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Discussion Starter · #1 ·
Right, I'm being press ganged into a company pension fund and I'm not sure I'm happy about it. Not because I'm a hooligan who doesn't want to think about the future but because I'm highly sceptical about the long term strength of the Rand and pension funds are limited to 25% offshore investment. And this story about "inflation + 4%" doesnt hold much water with me because I'm highly sceptical about the official CPI figures.

I'm considering pushing back and taking the money, letting it be taxable and furthering my own choice of investments.

So Perreby/Giorget etc - what are your opinons on the Rand? And I'm asking honestly, not the rose-tinted story that we spin to investors ;). I suppose medium to long term is the relevant period here.
 

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I don't have the time to give a more detailed answer now, but here are some thoughts:

The rand will probably continue to depreciate steadily against major currencies like the dollar and euro in the long term - yes, with some bouts of strength every now and again, but there's no big reason to think that the long-term trend will reverse. It would take a very significant shift in SA's monetary policy to achieve that.

With regard to offshore investment, you do have to keep in mind that a very large proportion of the companies listed on the JSE are actually mostly or even in some cases entirely "foreign" these days. A company like SAB and BAT, Sappi, Mondi and even Sasol, etc. etc. all have the majority or a significant minority of their operations and assets overseas. Therefore, even if a local pension fund is only invested in local equities and bonds, it's actually automatically significantly diversified offshore.

In terms of the tax implications, the best would be to talk to a trustworthy accountant who could advise you and run the numbers in your specific case. Remember, depending on where you plan to invest alternatively, you could stand to create a significant tax liability for yourself, both in future when you want to draw down the investment and continuously as foreign dividends are taxable in your hands while local dividends are not. This risk would need to be outweighed by the superior returns that you expect to receive by not going into the company fund (or an alternative fund).
 

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ArthurB. Remember most of your pension fund holdings will be in the big listed stocks. And as Giorget mentioned most of them have significant operations outside SA. Think SASOL, Richemont, SAB, British American Tobacco, MTN etc..

Now if the rand continues to depreciate (which most economists expect it to do), the listed shares your pension fund is invested in, will report earnings and dividends in Rands.

So currency weakness flatters their results, as reported earnings in Rands will be positively affected by Rand weakness. This is positive for the stock prices and dividend yields

So trust me you will be hedged against Rand weakness.

Besides that you are allowed to take large sums out of SA per year in your personal capacity so if you want you can follow that route too.

Im not as bearish on the Rand as most other economists (but thats just the optimist in me coming out).
 

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don't know how things work in SA, but if your employer is willing to contribute, usually its best to join as you're getting some free money.
 

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don't know how things work in SA, but if your employer is willing to contribute, usually its best to join as you're getting some free money.
All the money always comes from the employer. There's no point in differentiating between "employee contribution" and "employer contribution".
In 2015 in South Africa, that pointless distinction in tax laws is going to be taken away at last as well.
 

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All the money always comes from the employer. .
A nice benefit to have. We used to have member non-contributory schemes in the UK, but the last ones closed over a decade ago, when the everybody realised equities don't always return 14% pa :rolleyes:
 

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don't know how things work in SA, but if your employer is willing to contribute, usually its best to join as you're getting some free money.
Most employer contribute 25% because that is what is needed to cover the costs of a pensionfund. And it is illegal in SA to force an employee into a fund and the use his money to enrich the fund managers. (This is not true in the UK where I had a pension fund. In SA the money deducted must show up in your pension account.) But even then the managers are still the only people who get rich from the investment.
 

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Discussion Starter · #8 ·
don't know how things work in SA, but if your employer is willing to contribute, usually its best to join as you're getting some free money.
well the way I see it, as long as it doesnt affect the total Cost to Company - it doesnt matter if its going to a fund or to my bank account...

im far too hungover to read the rest right now. give me a few hours.
 

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Discussion Starter · #10 ·
no, I think a fair amount of Jameson revenues go offshore. But considering the sin tax, it certainly wasn't a tax efficient investment.
 

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well the way I see it, as long as it doesnt affect the total Cost to Company

That's the point - the cost to company is really the only thing that matters. No company is going to increase your cost to company package because you join a pension fund, or at least it will be very rare for that to happen.
 

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no, I think a fair amount of Jameson revenues go offshore. But considering the sin tax, it certainly wasn't a tax efficient investment.
Jameson is ultimately owned by Pernod Ricard, so you're making some French guys happy by drinking Jameson, via the local distributor, via Bow Street Distillery in Dublin :)
 

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If you are not happy with the company pension, think about setting up a retirement annuity with one of the service providers such as Allan Gray etc. Then you still get the tax break on your contributions.

As pointed out above, many of the JSE top shares have substantial offshore nature to assets and revenue.
 

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Well , I don't live where you guys all do BUT ----- my experience of pension funds minus tax allowance , especially if self employed and about to pay a huge tax bill , YES , very tempting . I did just that for many years but due to world trends etc my pension actually came out at £4500 per annum rather than the ' projected ' £18000 . Frankly , what you saved not paying income tax in the working years ---- YOU PAID FOR LATER - BIG TIME
Unless you have a final salary pension (rare these days in the UK) then don't bother . Pay the tax due at the time and improve your home or buy bigger better over the years ----- this will look after you much better as you can then sell and down grade the house needed . Can't beat bricks and morter , just wish I'd listened to my father , who said all pensions are a rip off (he was a farmer) He was right , sold his farm at 60yrs so there was his pension !!!
 

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Bwah ha ha! Did you invest some cash in SAB short term solutions last night?:)
:cheese: BEST short term solutions, could have some medium term set-back :cheese:

Pay the tax due at the time and improve your home or buy bigger better over the years ----- this will look after you much better as you can then sell and down grade the house needed . Can't beat bricks and morter , just wish I'd listened to my father , who said all pensions are a rip off (he was a farmer) He was right , sold his farm at 60yrs so there was his pension !!!
This is a tricky one...
Let us consider for the argument 33% tax, and paying into a home bond at 9% interest over 20 years - that way you pay 2x times the value of the house. The growth of the house is usually marginally higher than CPI (make it 7% pa) - going by the rule of 72 (the time is takes to double you money) your home value will double twice in 20 years (that is 4x purchase price).

Going back to the 33% tax and paying 2x purchase price - you had to earn 3x your home purchase price to pay it off, So you make 1x the purchase price, and that might be subject to Capital Gains Tax :mad: Then you might walk away with very little over-and-above the money you actually earned to pay toward the house... THEN you still have to buy your smaller house to live in...

Lets consider RA: you pay no tax and service fees are zero (they just make a small % more growth than what they give to you) and let us consider a bad case where your returns are again marginally higher than CPI (7% again) - You walk out after 20 years with a little over 1x over-and-above your input money.

So only if you can escape CGT is it worth investing in the house you live in to supplement your retirement.

If however you live in a modest house that you can easily afford and make DOUBLE payments - you pay off the house in 7 years - If you then buy a new slightly bigger modest house, rent out the 1st one, and plough all same money into the 2nd house, you'll pay it off in the next 7 years, do it a third time, Then you will have a nice semi modest house (paid off) to live in and you'll will have 2 modest houses rental income to live from in 21 years.

EDIT: the argument is still valid with CPI vs CPIX - whether you agree is open to discussion ;)
 

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Discussion Starter · #16 ·
How realistic is CPI? The 'basket' that makes up the index is probably representative for the average south africa consumer.. But by virtue of the fact that you can afford a car you fit into the upper third? of SA residents and a representative basket would be much closer linked to exchange rates with a larger portion of imported goods comprising the basket for LSM groups 6-10. So I have real doubts about the accuracy of CPI for these type of calculations... its probably 2 to 3 percentage points higher in practice...
 

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Just a correction. There is no such thing as CPIX anymore :)

That was stopped February 2009 and was replaced by the mew headline inflation number which is the CPI for all urban areas (basically all the large metros and other cities in each province).

Arthur, the CPI as measure for what it intends to measure (inflation rate of the average South African household) is about as good as it gets. Every person's inflation rate will differ depending on their spending patterns. Stats SA have a personal inflation rate calculator where it derives inflation more suited to your spending patterns..
 

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Discussion Starter · #18 ·
yea I follow. But my gut feel is that if you ran a CPI for all households that at least pay some income tax, you could add 2 to 3 percentage points? So suddenly your pension scheme is delivering maybe 3% after inflation....
 

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Just a correction. There is no such thing as CPIX anymore :)

That was stopped February 2009 and was replaced by the mew headline inflation number which is the CPI for all urban areas (basically all the large metros and other cities in each province).

Arthur, the CPI as measure for what it intends to measure (inflation rate of the average South African household) is about as good as it gets. Every person's inflation rate will differ depending on their spending patterns. Stats SA have a personal inflation rate calculator where it derives inflation more suited to your spending patterns..
We've had a similar discussion before, I seem to remember, but I just want to point out that there's a (in my view significant) difference between "South African households on average" and "the average South African household". The former is actually what the CPI is intended to reflect and does reflect to the extent that it's practical.

Arthur, It's definitely (and obviously) the case that inflation rates won't be the same for everyone. However, for some reason people always tend to assume that the CPI underestimates their own personal rate all of the time. That is very unlikely - sometimes it will rather overestimate your own personal rate. I think it's mostly because people tend to focus on the things that they can see increasing in price, but tend to forget about the things that become cheaper or whose prices stay the same over time.
To give a simplified example, if you spend 40% of your money on one thing and 60% on something else, and the former's price increases by 15%, but the latter's price remains the same, people tend to feel like "Prices have gone up by 15%!". However, in that example, prices have on average only increased by 6%.

One other thing to keep in mind though, is that the consumer prices that are included in the CPI basket are not the only prices that are relevant to people in the economy. Inflation relates to more than just consumer prices. Insofar as it includes asset prices (for which inflation tends to run ahead of CPI), just make sure you are invested in some of those assets and you don't get left behind!
 

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Yes a prime example of items priced in the CPI basket that has decreasing price trends are electronics and say cellphone data bundles.

The cost per megabyte of data compared to 3 years ago or 12months ago are a lot cheaper. So is your average 45" LCD/LED TV, tablet, hi-fi etc.

You will find that for most electronic items the prices of the items will decrease over time as its replaced by a better and newer product.

Yet these decreases are never considered as its not something that someone buys every month. Out of sight out of mind.

Arthur with regards to taking the cash and going your own, just remember it will take you years if not a lifetime to make up the money you paid in taxes. The tax is there to serve as a disincentive to take your money.
 
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