You get the sense that the increasing number of Ponzi Schemes (especially the latest MMM) mushrooming in South Africa is directly related to the financial pressures that are induced by our ailing economy. When there are large numbers of people struggling to make ends meet they become easy prey for the vultures circling them who take full advantage of the situation by promising outrageous returns which are nothing but lies and deception.
Robbing Peter to pay Paul A Ponzi Scheme pays returns to early investors using capital from investors who join the scheme at a later stage. For example, you are promised a return of 20% per month on your investment of R10 000. At the end of the month your receive R2000 and you are so delighted that you tell family and friends. After all, you made a great investment decision, right? Meanwhile the scheme used your money to fund other investor returns giving you the idea that your R10 000 was invested for the next return. Now as your friends dive into the scheme their funds are used pay the R20% due to the existing investors including you. When you do the permutations, the scheme is destined to implode as the numbers of new investors required to prop up the existing ones simply run out.
Don’t get caught
Don’t get lulled into a ‘get rich quick’ promise. Sure, the higher the return you seek should be relative to higher risk but there are limits. When a guarantee is thrown in become suspicious. Spectacular guaranteed returns are too good to be true.
Check if the organisation is licensed with the Financial Services Board as a Financial Services Provider. If it is then it will have a Licence Number. This is no guarantee, but at least you have some idea that the company has been approved. Ponzi Schemes can bye-pass the regulatory environment, so if no number then there is a reason to be more careful.
Check out the company. Where is it based? How long has it been in business? What assets, products or services are they in the business of?
Get a second opinion. Ask a reputable financial advisor for advice. An experienced advisor will not be enticed by spectacular promises as he will understand that wealth is created over time. If the offer is extraordinary a good advisor will see the pitfalls.
A trust is a useful entity in some circumstances as the assets it owns do not belong to you and are managed for the benefit of its beneficiaries.
Here are 3 reasons why you should have one:
Long term planning for your family If you want your assets to provide for the long term for you, your children and grandchildren then a trust may be an appropriate vehicle. In the event of your death the assets in the trust will not trigger capital gains tax as they will not have to be sold or transferred which is the case in your personal estate. Estate duty is also avoided as the assets are owned by a trust which has perpetuity as it continues after your death. A trust never dies.
If parents die leaving behind minor children this causes huge complications for their financial future. If there is no will the assets will be cashed in and the proceeds invested in the Guardian Fund administered by the Master of the Supreme Court.
A testamentary trust which is set up in terms of your will is ideal in these circumstances as it creates a structured entity which provides for the financial well being of your children up to an age where they can take over control of the assets for themselves.
When you set up an irrevocable trust you relinquish control and ownership of your assets in the trust. If you fall into a legal problem leading to a claimants forcing you to to liquidate, your assets in the trust cannot be included as they are not owned by you. This form of asset protection should be considered carefully with expert advice.
A large estate attracts tax and estate duty. A trust can avoid these costs in a very legitimate way. It boils down to costs verses benefits at the end of the day.
A trust is a legal entity which controls assets on behalf its beneficiaries. It is managed by trustees in terms of a trust deed which details how the assets should be distributed. It helps some but not everyone.
Here are 3 reasons why a trust is not that beneficial for you:
The size of your estate
All taxpayers receive a deduction of R3 500 000 from the value of their assets in their estate before estate duty of 20% is applied. If you leave everything to your spouse there is no estate duty payable on your death. It is paid when the surviving spouse passes on. The R3 500 000 passes onto the surviving spouse leaving up to R7 000 000 as a deduction on the value of assets before estate duty is applied. So if your estate is under R7 000 000 the benefit of a trust is limited.
The running of a trust comes with administrative responsibilities. Trusts have to prepare financials and submit tax returns which incur accounting fees and costs. These costs will need to be weighed up against the benefits that the trust provides in the event of your death.
Trusts are taxed at the highest rate of 41%. If your individual tax rate is lower you should reconsider. A trust does not enjoy any exemptions on interest or capital gains either. For example, if your home is in a trust then you do not enjoy any rebate on the capital gains tax when you sell it. Whereas, if the house was registered in your name you would received a R1 500 000 deduction before capital gains is applied. Similarly, if you have taxable interest you enjoy an exemption on the first R22 800 if the investment was made in your individual capacity. In a trust you will pay 41% on the interest without any exemption.
So a trust does not make any sense if you don’t have a sizeable estate to warrant the costs. The tax concessions are often more effective in your personal capacity compared to a trust. The costs and fees too may not be worth it.
What is inflation? Inflation is the measurement of the average increase in prices of goods and services in an economy. It is a key indicator used by central banks to protect the value of the currency into the future. The current inflation rate in South Africa is 6,2%. This means that your rand is worth 93,8 cents compared to a year ago.
How does inflation affect you?
It stands to reason that inflation needs to be contained. If not, we will simply be poorer in the future. This is the primary function of our Reserve Bank which has an inflation target of 3% to 6%. At the current rate of inflation the rand will take 12 years to halve in value. If inflation moves to, say, 12%, then your rand will halve in value in 6 years.
You have to save.
SA Households are barely making ends meet, so very little is being saved. Saving is the only way towards financial independence. If you are merely existing from month to month the problem will only get worse as the value of your monthly income is eroded by inflation. Saving towards a nest egg will provide a source of funds in the future which you can use to counter inflation and wean yourself off having to generate an income.
Keep it real.
To improve the purchasing power of your savings your returns should be higher than the rate of inflation. If, for example, inflation is 6% you should aim for returns above this. If you achieve, 10% ( the so called nominal rate) then you improve the value of your return by 4%. This is called the real rate of return (Nominal rate – inflation rate = real rate). So when investing into the future you need to keep your returns real. You then are effectively improving the value of your money.
Paying off debt beats inflation
So the way forward is to invest in inflation beating assets. This is going to be difficult in the foreseeable future as the global economy is slowing and returns on investments will probably weaken even further before they improve. Perhaps your savings strategy should focus on reducing debt in the meantime. There is certainly a better return found in knocking off a high interest rate which is way above the current rate of inflation.