Notification – license rationalisation

Notification – license rationalisation

September 2020

by Albert Louw

Albert Louw

As custodians of investments, we continuously look for opportunities to enhance business efficiencies and provide quality service.

STANLIB Limited (“STANLIB”) has embarked on an entity and license rationalisation project, which seeks to simplify the corporate structure, as well as obtain operational, business and administrative efficiencies in line with its strategy and operating model. The purpose of this communication is to notify investors of the transfer of our business as a going concern to STANLIB Asset Management (Pty) Ltd.

Effective 1 September 2020, STANLIB Multi-Manager no longer operates as a licensed entity in its own capacity, but as an independent investment team under STANLIB, as a division of STANLIB Asset Management (Pty) Limited.

We remain committed to delivering strong investment performance and building our clients’ trust and confidence in us.

STANLIB Multi-Manager Diversified Equity Fund – simplifying the fund structure

STANLIB Multi-Manager Diversified Equity Fund – simplifying the fund structure

June 2020

by Albert Louw

Albert Louw

The STANLIB Multi-Manager Diversified Equity Fund is a diversified equity fund of funds. Its investment objective is to provide long-term capital growth through investment in local and global equity markets. It aims to outperform CPI plus 7% p.a. over rolling 7-year periods, with a low probability of capital loss over the long-term. As inflation is not a market variable, the preferred measure of relative performance – and the Fund’s benchmark – is the ASISA General Equity Category average.

Over the long term the Fund has outperformed its benchmark comprehensively, as shown in the table that follows.

Ongoing portfolio management

As part of our ongoing portfolio management process we regularly review the underlying managers in the Fund and evaluate the overall construction framework. This ensures the Fund is well placed to maintain or improve performance going forward. This process does not always result in changes but did result in a change recently.

This communication highlights the changes made to the Fund and the basis for these changes. The revised portfolio construct is highlighted in the table that follows.

Basis for the change

The primary basis for the change was to simplify the Fund’s structure and concentrate its exposure to STANLIB Multi-Manager’s house view domestic and global equity funds, namely the STANLIB Multi-Manager SA Equity Fund and the STANLIB Multi-Manager Global Equity Fund.

Our holdings-based analysis revealed that many of the primary characteristics of the Allan Gray SA Equity Fund, the Nedgroup Entrepreneur Fund and the STANLIB Multi-Manager Property Fund – namely large cap value, small cap and property – could be achieved through the STANLIB Multi-Manager SA Equity Fund.

The portfolio managers of the STANLIB Multi-Manager SA Equity and STANLIB Multi-Manager Global Equity funds have access to a range of quality managers from our Buy List. This list is a result of our manager research process, that takes managers through rigorous quantitative and qualitative analyses. The portfolio managers can shape their funds to get exposure to a range of managers from the Buy List and can hire or fire when they feel a superior alternative comes along. This is part of our ongoing portfolio management process that ensures we continue to give our clients exposure to quality managers.

Current CISCA regulations restrict fund of funds to a minimum of two underlying funds with a maximum exposure of 75% to any one fund. Global exposure (excluding Africa) is currently restricted to 30%. Therefore, to ensure the Diversified Equity Fund is not in breach of these requirements, we added a small exposure to a low-cost passive equity block, the 1nvest ALSI 40 Fund. This provides the additional flexibility in the management of the Fund that we require to take views around the direction of local and global equity, as well as helping to reduce the Total Expense Ratio of the Fund.

Underlying manager line-up

We believe that the revised structure of the Fund gives investors exposure to quality managers both locally and globally. The Fund’s current manager line-up is highlighted in the table below.


In constructing the STANLIB Multi-Manager Diversified Equity Fund of Funds we consider multiple facets of the underlying funds and managers; and how they blend together with the ultimate objective of outperforming the peer group average. The Fund has achieved this objective over the long term.

The new fund structure is simpler and more focused and we are confident that the recent changes will help retain the Fund’s excellent performance track record. As always, we continue to research the universe of managers and funds and will apply our investment process to identify and provide investors exposure to quality managers.

STANLIB Multi-Manager SA Equity Fund

STANLIB Multi-Manager SA Equity Fund

by Albert Louw

Albert Louw

In constructing the STANLIB Multi-Manager SA Equity Fund, multiple facets of the underlying managers and how they blend together are considered, with a view to achieving the objectives of the Fund. The STANLIB Multi-Manager buy-list generally comprises managers that use a fundamental valuation approach to equity investing and display various characteristics during different market environments. Therefore, it is not always possible to box these managers into a specific style, since they generally invest where they see opportunities. Some of these managers may be more nimble than others and some may have higher conviction weights for their stock picks.

Investec included, passive removed

As part of our continuous assessment of managers and the market, we have reviewed the Fund’s portfolio construction framework. The following changes have been made to the manager selection and weighting:

Removed the passive allocation

  • The STANLIB Multi-Manager SA Equity Fund had a 10% allocation to a passive tracker since November 2014. This passive component was originally mandated to track the SWIX
  • In July 2017, the Fund’s benchmark changed from the peer group average to the Capped SWIX. At the same time, we changed the passive component to track the Capped SWIX
  • We have assessed active managers relative to the Capped SWIX benchmark and found that, on average, active managers have beaten the Capped SWIX over the three years to June 2019 (net of fees). This makes sense fundamentally, as global quantitative easing initiatives slowed or halted. In addition to this, South Africa’s deteriorating economic fundamentals have made active management even more important
  • The STANLIB Multi-Manager SA Equity Fund aims to achieve a 2% return ahead of the Capped SWIX benchmark on a gross of fees basis. In order to achieve this excess return, the Fund – through its underlying managers – needs to have sufficient active stock picks or positions. The number and size of these active positions in the overall Fund is measured by the tracking risk relative to the benchmark
  • We therefore prefer a higher allocation to active managers. This increases the tracking risk of the overall Fund, especially in a murky market environment and as a result, we have removed the 10% allocation to passive

Included Investec Equity

  • The overall Fund has a more defensive position relative to the market with the underlying managers holding a small amount of cash and being overweight resources. Investec has a similar position but has higher weightings to shares that they really like. They have demonstrated that their portfolio mix is flexible, especially in the context of the other underlying managers in the overall Fund
  • We like increased flexibility of Investec, which is a result of their differentiated investment process. Investec focuses on the direction and magnitude of company earnings forecasts, which are derived by their highly experienced analysts
  • By focusing on earnings revisions, Investec has a momentum bias. This is a characteristic we would like to add to the overall STANLIB Multi-Manager SA Equity Fund. We believe that the inclusion of Investec will widen the tracking risk of the Fund, to within our target range of between 2% and 4%

Reduced Prudential’s strategic allocation from 22.5% to 18%

  • Prudential’s relative value approach has produced good returns for the Fund. Their investment approach and strong house factors make them a good anchor in the Fund
  • From a risk management perspective, we reduced their weight in line with Coronation, Truffle, Investec and Visio, in order to create a more uniform allocation to our active managers
  • In addition, Prudential’s investment approach makes them more benchmark cognisant. By reducing their strategic weight in the portfolio, we again increase the tracking risk of the overall Fund, which in turn increases the potential to achieve our alpha target of 2%

Reduced Foord’s strategic weight from 17.5% to 12.5%

  • Given the persistently weak local economy, Foord prefers companies with offshore earnings. Some of their large positions have been in British American Tobacco, Sasol and Aspen. These companies have faced regulatory or company specific headwinds, which has negatively impacted Foord’s performance
  • Companies that derive a large portion of their earnings offshore – known as rand hedges – typically do better as the rand weakens. Over the three-year period to July 2019, the rand has only depreciated 1.3% relative to the US dollar and thus, not playing in Foord’s favour
  • Of more significance, many of the returns in the local market have come from resources, a sector where Foord has been underweight
  • For these reasons Foord underperformed the Fund’s Capped SWIX benchmark, as well as the other underlying managers. Their weight in the Fund has therefore, settled close to 12.5%
  • Foord is positioned differently to the other managers in the Fund and we believe their performance could come through if the rand weakens significantly. However, their differentiation also implies the potential for higher tracking risk. Given the other changes noted above, we will manage this risk by keeping Foord’s strategic weight at 12.5%

The Fund has a robust blend of managers with different approaches to equity selection. Three of the managers – Coronation, Truffle and Visio – are long-term value managers that focus on bottom-up stock analysis. We believe this approach has the potential to outperform the benchmark through various market cycles over time. These managers, however, typically have a less consistent alpha profile. Therefore, these managers have been complemented by Prudential’s relative value approach that generally produces a more consistent alpha profile. Investec is likely to outperform when shares with good earnings growth, drive the market – a more momentum-oriented market.

Part 1: the tax treatment of investment income – local vs foreign

Part 1: the tax treatment of investment income – local vs foreign

by Albert Louw

Albert Louw


South African residents are subject to tax on their worldwide income. There is a difference in the way South African residents are taxed when investing locally or when investing abroad.

In the first of a three-part series, we provide a brief explanation of the tax treatment of local and foreign investment income/distributions for a tax resident in South Africa.

Summary table



Each tax year, investors are issued with an IT3(b) certificate for local investment income and/or a statement for foreign investment income. This certificate/statement states the total interest and dividends earned locally and offshore during the course of the tax year. These amounts should then be included on tax returns submitted by the investor to SARS. Investors are entitled to claim a tax credit for any withholding tax paid in respect of a foreign dividend/interest that is included in gross income up to the amount of South African tax payable.


Local interest Local interest is currently taxed (for the 2019 tax year) subject to the following exemptions:

  • Under 65 years of age: R23 800
  • 65 years of age and older: R34 500

The excess is taxed at the investor’s marginal tax rate, which varies between 18% and 45%.

Foreign interest

Foreign interest earned is fully taxable.


Local dividends A dividends tax of 20% is required to be withheld in respect of dividends received from South African resident companies and cash dividends from dual-listed companies. South African residents will receive the dividend less dividends tax of 20%. As the dividend was subject to dividends tax, it will be exempt from normal income tax.

Dividends tax is categorised as a withholding tax because the tax is withheld from the dividend (income) distribution and paid directly to SARS by the company paying the dividend and/or the withholding agent, such as STANLIB.

Dual-listed companies

Dividends declared by foreign companies listed on the JSE are subject to dividends tax in SA. Foreign withholding tax may also apply to the dividend declarations. Richemont, British American Tobacco and Anheuser-Busch would be examples of such companies.

Example 1 Richemont, a company listed on the SIX Swiss Exchange and the JSE, pays a dividend of R100 to a South African shareholder named Natina. The R100 is subject to Swiss dividends tax at a rate of 35%. This rate is reduced to 15% in terms of the Double Taxation Agreement concluded between SA and Switzerland, whereby 35% is withheld and 20% can be claimed back. Richemont generally provide investors with assistance in this regard. Therefore, Natina only receives R65. In SA, Natina’s dividend attracts dividends tax at a rate of 20% on the R100. However, as she already suffered an effective 15% Swiss dividend withholding tax, an additional 5% SA dividends tax will be withheld.

In total Natina will receive a cash dividend of R80 (R65 after Swiss withholding tax + claim of R20 for overpayment of Swiss withholding tax – R5 paid to SARS) The dual-listed dividend is thus generally subject to tax at the highest effective tax rate between the relevant treaty countries, since a tax credit can be claimed (i.e. no double tax applies). It should be noted that, contrary to Switzerland, many countries only withhold at the reduced treaty rate, subject to receiving the relevant dividend declaration forms.

Foreign dividends

There are two ways in which South Africans can invest offshore:

  • Via a rand-denominated investment such as a collective investment scheme (CIS); or
  • Directly in foreign currency making use of the foreign investment allowance, to invest in a foreign-denominated CIS and/or buying shares in a foreign company by way of an offshore stockbroker account

In both cases, the investments are in foreign companies that are not listed on the JSE – not dual-listed – and therefore, local dividends tax does not apply. Foreign dividends are, however, subject to normal income tax in the hands of the South African resident taxpayer, subject to certain exemptions or partial exemptions.

In order to align the effective tax rate applicable on local and foreign dividends, 56% (25/45) of the foreign dividends arising from a portfolio of shares accruing to a natural person, are treated as exempt. At the highest marginal rate of 45%, this will result in a maximum effective tax rate of 20%; and proportionally less at lower tax rates as illustrated in the table that follows.

A foreign withholding tax may also apply in respect of foreign dividends, which, if applicable, is withheld by the relevant foreign tax authority. Where applicable, a tax credit may be claimed in respect of the foreign tax suffered, limited to the amount of tax payable in SA, even though such dividend may only be taxed at an effective rate of 20%. For example, if a person received only one foreign dividend and no other foreign income during the tax year; and the foreign dividend withholding tax was 12% on the dividend payment, the South African tax on the dividend will be 8% (20% less 12% credit).

Example 2: Natina opened an account with an offshore stockbroker and bought Apple shares with her foreign investment allowance. Apple pays a dividend of R100 to Natina. Firstly, withholding tax of 15% is paid to the US tax authority – the rate is reduced from 30% to 15% in terms of the US/South Africa Double Taxation Agreement. Natina therefore receives R85 in her pocket. Apple is not listed on the JSE and Natina does not hold at least 10% of Apple’s shares. Natina pays tax at 45%.

In this scenario, the income tax implications are as follows:

  • Foreign dividend: R100
  • Foreign withholding tax: R15
  • Foreign dividend subject to SA income tax: R100
  • Minus: exemption (25/45): -R56
  • Income tax payable: R44 x 45% = R20
  • Total tax payable by Natina on the Apple dividend: R20 (R15 US withholding tax and

*R5 normal tax in SA. *R20 income tax less R15 rebate for foreign withholding tax suffered.

Risk profiling – combining multiple factors as part of goals-based financial planning

Risk profiling – combining multiple factors as part of goals-based financial planning

by Albert Louw

Albert Louw
Executive summary
  • Risk profiling is principle-based and little guidance is provided by the regulator on how an adviser should determine the risk profile of a client
  • However, as part of goals-based financial planning, risk profiling has evolved. Many financial advisers are now able to use advanced software tools that allow them to perform more holistic financial planning
  • Financial advisers are able to combine multiple factors – risk required, risk capacity and risk attitude – to determine a more accurate risk profile for clients
  • It is crucial for advisers to ensure that clients are educated and understand their true risk profiles.


The Financial Services Conduct Authority (FSCA) recognises the importance of risk profiling and as such, it is included in their regulation dealing with the suitability of financial advice. However, the regulation on risk profiling is principle-based and provides little guidance on how an adviser should determine the risk profile of a client.

This has resulted in many different risk profiling questionnaires, each with its own questions, weightings and multiple approaches to form the risk profile of a client. In this article we briefly highlight some of the flaws that exist with risk profiling. We discuss how advisers can evolve approaches by combining risk components to lay the foundation for goals-based financial planning.

Traditional risk profiling approach – flaws with one dimensional measurement

Many advisers have advanced from single-dimension measurement of risk profiles by using advanced planning software. However, there are still service providers with an advice process and compliance that “allows” planners to get their clients to complete a risk profile questionnaire that focuses on risk tolerance. This process implies that the risk tolerance of a client is equivalent to his or her risk profile. This is misleading. The outcome – conservative, moderate or aggressive – is then used to select investments such as a conservative, moderate or aggressive investment portfolio.

This is a process whereby the adviser is able to “tick all the boxes” and is deemed to be compliant. However, the outcome may not serve the best interests of the client. Although most of these risk categories – conservative, moderate or aggressive – have some general, subjective descriptions, they are, by definition, entirely open to interpretation unless some quantifiable objective is added.

The traditional approach to risk profiling has little to do with meeting the objectives, or goals, of a client. If an adviser invests a client’s money according to his/her aggressive risk profile for example, neither the adviser nor the client would know whether the investment will meet the needs and/or objectives of the client, as required in terms of the Code of Conduct. Section 8(1) (c), states that an adviser must seek appropriate product(s) in accordance with the client’s risk profile AND financial needs.

What is the most appropriate way to determine the true risk profile of a client?

The request for a client to complete a risk profiling questionnaire marks the start of a conversation about risk. Only through a thorough and carefully structured conversation as part of a systematic approach to investment advice, can advisers understand the true investment risk profile of a client.

This is the reason why we need to provide context to the meaning of the risk profiling that we envisage in terms of the Code of Conduct. A multi-dimensional process combines many factors – subjective and objective – to create a true risk profile or rather, an overall assessment of the most appropriate level of risk for a client.

Risk profiling in practise

The risk profile of a clientis built upon three primary considerations – the risk they would be required to take to generate sufficient return, their capacity for risk and their attitudetowards risk.

Most reputable financial planners, locally and abroad, start with an assessment to assess a client’s attitude to risk. The rationale behind this is that although each investor is unique, it is possible to categorise clients’ attitudes to risk using proven psychometric profiling techniques. Such an assessment measures psychological factors including intelligence, aptitude and personality traits. Aspects such as tolerance for ambiguity, desire for profit and investment experience are good indicators of a tolerance for risk and how a client may feel about taking risk with an investment.

The question is whether it is the correct approach to determine the risk profile of a client with analysing subjective factors, before educating that client. Is it possible to test the risk tolerance of an investor, without educating him about the behaviour of investments? By this we mean risk aversion (the risk of losing capital), timing the market, greed, fear, etc. For goals-based financial planning it is important to educate the client – so that he understands the advice – before it is possible to have a meaningful discussion of the lifestyle goals that must be transformed into financial goals and investment strategies.

Step 1 – risk required

The first step should be to determine the financial needs of a client. This requires focused questioning to uncover the financial position and objectives/goals of a client. The aim of this discussion is to understand the objectives of the client – whether it be income, capital growth or a combination thereof.

Determining the term and risk required are objective tests. Only once a client is educated about various inflation-beating investments strategies, can one move onto risk capacity and finally risk tolerance. Thus term and inflation should be approached in an objective manner.

Example: a client reaches retirement age and wishes to invest his capital into a living annuity. We can assume that risk capacity is not a problem and that there is sufficient capital to provide income for the rest of the client’s life in line with the budget that was agreed upon with the client.

It may appear that the scales of the investment composition should be tipped towards growth assets in the investment portfolio. However, as stated earlier, when one deals with the consumption phase in one’s life, and in our current economic environment, the client may be reluctant since he may see the volatility of his investment portfolio each time he meets with his financial planner. It would not be surprising if the client insisted on a more conservative portfolio.

What should the financial planner do? If they have highlighted the inflation risk over the long term, together with the risk of longevity and explained the fundamental investment principles as captured with goals-based financial planning, then the adviser is free to enter into the contractual relationship with the client and proceed on that basis.

It is therefore not the outcome – namely the portfolio that the adviser has selected – that will determine whether they have dispensed the correct or incorrect advice, but the process they followed in order to get there. Risk required is thus the risk associated with the return required to achieve a client’s goals, taking term and inflation into consideration.

Step 2 – risk capacity

The next step is to assess how much risk the client can afford to take financially? The examples below illustrate this concept.

Example A: John is a salaried 40-year old man, married to a spouse with a secure job. He has 25 years before retirement. He has stable employment at Standard Bank, sufficient liquidity, group life, income protector, funeral cover, etc. John doubts it will be necessary to tap into his investments prior to his retirement.

Based on the information gathered, John has a high-risk capacity. Given his overall financial position, he can take on higher risk in his portfolio, meaning more growth assets.

Example B: Peter is also 40 years old, married, has his own business and supports a family of three. He has an unstable career outlook as the business is in its early stages. He currently does not have sufficient liquidity as all his profits are ploughed back into his business. Peter also has 25 years to retirement. The likelihood is that he will have to tap into in his investment portfolio to support his family while he builds his business.

Given his overall financial position, Peter has a low-risk capacity. Peter cannot take on higher risk in his portfolio, meaning fewer growth assets.

It is for this reason that we regard the logical order of any investment to be firstly the risk required. This would be followed by risk capacity and finally adjusted by risk tolerance. The risk tolerance – discussed below – is likely to be the final factor in finalising and cementing the contractual relationship – a very logical order. Such order makes sense since the client and financial planner finalised their discussion with a contractual undertaking that may eventually deviate from the overriding requirement, namely risk required or objectives. This is perfectly in line with Section 8 of the Code of Conduct.

Step 3 – risk tolerance

Risk tolerance is clearly a subjective test and should never form the starting point of any attempt to establish the risk profile of a client. It is a psychological parameter. Risk tolerance could be a balancing factor and the final step to the contractual relationship with a client, as per the Code of Conduct.

Simply put, risk tolerance is how a client feels about taking risk. Where the client strikes the emotional balance between seeking a favourable outcome versus risking an unfavourable outcome.

At this stage there are many options available should a client not accept the investment solution proposed by a financial planner. He may select a higher risk portfolio primarily made up of growth assets – equities and property – and want the highest possible return on his capital, not suffering from regret to any extent, despite not having the risk capacity for this portfolio. This is how we balance risk tolerance with risk capacity.

The above is nothing more than investment and financial planning strategies working hand in hand to ensure value-added financial planning.

Clients need to be empowered to make informed decisions

From a goals-based financial planning point of view, a client should be at the centre of every disclosure. In order to enable a client to make an informed decision, all relevant and material disclosures about investment risk and the risk taken need to be provided. Hence client education on investment planning and risks is crucial.

Section 8(2) of the Code of Conduct states that a provider must take reasonable steps to ensure that the client understands the advice and is in a position to make an informed decision.

Explaining various risks to clients helps them to gain a better understanding of the risks of investing. This includes shortfall risk – failing to meet goals – or, in its simplest form, that the value of his investments may decline over a given period, as well as explaining that the investment is exposed to downside risk. These concepts need to be quantified in simple and understandable terms.

Section 3(1) of the Code of Conduct states that advice must be provided in plain language…

Financial planners also have a duty to provide advice with due skill, care and diligence. Therefore, they need to caution a client if risks taken or agreed on, are not suitable considering all the information collated from the client and the subsequent outcome of the overall assessment.

Section 9(1)C of the Code of Conduct states that the recommendation is likely to satisfy the client’s identified needs and objectives …

Lastly, client information and the risk profiling analysis need to be properly documented in the advice process. The record of advice furnished to the client must reflect the basis on which the advice was given. Ultimately, the final decision rests with the client and it is imperative that any deviations from the recommendations made by the financial planner should be kept on record.

The pitfalls of emotional investing

The pitfalls of emotional investing

Time in the market, rather than timing the market is far more valuable to investors

by Albert Louw

Albert Louw

In The Educator, we address a number of topics with the ultimate goal of providing a better understanding of investing clients’ money.

Emotional potholes

Since investors rarely behave according to financial and economic theory, behavioural finance has grown over the past twenty years. Most investors know that emotion affects the way in which investment decisions are made – and that greed and fear play a large role in driving investment markets. The actions of many investors are based on feelings rather than facts. They may make decisions based on a host of emotional biases that, unfortunately, undermine the chance of meeting the desired investment outcomes. Admittedly, it is difficult to escape the influence of emotions on investment decisionmaking and that influence, is more than likely the main reason many investors do not achieve the results they want.

Our brains regularly set little traps for us – and these ‘emotional potholes’ may have very real costs associated with them. Crucial in overcoming this risk is awareness of how emotions can affect decisions, which may make you a better investor in the process. In order to improve decision-making and investment results, it certainly helps to be aware of:

1. Some of the most common biases;

2.How to avoid/mitigate these costly investment mistakes; and

3. Focusing on your goals.

Some of the most common biases

Herd mentality

Our emotions may be influenced by the prevailing investment climate – such as a fear of standing out from the crowd or missing out on a trend. Herd behavior/mentality can amplify the market upswings and down turns and a prominent example was the dotcom bubble in the late 1990s. Venture capitalists and private investors made frantic moves to invest huge amounts of money into internet companies, despite the fact that many of those dotcoms not having financially sound business models. Many investors more than likely moved their money in this way, on the reassurance they received from seeing so many other investors do the same thing. They did not want to miss out and followed the ‘herd of sheep’ rather than their logic.

Greed and fear

This relates to an old Wall Street saying that financial markets are driven by two powerful emotions – greed and fear. Succumbing to these emotions can have a profound and detrimental effect on investment outcomes, as too often, investors enter (on greed) or exit (on fear) the market at precisely the wrong time.


Overconfidence may cause investors to overestimate the quality of their judgment or information. Some investors believe they can successfully predict market downturns and rallies. Others perceive themselves to have a knowledge advantage when they get a tip from someone in finance or read information from a publication or research report. In reality, several studies have shown that overconfidence bias leads investors to trade more frequently in effort to align their positions with current market conditions. The cost of frequent trading erodes returns and returns earned are rarely sufficient to make up the difference. Investors are very susceptible to forgetting the times they were incorrect or recognizing the role that luck played in positive outcomes.

If you ever find yourself saying things such as ‘nothing could ever go wrong,’ ‘I believe it will go forever,’ or ‘I know the risks,’ it may be time to check yourself. It is important to remember that every investment carries some risk and the potential for loss.

Loss aversion

The basic concept behind loss aversion is that investors feel losses much more than they feel gains. Investors would rather avoid losses than reap rewards. Loss aversion is often seen in financial markets – stock market investors hold their positions with paper losses too long and sell their investment holding paper gains too early.

Consider an investment bought for R1 000 that rises quickly to R1 500. Investors would be tempted to sell it in order to lockin the profit. In contrast, if the investment dropped to R500, investors would tend to hold it, in order to avoid locking in the loss. The idea of a loss is so painful that investors tend to delay recognizing it. More generally, investors with losing positions show a strong desire to get back to the break-even point. This means that investors generally show highly risk-averse behaviour when facing a profit – selling and locking in the sure gain – and more risk tolerant or risk seeking behaviour when facing a loss – continuing to hold the investment in the hope the price rises again.

Mitigating biases

How does one go about avoiding ‘emotional traps?’ Financial markets without volatility would be unnatural, like an ocean without waves. Like the open ocean, the market is constantly churning and the degree of market volatility varies from small ripples, to rolling waves, to a financial crisis sized tsunami. Despite any negative connotations, volatility simply refers to a change in prices. It is normal and happens over time. It is not necessarily a cause for panic and is something that needs to be considered when investing. By understanding that prices of stocks and bonds will go up and down, there are things that can be achieved with that in mind. Many investors are uncomfortable with the large amplitudes swings inherent in a volatile investment and thus shun this risk – and the associated return – for less-swingy, lower returning investments. Avoiding more volatile investments simply leaves a lot of potential return on the table and may shave thousands and possibly hundreds of thousands off one’s wealth at retirement. Paradoxically, avoiding risk in long-term investing typically leads to a smaller pool of wealth, feeling far “less safe” in retirement than if one had assumed more risk along the way.

How to respond to market volatility

It might sound counterintuitive but during periods of market volatility, the correct course of action might be to take no action. This is difficult to do because volatility can leave investors feeling vulnerable and concerned that they have to react. That means that investors who jump ship after a ‘big wave’ may break the cardinal rule of investing by ‘selling low.’ Consider this – if you own a home and its value went down this year, would you panic and sell? Most likely, you would not. You bought your house because you knew you would be there a while and so its day-to-day price movement is not as important. The chances are that your home’s value will rise over time and that is what you are focused on.

Be disiplined and stay invested

There might be many investors who have made money by seemingly timing the market correctly – in other words, predicting market movements and selling or buying shares accordingly – but it is likely that this was due more to luck than skill. For the average investor it is not only difficult to foresee market upswings and downswings, but also challenging to make decisions that are not marked by emotion.

The golden rule that it’s about time in the market and not timing the market is valuable to investors. We know that markets do not move up in a straight line and that volatility is inherent in equities as an asset class. Checking a portfolio too frequently can make investors more susceptible to loss aversion, since the probability of seeing a loss in a short time period is much greater than over longer time periods. As a result, investors that frequently check their portfolios tend to take a less than optimal amount of risk. True long-term investors are more willing to allocate towards risky assets because they do not care about the short-term ups and downs. Holding a portfolio for long enough increases the probability of a positive return. Research from Putnam Investments on investing offshore in the S&P 500, shows that by remaining fully invested over the past 15 years, would have earned investors $20 460 more than those who missed the market’s 10 best days – more than double!

A goal without a plan is just a wish

Acting on emotion may lead to irrational decisions — and difficult lessons. If you develop a sound investment game plan and stick to it, you will more than likely be in a better position to pursue financial goals. A game plan can help remove emotions from the equation, enable investors to make the most of potential market opportunities; and help preserve assets during periods of volatility. Investors who are not saving for a goal and/or do not have the discipline to remain invested during the time saving for a goal, are more likely to realise the waves of volatility that occur over their period of investing. In contrast, investors with clearly defined goals, that are able to shift their focus on the potential of meeting their needs and requirements, have the luxury of realising infrequent negative market returns. There is unfortunately no assurance that an investment strategy will be successful but investing with a clear plan provides a higher probability of meeting your goals/needs.


The industry is learning more and more about emotional biases and the effect on individual investors. But it seems that adhering to a sound investment plan may be one of the best ways to avoid the pitfalls set by our brains.

Tax-Free Savings Accounts (TFSAs): how to select the most appropriate investment portfolio

Tax-Free Savings Accounts (TFSAs): how to select the most appropriate investment portfolio

by Albert Louw

Albert Louw

In The Educator, we address a number of topics with the ultimate goal of providing a better understanding of investing clients’ money.

Executive Summary

  • A TFSA is a flexible and highly tax-efficient solution for discretionary savings • Save for the long term (use your maximum annual contribution) to maximise the tax benefits – the longer the investment is held, the greater the (tax saving) benefit
  • A TFSA is not suitable for money market / income type portfolio. The portfolio would have to deliver a return above the annual interest exemption to deliver a real benefit.
  • Investors would only benefit meaningfully once the value of the investment is sufficient to exceed the annual interest exemption
  • Be disciplined and don’t withdraw from your TFSA if you have other sources of income available


In 2015 National Treasury decided to incentivise South Africans to save more to address the underlying socio-economic problems that arise from our 1 poor savings culture. It introduced tax-free savings and investment vehicles. The TFSA is an ideal discretionary investment option to supplement your existing retirement and /or discretionary savings. A TSFA is completely tax free. It reduces your taxable income while you invest. When you withdraw, you receive the full investment back, without incurring any tax on the growth.

Advantages & limitations Advantages

  • The investor’s growth is tax free: the interest, capital gains and dividends are completely tax free;
  • You can choose from a range of selected underlying funds that can meet your unique investment needs;
  • You can access your investments whenever you need them. There are no penalties for withdrawing from your investment and you can change, stop and restart your debit order whenever you wish, at no extra cost;
  • Flexibility – you can transfer savings from one provider to another, without it being seen as a new contribution. This increases competition among TSFA providers and helps to ensure that products stay competitive;
  • Liquidity – you make a long-term investment into a TSFA, intending to leave it there for the long term, at least you have the comfort of knowing that if the “wheels do fall off” and something unexpected does happen, you can access your money;
  • Saving additional CGT – When you die, the value of the TSFA will be added to your estate. After the exemption of R3.5million, it will be subject to estate duty. However, the estate will not be liable for CGT when the investments in the account are sold (deceased estates are subject to CGT). Neither you nor your estate can transfer investments in a tax-free savings account to someone else. Your heirs can inherit the savings and transfer them to their own tax-free savings accounts, but the amount transferred will be regarded as a contribution by the beneficiary to their accounts and will count towards their annual and lifetime limits;
  • Saving on executor fees – If a life assurance investment policy is an underlying investment in your tax-free savings account and you nominate a beneficiary, the proceeds from the policy can be distributed to him or her before your estate is wound up. This will save executor’s fees.
No real disadvantages – only limitations
  • The maximum amount you can currently invest is R33 000 a year or R2 750 per month with a lifetime maximum of only R500 000;
  • You will incur a penalty of 40% of any amount you invest above the maximum.

BUT what investment portfolio to consider?

When selecting a TFSA, it’s important to ensure it fits within a holistic long-term financial plan.

The (1) first step is to ensure the investor’s discretionary investment goal is mapped against the appropriate portfolio – choose the portfolio that is suited to your investment objective.

(2) Secondly, to maximize your after-tax return, you may want to consider a TFSA or what is sometimes referred to as “tax free wrappers”, to achieve medium to long-term investment goal(s).

TFSAs are NOT intended for short term savings such as money market / call account investments

If you are not already paying tax on your investments, or are not investing for the long term, the TFSA may not provide significant tax benefits. You would only benefit meaningfully from the tax-free treatment of money in the TFSAs once the value of the investment is sufficient to exceed the annual interest exemption. Consider that the current annual interest exemption for people below age 65 is R23 800 per annum and this is not going to be increased in future. If you are younger than 65 and select only interest-bearing investments earning, say, 7% a year, the investment would have to be worth 2 R340 000 before the interest exemption is exceeded.

The real value of your tax savings on a TFSA needs time to compound. So if you contribute to a TFSA and withdraws that money in two years’ time, you will have used up two years of contribution limits, but you’ve actually gained very little in the way of tax savings.

You should have a 10-year or longer investment horizon when choosing a tax-free savings account. Investors sometimes think because it’s an account, it has to be held in the form of bank or fixed deposits. It is important to consider very long-term investments, in other words things like investments in shares or listed property, or balanced unit trusts.

The longer you remain invested, the greater the (tax saving) benefit

As with all worthwhile things in life, patience and discipline are vital. The longer you remain invested, the greater the benefit from tax-free growth – so target a term of at least five to ten years or longer. The extent of the tax saving will vary significantly across the universe of portfolios available. It depends on a combination of factors, the primary two being:

  1. Your marginal tax rate, and
  2. The type and amount of income and capital gains earned from your selected portfolio.

Time horizon growth portfolios typically have most of their assets invested in equities, including listed property. Equity dividends received from shares, both locally and offshore, exempt from paying 20% dividend withholding tax (DWT). On the other hand, taxation of 3 REIT dividends are taxed at your marginal rate but in a TFSA are tax-free. 4Research shows that property as an asset class typically has the greatest tax saving regardless of your marginal tax rate. Property distributions i.e. dividends are paid from pre-tax profits and typically produce higher dividend yields than equities. The saving on DWT, and relatively high property distributions (“dividends”) in growth portfolios make them ideal long-term investments for tax free savings accounts.

The CGT saving is underestimated when the investor decides to sell all or part of a non-tax free investment

Any capital gains must be declared to SARS and if they are above the tax threshold of R40 000 you will be liable for tax on your return calculated according to your marginal income tax rate.

For instance, the current capital gains tax exclusion is R40 000 per year. If you chose investments with strong capital growth it could potentially exceed the capital gains exclusion within five years. That means you would be better off having this money in a TFSA. The tax saving (i.e. capital gains tax) when “cashing- in” your investment at the end of your savings term, should not be underestimated.

Let’s look at the following example:

The investor realizes the full extent of the cost of education once a child starts school. So he decides to invest the full annual tax-free allowance of R33 000 every year for 15 years, which means that he would have contributed a total of R495 000 over the period – this is very near the current maximum R500 000 lifetime limit. If the annual R33 000 was invested in a high growth multi-asset portfolio and achieved a 5 real return of inflation plus 6% over the 15 years it would have grown to R1 373 846 when the investor decided to sell his investment to pay for the children’s education (“he would have doubled his investment”).

The capital gains tax saving of *R150 000 is substantial by comparison with non-tax free investment portfolio. The investor would therefore have notched up an extra R150 000 for school education at the end of the 15-year investment term solely as a result of the tax-free benefits of this vehicle. This would be a substantial bonus for anyone saving for a specific goal such as education.

R1 373 846 – R495 000 = R878 846 Min annual exclusion: R40 000 Capital gains of: R838 846 CGT (6 18% x R838 846) = R150 992 ~ R150 000

A TFSA is a “no brainer” – on condition you put savings into the right vehicle and for the right reasons

TFSAs are a great solution to South African’s poor savings culture. Investors should take advantage of the opportunity to grow their savings without paying any interest, dividends or capital gains. If used wisely, TFSAs can have significant and positive long-term financial consequences. The key is to start contributing as soon as possible. It is also important to contribute the maximum allowed each year. The tax saving will compound returns in the long term. The investor’s marginal tax rate and type of portfolio should be carefully considered, as should their existing retirement and/or discretionary savings.


  1. According to the 2017 Old Mutual Savings and Investment Monitor, only 15% of household income is allocated towards savings
  2. R340 000 = 7%/23 800
  3. A Real Estate Investment Trust (REIT) is a listed property investment vehicle that publicly trades on the JSE board and qualifies for the REIT tax dispensation. REITs must pay at least 75% of their taxable earnings available as a distribution to their investors each year.
  4. (1) MoneyMarketing publication (February 2018) – Tax-free investing Feature (2) Nedgroup Investments (Q1 2015) – The new tax-free savings account: how much will you actually save?
  5. Assume the portfolio achieved an annual return of 12% (with inflation at 6%)
  6. Assume highest tax bracket of 45% x 40% inclusion rate

Part 3: Contributing towards your retirement fund(s) – contributing more than what is allowed for income tax deduction

Part 3: Contributing towards your retirement fund(s) – contributing more than what is allowed for income tax deduction

by Albert Louw

Albert Louw

In The Educator, we address a number of topics with the ultimate goal of providing a better understanding of investing clients’ money.

In the final part of a three-part series we briefly discuss a number of factors to consider when retirement contributions are more than the amount allowed under Section 11F of the Income Tax Act. This series of articles focuses on Section 11F of the Income Tax Act – deduction of contributions to retirement funds.


Carried forward to future years of assessment

In the 2017/2018 tax year Mrs Selinda’s retirement contributions qualified for a deduction of 27.5% of her taxable income. This amounted to R500 000. Since her deduction was capped at R350 0000, she qualified for a deduction of R350 000 in that tax year of assessment, with R150 000 rolled over to the current 2018/2019 tax year.

In the current year of assessment, the 2018/2019 tax year, her preliminary assessment shows that she qualifies for a deduction of R400 000. Since her deduction is once again capped at R350 000, the contributions rolled forward amount to R200 000 (150 000 + 50 000) i.e. R200 000 of previously disallowed contributions.

Contributing more than the amount allowed for under Section 11F allows you to rollover excess amounts

Non-discretionary savings vs discretionary savings

Mrs Selinda is contemplating whether she should continue to contribute more than the capped amount of R350 000 per year or reduce her contributions and instead, use them towards a discretionary savings vehicle such as a unit trust.

The answer will differ for investors, based on their financial needs, the amount they contribute in excess of the R350 000 cap, their term to retirement, tax brackets, appetite for risk, etc. It is therefore vital for Mrs Selinda to speak to her financial adviser and establish the best solution for her specific needs. Below are some of the options/factors that her financial adviser will bring to her attention.

Non-discretionary savings: contributing in excess of R350 000 cap

  • If Mrs Selinda continues to contribute more than the amount allowed for under Section 11F of the Income Tax Act into a retirement annuity (RA), she will not receive immediate tax relief but will get the deduction in following years of assessment
  • She will accumulate tax-free growth while invested in the RA
  • If she is not financially astute and/or has a poor savings track record, it may be worth her while to continue contributing more than the capped R350 000 towards her non-discretionary RA savings vehicle
  • Lastly, she may also decide not to take a lump sum benefit in excess of the R500 000# taxed at a nil rate, at retirement – following her inheritance from her late dad. This means she will not have to pay 36% lump sum tax as per the retirement tables, as she has adequate discretionary savings by way of her inheritance.

(#R500 000 only taxed at nil rate if previous lump sum benefits have not been taken)

Tax fee ‘build up’ allows for disciplined investing

Discretionary savings: contributing non-deductible contributions into another investment vehicle

If Mrs. Selinda decides to invest her non-deductible contributions into an investment vehicle other than an RA, such as a unit trust, all income generated from her unit trust will attract income tax as well as dividends withholding tax. Furthermore, any withdrawal would be taxed as a capital gain (excluding money market funds). While tax is a very important consideration, there are many other factors to take into account.

  • She can optimise her tax benefits by investing into a tax fee savings account. This is unfortunately limited to a maximum of only R33 000 p.a
  • Investing in a unit trust will allow her more flexibility. In contrast, Regulation 28 restricts RA’s. Her needs analysis may show a capital shortfall at retirement and in view of that, will allow her to invest 100% in an equity (growth) fund in order to potentially overcome the shortfall by the time she retires
  • Mrs. Selinda can only access her RA fund value at the age of 55 and even then, she can only access up to one third of her fund value in cash. Her discretionary savings allow her to withdraw at any stage from a unit trust account – her financial planning analysis may show the need for an ‘emergency fund’ to cater for short-term needs.

Tax benefits limited but provide full liquidity

At retirement

If Mrs Selinda elects to commute the lump sum she receives from her retirement benefit, it will be taxed in terms of the retirement tax table. However, in addition to the R500 000 taxed at a nil rate, she is allowed to deduct her previously disallowed contributions from her lump sum. Had she rather chosen to invest her nondeductible contributions into her unit trust account, then any withdrawal would be taxed as a capital gain.

Disallowed contributions can be deducted from lump sum amount taxable at retirement

In retirement

Any income derived from Mrs Selinda’ s compulsory annuity will be taxed as income at her marginal tax rate. Though Section 10C of the Income Tax Act provides that any previously disallowed contributions that have also not been set off against a lump sum taken, may then be applied towards exempting annuity income received from compulsory annuities.


Over the years, Mrs Selinda continued contributing more than the amount allowed for under Section 11F and built up previously disallowed contributions of R1 200 000. On retirement she elected to take only R1 000 000 of her retirement annuity as a lump sum and used the remaining amount to purchase an annuity. She will earn an annuity income of R600 000 in her first year of retirement.

An exemption will be applied under Section 10C for disallowed contributions not set off against lump sums

Upon your death

Non-deductible contributions included in estate

Mrs Selinda’s previously disallowed contributions would be property in her deceased estate and are subject to estate duty tax. This will be for all deaths occurring on or after 1 January 2016 and for all non-deductible contributions to retirement funds made on or after 1 March 2015. However, it is important to note that although her previously disallowed contributions are subject to estate duty, they do not create additional estate duty tax. The money was voluntary money to start off with and regardless of how the money was invested; it would be subject to estate duty in any case.

Disallowed contributions do not create additional estate duty cost

Mrs Selinda’s wishes vs that of the trustees

Mrs Selinda’s non-deductible contributions will be subject to Section 37C of the Pensions Fund Act, which specifies that trustees must apply their discretion as to who the dependants of the deceased member are and to distribute equitably among them.

If, however, she decides to invest her non-deductible contributions into a discretionary savings vehicle, the investment will be dealt with in terms of her will. In her will, Mrs Selinda may instruct how the proceeds of her unit trust account should be dealt with. This is not the case, however, with retirement funds.

In summary

  • The reality is that the question of whether there is still rationale for making excess contributions to a retirement fund, will not impact the average salaried employee since their existing contributions will more than likely fall comfortably within the 27.5% deduction and the R350 000 cap.
  • The question is whether you should contribute in excess of the amount you are entitled to as a tax deduction. If this is the case, deciding how to invest is not a simple decision as there is no right or wrong answer. And if you are in this fortunate predicament, there are many factors to consider. It is therefore important to engage with your financial adviser to help you make the decision.

Part 2: Contributing towards your retirement fund(s) – the impact of CGT on your retirement savings deduction

Part 2: Contributing towards your retirement fund(s) – the impact of CGT on your retirement savings deduction

by Albert Louw

Albert Louw

In The Educator, we address a number of topics with the ultimate goal of providing a better understanding of investing clients’ money.

In part two of a three-part series we discuss the impact of Capital Gains Tax (CGT) when calculating the amount you can deduct for tax purposes. The series of articles focuses on section 11F of the Income Tax Act, which relates to the deduction of contributions to retirement funds.

Review – three limitations to be considered

The amount of the deduction in a particular year of assessment is limited by Section 11F to the lesser (smaller) of A, B and C below:

A: R350 000

B: 27.5% of the greater of:

Remuneration, excluding retirement lump sum benefits and severance benefits; or

Taxable income including a taxable capital gain but before allowing this deduction and the section 18A donations deduction. It also excludes any retirement lump sum benefits and severance benefits

C: Taxable income before the section 11F deduction and before the inclusion of the taxable capital gains

‘Taxable income’ vs. taxable income – be mindful of the context in which the words are used

Taxable income is used to determine the maximum amount you can deduct for tax purposes for retirement contributions. However, you need to be cautious when applying Section 11F as SARS uses the words taxable income in two instances, which can create confusion. (1) For determining the maximum amount you can deduct for tax purposes for retirement contributions, and (2) to determine your final tax liability.

The following examples illustrate the above application

The calculation is a three-step process:

  • Calculate your retirement fund deduction by applying Section 11F
  • Add your taxable capital gain to calculate your taxable income
  • Apply the tax tables to determine your tax liability.

Example 1: R50 000 contribution

  • Mrs Selinda earns an annual salary of R250 000
  • Her employer contributed 20% (i.e. R50 000) to a pension fund on her behalf
  • She also earned rental income of R20 000 (no expenses incurred)
  • She incurred a taxable capital gain of R2 500 000 after selling shares from the portfolio she inherited from her late father.

Step 1:

The maximum deduction that she can make is limited to the lesser of:

A: R350 000

B: The greater of:

27.5% x R300 000 (remuneration ) = R82 500 or

27.5% x R2 820 000 = R775 500 [R2 820 000 = R320 000 + R2 500 000]

C: R2 820 000 (taxable income) – R2 500 000 (taxable capital gain) = R320 000

The deduction will be limited to the lesser of the three amounts in bold, which is R320 000. Mrs Selinda only contributed R50 000 and therefore can deduct the full amount of R50 000 for tax purposes.

To the extent that a taxable capital gain is included in taxable income, it will increase the potential deduction and ‘saving more tax’ for that year of tax assessment.

Step 2:

The following applies under the tax table:

Step 3:

Example 2: Retirement fund contribution of R350 000

Mrs Selinda decided to increase her pension contribution to R350 000 for this year of tax assessment in order to ‘get the full tax benefit’ now that she has incurred a taxable capital gain of R2 500 000. She used R300 000 from the sale of shares from her equity portfolio to make a voluntary contribution towards a retirement annuity (RA). The total contribution is therefore R350 000 (R50 000 contribution from her employer and R300 000 voluntary contribution).

Step 1:

The maximum deduction that she can make is limited to the lesser of:

A: R350 000

B: The greater of:

27.5% x R300 000 (remuneration) = R82 500 or

27.5% x R2 820 000 = R775 500 [R2 820 000 = R320 000 + R2 500 000]

C: R2 820 000 (taxable income) – R2 500 000 (taxable capital gain) = R320 000 The deduction will be limited to the lesser of the three amounts in bold, which is R320 000. Mrs. Selinda contributed R350 000 BUT is now limited to deducting only R320 000 for tax purposes.

Taxable capital gain included BUT your deduction is limited to ‘taxable income’ only

Step 2:

The following applies under the tax table:

Step 3:

The result is almost a 50%* tax saving with the additional R300 000 voluntary contribution

(*R1 666 459 – R 1 517 959)

Dispelling the myth that your retirement contributions can reduce your tax on capital gains

Confusion exists among investors because taxable income, as defined in Section 11F, includes taxable capital gains. However, if you look at the limitations i.e. part C, the retirement savings deduction is reduced to taxable income before the taxable capital gain is added. In other words, your taxable capital gain is therefore still fully taxable – as illustrated per the above examples – and does not reduce the tax on capital gains.

Your taxable capital gain (and the eventual tax arising from it) cannot be eliminated or reduced by the deduction under Section 11F for retirement contributions


  • SARS uses the words ‘taxable income’ in two instances. This can create misunderstanding and ultimately, the miscalculation of deductible contributions – ‘taxable income’ for retirement contribution deductions and taxable income to calculate your final tax payable
  • The inclusion of the taxable capital gain in Section 11F of the Income Tax Act, presents the opportunity to allocate a larger contribution to retirement funds for that year of assessment. The additional tax saving is clearly illustrated in the two examples
  • The taxable capital gain is included in Section 11F, BUT your deduction limited to ‘taxable income’ only. Therefore, if you wish to make a larger retirement contribution in a year where you also have a large taxable capital gain, first apply Section 11F to assess the maximum amount you can deduct, before deciding on what your voluntary contribution should be in order to achieve the maximum tax saving
  • Your taxable capital gain cannot be eliminated or reduced by the deduction under Section 11F for retirement contributions

STANLIB Multi-Manager is not a tax professional. Please seek the appropriate assistance/advice from a qualified financial or tax adviser.

In the next issue: Deductible contributions – Part 3: The advantages and disadvantages of your retirement contributions being more than the amount allowed for under Section 11F of the Income Tax Act, carried forward to future years of assessment.

Part 1: More savings, less tax – take advantage by contributing more to your retirement fund(s)

Part 1: More savings, less tax – take advantage by contributing more to your retirement fund(s)

by Albert Louw

Albert Louw

In The Educator, we address a number of topics with the ultimate goal of providing a better understanding of investing clients’ money.

In the first of a three-part series, we discuss how you can save on tax by starting to contribute or contributing more to your current retirement fund(s). The series focuses on section 11F of the Income Tax Act – the deduction of contributions to retirement funds.

Background – new Section 11F

You may be aware that as from 1 March 2016, total contributions to retirement funds – pension funds, provident funds and retirement annuities – are tax deductible. Thus, as the tax year-end approaches on the 28 February 2019, you can benefit from a tax deduction when filing your tax return for the year of assessment. The amount of the deduction in a particular year of assessment is limited by Section 11F to the lesser (smaller) of A, B and C below:

A: R350 000

B: 27.5% of the greater of: Remuneration, excluding retirement lump sum benefits and severance benefits; or Taxable income including a taxable capital gain but before allowing this deduction and the section 18A donations deduction. It also excludes any retirement lump sum benefits and severance benefits

C: Taxable income before the section 11F deduction and before the inclusion of the taxable capital gains Any contribution over (the smaller of A, B and C above) that does not qualify as a deduction in the year of assessment, will be carried forward to future years of assessment, subject to the annual limit.

The following examples illustrate the application of these limits

Example 1: Tax saving on current contributions

  • Mrs Selinda earns an annual salary of R250 000
  • Her employer contributed 10% (i.e. R25 000) to a pension fund on her behalf
  • She also earned a well-deserved bonus of R50 000
  • She earned rental income of R35 000 (no expenses incurred)

The maximum deduction that Mrs Selinda can make is limited to the lesser of: A: R350 000

B: The greater of:

27.5% x R325 000 (remuneration ) = R89 375 or

27.5% x R360 000 (taxable income ) = R99 000

C: R360 000 (taxable income) – R0 (no taxable capital gain) = R360 000

The deduction will be limited to the lesser of the three amounts in bold, which is R99 000. Mrs Selinda only contributed R25 000 and therefore can deduct the full amount of R25 000 for tax purposes.

The following applies under the tax table:

In the example above, for every R1 invested (retirement fund contributions) by Mrs Selinda, SARS will provide tax relief and ‘refund’ her with not less than 31 cents. Her R25 000 annual contribution effectively resulted in a tax saving of R7 750 p.a.

Save more and SARS will provide you with tax relief

Example 2: Tax saving when increasing contributions

  • Mrs Selinda understood the major tax saving and decided to increase her annual retirement contributions from R25 000 to R50 000. After meeting with her financial adviser, her monthly cash flow analysis indicated that she could afford to save an additional R25 000 per year.
  • She decided to increase her contribution within her employer’s pension fund by R10 000 (i.e. an additional voluntary contribution) and to contribute the balance of R15 000 annually (before the February tax year-end) towards a retirement annuity from a reputable service provider.

The maximum deduction that she can make is limited to the lesser of:

A: R350 000

B: The greater of:

27.5% x R325 000 (remuneration) = R89 375 or

27.5% x R360 000 (taxable income) = R99 000

C: 360 000 (taxable income) – R0 (no taxable capital gain) = R360 000

The deduction will be limited to the lesser of the three amounts in bold, which is R99 000. Mrs Selinda contributed R50 000 and can therefore still deduct the full amount of R50 000 for tax purposes.

The following applies under the tax table:

Although Mrs Selinda’s contribution doubled from R25 000 to R50 000 per annum, her take-home pay only dropped by R34 500 per annum (from R279 360 to R244 860) or R2 875 per month. This resulted in overall tax relief of R15 500 per annum or R1 292 per month.

Dispelling the myth that an additional contribution of say 10% will result in your take-home pay also decreasing 10%

Retirement savings vehicles – pension plans and/or retirement annuities (RAs)

Mrs Selinda had the option to increase her contribution (refer example 2) within her occupational fund (pension fund) and/or via a retirement annuity (RA). She opted to contribute towards both retirement vehicles. The main reasons for this are:

  1. Additional diversification – the pension fund follows a specialist investment approach and invests with a single manager. The RA offers more investment choices, allowing her the opportunity to diversify between
  2. Staggering her retirement needs – when she retires from her pension fund no further contributions can be made. In contrast, you can mature your RA any time after the age of 55. She realises the cost of medical expenses and plans to continue contributing towards her RA once she retires from her occupational fund in order to build up additional savings for post-retirement medical expenses. In this way, making use of an RA to continue saving after retirement for medical expenses.

Retirement annuities: No real disadvantages, only limitation(s)

It is not possible to withdraw from a RA other than on early retirement due to ill health, divorce orders and formal emigration. Whist this may be considered a ‘disadvantage’, it ensures you do not interfere with savings. Only if your fund benefit is below R247 500, can you can withdraw the full amount. In addition, with all investment vehicles there are a variety of RAs, costs and fees to consider when making your final selection.

Major benefits when contributing more towards retirement

  • No tax (income, dividend or capital gains) is paid on the growth of your retirement savings. Tax is only payable when accessing your savings.
  • Retirement contributions are tax deductible, subject to section 11F of the Income Tax Act. Based on the examples provided, SARS will provide tax relief and ‘refund’ you for contributions made towards your retirement fund savings.
  • Flexibility – you can contribute to your existing employer retirement fund and/or via a retirement annuity (RA) or if selfemployed, 100% into an RA.
  • In the unfortunate event of death prior to retirement, RA benefits are not subject to estate duty#, thus saving 20% estate duty tax or 25% if your estate is greater than or equal to R30 million. # Any contribution amount to a retirement fund that was not income tax deductible in the year it was made will be property in the deceased estate. This will be for all deaths occurring on or after 1 January 2016 and for all nondeductible contributions to retirement funds made on or after 1 March 2015
  • Discipline – many may disagree that this is an actual advantage, but the fact remains that South Africans are not doing enough to ensure a comfortable retirement. For those less disciplined who may succumb to the temptation of withdrawing from their investments to fund impulsive purchases, a retirement plan (occupational fund and/or RA) is an ideal investment vehicle.

South Africa has several tax initiatives to encourage a savings culture. You should consider taking full advantage of the current legislation if you wish to save more towards retirement. In addition to the annual tax-free amount of R33 000 in an appropriate taxfree savings account, making additional contributions towards retirement savings is a no-brainer.

In the next issue: Deductible contributions – Part 2: The impact of Capital Gains Tax (CGT) when calculating the amount you can deduct for tax purposes.