Agenda

2. Agenda • Why you need to plan • How much you need • Long-term savings choices • Pension choices • The risks you face • The need for advice

3. Reasons to plan • What you need, why you need it and how long it will take • Taking account of the threats: Inflation, investment market returns/volatility and living too long • Finding the products that will generate enough capital to provide a sustainable income in retirement • Taking account of risk you can and cannot take in your asset class and asset management choice • While minimising taxation • And planning your estate.

4. Don’t Plan: You become a statistic • Only 26% of retirement fund members will reach retirement financially secure • To achieve a financially secure retirement you need to save at least 13 cents of every rand you earn in your life • Most fund members contribute between five and six cents of every rand they earn • Average period of contribution: 27 years and six months – instead of 40 to 45 years • Most people go into retirement with a pension equal to 28% of their last pensionable pay cheque

6. Planning: A Matter of Options Retirement funding is deciding what pleasure you will forgo now to have some pleasure in retirement • Too little saved = Poverty in retirement • Retire early = less in retirement • Live too long = Depletion of cash • Too much saved = Unnecessary sacrifices before retirement

7. How much do you need It is not a quick calculation: • Capital amount of 10 x annual income is Not Enough • It will be closer to 15 to 20 x annual income You need to start at the end, not the beginning • Your lifestyle in retirement • Your age at retirement • A sustainable income in retirement (NRR) • Capital required to generate a sustainable income

8. Your target: Replacement rate • A net replacement rate (ratio) (NRR) is the percentage of your final salary calculated as retirement income • The most common NRR ranges are 70 to 80 percent of pensionable pay (excludes allowances) but: • after 40 years of membership • with a contribution rate (total of member and employee) equal to approx. 12 percent of pensionable income • with an average investment return of approx. five percent a year

9. A NRR is not an exact science Your NRR will be influenced by: • Inflation • Interest rates (particularly in retirement) • Investment markets (particularly before retirement) • How much you save • How long you save • The type of annuity (pension) you buy

10. Tax-incentivised retirement vehicles Occupational Retirement Funds (mainly sponsored by employers): • Defined Benefit Funds • Defined Contribution Pension Funds • Defined Contribution Provident Funds • Umbrella Funds Individual vehicles: • Retirement Annuity Funds • Preservation Funds (Pension & Provident)

11. Defined Benefit Occupational funds Defined benefit funds: • Contributions up to 7.5 percent of pensionable income a year deductible from taxable income • You know what you will get (Final salary x years of membership x a factor) • No investment risk for you • Must use two thirds to purchase a pension – subject to income tax at marginal rate • Lump sum subject to tax with first R315 000 tax free

12. Defined Contribution Occupational Funds Defined contribution pension funds • Contributions up to 7.5 percent of pensionable income a year deductible from taxable income • Contributions by your employer and yourself defined • No benefit guaranteed- Investment risk all yours • Must use two thirds to purchase a pension – subject to income tax at marginal rate • Lump sum subject to tax with first R315 000 tax free Defined contribution provident funds • Contributions not deductible from taxable income • Contributions by your employer and yourself defined • No benefit guaranteed- Investment risk all yours • Can take full lump sum at retirement • Lump sum subject to tax with first R315 000 plus own contributions tax free. Employer contributions and investment growth subject to tax on lump sum tables

13. Dangers of Occupational Funds • Mind the Gap:No employer sponsored scheme is sufficient. Most funds aim to provide 70 - 80% of pensionable income after 40 years of employment. • Contributions based on pensionable income: Final salary excludes all allowances • Big gap for dependants/disabled of DC funds: Dangers on death are: • Life assurance normally 2x or 3x annual pensionable • plus accumulated savings. This means • Too little when you are young with dependants • Too much when you are older with no dependants

14. Individual Retirement Funds Retirement Annuity Funds: • Contributions up to 15 % of non-pensionable income a year tax deductible • Must use two thirds to purchase a pension – subject to income tax at marginal rate • Subject to lump sum tax with first R315 000 tax free (cumulative from all sources) • You decide when to retire after age 55 Preservation Funds: • Amounts transferred from occupational funds • No new contributions • Preserves tax status of previous fund (pension or preservation)

15. Individual Retirement Fund Challenges Underlying Product choices • Life assurance: Normally contractual with penalties for reducing or stopping payments. Higher cost. • Linked Investment Product: Greater investment choice. Non-contractual but can be costly. • Unit trust: Choice limited to the management company. Non-contractual. Costs will depend on management company

16. At Retirement Decisions must be made on annuity (pension). Annuity choices are: • Fund-provided pension: normally a defined benefit occupational fund Or • Voluntary purchase annuity (VPA): pension bought with after-tax money, including discretionary savings and proceeds of a provident fund. Or • Compulsory purchase annuity (CPA): pension bought with proceeds of a tax-incentivised occupational pension fund or retirement annuity fund

17. Compulsory Purchase Annuity Choices Guaranteed life annuity: a life assurance company guarantees you will be paid a pre-determined pension for life (level, escalating, capital guarantee, joint and survivorship options). Pension depends on gender, age, interest rates, guarantees and product. Dies with you (depending on guarantees). And/or With profit annuity: a life assurer guarantees you will be paid a minimum pension for life but increases will be dependent on investment returns. Dies with you. Only available in Namibia through an occupational fund And/or Investment-linked living annuity (ILLA): you take the risk of ensuring that you will have a sustainable pension for the rest of you life. Must drawdown between 2.5 and 17.5%. Lives after you.

18. Threats to a financially secure retirement • Not planning holistically (with proper advice) • Starting to save too late • Not saving enough • Withdrawing savings before retirement • Retiring too early • Inflation • Costs • Tax • Investment choices • Product choices • Living too long • Dying too soon • Choosing the wrong annuity • Advice Risk

19. 1. Not planning holistically Finances are a balancing act which require: • Taking some risks yourself and sharing others with others. • Deferring spending (saving) • Taking account of affordability (debt) Best solution: • A financial needs analysis • With regular check ups, particularly when circumstances change

20. 2. Starting too late Current Age Targeted Retirement Age 55 60 65 • 20 10% 7% 6% • 30 16% 12% 8% • 35 22% 15% 11% • 40 32% 20% 14% • 50 51% 48% 27% • 55 103% 44% Assumptions: Target 75% of final annual salary with a 3% real return Source: Sam Robson, Glenrand MIB

21. 2. Starting to late • You lose the power of compound interest • Assuming a regular savings pattern every R100 in pension income you receive in retirement, R65 will be from money you saved (with the investment returns) before the age of 45.

22. 3. Saving too little • Don’t mistake high income with high net wealth • Save below the required minimums and you will not achieve your target • Save less at the beginning and you need to save a lot more at the end

23. 4. Withdrawing savings before retirement Alexander Forbes research shows that after 40 years of potential fund membership: • 12% of fund members reach retirement with an NRR of more than 75%; • 7% of members have an NRR of between 60 and 75%; • 10% of fund members have an NRR between 45 - 60%; • 14% have an NRR between 30 – 45%; and • 57% of retirement fund members have an NRR of less than 30% of their final pay cheque • Non-preservation reduces potential NRRs of 75% by between 15 and 24%

24. Non-preservation

25. 5. Retiring too early Replacement ratios Retirement   Age Now Age 20 30 40 50 60 77.8% 50.4% 29.1% 12.5% 61 83.3% 54.4% 31.8% 14.3% 62 89.4% 58.7% 34.8% 16.2% 63 96.0% 63.5% 38.1% 18.3% 64 103.2% 68.6% 41.6% 20.7% 65 110.9% 74.1% 45.5% 23.2%

26. 6. Inflation Inflation and being too conservative: • R1 000 a month X 480 months = R480 000 • Average annual return of 8% = R3 221 070 • Average annual inflation of 10% = R340 329 SO: The buying power is R340 329 Note: • Inflation of 4.5% will reduce a fixed pension by 25% every six years • Inflation of 7% will halve a fixed pension every 10 years

27. 6. The effect of inflation

28. 7. Costs • Warning: Percentage points seem low – but the impact is high • Every one percentage point saved in costs will improve your end benefit by 20% over 40 years • Rusconi's 2004 research on retirement saving vehicles showed: - Most cost-effective is a larger occupational retirement fund. - RA with unit trust funds will reduce end benefit by between 22.3 and 32.5% over 40 years. - Life assurance RA will reduce benefit by between 30.8 and 44.7% over 40 years.

29. Costs just nibble away

30. 8. Tax Income tax: E = exemptions/deductions apply T = taxed fully or partially • Pension funds and RA funds: Exempt, exempt, taxed (EET) • Provident funds: Taxed, exempt, taxed – partially (TET) Capital Gains Tax: Full exemption Dividend withholding tax: Full exemption NB: The longer held in fund the more you benefit from tax exemptions – differed tax

31. 8. Income Tax: Incentivised retirement products (Pension & RA funds) 1. (E) Contributions deductible from taxable income: Now: • Occupational funds: 7.5 percent of pensionable income • Retirement annuities: 15 percent of non-pensionable income. From March 1, 2013: • 22.5% for people under the age of 45 with an annual maximum of R250 000 • 27.5% for people aged 45 and older with an annual maximum of R300 000 2. (E) Investment returns exempt from income tax, dividend tax and CGT: 3. (T) Pension benefits • Lump sum: First R315 000 tax free; next R315 000 taxed at 18%; next R315 000 taxed at 27% and amounts over R945 000 at 36% • Pension: Taxed at marginal rate

32. 8. Income Tax: Incentivised retirement products (Provident funds) • (T) Paid with after-tax income: 2. (E) Investment returns exempt from income tax, dividends tax and CGT 3. (T) Pension benefits • Lump sum: Own contributions plus first R315 000 tax free; next R315 000 taxed at 18%; next R315 000 taxed at 27% and amounts over R945 000 at 36 percent.

33. 8. Tax: Non-incentivised savings products Life assurance products: Capital Gains Tax: • 7.5% annually in the hands of the insurer Dividend withholding tax: • 15% when dividend is paid Income tax: • 30% in hands of insurer • No exemptions apply (loss of annual interest and CGT exemptions)

34. 8. Tax: Non-incentivised savings products Collective Investment Schemes: (Conduit principle applies) Capital Gains Tax: • 13.3% top effective rate in your hands when realised • Annual exclusion gain/loss of R30 000 Dividend withholding tax: • 15% when dividend is paid Income tax: • Interest in tax year it accrues • Marginal rate of income tax applies • Annual exemption of under age 65 – R22 800; 65 and older – R33 000

35. 9.Investment choices: (Savings & Dis-saving) • Some facts of life: • The best tax-free guaranteed return you can get is paying off your debt • The best interest rate comes from RSA Retail Bonds (available from the Post Office or Pick n Pay or www.rsaretailbonds.gov.za) • The cheapest equity investment s are in tracker collective investment schemes – unit trust funds and Exchange Traded Funds (and in the long term you may probably do better) • Diversity of investments is the proven best solution • Exceptional promises of returns come with inordinately high risks – If it sounds to be too good to be true, it will be too good to be true

36. 9. Investment Choices: Reg 28 Prudential regulation: • Dictates how much you can invest in asset classes and sub-sectors • Aims at diversity of investment But: • Does not force you into a low yielding portfolio • Applies to tax-incentivised retirement savings (by law) and investment linked living annuities (by industry agreement)

37. 9.Investment Choices: Danger lurks • Masterbond • FundsTrust • Supreme Holdings • Fedsure • Saambou Bank • Fedbond • Leaderguard (Currency speculation) • Pyramid/ Ponsi (Rainbow, Kobus Milk, Airplane, Tannenbaum) • Publiserv medical scheme • Insider trading • Alexander Forbes (Secret profits) • Life assurance confiscatory penalties • Unregistered money market funds (Ovation: Common Cents, CMM) • Fidentia • Property syndications/fractional ownership (BlueZone/Sharemax) • Latest: Trilinear, Rockland TDI fund, Herman Pretorius’s Relative Value Arbitrage Fund

38. 9. Investment choices: That Balancing Act • Inflation versus returns • Greed versus fear • Costs versus returns • Tax versus tax • Risk versus returns • Too conservative versus too aggressive • Passive (lower cost) versus active (higher cost)

39. 9. Investment Choices: Beware averages Assuming constant real after-inflation returns is dangerous for: • People planning for retirement • For pensioners living off an investment linked living annuity It all depends where you are in the cycle: Example: Fund member 10 years from retirement: • 1998 retiree: NRR of 8x pensionable salary • 2008 retiree: NRR of 14x pensionable salary (Source: Daniel Wessels)

40. 9. Investment Choices: Fate Wins Volatile markets

41. 9. Investment choices: Your NRR will vary • Assumptions: Source: Simeka Employee Benefits • Join age 35 • Contribute 13% of salary

42. 10. Product choices • Guaranteed versus no guarantees • Capital guaranteed index linked (synthetic) versus life guaranteed product (non-synthetic) • Contractual (life assurance RA) versus non-contractual (Unit trust RA) • Limited underlying investment choice (single balanced/flexible portfolio) versus wide investment choice (multiple funds) • High profile brand (often higher cost) versus low profile brand Warning: Only invest when you understand all – There is no such thing as silly question

43. 11. Living too long • Many pension plans based on a 65-year-old dying at 84 but 50% live longer • One person in a couple aged 65 has a 52% chance of reaching age 90 • A living annuity with a 3% average real annual growth and 5% drawdown has a 25% chance of lasting until age 90 • First person to live to 150 is already 50 years old

44. 12. Dying too soon (pre-retirement) • Most South Africans will die before age 50 – Your chances of being involved in a motor accident are one in ten • 80 percent of retirement fund member beneficiaries receive less than 50 percent of what they require • Most South Africans are under-insured • Insurance is there to ensure that there is sufficient when life deals you a bad hand. But it is a continual balancing act… • Too much insurance = you go without • Too little insurance = you and your dependants go without

45. 12. Dying too soon: An example • A child is born • Saving target R150 000 in 18 years • You die after 10 years • You have only saved R60 000 • You need to cover the risk But say you die after 15 years and investment markets have been good: • You only need R10 000 • You are still insured for R150 000

46. 12. Dying too soon: Health Warnings • Life assurance is not to make dependants rich – that will make you poor while you live • Compare premiums • But cheap assurance can be expensive (watch the premium guarantees) • Be on with the new love before you are off with the old (apologies to Will Shakespeare) • Remember you have group life assurance • Be cautious of accident and big toe assurance • Always confess to the dickey heart and weekend sky diving

47. 13. Choosing the right annuity (pension) A traditional (life assurance) guaranteed annuity: • Once you purchase a guaranteed annuity, you are locked into that annuity for life • The reason: The guarantee is calculated using your average expected life span and the prevailing long-term interest rates What too consider • Age: the older you are the better the yield – taking account of interest rates optimum time from age 70 • Interest rates: the higher the rate the sooner to consider locking in - the lower the rate the later. • Health: The shorter your life expectancy the better an investment linked living annuity • A split annuity: Do not have to buy a single annuity with all your retirement capital • one annuity must have a minimum income of R150 000 a year • Max. 4-way split – capital value of each must exceed R25 000

48. 13. Choosing an annuity: Age counts Male buys a level annuity with R1 million - implied yields are: Age 55: R93 288 a year - 9.33% implied yield Age 60: R100 976 a year - 10.1% implied yield Age 70: R125 134 a year - 12.51% implied yield Age 80: R171 770 a year - 17.18% implied yield Age 85: R210 280 a year - 21.03% implied yield (An implied yield is the annuity (pension) divided by R1m expressed as a percentage)

49. 14. Advice Nearly everyone needs financial advice – but it can be a double-edged sword: • No advice and you may not get the balance right and make wrong investment decisions. • Bad commission-driven advice and you will not get the balance right

50. 14. Advice: Getting it right • Consider dealing with an organisation, such as a financial advice company or network, rather than a one-person operation. Organisation should have a competent team • Beware of what are called broker funds, often used to charge extra fees • Best-qualified advisers have a certified financial planner accreditation from the Financial Planning Institute (www.fpi.co.za) • Pay for it – preferably a fee for advice – not a commission for product