It is a great way for people to generate income – at 7.25% for 2 years it is still the best rate out there, but as a long term savings product it is pretty poor. Even at 8.25% the 5 year rate is way below what you could reasonably expect from a balanced fund and the All Share index generated about 11.5% pa for the past 5 years.

I have long been a fan of the RSA Retail Bond and still am for people looking for income but as a savings option I think that it is pretty poor – you can do significantly better over the long term – even after fees and commissions – if you are prepared to put up with a bit of volatility risk.

Related posts:

1. Contract save from Std Bank?
2. I cant save now…
3. RSA Retail Bonds

The basic argument goes around the fact that in a retirement fund an investor may not have more than 75% of his/her funds invested in equities and by default most investors tend to opt for “balanced” funds. Although balanced funds can have 75% equity exposure, most, in reality, do not and they tend to err on the lower equity side.

As a result of the lower equity exposure, a balanced fund will under-perform an equity fund over long periods of time.  In fact, Mouton’s article suggests that as a result of the more “conservative” asset allocation, an investor in a retirement fund could have less than 1/3 of the money that an investor in an equity unit trust fund could have. Scary stuff indeed and certainly it sounds like a compelling reason not to use retirement annuities – especially if you are young. Or is it?

Let’s take a different look at the case and let’s assume that the chosen equity fund (outside of the RA) gives a total return of “x” over the period. Now if we use the same equity fund within the RA we could invest 75% of the contribution into this fund – the balance of the money would have to go into the other asset classes and for the purposes of this example let’s refer to that as “cash”. Over the investment term, the RA would then give the following: 0.75x + “cash”. Clearly this is less than the equity fund.

But this is where the financial planner in me comes out…

One of the primary reasons for using an RA is because of the tax saving involved. For every rand you contribute, you receive a “rebate” equivalent to your marginal tax rate. Simply put, if your marginal tax rate is 30% you will only effectively pay 70cents in every rand of the RA premium – the 30cents is the tax saving. Now if you are disciplined you can invest this amount and if we use the same equity fund used above, then over time your return will be 0.3x (or your marginal rate * x).

So your total “RA” return now becomes: 0.75x + “cash” + 0.3x.

This is equal to 1.05x + “cash” (this could be as high as 1.15x + “cash”).

Even without the “cash” portion, 1.05x > x (apologies for the maths but you should have paid attention in class!). And then it is also possible to invest the “cash” portion into a property fund – which would be significantly better than “cash” over the long term.

Now this is where the detractors of RA’s will jump up and say “yes but there will be tax on the income taken from the RA whereas there will only be capital gains tax payable on income taken from the equity fund”. You are correct and this could well be less than the income tax payable on the RA income.  However, at death, there will be estate duty payable on the equity fund whereas the money in the RA will fall outside of your estate (there will also be no executor’s fees on it).

I am sure that there many responses possible to this article, not least of which would be to make sure that the voluntary money was invested via a trust but that has another whole set of implications. The point of this article was to show, mathematically, that there is still a case for RA’s.

Related posts:

1. The future of RA’s looks bleak…
2. Is there still a case for investing offshore?
3. It's not all in the name

20′s: I CANT SAVE NOW. I’m just getting established. I have student loans to pay back, as well as a car loan. I’m not ready to make committments yet and I want to have fun while I can. There will be time to think about saving later on, then I will save

30′s: I CANT SAVE NOW. I’ve got family and responsibilities. It costs a lot to raise children and there is a bond on the house too. It takes all I have to make ends meet. When I am making more and the kids are older, then I will save.

40′s: I CANT SAVE NOW. I’ve got kids at varsity and the costs are out of sight. Then there are the weddings. I want to help the kids get started. Expenses are at their highest and it is the hardest time to save. But things will ease off soon and then I’ll save.

50′s: I CANT SAVE NOW. Things haven’t worked out like I thought they would. It’s not easy when you are locked in and there is no chance to move up the ladder at work. I cant just make a break and start a new career now. I’m helping the folks too, now that they need assistance. I’m just barely making ends meet. Something will open up and then, I’ll save.

60′s: I CANT SAVE NOW. I thought things would be better. I wanted to retire sooner but I just cant do it. I’m trying to pay off the last of the bond and take care of other bills but things just mount up. Remembering the grandchildren and other things takes all I have. I guess that’s the way it is. I wish I could save now.

70′s: I CANT SAVE NOW. I’m too old to save. Medical and long-term care expenses really scare me and my pension does not stretch far enough. I hate being such a burden on my kids. I wish I had saved when I should have.

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2. A great way to save?
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(Once again) if you are a pensioner living off interest income your “salary” has effectively been halved over the past few years by all the interest cuts and while inflation might officially be at some unbelievably low level the cost of living seems to have risen (oblivious to these low inflation figures).

So if you are looking for interest income, what are your options?

The “only” option (in my opinion) is the RSA Retail Bonds – the 2 year rate is still 8.5% while the 3 and 5 year rates are 8.75 and 9% respectively. There might be other products out there offering similar or even slightly higher rates but the reason that they are offering higher rates is because there is higher risk associated with them. The RSA Retail Bond is guaranteed by the SA Government (which is about the safest guarantee you can get in SA).

An “investment” of R100000 for 2 years would give you the following monthly interest:

• RSA Retail Bond – R708.33 (R8500/12)
• Capitec – R650 (R7800/12)
• Nedbank – R454 (R5450/12)
• FNB – R467 (R5600/12)
• ABSA – R463 (R5560/12)
• Std Bank – R450 (R5400/12)
• “Average” Money market unit trust – R500 (R6000/12)

Rates on the RSA Retail Bond are adjusted at the end of the month (unlike money market rates which move daily) and so if you are looking for interest income and are prepared to lock your capital away for the next 2 years then you still have until the end of September to invest at 8.5% (it is quite possible that the rate will be adjusted downwards by 0.5% at the end of Sep).

Based on the above information (and that available on the various bank websites) I would stay far away from all of the “big 4″ bank fixed deposits – even unit trust money market rates are better than their rates.

Related posts:

1. RSA Retail Bonds part 2
2. RSA Retail Bonds
3. Interest (ing)…

In a nutshell it appears to be a form of “contractual” saving with a minimum term of 12 months although there are no penalties if you cant afford to continue paying at any stage. The minimum premium is R100 and the current interest rate is 4% with a bonus of 0.5% at the end of the year. If your chosen term is longer than 12 months (say 3 years) you can access 10% of the total funds after 12 months with no penalties…more than 10% and there appears to be a R200 penalty.

By way of example:

• R100 per month for 12 months = R1222 at the end of the year +an extra 0.5% interest = R1228

This is not bad – especially as far as traditional bank offerings go, but it is not the “best” by a long way. Capitec Bank are still streets ahead in this space – they are still offering 7% on their daily savings account on balances below R10000. No minimum term and instant access (no penalties).

And then there are money market unit trust accounts – Metropolitan Unit Trusts take a monthly debit order of R1000 into their money market unit trust account (and you will get about 6% per annum in interest). For my money (and on amounts less than R10000) Capitec are still King!

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1. Interest (ing)…
2. RSA Retail Bonds
3. Bank fees…moving forward!

1. Ignorance,
2. Indulgence, or
3. Poor Planning

Debt is often the symptom of some “other” issues but that is the subject for another post. In this post I want to look at the first category: ignorance. This is where someone has no idea of the real cost of the debt. For example, few people stop to think that the total cost of all the interest payments on a million rand house over 20 years is over R2.3million rand – R1.3million of that is interest!*

The National Credit Act has made it a lot easier for people to know the full cost of a financed purchase as the total cost of the item being purchased has to be displayed. This includes the interest, finance charges and even insurance charges. So if you are buying a car and financing it, you must be shown the full costs of financing it over the period for which you have opted and even advertisments are supposed to show this information (take a closer look next time you see one).

But one of the areas that has fallen through the cracks is the cost of having debt while trying to save at the same time. Consider the following fairly typical example:

• Client A has a current account which is in overdraft of R7000. At the same time he has R11000 in a bank savings account just to see himself through any financial emergencies.

While the principle of an emergency fund is an excellent one, what he has not realised is the cost of keeping money in it while he is in overdraft.

Typically banks now charge a monthly fee for the “privilege” of having an overdraft facility on your account. One bank that I contacted today charges R57 per month for this (that’s R684 per year!). At the same time they levy an interest rate of 16% per annum on overdrawn accounts. On R7000 that amounts to R1120 per year – so the total cost of the overdraft is R1804 per annum.

Now at the same time, the positive interest that they pay on R11000 in a savings account is 0.25%, or R27.50 per year (this is criminal). So the real cost of this financial compartmentalization is R1776 per year! Of course the bank know that the client is wasting money and if you ask them, the would probably advise against doing this kind of thing but then again, if you dont ask, they make more money and that’s what they are there for.

So my advice is to use the money in the savings account to pay off the overdraft and then use the money you were paying into the overdraft to build up the savings account again. And better still, use a money market unit trust account instead of a bank savings product – you will get about 6.5% interest per annum (Capitec bank offer 7% on balances under R10000).

* interest rate of 10% per annum.

Related posts:

1. Contract save from Std Bank?
2. Interest (ing)…
3. The real cost of the bond…

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1. RSA Retail Bonds
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Here is my thinking…

Following some basic maths, I calculated that the projected return using Fundisa would look something like this (assuming R200 from me + R50 from govt and a 10% per annum return – this also assumes no escalation on the contribution because the bonus is capped on the first R200).

So after 10 years there should be ±R51000 in the account and by 15 years, ±R103600…

However, if I use a simple balanced fund and I put away R200pm, no escalation and I can get a return of 14% pa (which is the historical average return for this sector over 10 years) the results look something like this:

So for the first 9 years or so, Fundisa is a better prospect, however after that, it gets left behind. This is without any escalation on the debit order – which you would normally do and also assumes I use a balanced fund not an equity fund which would be totally appropriate over a 15 year period…

So we have a problem…Given that most people will start saving (via Fundisa) when their kids are very young and will therefore be saving for much more than 15 years, Fundisa is not as good as it appears and anyone using it would be worse off over anything more than a 10 year period…

To my mind, Fundisa needs to do the following to make it a really attractive option:

1.       Fundisa needs to have an alternate (more aggressive) fund option such as a balanced or equity fund.

2.       Fundisa needs to allow for bonuses on an escalation – this could be capped at 10% per annum.

Even if I escalate my contribution on Fundisa without the bonus increasing, I will still be significantly worse off than escalating the contribution on the balanced fund (without any bonus)…

I have written to ASISA re these concerns and will post their reply if we get one…Fundisa is a great concept, but in my opinion, it was not clearly thought through…

For now, I would hold off on new investments into Fundisa.

Related posts:

1. Fundisa – it’s a no-brainer!
2. Guaranteed returns of 25%?
3. Is there still a case for RA’s?

Turns out though, that if you want to invest via the website you need to “register” and once you have completed the form online, you will be issued with bank account details so that you can make the payment.

We made the recommendation to them that the document is made available and that the “register” button is changed to “invest” or “invest online”…let’s see if anything changes.

While spending some time on their website it is also interesting to see the age profile of investors in the RSA Retail Bonds…±40% of investors are under 50 and almost 22% are under 40 years old.

While there is nothing wrong with investing into the RSA Retail Bond, it is hardly a suitable investment vehicle for a 25, 30 or even 40 year  year old…but I guess that is one of the dangers of “cutting out the advice chain”

Investors may have got into the product without paying commission but a 25-40 year old investor sitting in the RSA Retail Bond is most probably in an inappropriate product…it is certainly not an emergency fund (you cant access it) and the majority of 25-40 year olds are not looking for income from an investment – it is capital growth that they need and for that, there are far more appropriate investment options (even if there are some fees to be paid to advisors).

A typical “balanced fund” unit trust has given returns of almost 15% per annum for the past 10 years. At that rate the money has doubled in value every 5 years while investors in the RSA Retail Bond will only see their funds doubling every 8 years…I know where I would rather be invested!

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1. RSA Retail Bonds
2. RSA Retail Bonds
3. Interest (ing)…

Well, I have been trying to buy some of these for a “man-in-the-street” using the RSA Retail Bond website – what a nightmare. There is an application form online but no details where to submit it or how to pay the funds into an account.

So I sent an email to the address on the site – 4 days later and still no reply. So I tried calling the telephone number (which is the number investors are supposed to use if they want values) and it just rings and rings and rings until it goes dead…

I know that you can also buy these at Pick n Pay or via the Post Office but if that is the only way to do it then why have forms on the website? And if no-one is going to reply to emails or answer the phone, why have an email address or telephone number on the site? And if you are not going to reply, how do you expect investors to get information or communicate with you?

This is my first experience of using this investment vehicle for a client and so far, I am not impressed.

I have written to the communications manager at National Treasury – let’s see if we get a reply.

Related posts:

1. RSA Retail Bonds part 2
2. RSA Retail Bonds
3. Dont get caught!