Single Premium Retirement Annuity

1
Retirement Annuities Business Times Insinger de
Beaufort Wealth Forum Dave
Hudson 31 July 2006
2
Retirement Annuities A category of investment
in continuous evolution Dave Hudson 31
July 2006
3
RAs 3 distinct elements
RA, as defined in Income Tax Act, Pension Fund
Act Estate Duty Act
CATEGORY
VEHICLE
The product the administrator
The assets the asset manager
PORTFOLIO
4
RAs a defined category of investment
The category Retirement Annuity
- contributions deductible (within limits)
- lump sum benefit partly tax free (within
overall limits)
- capital restricted to 55- 69 (except on death
/disability)
- build-up favourably taxed (less so in 1996 -
2005)
5
RAs a defined category of investment
The category Retirement Annuity
- contributions deductible (within limits)
- lump sum benefit partly tax free (within
overall limits)
- capital restricted to 55- 69 (except on death
/disability)

• build-up favourably taxed (less so in 1996 -
  2005)
• proceeds (2/3rds plus) must generate a life
  annuity

6
RAs a defined category of investment
- growth exempt from Capital Gains Tax
- income proceeds estate duty free
- benefits direct to beneficiaries (no executors
fees)
- full insolvency protection while in the fund
- income not subject to forex limits
7
RAs the 4 vehicles at present
8
RAs the 4 vehicles at present
1961 ? Traditional RA policies
1990 ? Unit Trust RAs
1993 ? L.I.S.P. RAs
1998 ? New Generation RA policies
9
RAs the portfolio

10
RAs the portfolio greater freedom, greater
responsibilities

11
RAs the portfolio greater freedom, greater
responsibilities

• Domestic assets only
• Assets prescribed eg max 47 equity

pre 1990

12
RAs the portfolio greater freedom, greater
responsibilities

• Domestic assets only
• Assets prescribed eg max 47 equity

pre 1990
90 96

• Domestic assets only
• Allocation limits if guarantees offered

13
RAs the portfolio greater freedom, greater
responsibilities

• Domestic assets only
• Assets prescribed eg max 47 equity

pre 1990
90 96

• Domestic assets only
• Allocation limits if guarantees offered

- Open to international assets
post 1996
14
RAs the portfolio greater freedom, greater
responsibilities

• Domestic assets only
• Assets prescribed eg max 47 equity

pre 1990
90 96

• Domestic assets only
• Allocation limits if guarantees offered

- Open to international assets
post 1996

• Separation of asset managers from
  lllunderwriters of RA policies

post 1998
15
A tale of two RAs.
16
A tale of two RAs .
(Two single premium RAs)
R 100 000
2000
2001
2002
17
A tale of two RAs .
R 347 326
R 200 000
2000
2001
2002
18
A tale of two RAs .
R 173 663
R 100 000
2000
2001
2002
19
A tale of two RAs .
R 173 663
R 100 000
R 23 494
2000
2001
2002
20
A tale of two RAs .
R 323 832
R 173 663
R 100 000
R 23 494
2000
2001
2002
21
The impact of investor choice
R 23 494
2000
2001
2002
2000
2001
2002
22
How do investors make the call ?
900
800
World Technology
Mining Resources
700
600
500
400
300
200
100
0
Feb-97
Feb-98
Feb-99
Feb-00
23
The impact of investor choice
R 23 494
2000
2001
2002
2000
2001
2002
24
More freedom, more responsibility
R 23 494
2000
2001
2002
2000
2001
2002
25
Some pros also do it
16 000
OM Mining Resources
XYZ Mining Resources
12 000
8 000
4 000
1 000
-
July 87
Jan 03
Jun 99
26
The tale of two RAs continued .
R 500 000
World Technology Fund
R300 000
R 100 000
R 25 978
Feb 2000
Feb 2006
27
The tale of two RAs continued .
R 601 247
SA Mining and Resources Sector Fund
R 500 000
World Technology Fund
R300 000
R 100 000
R 25 978
Feb 2000
Feb 2006
28
RAs - the polar views on tax
29
RAs - the polar views on tax
30
RAs - the polar views on tax
31
RAs the compelling logic of the basic
arithmetic.
32
RAs the compelling logic of the basic
arithmetic. A simple example A husband and
wife, both working but with no pension fund,
weigh up an RA vs the alternatives
33
A Retirement Annuity, using pre-tax money
Paying the tax, and investing the after tax
money in an alternative investment
34
R1 000 a month increasing by 10pa and growing
by 10pa
R.A.
35
R1 000 a month increasing by 10pa and growing
by 10pa
R.A.
R1 000 a month increasing by 10pa and growing
by 10pa
36
R1 000 a month increasing by 10pa and growing
by 10pa
R.A.
R1 000 a month R600 pm, after tax (assuming
40) increasing by 10pa and growing by 10pa
37
R 720 000
R.A.
38
R 720 000
R.A.
R 432 000
39
R 720 000
R 240 000tax free
R.A.
R 432 000
40
R 720 000
R 240 000tax free
R 480 000
R.A.
R 432 000
41
R 720 000
R 240 000tax free
R 480 000
R.A.
R 432 000
R 240 000tax free
42
R 720 000
R 240 000tax free
R 480 000
R.A.
R 432 000
R 240 000tax free
R 192 000
43
R24 000 pa increasing at 5 pa
R 720 000
R 240 000tax free
R 480 000
R.A.
R 432 000
R 240 000tax free
R 192 000
44
R24 000 pa After tax at 40, R14 400
pa increasing at 5pa
R 720 000
R 240 000tax free
R 480 000
R.A.
R 432 000
R 240 000tax free
R 192 000
45
R24 000 pa After tax at 40, R14 400
pa increasing at 5pa
R 720 000
R 240 000tax free
R 480 000
R.A.
R14 400 pa untaxed, increasing at 5 pa
R 432 000
R 240 000tax free
R 192 000
46
R24 000 pa After tax at 40, R14 400
pa increasing at 5 pa
R 720 000
R 240 000tax free
R 480 000
R.A.
R14 400 pa untaxed, increasing at 5 pa
R 432 000
R 240 000tax free
R 192 000
47
R24 000 pa After tax at 40, R14 400
pa increasing at 5pa
R 720 000
R 240 000tax free
R 480 000
R.A.
R14 400 pa untaxed, increasing at 5 pa
R 432 000
R 240 000tax free
R 192 000
48
R 720 000
R 614 000
R 240 000tax free
R 480 000
R.A.
R 432 000
R 240 000tax free
R 192 000
R 65 000
49
R 720 000
R 614 000
R 240 000tax free
R 480 000
R.A.
R 432 000
R 240 000tax free
R 192 000
R 65 000
50
R 720 000
R 614 000
R 240 000tax free
R 480 000
R.A.
R 432 000
R 240 000tax free
R 192 000
51
R 720 000
R 605 000
R 240 000tax free
R 480 000
R.A.
R 432 000
R 240 000tax free
R 192 000
52
R 720 000
R 605 000
R 240 000tax free
R 480 000
R.A.
R 432 000
R 240 000tax free
R 192 000
53
R 720 000
R 240 000tax free
R 480 000
R.A.
R 432 000
R 240 000tax free
R 192 000
54
History of the Tax-free Lump Sum
R 700 000
Tax-free Lump sum
R 500 000
R300 000
R 120 000
R 100 000
0
1962
1970
1980
1990
2000
55
History of the Tax-free Lump Sum
R 700 000
R 640 000
Tax-free Lump sum
Inflation
R 500 000
R300 000
R 120 000
R 100 000
0
1962
1970
1980
1990
2000
56
RAs recent criticism
1. Early termination costs
- a vehicle issue
2. Smoothed Bonus governance
- a portfolio issue
57
RAs early termination costs
Where are they significant?
58
RAs early termination costs
Where are they significant?
59
RAs early termination costs
Where are they significant?
60
(No Transcript)
61
Getting Started - Money Matters for
Under-25s

"A big advantage of unit trust investments is
that you can invest and withdraw whenever you
want." "The most important fact to know about a
life assurance investment is that it is
contractual", and "The contractual nature of the
investment has the advantage of making you a
disciplined saver, ..."
62
(No Transcript)
63
Financial Freedom for Women
"There is no enforced discipline to your (unit
trust) investment plans, as you can withdraw
amounts or stop paying whenever you want. "The
contractual nature of the investment and the
severe penalties for not sticking to the contract
help make life assurance investments a very
disciplined form of saving and investment."
64
RAs recent criticism
1. Early termination costs
- a vehicle issue
2. Smoothed Bonus governance
- a portfolio issue
65
Press Release, Office of the PFA, May 2006
SMOOTH BONUS INVESTMENTS UNDER SCRUTINY

• At the heart of this matter is the structure of
  so called smooth bonus products, the nature of
  which were called into question by the
  adjudicator.

66

• In tough times, members who withdraw early are
  effectively subsidizing the guarantees on the
  later remaining members benefits.

67

• In good times, when a member withdraws and the
  fund is in an over funded (surplus) position, a
  proportion of that profit is not passed on to him

68

• Which raises the question where do all the
  profits go?
• Used to top up policyholder values in bad times?
• Shared by policyholders and shareholders?
• Treated as profit and paid out to shareholders?

69

• These questions were left unanswered in the
  determination, since it was decided on other
  grounds, but the fact that the Adjudicator has
  raised them, signifies his concern about
  transparency and possible abuses in this type of
  underlying product.

70
What about the 4 worlds ?
R 87 600
Pre- departure
Post- departure
Post-tax
Pre-tax
71
What about inflation ?
R 27 600 behind
72
Retirement Annuities A category of investment
in continuous evolution Dave Hudson 31
July 2006