RSA Retail Bonds are an option for those seeking that little extra interest from their strained savings. Effectively, you are lending the government money on a short term basis of 2, 3 and 5 year options where the interest is fixed and you are guaranteed your money back at the end of the term that you choose.

Interest rates are on money market rates are yielding around 8%.

Money market rates are available to those who have the means to qualify. The bank normally requires a minimum balance or a fixed period to earn the higher interest rates found in the money market.

The changes in interest rates affect future RSA Retails Bond rates. Generally speaking, as interest rates fall, bond rates rise. The converse applies. With the recent pause on interest rates by the Reserve Bank the current rates are unchanged.

RSA Retail Bonds are very competitive 

The rates currently on offer are higher than the rates offered by the money market. There are no fees or costs so the rate is clean. Pensioners over 65 can opt to have the interest paid monthly and if you elect the 5 year option you can opt out after 12 months paying a penalty.

So where can you invest in a RSA Retail Bond

Payments can be  through the following means

Treasury has a draft proposal before parliament which allows you to access your retirement funds for  emergencies and unforeseen expenses. This may seem like good news as many South Africans were financially strapped during the COVID lock down and could have found some relief if they could unlock their pension funds. In desperation many South Africans actually resigned from their employment so that they could access their pension funds. 

A two pot proposal will come into effect in 2023 but there are pros and cons……

The Upside

All contributions to your retirement funds from 2023 will be split in to two pots with one third into the cash pot and two thirds into your retirement fund pot.. You will be able to access the cash pot once a year with a minimum of R2000. The contributions will still be allowed as a deduction against your taxable earnings every year within the current limits of 27,5% with a maximum of R350 000 per annum.  

The returns will be exempt from tax so the performance will be that much better. 

The new cash pot does not have to be taken. It is there for emergencies and should only be used as a last resort. If not used it can be added to the retirement pot when you decide to go on pension. 

The Downside

When you make the withdrawal it will be subject to tax. So the tax deduction you enjoyed previously on your contributions is paid back.

Many members will be enticed into accessing their funds because of the availbllity. This will have a huge effect on the value of your pension in the future. 

Your current retirement funds are not accessible. Only the pots set up from future contributions made in 2023 onwards will available. 

There is still a way to go before the proposal is finalised. We will have to wait and see…..

The Reserve Bank Monetary Policy Committee (MPC) announced on Thursday another interest rate hike of 75 basis points.This extends to the banks prime lending rate to 9%..

Inflation

The Reserve Bank has a mandate to protect the future value of our purchasing power which is measured by what is known as the Consumer Price Index or CPI. Essentially, this is a basket of goods which is monitored by Stats SA. 

Year on year inflation is running away from us at a 13 year high of 7.4% % which is way outside the target range of 3 to 6%. This means one rand is now worth 92,6 cents from 12 months ago. .

So how does that affect you and me?

The main mechanism used by the Reserve Bank is the control of the interest rate on the money it supplies to the banks, known as the repo rate which is now 5,5%. The banks in turn lend money to the public at a rate which is called prime. The intended effect is that consumers will spend less which pulls back demand on goods and services which in turn slows down increases in prices.

Double edge sword for the consumer

On one side if you are in debt (which most households are), the cost of debt is simply that much more expensive. All loans – mortgage, cars, credit cards, overdrafts and personal lending move directly with the new increase. This has a direct impact on expenses driving down any disposable income in the household.

On the other side the cost of living is already expensive with the high rate of inflation. The consumer is left with the problem of getting through the month same income which is technically worth less.

The main culprit is the fuel price which we unfortunately import as we don’t have any oil in South Africa. Since oil is priced in US Dollars we have a double whammy if the high prices are paid by a weak rand. This is the current status and we will have to wait for a drop in oil oil price and the rand to strengthen before we will see the pump price of fuel come down.

It’s a global problem

The problem is world wide. The US has inflation of over 9% which is the highest in 40 years. Europe is in the same boat. The main driver is the price of oil which our world is so dependant upon.

So what can we do?

Wean ourselves off the dependency of debt as a starting point. Those households which are not indebted will not feel the squeeze of the rise in interest rates. In fact they will benefit as their personal savings will increase from the extra interest. They still have to contend with the cost of other goods and services but by having no debt costs they will be so much better off.

You will still be better off targeting your debt in the short term as the interest rate charged is much higher that the savings rate earned. The prime lending rate is 9% and the interest on savings is 5%.

The interest rate cycle is on its way up which means that the future cost of debt will be even more costly. Reducing your debt sooner will save you that much more in the long run.

It will be a tough road ahead as the effect of the interest rate hike will take a while to filter into the economy. Prices will take a while before they stabilise. Financial pressure is with us for a while.

Short term solution in the current environment

Our economy is battling in the face of high inflation and investment options are very challenging. A great place to invest in the short term is the money market which can be accessed at banks and all financial service providers. Interest rates are on the rise with the last hike of 0,5% adding to the previous two of 0,25%.

There aren’t too many investments in the current markets which will fetch a return of around 6% with a low risk of losing your money. I say low risk because there is an extreme possibility though not likely that the bank where your investment is made could run into financial trouble as was the case of Africa Bank a few years ago.

What is it all about?

A money market account trades in bank instruments called “paper”, such as Treasury bills, Banker’s acceptances, certificates of deposit, bills of exchange which all trade in a period of less than a year.
The money market trades at the so called ‘interbank’ level where banks lend to  and borrow from each other. These wholesale rates are higher than the retail rates offered by banks on their savings accounts.

Money markets do better when interest rates rise

The rate that the Reserve Bank lends Money to the banks is called the Repo Rate. This is now 4,75%. Banks make money when they charge above this rate on what is called the prime lending rate which is now 8,25%. Interest rates in the money market vary on the type of instruments and their maturity dates. As interest rates rise so too will money market rates move upward..

Make sure you understand the actual rate offered

The nominal rate is the actual rate of return – normally annual. The effective rate is the rate achieved by reinvesting the interest received and compounding it back into the investment.
Example:
Nominal rate of 7% per annum yields an effective rate of 8.25% over a 5 year period.
If you draw out the interest then you do not get the effective rate as it stays nominal because you are not compounding the interest.
The real rate is the difference between your interest rate and the inflation rate (currently 5,9%).

Saving in the money market is an ideal place for the foreseeable future if you need to keep your investment safe and real.

Your pensions are now taxed inclusively

Up to March this year If you were a retiree and received pensions from more than one provider each of your incomes were taxed separately. 

The provider taxed the pension on its own as if it was the only income you received in the tax year not being aware of the other income sources.

Tax is applied on total income

The problem that arose was a shortfall in tax at the end of the year because when you added all you incomes together to the tax tables for the year you found yourself in a higher tax bracket. Having paid PAYE on the various pensions at a lower rate of tax during the year resulted in a shortfall of tax owed to SARS which was never a pleasant result.

You are not effectively paying more

Based on your previous tax year SARS has now advised all pension providers of the tax rate that should be applied. It may seem that by paying more tax monthly you are paying more – not so.. the effective rate implied should result in a nil amount owing to SARS at the end of the year.

SARS wins

Whilst this new implied tax rate avoids a shortfall for you it also boosts the collection of tax during the year. SARS now is collecting monthly during the year instead of waiting for your tax return at the end of the year when only then you pay the shortfall due.

The most affluent consumers in South Africa have the highest increasing default loan rate. Experian Consumer Default Index (CDI) statistics reveal a rapid increase in the rate of people who defaulted on their loans in the fourth quarter of 2021.

“The most affluent consumer group, the luxury living segment, makes up 2.5% of the South African population, yet accounted for 35% of total credit exposure in 2021 Q4 [quarter 4],” explained Jaco van Jaarsveldt, the chief decision analytics officer at Experian Africa.

The CDI of this group became progressively worse, with the default rate rising from 2.30 in the previous year to 2.47. This resulted in a 7% deterioration in the CDI.

Balance debt and savings

We need some debt to maintain our lifestyles. A bond to buy a house. A loan to buy a car. A credit card for living expenses. If the monthly cost of this debt is more than your savings then your financial freedom will take a lot longer.  Very few of us achieve this in our life times and yet it can be attained if we scale down on our dependency on debt. The affluent consumers highlighted in these stats from Experian clearly are living above their means, essentially buying now and paying later. They cannot maintain their lifestyles within their incomes so they resort to borrowing more. The cost of this debt leaves less to save which pushes the financial independence further away into the future. 

Work on earning interest instead of paying it
If you are borrowing to maintain your lifestyle your standard of living is too high relative to your income. You should be able to service your debt comfortably after having firstly set aside the appropriate amount for savings.The cost of your total debt should not exceed 30% of your monthly income and your savings for retirement, insurances and contingency fund should be 30%. If your debt costs are higher than your savings you should be living in a smaller house or driving a cheaper car.

Take charge
Many of us leave it too late thinking that we have plenty time ahead to build up a nest egg. 
We then don’t see how critical it is to save now. Instead we only wake up much later and then have to play catch up which often ends up being too late.
The only realistic way to building enough capital is compounding over time. The sooner you start saving the less it will cost you as the power of compounding increases exponentially the longer you save. Its the only magical way to reach financial independence, but it does need time to make it happen. Having too much debt to pay off stalls this opportunity.

The higher you climb the more your need 
The higher your lifestyle the more your will need to maintain it. So savings will have to be that much more for someone earning R100 000 per month compared to R10 000. These affluent consumers credit exposure should be much less leaving much more to savings. Especially in the face of rapidly rising inflation and the consequential rise in interest rates. 

Your financial independence relies on your savings compounding at a higher return than the rate of inflation over the longest possible time.

The huge surge in the oil price has sent the price of fuel into the stratosphere with petrol reaching a record high of over R21 per litre. During my last drive to Natal I noticed hundreds of trucks transporting goods up and down from the Highveld. Each one driven on diesel the cost of which is included in the price of the goods being transported.

Add to this the new hike in electricity tariffs and we can only expect inflation to get ugly.

Expect interest rates to rise quickly

The Reserve Bank will struggle to keep inflation under 6%. So expect interest rates to rise sharply in an attempt to curb the rapid price increases.

So what should you do?

Tighten up your budget quickly and drastically. Sift through your bank statements and find ways to cut back on your expenses. Every rand will count…..

Get creative with ways to save more . Perhaps bulk buying essentials with family and friends. Lift clubs to work and school. Shopping on line.

Get creative with a side hustle. Using your spare time on income generating projects will certainly soften the blow. There are many opportunities but you have to search and find them.

What you shouldn’t do

The last thing you should think about is borrowing more to keep up with the rising cost of living. This puts you in a space of living above your means which in turn will dig a deeper hole for you as the cost of interest rises into the future. Your debt needs to decrease if you are to have any hope of getting through.

Don’t bury your head in the sand. The impact of inflation will not go away on its own. It will have a very harsh affect on your cost of living. Taking action now will prepare you for what is to come.

Generally speaking, when you make a financial decision the outcome is only realised some time in the future.
Your advice should not be taken in isolation and as a once off decision. You need to keep in touch with the advice given by reviewing frequently to ensure it is keeping track with your expectations.
At the outset you need a good relationship with your financial advisor. This relationship, like any other, should be based on transparency and trust.
So it stands to reason that you should get to know your financial advisor as much as possible before taking his advice.
Here are some questions you should have answered.

Who do you work for ?
If your advisor is an independent he does not work for anyone but himself. If your advisor is an agent he works for a company.

Independents answer to themselves. They work for their reasons and are not accountable to any company. They have their own business objectives and expenses for that matter which translates into the
fees they charge for the advice provided.

Agents/broker representatives are accountable to the companies they work for. Therefore, they work towards targets and objectives set by these entities.

Independent advisors need a succession plan to assure their clients will be looked after if the advisor moves on. This places the client in a vulnerable position if there advisor is not there to review the performance of the financial plan into the future.

Agents have the backing of the company they work. The entity will be in a position to provide continuity by assigning a new representative to the plan.

When dealing with either an independent or a representative trust and transparency will always be the order of the day. It boils down to liking your advisor in the light of believing that he has your interests at heart.

What license do you have?
Advisors need to be licensed to provide certain levels of advice.
The licenses are controlled by the FSCA and they need to be maintained by the advisor through some stringent compliance which includes continuous development on the part of the advisor to keep up to date with the ever changing industry.
FSCA regulatory exams are compulsory for all advisors and they cannot do business without having completed them.

How do you ensure that the advice you give is appropriate?

The advisor should in every instance provide objective advice which suites your situation and lifestyle needs.
He should conduct a comprehensive financial needs analysis before making any recommendations. A need is the difference between what you have and what you want. So how can anyone know what you need without establishing what you have. A financial needs analysis is a discovery process which comprehensively looks at what you have in relation to what you need. Only then can an appropriate recommendation be given. Sound advice?
How do you get paid?
Commissions and fees. What do you actually pay for? Understand this in rand terms and not only percentages which look very different on paper.
1.5% of a R1 000 000 with an annual fee of 0.5% on the value of the fund means that the advisor gets R15 000 upfront which comes off the initial investment and around R5000 plus, depending on the value of your investment, per annum, which also comes off your investment. A 1% per annum fee translates into R10 000 plus per annum which is a bigger slice out of your investment every year and on e would expect more justification over this charge. So its important to discuss what the advisor does for you to justify his fees.

2021 has been another year dominated by COVID19? It’s left a deep scar in our global history having devastated lives and livelihoods. Yet as life goes on there are some questions which were raised in the year affecting our personal financial planning which need to be addressed.

Should I invest in shares?
In spite of lockdowns and restrictions records have been set in the markets. The S&P 500 which is an index of 500 large companies in the US broke all time record highs 50 times this year. The JSE managed to break through 70 000 points. Shares are risky especially at these levels. The sharp fall experienced in March 2020 which was the sharpest in financial history is a harsh example of what can happen. The current valuation of shares are not a reflection of our economy so be very aware that equities are trading at extremely high levels of risk. Entering into these markets is a very brave move. A cautious approach is to average in over a period of time limiting downside risk on all of your money. Mt personal view is stay away for the short term.

Should I fix the interest rate on my bond? Interest rates were raised this year for the first time off the back of the lowest they have been in 47 years. This marks the beginning of an upward cycle and begs the question of fixing your rate on your bond. The bank sets the rate if you decide to fix it. You will probably be offered at a higher rate than the current one as they anticipate future interest rate movements and cover themselves for probable outcomes. You probably would be better off riding the interest rate cycle and focussing saving a little extra into your access bond as and when you can. The extra in your bond compensates future rate hikes as your balance owing is that much less. You will also reduce the term which will save thousands.

Should I invest offshore?
The rand broke through R16 to the US$ this year raising the question around investing offshore. Our currency has always been volatile and undervalued. Conventional wisdom is to invest abroad in other currencies to protect value. The problem is which currency and what investment? Interest rates offshore are zero. Property and stock markets expensive and risky. The decision is difficult with the uncertainty of the pandemic still playing out through the globe.

Some pundits will argue that offshore is a far better place to be than South Africa. Only hindsight will determine which is better. Most unit trusts have taken up their offshore asset swaps in their portfolios so you probably have exposure which you are not aware of. In times of uncertainty a prudent approach is to invest in certainty. Paying off debt whilst interest rates are low is a certain option which should not be ignored.

These questions do not have quick answers. They should be considered holistically. The COVID19 era is here for the foreseeable future. If in doubt take the cautious root.