When consulting with a client who wishes to invest, it often happens that our mandate is to achieve the maximum return on their funds, but with the minimum risk to their capital.

This may sound like a simple instruction, but first the client has to understand what it is that they are saying.

The field of investment options are vast and how do we narrow these down to recommend a suitable investment option for a client?

Each client comes with a specific set of circumstances relating to age, employment, funds available, time horizon for the investment and many more.

So, for example, a 65-year-old who is retiring from his pension fund will be a very different investor to one of 45 who has some funds available that he wishes to invest in the stock market.

These two examples indicate some of the crucial aspects that have to be considered. The term the investor wishes to invest for, for example, has to be determined and when does he require the capital to be returned, if at all?

The person who is retiring may be more interested in the income generating capability of his capital (which is one of the many functions of investment returns) while he understands that his capital may not necessarily be returned. I know that there are variations on this theme, when one considers living annuities, but that I will discuss in further articles.

An investor investing “extra” funds in shares would also want the best return on his capital, but may understand that there is a greater possibility of fluctuation in the value of his capital. It is however important to mention that not necessarily all investments in share portfolios should be classified as risky.

It is important that the investor has at least a basic understanding of the various investment asset classes, the possible risk attached to each and how they interact with each other.

For instance, cash is seen by many investors as a low risk, stable investment asset class. However, the risk attached to cash, is that inflation will deplete the real buying power of your money.

The other main asset classes, shares or equities, bonds and property each have their inherent risks and benefits. Therefore, many investors are suited to a mixed portfolio containing differing combinations of the various asset types.

As a rule of thumb, investors have to remember that high returns are often accompanied by high levels of risk. This is why determining an investor’s risk profile may be a handy exercise to see whether they do in fact have such a big appetite for risk.

Risk profiling is however not an exact science. It is merely an indication of the investor’s views on the various aspects of investment at that particular time.

One often finds that anyone who has been disappointed by returns quickly becomes a far more conservative investor!

Next time, more about different investment vehicles and the benefits provided by each.

Pieter Willem is the founder of PWM Financial Management in Port Elizabeth in the Eastern Cape. Their mission is to provide financial security and create wealth for their clients. Visit www.pwmfb.co.za.

’n Leser, wat as die enigste eksekuteur van haar man se boedel aangestel is, wil weet of dit normale praktyk is.

Dit is R10 miljoen werd en sy is bekommerd dat sy nie opgewasse sal wees om dit te kan hanteer nie.

Ek het ongelukkig slegte nuus vir haar. Daar wag beslis ’n moeilike tydjie, veral omdat sy nie ondervinding hiervan het nie.

Niemand wil met sulke probleme opgesaal wees terwyl hulle rou nie en, in my ondervinding, word “slegte” besluite dikwels geneem waar daar emosie ter sprake is.

Na aanleiding van die leser se vraag, sal ek ’n bietjie oor testamente en die bereddering van bestorwe boedels uitwei.

Die gemiddelde persoon spandeer hopeloos te min tyd aan hul testament en sinvolle boedelbeplanning. Baie weet nie eens waar hul testament is nie!

Alvorens jy jou testament opstel, maak seker dat ’n volledige boedelbeplanning gedoen word. Dit sal belangrike aspekte soos die volgende na vore bring:

Kan jou wense tot uitvoering gebring word? Is daar voldoende kontant om die beredderingsproses sinvol af te handel? Gaan jou afhanklikes voldoende voorsiening hê? Wat gaan die boedelbelasting wees? Gaan kapitaalwinsbelasting betaalbaar wees?

Sodra die boedelbeplanning afgehandel is, kan ’n eenvoudige en prakties uitvoerbare testament opgestel word.

In die eerste plek moet jy seker maak dat jy die regte eksekuteurs aanstel. My raad is om iemand na aan jou, soos jou vrou, asook ’n kundige, soos jou rekenmeester, te benoem.

Omdat hulle nie noodwendig die kennis het om die boedel te beredder nie, moet die mag van assumpsie ingebou word. Dit beteken dat hulle ’n agent kan aanstel om die boedel namens hulle te beredder.

Die bemaking van jou boedelbates moet in ooreenstemming met jou boedelbeplanning geskied. Maak byvoorbeeld gebruik van Artikel 4A-korting, wat beteken dat sowat R7 miljoen van boedelbelasting gevrywaar is indien jy getroud is en R3,5 miljoen indien jy enkel is.

Doen jou bemakings so prakties en eenvoudig moontlik. Mense wat uit die graf wil regeer, plaas net onnodige druk op erfgename.

Moet sover moontlik nie besluite by erfgename laat nie, want dis ’n resep vir ’n familietwis.

Indien jy getroud is, maak seker dat daar voldoende voorsiening vir jou eggenoot/eggenote is. Erf is nie ’n reg nie en jou wederhelf is dus prioriteit.

Bly weg van vruggebruik indien moontlik en benoem voogde as jy minderjarige kinders het.

Moenie vaste eiendom aan meer as een persoon vererf nie. Bemaak dit eerder na ’n inter vivos-trust met die erfgename as begunstigdes.

Ter afsluiting, maak seker dat jy ’n geldige testament het. Om intestaat (sonder testament) te sterf, is ’n groot gemors.

Daar moet verkieslik twee oorspronklike kopieë wees – een wat jy hou en een vir jou kundige vertroueling.

Onthou, ’n testament is ’n lewende dokument, so pas dit jaarliks aan.

One of our readers is planning to sell his business and wants to know whether this would have any Capital Gains Tax (CGT) implications for him.

CGT was introduced at the turn of the century and forms part of the provisions of the Income Tax Act. Income tax typically focuses on gains of a revenue nature, while CGT provisions target gains of a capital nature.

The first step in calculating a person’s tax liability is to determine whether a capital gain or loss has been made. The event that triggers CGT is the disposal of an asset and, unless such a disposal occurs, no gain or loss arises.

For the purposes of our discussion, the sale of a business crosses this first hurdle.

Where an asset is disposed of, the amount which is received by or which accrues to the seller of the asset, constitutes the proceeds from the disposal.

Another important building block in the calculation of a capital gain or loss is the base cost of an asset.

The base cost essentially consists of three broad components, namely costs incurred in respect of the: acquisition of an asset; improvement of an asset; and direct costs in respect of the acquisition and disposal of an asset.

CGT applies to all assets of a person which are disposed of on or after 1 October 2001 (valuation date), whether or not the asset was acquired before, on or after that date. However, only the gain accruing from the above date will be subject to tax.

Our reader therefore would have had to have had his business valued as at October 2001 to determine what his base cost is. If he acquired the business after this date, the purchase price and/or capital input will constitute the base cost.

The legislation also provides for formulas that can be used if no base cost was determined within the allowed time after October 2001.

Only a portion of the difference between the base cost and the proceeds (the taxable gain) will be included in the CGT calculation. In the case of natural persons, the inclusion rate is 25%.

Once a person’s taxable capital gain has been determined, it is included in his/her taxable income in terms of Section 26A of the Income Tax Act of 1962. Thereafter, the ordinary tax rates are applied to the person’s taxable income (which now includes taxable capital gains) to determine his/her normal income tax liability.

From the above it can also be seen that if our reader sells his business in August of one year, he will only have to account for capital gains, if any, at the end of the tax year in February of the following year.

On the other hand, it is also possible that if an asset is sold and ownership has been transferred in, say, February, but the seller only receives the purchase price some months later, for whatever reason, he will already be potentially liable for CGT after the end of February.

Since CGT could have such far-reaching effects, it is advisable to acquire sufficient information if any uncertainty exists.

Take note that CGT could also be an issue that affects the liquidity in a deceased estate, as there may be CGT payable in various instances as a result of death, which is seen as a disposal for CGT purposes.

Pieter Willem is the founder of PWM Financial Management in Port Elizabeth in the Eastern Cape. Their mission is to provide financial security and create wealth for their clients. Visit www.pwmfb.co.za.

As a financial management group, we are often requested by current and prospective business owners to assist in drafting business plans.

They either need to submit the document to a bank when applying for finance, or they want to realign their business strategy to adapt to a changing marketplace.

In today’s economy, where retrenchments and early retirements are commonplace, the trend is that more and more people become business owners – whether they start their own business or buy one – and they need specialised guidance.

There are two important aspects that one should keep in mind when compiling business plans.

First and foremost, the owner has to be actively involved in the process. It serves no purpose if the owner, our client, invests in a document without buying into the concept first.

The owner has to understand the plan. In fact, our client will give us most of the input – we simply give guidance and facilitate the process.

Secondly, a comprehensive and well drawn up business plan does not guarantee the success of the business. Success depends on how well the plan is being executed.

A business usually starts with an idea – for instance, a novel way of delivering a certain product or service to a market that is prepared to pay for it. The business plan is the proposed process that an owner will follow to achieve this.

Everything starts with a vision. Therefore, incorporate the critical elements that will make the business work in the vision statement – this also forces you to verbalise your dream, or your objectives.

Here is an example: “The Village Deli focuses on organic and creative food to serve to our trendy target market. Most important to us is our financial success, which we believe will be achieved by offering high-quality service and extremely clean, non-greasy food as well as deli products with interesting twists”.

After the vision statement, the other critical elements – such as target market and product – are analysed and broken down. Using the above example, “trendy” may be defined as: “The lonely rich; young healthy hippies; dieting mothers etc”.

Financial success is always the core focus of any business – if not, it would’ve been called a hobby or charity.

Costing of products and services; projections for capital expenditure and other expenses; projections for expected sales; turnover targets in order to reach breakeven point in a certain time and so on are all critical to the financial success of a business and should be included.

Typically, any proper business plan will include a Swot analysis, which is an acronym for the anticipated strengths, weaknesses, opportunities and threats of a business.

Shortlist ideal locations – where do the trendy hang out and how far would they go to find your offerings?

Although I’ve only touched on some points, these should give you an understanding of how a business plan will “force” you to focus on the areas that will dictate eventual success.

Pieter Willem is the founder of PWM Financial Management in Port Elizabeth in the Eastern Cape. Their mission is to provide financial security and create wealth for their clients. Visit www.pwmfb.co.za.

A reader has asked me to comment on his retirement provision.

He is due to retire in about three years’ time and will then have contributed for about 10 years to a provident fund. His accumulated capital will amount to approximately R110 000 and he wants to know what his options are.

The first important aspect to keep in mind is that the growth of your provident fund (or any other investment) is not only related to the time over which you have invested, but also the amount contributed.

The combination of reasonably sized, regular contributions over a number of years is what is going to assist you in achieving your retirement capital goal. Therefore, investing merely R100 per month for 30 years is not going to be as effective as, say, investing R1 000 per month for even just 10 years.

The question is how much is enough? Your goal will be affected by various factors.

The first question to think about is at what age you wish to retire. The earlier you stop working, the more capital you will need to sustain your lifestyle – and don’t forget that life expectancy has increased significantly as our general living conditions have improved.

Next you must consider how much income you will require in retirement. While certain expenses may decrease, more provision may have to be made for, say, entertainment, travelling and medical expenses as you grow older.

Aim to pay off any debt before you retire so that you do not have to use your valuable savings to pay vehicle financing and bonds after retirement.

As a rule of thumb, you will require R1 million’s worth of capital for every R5 000 of income required per month.

This is based on a life expectancy of approximately 20 years and will also mean that you deplete your capital. Should you wish to preserve your capital, the required amount will increase.

Our reader mentions that he has three years until he retires. If he cannot extend this date within his current employment, it may mean that he will have to look for alternative employment to allow him to carry on earning an income with which to supplement his retirement capital.

As we all are aware though, finding employment is not always easy for older people, emphasising the importance of saving while you are still young enough to work gainfully.

It may be unavoidable for our reader to change his lifestyle drastically to boost his retirement savings by as much as he possibly can in the next few years. Even then, it is doubtful that he will ever be able to retire financially independent.

For those readers who are younger and still have more time to provide for their retirement, keep in mind the words of the investment guru, Warren Buffet: “Don’t save what is left after spending. Spend what is left after saving”.

Pieter Willem is the founder of PWM Financial Management in Port Elizabeth in the Eastern Cape. Their mission is to provide financial security and create wealth for their clients. Visit www.pwmfb.co.za.

John, a 37-year-old production manager who is facing the possibility of being retrenched, has recently approached me for options relating to his retirement funds.

He is married with two children and not sure when he will find alternative employment. He is considering using the proceeds of his retirement fund to settle his bond.

If we consider that only seven out of every 100 South Africans are able to retire independently and, further, that one of the main reasons for insufficient capital at retirement is that funds are not preserved in the event of a job change, it is crucial that John pays careful attention to this decision.

While the above option may seem wise as it will reduce his current expenditure during his job search, it may spell disaster in respect of his retirement planning. By taking the cash, he will be taxed on the proceeds.

Only the first R22 500 is tax-free, with the balance being taxed on a sliding scale, which means that a substantial portion of his hard-earned retirement funds will be lost.

If John considers preserving his funds, he could consider transferring the proceeds to a so-called preservation fund, which is geared towards protecting the value and nature of your pension or provident fund.

The main difference between a pension and provident fund is that the former only allows you to take up to one third in cash (subject to tax), while the balance has to fund a lifelong annuity that will provide you with an income.

John will not pay tax upon transferring his retirement fund to a preservation fund and will have a wide investment fund choice available to ensure that his money continues to grow until he retires.

He will not be able to make further contributions to the fund, but can choose to use a new vehicle to channel future contributions.

An important aspect of a preservation fund is that you will have one opportunity to make a full or partial withdrawal before retirement. Such a withdrawal will, of course, also be subject to tax.

Another option John has is to transfer his existing retirement fund tax-free to a retirement annuity (RA), of which only a third is available in cash at retirement.

It is important to remember that neither one of these vehicles will provide better investment growth than the other. They are simply different options with different rules applicable at retirement and relating to withdrawal options.

In the case of an RA, it is important that John realises he will only have access to the funds once he turns 55. For some this protection is important, because it will prohibit them from squandering their retirement money.

Other investors may however feel more comfortable knowing that they have access to their funds in the case of an emergency.

Pieter Willem is the founder of PWM Financial Management in Port Elizabeth in the Eastern Cape. Their mission is to provide financial security and create wealth for their clients. Visit www.pwmfb.co.za.