Provident funds

[Bells]

Hi guys

My hubby has 26 years of pension that is in a provident fund. We are being bombarded by all sorts of advice, not to sure who has our best interest at heart and who is trying to line their own pockets !

He wants to cash in and pay 27% tax (not too sure if that is right), rather than put it in a preservation fund for three years where we would only pay between 12-18% ........ by then who knows what the law will be with regards to tax and how much one can take out.

Would putting your savings into a superannuation fund be wise?

Anyone been there done that....? One needs to make sensible decisions with one's life savings!

Would really appreciate some advice please.

[Springbok]

My hubby has 26 years of pension that is in a provident fund. We are being bombarded by all sorts of advice, not to sure who has our best interest at heart and who is trying to line their own pockets !

yeah those greedy sharks all have their OWN interests at heart! Rather get someone independent, ask Andro on this forum by sending him a PM. He works with this stuff and should be able to point you in the right direction. You'll find his details in this thread: http://www.saaustralia.org/index.php?showtopic=797&hl=

He wants to cash in and pay 27% tax (not too sure if that is right), rather than put it in a preservation fund for three years where we would only pay between 12-18% ........ by then who knows what the law will be with regards to tax and how much one can take out.

I'm not 100% sure, but I think you will be taxed at your average tax rate of the last 2 years. So once you have been in Australia for 2 years (i.e. earning nothing in S.A.), your tax rate in S.A. will be at the lowest level. My personal opinion - take as much money as possible to Australia.

Would putting your savings into a superannuation fund be wise?

I think Bob can give more details on this...?

[Pixi]

Hi - the big question - youre going to save 9% on tax if you leave it for the timespan - but what are you going to gain or loose on the exchange rate? The other question - if you do decide to take the money out, what is the money going to do in Oz? Just my very subjective , unfounded opinion: I think our currency will last till 2010- , but what is going to make us on the long run so much more special than the Zim dollar? . Also contanct your husbands current fund and ask them if they got call it ''connection funds; meaning funds where the money can be transferred to but because its maybe the group of people managing different funds, you might get better rates. But shop carefully ! 'If you want to buy a house in OZ , I would take my money and rather sit with a lower mortgage. You can take half the money to OZ and leave half the money for the new fund.....just some ideas to confuse you even more. Wish I could say with certainty what to do ...

[ottg]

Hi

Just to add to the confusion!!

In order to make a decision you need to make certain assumptions. There is not a right or wrong decision.

Many factors will influence such a decision. So lets us attempt to name it.

a. It depends on how many years left before retirement i.e how many years to continue grow your pension fund. Assume 10 years.

b. It depends on what is the value of your current RSA pension fund? Assume R1.5m

c. The tax payable on the sum is more likely closer to 35%

d. Exchange rate of 5.5:1 ZAR:AUD

e. It depends on what income and lifestyle you require when you retire. Lets assume you have no dependants, keep the status quo and your current monthly income now is R20,000 (RSA Inflation adjusted 5% for 10 years = R32,577. Expendable income is 30%

To retire in 10 years with an income R32.5k pm requires an income investment like E170 (13%) long bond with all-in-price of 150 will cost R4.5m. This does not make provision for any further income growth. To ensure future growth you need to add an extra 20% i.e R5.4m

It also depends on what investment vehicle you intent to use to achieve future growth.

a. Annuity managed funds

b. Property

c. Self managed superannuation funds

d. others

How to achieve those figures is another discussion. So let us focus on the question to move funds now or later to Aus!

To bring the pension to Aus after paying tax of $95k4 will leave $177k2 for investments. Aus Superannuation managed fund’s growth varies between 8%-12%, while self managed superannuation’s will perform better. Let us assume 10%

To make up for the taxed loss will take 4.5 years. But you also need to add an additional loss called opportunity cost of $145k9. Your total loss for 4.5 yrs is actually $95k4 + $145k9. If you didn’t have had to pay the tax, your investment of $177.2+$95.4 would have been $418k5 after 4.5 years.

NOTE: The biggest assumption is that you have done your Aus homework wrt to where to invest. This will better/worsen the figures and shorten/extend the time duration. With property the time period can be less than one year. On the other hand you don’t need your own money for investment property.

What you may need is more time to do your investment homework while you settle in Aus. Assume you need 2 years. If you keep you funds in RSA and do self management you can achieve ALSI + 4% (avg 22%). Your capital will grow to R2.2m. This is enough to cover the tax payable should you want to move it. Note there would be a reduced tax rates (assume 30%) because you did not earn a RSA income while you resident in Aus. This will then give you $280k to move across and after 2.5 yrs be worth $346k1, which is $74k better after 4.5 yrs should you decide NOT to move it now AND be doing self management for 2 years.

Obviously if you know the Aus stock market and know where to invest, the above outcome will be different!

For self managed RSA pension funds see link: http://www.saaustralia.org/index.php?showtopic=797&hl=

Good luck and hope it helps!!

[Bells]

Showweee Ottq....what a comeback!!! Going to print info and decipher into "laymans terms" over the weekend!

Thanks Pixie and Springbok for your input..........if only life were simple?!

Will give a report back once we have finalised our money matters....!

Cheers

B

[Pixi]

I'm back - for me the most important phrase was what Otto said: time to do investment homework in OZ - I've seen a couple of friends overreacting and wanted things to happen fast and may be not chosing the smartest options. Enjoy the weekend!

[Bob]

Not being wise to South African tax law or the export of capital requirements there, I wouldn't advise anyone on what to do with their money.

however, I think you have to take into account a few variables and ask around to get the best informed mindset on what applies to your individual circumstances, as everyone is a bit different.

How much extra tax would you pay by withdrawing and taking money to Australia?

If you kept the money in South Africa for a couple of years, say, and paid less tax on withdrawing, would you still lose out by getting fewer Aussie $$$ for every Rand? (would the Rand stay strong against the Aussie $ or go down?)

If you put your money into an Australian Superannuation scheme, and the money grew by 10%, say, each year for next couple of years, would that offset any loss you incur by withdrawing your money now from South Africa and paying more tax?

Don't expect to be able to invest with confidence in the Australian stock exchange for the first couple of years. You're on a learning curve when you first arrive.

However, if you manage your own superannuation by investing in shares and/or property yourself, you can achieve good growth if you are knowledgeable enough to invest smartly.

Personally, I have only retired about nine months ago, still "on a holiday" and love it . . . . . best thing since sliced bread!

I have an indexed pension, which goes up with the cost of living increases, for the rest of my life (and my wife's life if she outlives me . . . a "revertible" pension)

I also have quite a few thousand $$ tied up in a Superannuation scheme which seems to be making good growth of about 12 to 14% so far this year. I intend to buy my wife a "life pension" when she quits at the end of the year with this sum. That way, we get to split our income and both of us get the advantage of lower income tax on our separate incomes.

My investments on the ASX (Australian Stock Exchange) are giving good growth, particularly in the past month or two. This will give me some quick cash if I need to buy a new car or daughter gets married, etc.

I have tried to "spread" my money around to achieve growth and have some ready cash if I need it in the future.

Good luck with your choices.

[Mara]

With regard to the exchange rate. We cashed in and took everything we could at the time of emigrating 13 years ago. The exchange rate at the time was around R2.40 per $. Now it is around R5.50 per $. Thought that may help you.

[Springbok]

With regard to the exchange rate. We cashed in and took everything we could at the time of emigrating 13 years ago. The exchange rate at the time was around R2.40 per $. Now it is around R5.50 per $. Thought that may help you.

Here's another thought:

The change in the Rand vs. the A$ from 2.40 (1994) to 5.65 (end-2006) = 135%. So R1,000 in 1994 bought A$417, while that same R1,000 bought only A$177 in 2006, not taking inflation into account, just the pure exchange rate change.

Now consider the growth delivered by Allan Gray over the same period. Allan Gray's track record states the following growth figures:

1994: 40.8%

1995: 16.2%

1996: 18.1%

1997: -17.4%

1998: 1.5%

1999: 122.4%

2000: 13.2%

2001: 38.1%

2002: 25.6%

2003: 29.4%

2004: 31.8%

2005: 56.5%

2006: 49.7%

So let's start with R1,000 in 1994, which turned into R1,408 by the end of 1994 (40.8% growth). Applying the above growth figures right through, we end up with R28,265.40 at the end of 2006. That is 2727% growth (in Rand terms) over the 13-year period. So the R1,000 = A$417 in 1994 turned into R28,265.40 = A$5,002.70 at the end of 2006. Put another way, in Australian dollar terms, your original investment (A$417) with Allan Gray grew by 1101% to A$5,002.70. Therefore the question is, Mara - did everything you cashed in 13 years ago, grow by 1101% in A$ terms? i.e. is every A$100 invested in 1994, worth A$1,200 today?

My point is - do not look at the exchange rate in isolation. As you can see from the above performance figures, I am happy to leave my current funds with Allan Gray in South Africa over the longer term until I retire. While past performance should never be an indicator of future performance, Allan Gray does have a 30-year track record of consistent outperformance over its benchmarks. Of course I'll also put funds to work in an Australian superannuation scheme.

[woodag]

With regard to the exchange rate. We cashed in and took everything we could at the time of emigrating 13 years ago. The exchange rate at the time was around R2.40 per $. Now it is around R5.50 per $. Thought that may help you.

And, if you need further help like that, let me tell you that at the time we left SA the exchange rate was around R0.95 per $. I will leave it as an exercise for you to work out when that was (hint, invert the figures at http://www.resbank.co.za/economics/histdow...load/AUSTRA.csv ).

[Springbok]

And, if you need further help like that, let me tell you that at the time we left SA the exchange rate was around R0.95 per $. I will leave it as an exercise for you to work out when that was (hint, invert the figures at http://www.resbank.co.za/economics/histdow...load/AUSTRA.csv ).

Allan Gray did even better since 1975 when we could exchange 92c for an Aussie dollar. Had you given R1,000 to Allan Gray starting 1975, you would've had R5,594,394 at the end of 2006 - that's 559,339% growth over 32 years! In Aussie dollar terms, your R1,000 = A$1,093 in 1975 would've grown to R5,594,394 = A$1,013,704 at the end of 2006 - still an amazing growth of 92,662%!

Don't believe me? Check out the performance figures on page 2 in the downloadable PDF file below the graph...

Edited February 6, 2007 by Springbok

[ottg]

Hi All

When looking at the time value of money you have to look at all factors that will influence the rate and period. Obviously we do not have a crystal ball and therefore you have to make certain assumption keeping all other things equal. Further, money growth is directly correlated to the interest rate which is influenced by exchange rates...and the variation of many other factors which influence the risk.

While equity funds like Allan Gray and Coronation are performing well in a bulls market, once a bear market arises you need to switch out. South AFrica and Australia had a fantastic bull run over the last 3 years. The JSE All Share Index grew with 39% per annum, over the last 3 years. See graph! Currently it looks if the RSA will have a another year of good growth, however there are some uncertainty in the air. (Some of my stock grew with 40% over the last 5 months)

Remember also that every market will still show winners, even in a bear run. The old saying holds; "that people drink more when things go tough!!"

Know your risk profile and do your homework first before investing in any market i.e fundamental analysis and technical analysis. For property investments run your simulations and know what to expect if things do go wrong!! Have a contingency plan!!

My 2c worth. Hope it helps!!!

[Springbok]

When looking at the time value of money you have to look at all factors that will influence the rate and period. Obviously we do not have a crystal ball and therefore you have to make certain assumption keeping all other things equal. Further, money growth is directly correlated to the interest rate which is influenced by exchange rates...and the variation of many other factors which influence the risk.

I agree 100%.

While equity funds like Allan Gray and Coronation are performing well in a bull market, once a bear market arises you need to switch out.

Not necessarily - saving for retirement is a longterm plan, usually 20-30 years. And it has been proven that returns from equities outperform all other asset classes (bonds, property) over the long term. You just have to identify who are the superior asset managers over the long term. In Allan Gray's case, consider the following statistics (compared to its benchmark, the JSE Allshare index, in brackets):

Number of years: 32 (32)

Positive years: 30 (23)

Negative years: 2 (8)

Years Allan Gray outperformed JSE Allshare: 26 out of 32 (81%)

Average outperformance: 11.6%

Worst annual performance: -17% (-19%)

Best annual performance: 122% (94%)

Annual average: 31% (19.5%)

a breakdown of shorter term performance:

1975-1980: Allan Gray = 590%; JSE Allshare = 227%

1980-1990: Allan Gray = 1509%; JSE Allshare = 527%

1990-2000: Allan Gray = 726%; JSE Allshare = 403%

2000-2006: Allan Gray = 693%; JSE Allshare = 360%

R1,000 invested with Allan Gray at the start of 1975 was worth R5.6 million at the end of 2006.

R1,000 invested in the JSE Allshare index at the start of 1975 was worth R297,000 at the end of 2006.

This illustrates that it's a waste of time to invest in index-tracking funds like Satrix40. Rather identify those asset managers with a long term track record and producing consistent outperformance.

Let's focus on the short term as well, e.g. a 3-year period. There are thirty (30) 3-year periods since Allan Gray began in 1975, i.e. 1975-1977, 1976-1978, etc. until 2004-2006. Once again, Allan Gray's stats (with the JSE Allshare's in brackets) are:

Number of 3-year periods: 30 (30)

Positive years: 29 (28)

Negative years: 1 (2)

Number of 3-year periods that Allan Gray outperformed JSE Allshare: 27 out of 30 (90%)

Average outperformance: 47%

Worst 3-year performance: -1% (-13%)

Best 3-year performance: 293% (276%)

Average 3-year performance: 124% (74%)

BUT (yes there's always a "but"):

Know your risk profile and do your homework first before investing in any market...

Absolutely!

Edited February 6, 2007 by Springbok

[Mara]

All the above is pretty good advice - money will grow - you will do well!

HOWEVER, who knows what the government will do? At the time we left all I had in mind was what the government in Zimbabwe did, I was not going to end up with nothing, so we took the plunge and took what we could at the time! We did well with it, we cannot complain!

I am no financial analyst! Just an ordinary person, doing an ordinary job and working hard for that which I earn. I also like to keep it close to me, with my eye on it. I may do better if I followed other people's advice, but then it is my money that they are playing with and that to me is not such a great idea.

In Australia the company you work for has to place 9% of your gross wages into a superannuation fund for you, you do not have to contribute anything. If you do, you can usually arrange with your company to deduct it before your tax is calculated, so you save both ways, less tax and more super which is taxed at a lower rate!

In Australia we have no exchange control regulations, I can invest how much I want to, where ever I want to, anywhere in the world! Now that is what I call freedom of choice!

Springbok and Ottq..wish I had your knowledge!

[Bob]

For an old Rhodesian, living in Zimbabwe (Rhodesia) years ago would have meant it would have been better to transfer the funds out of Zimbabwe and to Australia. With the benefit of hindsight, we are all winners.

Nowadays, I can't imagine Bob Mugabe letting a white fellah send his life savings out of the country to a place like Australia, despite investment companies possibly doing well over the years.

The investment performance of companies such as Allan Gray are outstanding. . . . . Geez, I'd even want to stick my dollars in with that investment company. . . . . but in 20 or 30 years time is the government of the day in Pretoria going to let you repatriate your winnings to Australia, or insist you spend your cash in South Africa?

Looking at investment performance figures might seem a great idea and has influence on the final decision, but the political uncertainty of Africa in the next twenty years would worry me.

If it doesn't worry you, then fine, keep the money in South Africa and get high performance from it.

You're the one who has to sleep at nights worrying about your life savings, not me.

At the end of the day, is it better to know that you are getting $1.5 million in Australia in 20 years time, or achieve the equivalent of $2.5 million in investments with the possibility of not getting your hands on it in Australia to live off?

There's an old saying in investing . . . . . the higher the return, the greater the risk.

Your call.

[Springbok]

The investment performance of companies such as Allan Gray are outstanding. . . . . Geez, I'd even want to stick my dollars in with that investment company. . . . .

Allan Gray has a sister company, ORBIS, also founded by dr. Allan Gray. In 1974, he formed what is now the top performing and largest privately owned manager of pension fund assets in South Africa, Allan Gray Limited, now managing over $13 billion. In 1988, Allan Gray and his son William, now President of the Orbis Group, opened a global investment advisory firm in London. Bermuda-based Orbis Investment Management Limited was formed in 1989 and the first three Orbis mutual funds were launched on 1 January 1990. Both Allan and William Gray are resident in Bermuda.

Orbis has grown from $67 million under management at the beginning of 1990 to approximately $12 billion. Orbis now offers a broad range of equity-based products including a family of equity funds, as well as four related absolute return funds for non-U.S. investors.

Lastly, Allan Gray's non-executive chairman, dr. Simon Marais, is a Director of the Orbis Funds Research arm. He relocated to Sydney at the end of 2004.

[Pippa]

Hi Everyone,

Springbok and Ottq..wish I had your knowledge!

Me too! Springbok and Ottq, many thanks for sharing your knowledge with us ! You are my financial heroes on the forum!

Bye, Pippa! X

[woodag]

. . .

This illustrates that it's a waste of time to invest in index-tracking funds like Satrix40. Rather identify those asset managers with a long term track record and producing consistent outperformance.

. . .

That is one opinion.

Here is another:

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."

(Warren Buffett)

Now clearly Allan Gray has done better than the great majority of investment professionals, but you need to remember the standard disclaimer that past performance is not necessarily an indication of future performance. Or to put it another way: "Prediction is very difficult, especially if it's about the future.” (Niels Bohr)

[Bob]

Don't you just love that, Belinda?

Ask any seven different economists (or financial planners, for that matter!) and you will get eight different replies!

Theodore Roosevelt, when asking his economist on the state of the American economy was told that if he "did this, then this would happen . . . . on the other hand, if he did that, then that would happen".

In frustration, he appealed to a "one handed" economist.

Edited February 8, 2007 by Bob

[starfish]

Lastly, Allan Gray's non-executive chairman, dr. Simon Marais, is a Director of the Orbis Funds Research arm. He relocated to Sydney at the end of 2004.

Hmmm. Is that a sign in itself, he wonders....

[Springbok]

Hmmm. Is that a sign in itself, he wonders....

Probably want to start something similar in Australia, as their market is quite similar to ours (commodities). Australia can only benefit from having an Allan Gray-type asset manager.

[starfish]

Probably want to start something similar in Australia, as their market is quite similar to ours (commodities). Australia can only benefit from having an Allan Gray-type asset manager.

Or maybe he's not confident in the future value of the ZAR.

Edited February 8, 2007 by starfish

[Hugo2]

yeah those greedy sharks all have their OWN interests at heart! Rather get someone independent, ask Andro on this forum by sending him a PM. He works with this stuff and should be able to point you in the right direction. You'll find his details in this thread: http://www.saaustralia.org/index.php?showtopic=797&hl=

I'm not 100% sure, but I think you will be taxed at your average tax rate of the last 2 years. So once you have been in Australia for 2 years (i.e. earning nothing in S.A.), your tax rate in S.A. will be at the lowest level. My personal opinion - take as much money as possible to Australia.

I think Bob can give more details on this...?

The correct answer: first R22500 tax free. this amount increased by contributions made whilst in Oz, IE you were not able to benefit from same against SA tax in the case of a A (not for Prov Funds as they are often after tax, but then they pay out tax free, so I assume it is a pre-tax contribution). The excess over the tax exempt amount is taxed at several bands - see www.sars.gov.za for the current official rate.

resignation tax rates on page 2 of 4

R0 - R22 500 0%

R22 501 - R600 000 18% of amount exceeding R22 500

R600 001- R900 000 R103 950 + 27% of amount exceeding R600 000

R900 001 + R184 950 + 36% of the amount exceeding R900 000

Annual check with broker for new / ruling rates as this is the rate emigrants will be taxed on as well and there is no treaty benefits IE SA has full taxing rights and ATO none as it is a lump sum and not an annuity. Annuity or monthly payments taxed in tax home country

[Hugo2]

.... but I think you will be taxed at your average tax rate of the last 2 years. So once you have been in Australia for 2 years (i.e. earning nothing in S.A.), your tax rate in S.A. will be at the lowest level. My personal opinion - take as much money as possible to Australia.

Hugo replies

The correct answer: first R22500 tax free. this amount increased by contributions made whilst in Oz, IE you were not able to benefit from same against SA tax in the case of a A (not for Prov Funds as they are often after tax, but then they pay out tax free, so I assume it is a pre-tax contribution). The excess over the tax exempt amount is taxed at several bands - see www.sars.gov.za for the current official rate.

resignation tax rates on page 2 of 4

R0 - R22 500 0%

R22 501 - R600 000 18% of amount exceeding R22 500

R600 001- R900 000 R103 950 + 27% of amount exceeding R600 000

R900 001 + R184 950 + 36% of the amount exceeding R900 000

Annual check with broker for new / ruling rates as this is the rate emigrants will be taxed on as well and there is no treaty benefits IE SA has full taxing rights and ATO none as it is a lump sum and not an annuity. Annuity or monthly payments taxed in tax home country

[Jordy]

Hugo,

Nearly 3 years between yours and the post before yours. Must be a well considered reply.

//joking