Author: CWS Editor

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Reporting from the Helm

I thoroughly enjoyed my recent trip to the US. It was incredible to walk the streets of New York and Chicago, soaking up the energy of these great cities. The purpose of my trip was to attend the Morningstar conference in Chicago. For those who are unaware, a few years ago, we engaged with Morningstar as we felt it was time to look beyond the borders of South Africa for a new investment consulting partner, and potentially remove the home bias in our global investments. This was on the back of a growing number of our clients’ assets being invested outside South Africa. Morningstar has had offices in SA for the better part of the last ten years, and we know their local team well, so it was fantastic meeting the global team in person. It was both enlightening and comforting to experience the scale and magnitude of their global operation. During the three-day conference, we attended fascinating asset manager presentations from many of the largest global asset managers, including Blackrock, Vanguard, Fidelity and UBS. All of them advise on assets well in excess of the entire South African savings industry.

There were a few takeaways from my time in the US. Firstly, I left with great confidence that we have selected a substantial global investment house to partner with us as we launch our new investment offering in October this year. I mentioned on our road shows that WealthStrat has formulated solutions for us whereby we can consolidate our clients’ investments into lower-cost and more tax-efficient investments. This will ensure your investments stay future fit with minimal capital gains tax liabilities while enjoying the benefit of Morningstar managing the asset allocation and fund manager selection.

My other observation is that the world is in a difficult place, particularly in the US, where the younger working generation has never really experienced inflation. There were adverts for jobs in every other shop and restaurant window. Yet, after chatting to the management, I learnt that people weren’t willing to work for the basic wage of $7.25ph, which is R116 an hour. Restaurants have had to increase food prices to attract staff to pay them what they consider fair pay. An average restaurant charges $8 for a beer, excluding 18% gratuity and 10.2% tax, so a beer costs R166. This is a simple example of where increasing inflation comes into play. While the US has always had an element of excess, this no longer seems to be realistic or sustainable. The markets are now factoring in higher inflation and increasing interest rates.

All in all, it was wonderful to travel again, but it’s always great to be home. South Africa has its challenges, but we are not alone, and it’s hard to believe that the US inflation is now higher than SA.

On the home front, I am pleased to report that finally, we are changing our phone system to a new provider, we hope this resolves our phone problems we have all experienced. Thank you for your tolerance and patience.

Warm regards,
John

Practical steps to take for winding up an estate

The winding-up of a loved one’s estate can often be frustrating and time-consuming. Certain things, such as the backlog at the Master’s Office and delays at SARS, are simply out of our control. There are, however, some practical steps that individuals can take to ensure that when the time comes, the winding up of their estate runs as smoothly as possible.

  1. Having your original vehicle registration papers
    If you do not have your original registration papers, your executor needs to apply for the original documents at the licencing department where the papers were originally issued. We were recently winding- up an estate, and the heirs wanted to sell the deceased’s car. The original registration papers could not be found, so the executor had to fly to Durban from Cape Town to go and apply for a copy of the original documents, as only an executor can apply and cannot be done by anyone else.
  2. Make sure SARS has your updated ID number
    Because of some legal changes, some people’s identity numbers were amended during the 1990s. In our experience, we have often found that the deceased had not updated SARS with their new ID number. This, unfortunately, cannot be done online, and a person needs to go to their local SARS branch to do this. However, not updating your ID number with SARS causes endless delays when winding- up estates.
  3. Having your tax affairs up to date
    All taxes need to be up to date for an estate to be finalised. A client at Chartered Tax’s father passed away in 2016. When collecting information required for compiling the Liquidation and Distribution Account, she discovered that her father had not submitted tax returns to SARS since February 2001 and what followed was countless hours spent digging through boxes, standing in queues at banks, and endless administration to try and submit his tax returns up until his date of death.
  4. Having the original title deed of your house should you not have a bond
    Property cannot be sold or transferred without its title deed. If the property is not yet paid off, the bank will be in possession of these papers. You must have the original title deed in your possession if you do not have a bond. If you don’t have the title deed, you can apply to the bank to release the original title deed to you (if you paid up your bond, there is a bond cancellation fee and a process to note this at the Deeds Registry) or to assist you to obtain a duplicate original if you have misplaced it.
  5. If you have a firearm, is your licence up to date?
    We often find that people bequeath firearms, particularly old family rifles or shotguns, passed down for generations. If the deceased does not have a valid firearm licence for each individual firearm, nothing can be done, and the weapon cannot be sold or transferred and must be handed to the police and destroyed. It’s best to discuss your wishes for your firearm with your beneficiaries and your executor and to keep the license up to date so that your beneficiaries can receive it from your estate without stress.
  6. Having your shares materialised for them to be sold or transferred
    Older share certificates were issued in paper before the “digital age.” Dematerialising shares is the process of exchanging the paper-original share certificate for an electronic one. Shares cannot be sold or transferred if they have not yet been dematerialised. Dematerialising shares takes several weeks (and sometimes months) and involves returning the original share certificate to the share provider to enable them to issue the shares digitally. Shares in an estate that need to be dematerialised can cause significant delays as the providers can sometimes be unresponsive or slow to process dematerialisation applications. If you still own an original share certificate for listed shares, it’s best to speak to the JSE Investor Services to hear how you can start the process to dematerialise your shares so that your executor does not have to follow this process.

If you would like to know more about the winding up of estates, or how to prepare your estate to make the winding-up process easier for your family, please reach out to one of the Chartered Legacy & Trust team members.

Click here to watch the Chartered Show Episode

To property or not to property?

Is your property a lifestyle, retirement, or surplus asset? Often, people take a lifestyle asset and think it will be a retirement asset, only to find the opposite to be true. When planning for retirement, many people believe that a property they own, whether a primary or secondary property, is a guaranteed part of their retirement plan which will provide them with an income or be converted to excess cash. However, this is not necessarily the case. There are numerous factors to consider that should be discussed with your planner and regularly reviewed regarding your properties.

Before 2001 there were no significant tax consequences when it came to owning property; now, there is a Capital Gains Tax implication. This is often a substantial outflow out of the retirement pot, even if the property is sold for a profit and some expenses are defrayed against the capital gain.

There is an important emotional aspect to owning property which is often overlooked in the planning process. As people get older, they have less energy, and a resounding challenge that clients express is the time, energy, and responsibility of being a property owner. Chasing rent, fixing property, or even having an empty property can become onerous and requires endless time and energy. For a rental property to be profitable, rent needs to be increased yearly at a rate above inflation; given the current economic state and the high unemployment rate, this is not always the case, and your property could end up costing you money. Sadly, too often, we are hearing stories from clients of rental properties remaining empty or the abysmal state that some tenants leave properties in, costing the owners thousands of rands to repair.

When selling one’s primary property, many factors are overlooked in the planning process, a significant one being the cost of moving. People often believe that downscaling to a smaller property will result in a profit, but after paying the agent’s commission, transfer duty and conveyancing costs, and sometimes having to buy new furniture to fit into a smaller space, there is no profit at all, in fact, people often land up using other investments to fund some of these costs.

We encourage you to continue to have conversations about your properties with your Retiremeant™ Specialist, no matter what stage of life you are in. Discussions around whether your properties are still working for you, and whether they are tax efficient and risk efficient are essential. It is vital to do a What-If analysis and consider the worst-case scenario in your financial plan.

Click here to watch the Chartered Show episode.

The Investment Merits of Bitcoin, Part 2

Click here to read the first part of this article.

In the world , as we know it today, money is no longer backed by anything tangible , such as a commodity. The system of fiat currency relies on the trust that everyone needs from their bank and the financial system overall, to look after their money and make it accessible. However, the Global Financial Crisis (GFC) imparted a shock to the foundations of this 35-year structure, as a lot more attention was paid to “de-risking” cash. Simply translated, this meant not having a current account or assets under custody with a bank that may fail. The focus on return on money for a while changed to the return of money! And it was in this environment that a white paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” was released, authored by “Satoshi Nakamoto” – the name is in inverted commas because no one really knows anything about the person/group!

At this point, trying to explain the technicalities that seem to engulf the whole concept of cryptocurrencies, whilst trying to keep it simple and avoid jargon, has tripped up many an author, both disciples and non-believers. So rather than do that, I will do my best to summarise the salient points. Bitcoin, and cryptocurrency generally, has three pillars or reasons for being.

  • It is peer-to-peer, person-to-person. It bypasses intermediaries and regulators. Therefore, it is “trustless,” an important term in the Bitcoin bibliography and circles back to people’s declining confidence and trust in the financial system, banks, intermediaries etc., after seismic events like the GFC.
  • It is an alternative exchange network that does not exclude anyone based on rules like nationality, financial standing or regulators’ parameters. It is, therefore, decentralised, again a term of regular use and importance, often referred to as DeFi, an abbreviation for Decentralised Finance. “Democratised” is a term that could be used for a similar description.
  • It is secure. How this is done is by cryptography and the proof-of-work concept. Cryptography is essentially the conversion of plain text (ordinary information) into unintelligible form. This is encryption and underlies the process of securing the internet, social media apps, etc. Taking this security one notch up, three cryptographers by the name of Diffie, Hellman and Merkle wanted to solve the problem of sharing secrets in one place (imagine a lockbox) without sharing one public key. This became known as the Diffie Hellman Key Exchange and underpins how each individual user has a unique code for their Bitcoin activities.

There are three ways that an individual can receive Bitcoin:

  1. Buying it – perhaps on an exchange, for example, of which there are now many.
  2. Getting paid for goods or services if the buyer has Bitcoin and is willing to use it in this way.
  3. Mining for new coins.

In the Bitcoin system, the mining process is directly linked to how transactions are executed. To transfer and store bitcoins, the user typically needs to download software that installs a digital wallet. This software generates a “public address” for the wallet, which is disclosed to anyone who wishes to transfer bitcoins into the wallet. This software also generates a password known only to the owner of the wallet, then used to gain access to Bitcoins. In simple terms, anyone can transfer bitcoins into your wallet; only you can take them out and use them.

To transfer Bitcoin from wallet A to wWallet B, a transaction will be generated which includes critical “public” information, such as details of the wallet, date and time, and certain unique identifiers to eliminate the possibility of duplication, and double spending the bitcoin etc. This is then broadcast to the Bitcoin network, to be validated. This authentication is carried out by other bitcoin users and is facilitated on the data structure upon which Bitcoin and other cryptos are built, which is known as Blockchain.

Each pending transaction appears as a set data stored as a block in the Blockchain structure. This must be checked to authenticate each transaction within that block. Once verified, the transactions are executed, the block is sealed off – effectively added to the chain – and the data it contains can never be altered. This distributed ledger is not owned by anyone and is autonomous in nature; there is no authority that can lay legitimate claim to it. Here we can close the loop on DeFi, disintermediation and security.

There are now more than 10 000 different cryptocurrencies in existence, with Bitcoin remaining the “big name”. Many factors and hypotheses can explain the popularity and rise of cryptocurrencies. There is no doubt that “counterculture” is high on the list—the triumph of being able to bypass financial intermediaries and democratise finance.

But how do we stack this up and reach a conclusion if Bitcoin / Cryptocurrencies are a good investment or not?

  • There seems to be no doubt now that cryptocurrency should be recognised as an asset class. It has received an incredible amount of press, hype, and a growing number of investors.
  • It falls into the category, at the moment, of a speculative asset. The volatility in the price of Bitcoin as the “grand-daddy” of the family is proof of that.
  • It is very hard to value. There is no fundamental underpin that I can see. It is willing buyer, willing seller valued.

If its permanent existence is reliant upon the financial system’s failure or the demise of the US$, then I would not be attracted. If the argument were more based on the fact that Decentralised Finance is coming, and the advantages of democratising the system are very apparent and easily reachable to most, then perhaps it does warrant a place in a portfolio …. But not for retirement purposes!

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Managing money in your 40s

As we come to the last part of our series, we find ourselves slightly busier in all aspects of our lives. For many of us, we are living in our family home (with lots of DIY projects on the go), making sure our children are on course with all their academic and sporting schedules, making waves in our careers (hopefully getting some well-deserved bonuses), trying to balance the social aspects and making some time for a relaxing beach holiday (or ski holiday, if you already have a sun-kissed tan).

We have now built the financial foundations and formed our healthy financial habits, which puts us in good stead for our 40s, and then, when the mid-life crisis hits, there won’t be any money problems to worry about.

Here are some tips to assist you in navigating through your 40s, some of which might follow on from my previous articles:

  • Add to your RetiremeantTM savings and make tax work for you. Any contributions added to your retirement funds (pension, provident and/or retirement annuity) may be deducted against your taxable income (up to prescribed limits). You will essentially be getting tax back for being disciplined and committed to your Retiremeant™ plan. On top of this, you will be adding to your retirement pot which will mean more compound interest (interest on interest).
  • Add liquidity to your RetirementTM plan. A common phrase we use in our industry is: “pension rich, cash poor” – this refers to clients not having liquidity to pay for bucket wheel items in their retirement years such as new cars, annual holidays, children’s weddings, give back to charities, sporting events etc. A lack of liquidity planning can lead to cash flow challenges, and we, therefore, suggest chatting to your Retiremeant™ specialist on the best way to structure your plan to cater for this need. Typical investment vehicles for this would include tax-free savings accounts, unit trusts and endowments.
  • Save interest on your bond. By adding an extra R1,000 into your bond every month, you can not only shave off several years, but you can also save a massive amount of bond interest, which will mean the banks won’t be declaring huge dividends cheques to their executives.
  • Speak to your children about finances. Children look to parents for cues on how to behave, and money habits are no exception. A big part of teaching our children healthy financial habits is making sure you’re modelling them yourself. Let your child know the expectations and norms around money in your family by setting easy-to-follow examples.
  • Update and polish your Will, wealth protection and estate plan. In my previous article (Managing money in your 30s), we spoke about getting these structures in place to ensure your wishes are met when the time comes. We now have to update and polish all these components as circumstances change, so make sure that you have the correct beneficiary nominations, your Wills are correctly signed and valid, and your life policies are consistent with your needs.
  • Find some balance. Amid all this financial jargon, discipline, financial habits and responsibilities, it’s essential to find balance amongst all the ‘adulting’ and take time to spoil yourself (and your family) with the money that you’ve worked so hard for. Be it a spa day, playing golf or even a trail run in the Berg, we must not forget that life is short, and balance will keep you sane.

We’ve now done the hard part by being consistent, disciplined and forming healthy financial habits over the last two decades. As we enter the 2nd half of our financial journey, we should carry on building onto our financial plan and take one of Zig Ziglar’s quotes into consideration: “Expect the best. Prepare for the worst. Capitalize on what comes.”

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