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THE IMPACT OF RETIREMENT REFORM IN SOUTH AFRICA

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Receiving the same tax treatment

Changes to retirement benefits for provident fund members, initially meant to come in five years ago and now scheduled for next March, will see tax uniformity for all who contribute towards retirement. These changes, in terms of the Taxation Laws Amendment Act, will also encourage greater savings, something South Africa desperately needs as it seeks to crawl its way out of an economic hole.

Dolana Conco, regional executive – consulting at Alexander Forbes, says: “One of the aims of retirement reform is to create a uniform retirement fund system for all types of retirement savings vehicles, such as pension, provident and retirement annuity funds. This will allow all members to receive the same tax treatment of the money contributed and how benefits can be paid at retirement.”

Alexander Forbes Member Watch analysis shows that about 50% of members retire with less than one-fifth of their final salary to live on in retirement.

Many reforms have been implemented over the last few years, but it has been a long journey for this next vital step. “The changes are beneficial for most retirement fund members and encourage greater savings for retirement and address issues in the retirement system,” remarks Conco.

Conco adds, “Currently provident fund members can take their retirement benefit as a full cash lump sum and do not have to buy a pension (annuity) from a registered insurer when they retire. However, pension fund members must use at least two-thirds of their retirement benefit to buy a pension, unless the total benefit is less than R247 500.”

 

How retirement reform affects members

From 1 March 2021, retirement benefits from provident funds will be treated in the same way as pension funds for the part of the benefit based on contributions. Conco explains that the changes for provident fund members are:

1. Provident funds will have the same annuitisation rules as pension funds.

This means that members will have to buy a pension (annuity) from a registered insurer with at least two-thirds of their retirement benefit, unless the total benefit is R247 500 or less.

2. Vested rights will apply. Retirement savings will be ring-fenced as follows before the new legislation takes effect:

  1. Any provident fundbalance saved before 1 March 2021 plus the future growth on this until retirement won’t be affected and can be taken in cash on retirement.
  2. Members who are 55 years or olderon 1 March 2021 will not be affected by this change at all if they stay a member of the same provident fund (or provident preservation fund, as proposed in the draft Taxation Laws Amendment Bill until retirement. This means that the retirement benefit will be treated in the same way as it is currently being treated when these members retire. If these members transfer to another fund, they will still have vested rights, but contributions and growth on this to the new fund will require them to buy a pension with two-thirds of their retirement benefit.

The benefit of this change is that funds will be able to transfer members’ savings tax efficiently.

Conco suggests that employers who have multiple retirement funds consider consolidating these funds, as pension funds, provident funds and retirement annuity funds will be harmonised in the tax treatment of contributions and the retirements benefits at the time of retirement. Consolidation requires many other factors to be considered.  One such example is understanding the implications on vested rights when transferring provident fund members who are 55 or older on     1 March 2021. Other factors include:

 

  1. the size of the funds
  2. potential cost savings or cost implications
  3. Section 14 transfer requirements
  4. deregistration
  5. liquidation requirements of the transferor fund and so on

 

“The changes to ensure further harmonisation between pension funds, provident funds and retirement annuity funds take effect on 1 March 2021. It is important for trustees to start implementing project plans to get ready for these changes. Amendments to rules, communication to members, and fund consolidation will be some of the matters to consider,” concludes Conco.

Top 10

DOGECOIN MADNESS

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by Nathalie Janson, Associate Professor at NEOMA Business School

 

After the unstoppable increase of Bitcoin (BTC) since January – it added 10 000$ to its price every month since January reaching 60 000$ in April 2021  – it is now the turn of the Dogecoin to be the next cryptofrenzy.

This crypto created in three hours by Billy Markus as a joke to make fun of the Bitcoin community back in 2013 had no specific use except federating crypto geeks sharing the same sense of humor. Its capitalization quickly reached 60 million USD back then. This is why until Tuesday, April 13th 2021, its price was closed to 0 since cryptos value derives from their usefulness.

The Dogecoin belongs to the family of Altcoins using proof of stake to validate transactions – more flexible and fast compare to Bitcoin and Ether based on proof of work – but essentially not as decentralized and secured.  So far Dogecoin has mainly been used for  tipping creators of content or more interestingly to noble causes. These include raising funds for the bobsleigh Jamaïcan team to send them to the Winter Olympic Games in 2014, paying back victims of Dogecoin hack in the early days after its creation,  and raising funds to provide access to drinkable water in Africa.

 

Dogecoin… a billionaire maker joke

How comes the DogeCoin price surged in such irrational manner? Is this move another proof of market madness? A sign that we might be close to the next burst of the crypto bubble? Who knows? … Why is it so difficult to understand the pricing dynamic of cryptocurrencies?  You might think that what we experienced is the paroxysm of futility. In a week, some Dogecoin holders become billionaires, the price of the Dodge coin increasing from almost 0 to 43 cents at its highest. How mad that sounds? Similar to what happened to Gamestop, we are dealing with a community with a strong identity – the Dogecoin joined by new members like Snickers – the sweet bar and more importantly by Elon Musk – who wants to set a record and claiming April 20th being DogeDay with the clear goal to push Dogecoin up to $1. They are encouraging each other to buy more of the coins. Given the limited size of the market dominated by “whales” – five “whales” are said to control 40% of the market – the increase in purchases of Dogecoin leads to significant rise in price given the low liquidity.

The Dogecoin case is an emblematic case showing how subjective value is in economics. Indeed, like Bitcoin, the price of Dogecoin only depends on its acceptance that in itself depends on the size of its network that suddenly increased.

Why now? First, Elon Musk started to show his interest in the Dogecoins by tweeting about it. Why does Elon Musk opinion matter? Because he symbolizes the success story of a man who is a visionary. After all, if Elon Musk invests in Bitcoin and supports Dogecoin it must be for a reason, and he may be right like he has been right about the industrialization of electric cars as the success of the Tesla demonstrates. He performs a role similar to leading investors in traditional financial markets like Warren Buffet.

Secondly, the Coinbase initial public offering contributed to a rally in the cryptocurrencies market, with no exception for the Dogecoin. Over the week-end, the major cryptocurrencies – BTC and Ethereum dropped for technical reasons due to a sharp decrease in the hash rate after an electricity shortage in the Xinjang province in China. When that happens, it usually benefits altcoins.

More broadly speaking, the crypto market is frenetic since the beginning of the year. This frenzy is a symptom of a global economy that is still suffering from severe restrictions in some activities but at the same time is also experimenting acceleration in others. Combined with overgenerous monetary policy feeding liquidity in search of profitability away from traditional markets because of low interest rates and over rated stock markets, this is a perfect combination for investors to try anything new to boost their portfolio return if you add on the top of that, growing concerns about the return of inflation in the US.

In this context how long will the Dogecoin rally last? This essentially relies on the determination of its fans to support it but after a while, it will need to be more than a symbol!

 

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Wealth Management

WHY COMPLICATED INCOME STRUCTURES SHOULDN’T PREVENT HIGH NET WORTH INDIVIDUALS FROM INVESTING IN PROPERTY

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Mike Coates, Founder and CEO of Commercial Expert

 

An investor’s preference is usually to split their investment across different funds, in a varied and balanced way.  Research has shown that the most popular investments made by high-net-worth individuals (HNWIs) vary between stocks, shares, hedge funds, private equity, and real estates (residential and commercial properties).  The allocation of funds is predominantly governed by taxes, goals and individual preferences.

However, in the past decade, HNWIs have encountered barriers to accessing finance because of the way lenders approve loans.

 

The barriers facing HNWIs

In the aftermath of the GFC of 2008, a notable trend to emerge was lenders seeking to minimise the level of risk to which they were prepared to expose themselves. This was achieved through adopting a more stringent selection criteria when it came to assessing an individual’s financial situation before approving a loan.

As a result of this change in lending behaviour, securing finance has ultimately become more difficult across the board, including, ironically, HNWIs, whom you might expect would be unaffected. The reason HNWIs might struggle is because the new lending culture favours those with straightforward finances, and a regular income.

However, for HNWIs, this is not usually the case.  For example, a HNWI’s portfolio could be split across various asset classes and jurisdictions; their income may be irregular or derived abroad (including off-shore tax-havens); many HNWIs are expats and may be receiving income in different currencies.  When these factors are considered, it’s easy to see why HNWIs might be classed as ‘high-risk’ in the eyes of some lenders.  As a result, many HNWIs have struggled to secure funding or even a credit card.

Consequently, for HNWIs looking to take advantage of the current low borrowing rates, as well as the tax relief by securing finance, they will be better off finding a reputable financial adviser or broker who will take a more holistic view when it comes to assessing their financial situation.

Financial advisers have established relationships with a wide portfolio of lenders who aren’t just the regular high street banks and building societies. There are certain lenders who are used to dealing with clients that have huge property portfolios and are experienced in calculating the stress levels on existing portfolios. They are able to use different assessment criteria in order to approve loans, even where applicants have a low debt service coverage ratio (DSCR).  They may also request to see your SA302 (self-assessment tax returns for the last 4 years), tax overviews and accounts in order to gain a deeper understanding of your income structure. Where people have deferred tax, this also gets taken into consideration.  At the end of the day, it’s about having your foot in the door with the right lenders, that helps to determine your ability to secure a mortgage as an HNWI.

 

Reasons to invest in property

Compared to private equity and hedge funds, real estate investment is by far the least risky option. Real estate is safe and is set to lead us to recovery following the aftermath of Covid-19.

What we witnessed during the global pandemic was that contrary to early predictions, rental prices remained relatively stable and property prices rocketed. The UK house price index, published in January 2021, revealed that the average house price increased by 7.5% year-on-year. i   Initially, the stamp duty tax relief may have been attributed to the increase, however, as the tax relief deadline approaches, there doesn’t appear to be any sign of a slow-down.  This indicates that other factors are underpinning the rise. Many believe that lockdown has forced people to reassess their priorities, with an increasing number of people desiring more generous living and outdoor space in areas away from cities.

 

What properties to invest in

As it currently stands, almost 60% of HNWIs have revealed that they invest in real estate. ii The properties are usually where they themselves reside, or in “offshore” areas where they enjoy going on holiday.  If properties are situated in tourist hotspots with nearby beaches or mountains, they are often rented out to tourists during peak holiday seasons and available for their own holiday use during off-peak times.

 

Final thoughts

If you want to invest in properties either in the UK or abroad, don’t be deterred by previous failed attempts at securing finance. It is a good move to appoint a specialist commercial finance broker with access to the whole of market, who can undertake all the research required, and recommend a suitable lender and product.

There are only a handful of lenders who are equipped to deal with HNWIs, with complex income structures, therefore it’s crucial to make sure you’re speaking with the right people.

 

References:

i https://moneytothemasses.com/owning-a-home/house-prices-2/what-is-going-to-happen-to-uk-house-prices

ii https://www.fool.com/millionacres/real-estate-investing/articles/what-are-high-net-worth-individuals-investing-in-now/

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