual, enjoys from creditors that a short term tax saving does not

has to offer1 Jewish Colonial Trust v Estate Nathan 1940 AD 1632 Goliath v Estate Goliath 1937 CPD 3123 Re Allen Trust 1941 NPD 1474 Jowell v Bramwell Jones (1998 (1) SA 836 (W)5 Income Tax Act, 1962 (Act 58 of 1962)6 Eighth Schedule to the Income Tax Act, 1962 (Act 58 of

1962)7 Vorster v Steyn 1981 (2) 831 (OPD)8 Du Plessis v Pienaar 2003 (1) SA 671 (SCA)

Harry Joffe,Head, Legal Services, Discovery life

Business assurance is undoubtedly a lucrative area for

tend to avoid it out of fear.nice niche area avoided by the ‘riff raff’. However, the area is fraught with dangers, even for the expert. The following are

ance structure:

and sell contract

This, alas, is an all too common occurrence. Often this is not

lose all interest in the agreements, and never get to sign them.

tract, they have very little to compel the surviving partners/spouse to buy or sell any shares/interest on a death. This would mean that the whole point for which the policies were taken out would not be achieved. The insurance company is regrettably unable to help, as they would be obliged to pay the owner of the policy and would be unable to get involved after that.

This again is an all too common occurrence. In almost all

tion of debiting the individual’s loan accounts. In practice, either loan accounts are never debited or created, or if they are, they are incorrectly allocated – normally they are simply

ing split. In both cases, according to a SARS guidance note, the policies will not be given estate duty exemption on death. Therefore, by this simple error, policies that should have been free of estate duty, are now made dutiable. In addition, if no loan accounts are ever created, this has the effect that the company has paid for private premiums which is a taxable

problem have now been created.

In practice, the problem arises because no true valuation is done to ascertain the real value of the shares in question. A ‘thumb suck’ value is simply used. This obviously creates a problem that the policies are either higher or lower in value then they should be. Two simple examples will illustrate this:

A’s shares are worth 1 million Rand objectively valued. B takes a policy on his life for 2 million Rand. On A’s death, two problems will arise. Firstly, SARS will say that because the shares were only worth 1 million, the 2 million policy was not a genuine buy and sell policy. This means that, once again, the

fore having to pay donations tax on the 1 million donated. Therefore once again a double problem has been created.

rectly valued in the beginning, and have simply become out of date due to an unforeseen event or crash in the market.]

Planning/Long-term

Business assurance concerns

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The Financial Planner June/July 2011 38

Dr. Estelle van Tonder, Programme Manager: Management and Leadership Faculty, Milpark

Business School

Social media marketing is ideal for small business owners not able to carry out conventional marketing activities because of limited resources.

????????????????????????????????

Boost relationships with social media marketing

4. The company pays the premiums

Conclusion

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The Financial Planner June/July 2011 39

pliers and support networks through social media marketing were a critical factor in their success. Coopers and Lybrand found very similar results in their study conducted among 400 small businesses with high sales growth. Small businesses with strategic alliances experienced an 11% higher sales turnover than those not utilising network relationships.

In the new, connected millennium, the availability of social media platforms offers small business owners opportunities to expand their customer base at a fraction of the cost of above-the-line advertising, to gain insight into their custom-ers and to build good relationships with them. Forming well-established partnerships could be of great value to the small

Business owners wishing to capitalize on these opportuni-ties need to ensure that they can successfully rise to the many challenges implicit in the digital arena. Certain key behaviours that need to change include the need to get closer to consum-ers, to engender bilateral conversations, to master the context of marketing messages, to make better use of consumer data and insight, and to build new and more collaborative relation-ships across the value chain.

Unlike their more traditional predecessors, social media are not merely digital platforms from which to showcase the busi-ness’s latest advertising campaign, to release a press state-ment or to tweet what you had for breakfast. The audiences have also changed: no longer just consumers of media and advertising, they are their creators, too.

In today’s increasingly fragmented and digital world, con-sumers are more involved in the purchase process than ever

before and are more likely to search for additional informa-tion and evaluate all the options available to them before making a well-informed decision. In this new connected mil-

If they are not persuaded by the sales offering or are bored with the content presented to them, they will simply click away to another website!

Social media marketing programmes should focus on ef-forts to create content that attracts attention and encourages readers to share them with their own social networks. A mes-sage will spread from user to user and may resonate more effectively precisely because it comes from a trusted source (a peer), as opposed to coming from the business itself. To win the minds and hearts of contemporary consumers, more cre-ative approaches are needed.

For starters, remember consumers no longer want passively to support a brand; they want to engage with it. Successful users of social media for marketing invite their consumers to become friends and partners in the business and aim to build trust relationships with them. Consumers want to understand the value of the products on offer and should be provided with opportunities to obtain more information, have their con-cerns addressed and share both positive and negative service experiences. Participation from both sides is thus a major fac-tor for online success, and the more the business participates in the conversation, the more it stands to gain.

Business owners need to ensure that they understand the needs of their target audiences, know what appeals to them and are up-to-date with current trends and information in

the consumer. The key to an effective social media strategy is listening and an investment in listening and measurement tools ensures that consumers’ needs are understood and addressed.

sors, in particular, could consider this approach for their busi-nesses; for example, a blog to advertise the advisor’s service and, consequently, create more brand awareness, could be

insurance product developments (perhaps a sponsored link to an insurance company’s website), comment on market devel-

tively address generic concerns raised by clients on the web.

friends, offering the advisor further lead-generation opportu-nities.

In conclusion, there might be great income potential for inde-

????????????????????????????????

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Patrick Bracher,Director, Deneys Reitz

The only rational way to ensure that the Short-term Insurance Act and the Long-term Insurance Act are aligned to the consumer protection measures provid-

ed for in the Consumer Protection Act by October 2012 is to incorporate those measures into the Policyholder Protec-tion Rules. The reason for this is not only the fact that major amendments to the Acts themselves is an impossible task within the time available.

The Consumer Protection Act has created two parallel com-mercial systems. On the one track is the legal framework gov-erning the relationship between the suppliers of goods and services and the protected consumers, namely all individuals

and small businesses with assets or annual turnover less than R2 million. For these transactions, the Consumer Protection Act has driven a bulldozer through the thickets of contract law. Freedom of contract is closely governed to see that the con-sumer is always entitled to fair trade practices.

On the other track is the economy that consists of supply and demand between commercial enterprises. Contracts relat-ing to the supply of goods and services to corporations having assets or turnover above the threshold are untouched by the Consumer Protection Act. The entire common law of contract, and freedom of contract, applies to these relationships except in relation to franchise agreements.

Consequently, amendments to the Insurance Acts themselves would be very messy if they try to cater for both these econo-mies. The Policyholder Protection Rules, on the other hand, are

as the insured under personal lines policies in the short-term arena. The Policyholder Protection Rules can be expanded considerably in order to incorporate the protection needed by individuals and very small businesses.

There are some real challenges. The Consumer Protection Act requires every limitation on risk and liability, any assump-tion of risk by the consumer, any indemnity imposed on the consumer and any acknowledgement of a fact by the consum-er to be drawn to the consumers’ attention clearly and in plain language with an explanation as to the nature and effect of the provision. Seeing that insurance policies essentially deal with risks, liabilities and indemnities, the task is challenging one.

In addition, the CPA regulations set out a number of re-spects in which a contract may be presumed to be unfair un-less, in the circumstances, it is a fair provision. These provisions relate to terms applicable to individual consumers who enter into the agreement for purposes unrelated to their business or profession. One of the relevant examples is that it is presumed to be unfair if the supplier imposes a limitation period for tak-ing legal steps including demands and legal proceedings, that is, shorter than otherwise applicable under the common law or other legislation. That will mean that individual policyhold-ers cannot be given less than the statutory prescription period of at least three years to enforce rights under a policy. Such long limitation periods are wholly inappropriate to the law of insurance and this has been recognised for hundreds of years. Much shorter limitation periods have been upheld because of the particular nature of insurance and the need to balance the books on an annual basis.

The question will always be whether a particular term is un-

Legal

Insurance and the Consumer Protection Act

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The Financial Planner June/July 2011 41

Ralph Mupita, Managing Director

The slow economic growth and potential weakening of the rand predicted for the year ahead mean that South Africans planning for their retirement should consider

diversifying their investments and investing offshore.However, investment principles such as “time in the market,

not timing the market” remain paramount. We like to think of it as the PREtirement age, which means the time that you have to save leading up to your retirement. Despite the turmoil in some markets, there are few shortcuts. People who plan

As a rule of thumb, those who invest early in their years leading up to retirement can afford to take more risks than those with less time to save for their golden years, meaning the rewards of a long-term view of investment can be com-pounded.

for individuals to get sound advice on how to capitalise on the many opportunities in diversifying their investments and ven-turing offshore.

those savings one step at a time. It feels more achievable tak-ing small steps in savings as opposed to viewing retirement as a distant, unattainable goal. Apart from providing peace of mind, various retirement vehicles are tax deductible within certain limits, whether the contribution is a lump-sum or a re-curring premium contribution.

“The generally long investment horizon for retirement plan-ning means it should ride out short-term market volatility. And

right now appears like a good opportunity to invest offshore, with South African equities looking relatively more expensive than some foreign markets. By capitalising on the undervalued

retirement savings as market conditions improve.A good time to increase offshore exposureThose who already have a PREtirement plan in place should

consider increasing their international equity portfolio, espe-cially those who hold less than the maximum offshore expo-sure now permitted.

likely to see a weakening of the rand, which means now is a

and exposure to fast-growing companies and industries not available within our borders.

ments) boutique found that the optimal portfolio for SA inves-

volatility is also no less than 30% higher than that of inter-national equity, making local equity a lot more risky. Further-more, the MSI boutique forecasts a return from international

believes this will be the best-performing asset class in real

The government’s easing of exchange controls has enabled those invested in active asset allocation funds to increase their offshore exposure through their fund managers. Although equities will deliver the best returns over the medium term, all indications

pects.

Offshore markets offer good yields for your PREtirement savings

Retirement

The insurance industry is going to have to give careful consid-eration to what can be limited and what cannot be limited. In a sense, the insurance industry is going to be subject to equity jurisdiction when it deals with individual policyholders.

The ideal place to provide equity for individual policy-holders is in the Policyholder Protection Rules. That is the very reason that they were developed. The rules are supposed to record sound insurance principles and practice in the interest of the parties and in the public interest generally. The public

policyholder protection will have to follow suit.

holder Protection Rules, it is going to be a monumental task to

tices of insurance, the outcome will be a mess.

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Colin Long CFP®

Executive Financial Planner,Post Grad Dip Fin Plan

The only certainties in life are death, taxes and change. The Financial Services Authority (FSA) in the U.K. has recently published a guidance paper for investment

selection. The FSA’s fundamental message for investment advisors is that they should have a transparent, defensible and logical process to match clients’ needs or the FSA will make life a misery. Look familiar?

In the past few months the FAIS ombudsman has made a number of determinations that have related to the sale of Property Syndication investments. In most cases the advisors failed to do one or all of the following:

3. No proper due diligence was done on these investments

and thus the advisors failed to properly understand the risks

4. The advisors failed to properly understand the clients’ risk tolerance because of a number of shortfalls involving Risk

world and there is a clear imperative to impose greater structure on the advice process. In the words of the FSA:

“The level of failure in this area is unacceptable. We have taken, and continue to take tough action to address these

“As we apply our intrusive and intensive supervisors approach,

procedures, tools and risk category descriptions (where used)

to take tough action where we identify poor practice e.g. Tools,

and asset allocation tools to take action to address any potential

“Firms [read advisers] remain responsible for assessing suitability, including assessing the risk a customer is willing and able to take action to address and potential weaknesses in their tools.”

The FSA is also concerned that many advisers do not fully

understand the nature and risks of products or assets selected for customers. In South Africa we have had a number of such

and unlisted shares.

Key risks for advisers to consider

to assessing the risk a customer is willing and able to make as part of suitability considerations, for example because they:

Planning

Process Driven Advice

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The Financial Planner June/July 2011 43

* Do not have a robust process to identify clients that are best suited to placing their money in cash deposits because they are unwilling or unable to accept the risk of loss of capital;

* Use poor questions and answers to establish the risk a client is willing and able to take;

* Inappropriately interpreting client responses to questions (particularly where advisers rely on tools with sensitive scoring or attribute inappropriate weighting to answers); or

* Use vague, unclear or misleading descriptions or illustrations to check the risk that a client is willing and able to take.

trait and it is likely to be one of the few permanencies in an individual’s life.

In South Africa, I don’t believe we have yet seen a determined focus by the FSB and the FAIS legislations to fully investigate and analyse the investment processes of Financial

to develop sound investment processes and a robust framework for making investment decisions for their clients before the regulators come knocking on their doors.

Consolidated Financial Planning KZN (PTY) LTD

FSP License Number 12978

Editorial

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The Financial Planner June/July 2011 44

Michelle Human, Senior Legal Adviser, Liberty Retail SA

In the event of a couple divorcing, once one of them has already retired and is already receiving an income from

can the annuity be taken into account as an asset in the divorce order, and divided among them? The answer is No! We cannot ‘split’ an annuity, for a variety of legal reasons.

Can a compulsory annuity be included in the

An annuity (including a living annuity) is what is regarded in the Pension Funds Act and Income Tax Act as a ‘compulsory’ annuity payable only to the retired person during their lifetime and which cannot be commuted or assigned to a third party during their lifetime.

Pension interest, against which a court could award a portion to a non-member spouse in terms of Section 7 & 8 of the Divorce Act, is an amount held by a registered retirement fund (pension/pension preservation/provident/ provident preservation/retirement annuity fund) prior to the member

An annuity, including a Living Annuity, on the other hand, is after

retirement.It follows that an Annuity cannot be construed as ‘pension

be considered for an award in the same manner as pre-

retirement annuity fund.

Does an annuity have an intrinsic capital value?

a future income stream for the rest of the retired member’s life (you could use the expression monthly pension or monthly annuity payment to describe this income stream).

The purchase of this income stream is compulsory where the fund from which the member retires is a pension/pension preservation or Retirement Annuity Fund, and compulsory to the extent that it is chosen by the retiring member in terms of the rules of a provident/provident preservation fund.

The retiring member is then compelled, in terms of the registered and tax approved rules of the fund, to purchase

Legal

The implications of divorce on a compulsory purchase

annuity

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The Financial Planner June/July 2011 45

with that amount the right to a future income stream (pension/annuity) from an authorised provider such as an insurer, and once that is done, they cease to be members of the fund and the fund has no further liability towards the retired member.

As the retired person is therefore no longer a member of a fund, it follows that the fund (that provided the original capital amount used to purchase the annuity) holds no membership or pension interest for that retired member and therefore any proposed ‘award’ against a pension interest in that fund is zero.

from an annuity is an income stream (usually regular monthly payments of income). It has no intrinsic capital value (even though a nominal capital value may be used to determine the value of the income stream under a living annuity) until such time as the owner (retired person) dies.

Only on the death of the retired person who was receiving

by the deceased, have the option to continue to receive the income stream or commute the future income stream for a lump sum depending on the conditions of the annuity contract itself.

The conditions under which a compulsory annuity may be purchased are established in terms of the Income Tax Act and the Pension Funds Act (Section 37A) , and require that the annuity may not during the lifetime of the retired person be commutable or assignable to a third party.

This means that the retired person may not enter into any agreement to “cede” or “transfer” a portion of the income

stream from such compulsory annuity to a third party during his/her lifetime, other than to be able to receive the whole income stream (after tax) into their possession and then use

paying a portion of it to a third party of their choice.

Can the income derived from an annuity be split?

The question then arises as to whether splitting the income in such a manner is possible and enforceable via a divorce order. In the context of an annuity, this would be an undertaking that as the annuitant receives an after tax income stream from the annuity every month, he/she undertakes to pay the agreed percentage of that amount directly from his own bank account to his / her former spouse. This is essentially an agreement to the payment of monthly maintenance equal in value to a percentage of the net after tax income he/she receives.

As the income stream is always considered to be income in the hands of the annuitant, and taxed as such in his/her hands, there is no taxation due by the former spouse.

An annuity therefore:

retired person in whose name it is purchased

Therefore it would be unlawful to attempt to ‘split’ the annuity during the lifetime of the defendant, whether the attempted split was of a capital or regular income stream in nature.

Editorial

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FPI News

FPI celebrates 30years of excellence

July 2011 marks the 30th year that FPI has been

planners in South Africa. To celebrate our achievements; a chronicle of the industry’s journey will be published and made available in early 2012.

Key milestones1981 Institute of Life and Pension Advisors (ILPA) was formed

and ILPA professional exams developed for professional membership with the highest level being FILPA (Fellow of the Institute of Life and Pension Advisors).

1986 ILPA signed an agreement with the then University of the Orange Free State to moderate and verify the standards of the professional exams.

1996 Strategy conference of the ILPA Council at which a generalist level (that eventually led to the Diploma in Financial Planning) and specialist level (leading to the Advanced Post-Graduate Diploma in Financial Planning) as well as the tiered

® professional) was conceptualised.

1998 CFP® mark brought into SA on licence from the

States. First Associate examinations through ILPA introduced.2000 Adopted the new company name: Financial Planning

offered through the University of the Free State.20022004

and founding member of the Financial Planning Standards

2005vision and activities to being a true professional body and

through FPI Learning.2007 Professional designations recorded on the National

2009

regulatory exams.2010 ® professionals.

2-year CPD cycle ends 31 December 2011

2011. It is important that members load their CPD points by this date (electronically via the FPI website) as non compliance

[email protected].

The new draft Code of Ethics and Responsibility is now available for commentary

The new code serves to become the beacon of professional

members have the opportunity to provide their input before the new code is implemented to bind members in their conduct.

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The Financial Planner June/July 2011 47

FPI NewsFPI News

The draft has been published and is available to members for commentary. The document can be downloaded from

Standards and Discipline.

[email protected]. Commentary on the draft code needs

Update your details online and stand a chance to win

In order to communicate timeously and effectively with members

contact details and that members maintain their member record on a regular basis.

The FPI has also applied to SAQA for recognition as a professional body and the registration of our professional

order to capture members’ details on the National Learners’

By completing this process by the close of business on 31 August 2011, members will be entered into a random draw and stand the chance to win one of the following prizes:

Technical Update

National Health Insurance

In a press release by the Department of Health on 11 August

Insurance was released. FPI has a NHI working group who will be looking at this document and will provide members with further information as soon as this becomes available.

The Taxation Laws Amendment Bill 2011

National Treasury for comment in June this year. The FPI

participated at public forums to engage with National Treasury on the proposed changes to tax laws. The FPI now awaits

passed through parliament later this year.

Repository created on the FPI website

The FPI has created a repository of technical information under

the FPI website. The repository contains all published technical communications and documents relevant to each ISG.

Conversion of medical deductions to medical tax credits

National Treasury released a discussion document in mid June for commentary. The document proposes a change to the current tax deduction afforded to taxpayers for medical scheme

email [email protected].

LexisNexis Online News and Legislation Service

For those members who have not yet accessed the free

the regulatory exams. This service is free to all FPI members during 2011.

Refresher Workshops

These national workshops are the second biggest event on the

its kind in South Africa at which professionals are updated on all

to refresh their knowledge as well as those students studying

again be presenting at these workshops.

[email protected].

International News

of Korea helped to push the global number of CFP professionals

professionals conducted business outside the United States. The number of CFP professionals outside the U.S. more than tripled

than doubled during the same time period.

Page 50: FPI June - July 2011

2011 Refresher Workshops for Financial Planning Professionals

REGISTRATION FORM (OR REGISTER ONLINE VIA FPI WEBSITE)

Fax: 086 635 2446 E-mail: [email protected] Tel: (011) 470-6050

Date Region 15-Nov-11 Free State

Venues to be advised

16-Nov-11 KwaZulu-Natal

17-Nov-11 Eastern Cape

21-Nov-11 Western Cape

22-Nov-11 Western Cape

23-Nov-11 Johannesburg

24-Nov-11 Johannesburg

25-Nov-11 Pretoria

Cost

EARLY BIRD until 30 September 2011

From 01 October 2011 6 CPD

points for FPI

members

Member R 765.00 (incl. VAT) R 900.00 (incl. VAT) Non Member R 999.00 (incl. VAT) R1 175.00 (incl. VAT)

To qualify for the early bird discount, registration and payment must be received by 30 SEPTEMBER 2011.

Personal Details

First Name: Surname:

Company: VAT No:

Tel No: Cell No:

E-mail:

Member Number: AND/OR

ID Number:

Signature: _______________________________________________ Date: ______________________________ PAYMENT: In order to secure your place, advance registration and payment is essential. An invoice will be issued on receipt of registration. Please use your membership number or your name when making payment through either direct deposit or electronic transfer. Proof of payment must be validated by means of fax or e-mail and will be regarded as confirmation of registration. Please ensure we have received your details to confirm your booking.

Payments must be made to: Bankers: Standard Bank / Beneficiary: Financial Planning Institute / Branch Name: Clearwater Mall / Branch Code: 001206 / Account No.: 021183732. TERMS AND CONDITIONS: 1. Payment is due in full at the time of registration. 2. No telephonic registrations will be accepted. 3. The FPI reserves the right to refuse admission to the workshops if payment has not been received. 4. Non-payment or non-attendance does not constitute cancellation. 5. You may cancel your registration in writing up to 8 days before the workshop date. 6. Workshop fees will de refunded less a 15% administration charge if cancellations are received 8 days or more prior to date of the workshop. 7. Cancellations made within 8 days of the date of the seminar will be liable for the full fee. 8. Substitutions may be made, without penalty. 9. Should the FPI cancel the workshop, for whatever reason, all monies will be refunded within a period of 14 days.

Page 51: FPI June - July 2011

The deadline has been extended and all representatives and key individuals now have to complete the first level Regulatory Examination by 30 June 2012. The required pass marks for the multiple choice examinations are 65% and 66% respectively and if you do not pass, you will not be Fit and Proper as required by the FAIS Act.

Milpark Business School has an extensive training support package for the first level examinations, consisting of: Study material; Electronic practice examinations; and A range of workshops covering both content and examination preparation.

Cape Town 021 673 9100 Johannesburg 011 718 4000 Durban 031 266 0444

w w w . m i l p a r k . a c . z a

PREPARE THOROUGHLY TO PASS THE REGULATORY EXAMINATIONS

Attend a content workshop if possible. This will ensure that the time you spend studying on your own is more focused

and thus more efficient. Study for at least 3 to 4 weeks (material on Inseta website or ordered from Milpark):

- Study one task at a time and then do the self-assessment questions at the end of each chapter to check your understanding. - Follow this process until you have covered all the tasks. - Ensure that you work through the material at least three times before attempting the practice exams. Once you feel you are ready for the exam, complete the online practice examinations offered by

Milpark. At the end of each examination, you will be given feedback on your progress which will enable you to focus on tasks that need attention. Once you have passed at least two full practice examinations, you are ready for the real exam!

Ensure that you work through the material in detail once more before the big day.

REGULATORY EXAMINATIONS SUPPORT

Register today: Contact an Educational Consultant at the campus closest to you or visit www.milpark.ac.za for more info.

Page 52: FPI June - July 2011