An RSA Retail Savings Bond is a government of South Africa investment that pays fixed or inflation-linked interest over a certain period of time. RSA Retail Savings Bonds are offered in the following forms:
- The Fixed Rate Retail Savings Bond series includes bonds with periods of two, three, and five years. Fixed Rate Retail Savings Bonds pay a market-related fixed interest rate on interest payment dates until the bond matures. Each of the maturities in the series has a different interest rate.
- The Inflation Linked Retail Savings Bond series includes bonds with maturities of three years, five years, and ten years. The principal invested in Inflation Linked Retail Savings Bonds is adjusted for inflation over the period, and a floating interest rate is paid every six months on interest payment dates.
The minimum investment amount is R1,000.00, while the maximum investment amount is R5 million.
- Directly at the National Treasury, 240 Madiba Street, Pretoria, on the corner of Thabo Sehume and Madiba Streets.
Is it wise to invest in South African bonds?
South African bonds have the highest real yields in the world right now. Long-term local bond yields are up to 9.0 percent higher than comparable instruments in the United States and 11.0 percent higher than those in Europe.
The market’s assessment of the dangers to South Africa’s fiscal position is reflected in these yields. However, according to Philip Bradford (pictured), PortfolioMetrix’s South African head of investments, they are also providing investors with a major opportunity.
“My British counterparts are envious of our bond yields,” Bradford remarked. “Investing in SA bonds is a no-brainer for foreigners, but it’s a no-brainer for local investors.”
He argues that while considering the country’s risk considerations, South African investors are sometimes too “emotionally involved.” Foreign investors, on the other hand, are seeing through the hype and focusing on the opportunities against the risks.
Bradford, who runs the PortfolioMetrix BCI Dynamic Income fund, stated, “As a fund manager, you often have to swim upstream and go against what the normal investor would want to do.” “That includes buying local bonds when there’s difficulties, which we’ve done in the last several weeks.
“In a week or two, we moved from our lowest bond exposure ever to doubling it since markets had dropped off and we were able to lock in yields of roughly 11.5 percent for our investors.”
The yield on the 10-year government bond in South Africa increased from 8.4 percent in early February to roughly 9.6 percent by the end of March. Short-term gains were harmed when prices declined, and some investors expressed concerns about the asset class.
“Because the value of fixed-rate bonds fluctuates, investors prefer to see them through the same risk lens as equities.” But I have a different perspective on bonds. I’m well aware that a bond is completely mean reverting. If it does sell, I’m confident that the cash flow will continue to flow. It’s still a safe instrument to use. The capital value fluctuates, but I’m confident that it will recover by the time it matures.”
The contribution of capital returns to the overall return on the FTSE/JSE All Bond Index (Albi) over nearly 20 years is actually somewhat negative, as seen in the graph below. The income has provided the complete return.
Bloomberg and PortfolioMetrix are the sources for this information. All data is from December 31, 2002, through March 3, 2021, and returns are annualized. Total return of the FTSE/JSE All Bond Index. (To enlarge, click on the image.)
“You get a guaranteed revenue stream at a fixed rate with bonds,” Bradford explained. “And that’s what you’re going to get over time.”
“Because individuals have an equity perspective, they believe that a 5% drop in bond prices is a tragedy. If you acquire a ten percent yielding South African bond and the value of the bond drops by five percent over the course of a year, you still get a net five percent return. But the crucial thing is that you’ll get that 10% the following year, and then another 10% the following year. That capital will eventually return as well.
“This is one of the reasons why bonds are so misunderstood. “It’s because they’re so dull.”
He went on to say that when it comes to investing in local bonds, country-specific risks may be overstated.
“Obviously, there are fiscal dangers,” Bradford added. ‘However, if the situation in South Africa deteriorates significantly, bonds may not be the worst option. Our cash is the item that will give.”
And, in the past, when the rand has blown out, South African bonds have nonetheless managed to record positive returns.
“I believe we’re a long way from what would be considered a South African local currency debt default,” Bradford added. ‘However, I am certain that bonds would be balanced off against the currency in a diversified portfolio in such case.”
Bloomberg and PortfolioMetrix are the sources for this information. The data ranges from December 31, 2002, through December 31, 2020, and is calculated on a quarterly basis. (To enlarge, click on the image.)
Bradford also feels that, with yields at current levels, investors should concentrate on the longer-term opportunities.
“Your anticipated returns over five years are roughly 8.0 percent per year from present levels,” he stated. “Your best-case scenario yields north of 12.0%.” Even if bonds have a horrible year, you will almost certainly outperform cash over the course of a year and earn a positive real return. You will obtain equity-like returns if they have a strong year.”
Bloomberg and PortfolioMetrix are the sources for this information. The data ranges from December 31, 2002, through March 3, 2021, and is calculated on a daily basis. Total return of the FTSE/JSE All Bond Index. (To enlarge, click on the image.)
These high returns also allow income managers to build strategies that target specific outcomes without taking on too much risk.
“Because longer-dated yields are so high, you only need a small portion of your portfolio in them to generate a solid inflation-plus return,” Bradford explained. “If you give me R100 today and want a 6.0 percent return (inflation plus 3.0 percent), I can take R50 and buy one of the longer-dated bonds at a rate of 12 percent. You’ve already received your 6% bonus.
“That means I could put the rest of my money into bank floating-rate bonds, which would yield 4.0 percent to 6.0 percent, or I could just sit in cash.” The return will be smoother as a result of this. I can currently provide you 7.5 percent if you invest half of your money in fixed rate bonds and the remainder in cash.
“Using a flexible technique like this helps us to maintain a yield comparable to the Albi while keeping a significant amount in cash.” That implies we’ll be able to dodge a sell-off and instead invest to lock in greater rates.”
Patrick Cairns is the South Africa Editor of Citywire, a global source of information and analysis for professional investors.
Are retail bonds in South Africa a good investment?
In the previous post, I mentioned money market accounts, which are either bank money market accounts or unit trust money market funds with current returns of roughly 4.4 percent and no fixed term. These funds or accounts are connected to the repo rate and track the repo rate’s upward and downward swings. Bank money market accounts offer a variable rate of return based on the amount invested, but unit trust-based money market funds offer a fixed unit price regardless of the amount deposited.
Fixed deposits were left out because their yields vary greatly depending on the term and the institution.
Cash, in any form, is not a good long-term investment, especially if you are under 65, because interest generated is taxed.
The only time cash in the form of a money market or fixed deposit account makes sense is if the investor is tax-exempt or if the funds are being saved for a purchase within the next two years.
Interest-bearing investments can be justified when money are invested in a special trust for a minor child, a special needs individual, or an NGO because these structures are tax-free. In the trust deeds of such vehicles, these types of investments are frequently designated as the prescribed investment of choice.
You enter the ‘growth’ space of the financial environment whenever you contemplate investment periods of longer than five years.
A 35-year-old with more than 20 years till retirement should, in my opinion, concentrate on high-growth assets such as shares and commercial real estate, as well as a healthy offshore exposure.
Retail bonds are a wonderful option for retirees who want income and are eligible for additional tax benefits. Retail bonds are taxed in the same way as cash and fixed deposits are taxed. Under the current circumstances, I would be hesitant to invest in a fixed five-year retail bond. The repo rate was recently hiked by 0.25 percent and is expected to continue to rise in the near future, making the 8% retail bond unappealing.
Depending on inflation, interest rates could easily approach and surpass a prime rate of 10% in the following two to three years. The inflation linker puts you ahead of inflation, but depending on your tax rate, the margin shrinks. If your tax rate is 30%, the yield on an inflation plus 4% retail bond drops to 6.3 percent in total if inflation is 5% (5 percent + 4% = 9 percent – 30% tax rate = 6.3 percent).
A 10-year retail bond with an interest rate of 8% is the same. If you are taxed at 30%, your return will be cut to 5.6 percent. The only difference is that you’re now locked in for ten years at a time when interest rates are expected to rise to normal levels. Remember that before Covid, the typical money market rate was around 10% per year.
When you’re retired, retail bonds make sense. Because they are backed by the government, they are a secure investment with a reasonable return (tax depending). However, I would not recommend investing in retail bonds as a means of securing future retirement income.
Given your age and depending on your investment horizon, you should aim for returns above inflation + 6% net (after-tax) as a retirement provisioning investment objective. After taxes, no cash or interest-bearing investment will provide that consistently.
If you’re a growth fund skeptic, consider income funds and low-equity multi-asset funds. Consider why it is so crucial to have a healthy proportion of exposure to growing assets locally and offshore while investing for retirement in the essay ‘Investments: Beware of the Cost of Conservatism’ that you referred to.
The lower your rate of return, the more money you’ll need to save to reach your retirement objective.
For instance, if you require R125 000 a month in 25 years (the equivalent of around R37 000 now with 5% inflation), you will require approximately R37 million. Assuming you have R1.5 million (the aim you should have at age 35 if you earn R37 000 per month and want to retire at age 60) so far and plan to retire at 60, you will need to make the following monthly contribution to attain your goal:
- Future value of current provision at 8% return = R10.2 million (shortfall = R26.8 million)
- Future value of current provision at 12% return = R25.5 million (shortfall = R11.5 million)
The numbers are self-evident. However, don’t be alarmed by the numbers. In actuality, you’ll start little and gradually increase your payments as your income rises. I just used a level contribution calculation to emphasize the need of decent returns and the consequences of being overly conservative.
Do bonds make monthly payments?
Bond funds often own a variety of separate bonds with varying maturities, reducing the impact of a single bond’s performance if the issuer fails to pay interest or principal. Broad market bond funds, for example, are diversified across bond sectors, giving investors exposure to corporate, US government, government agency, and mortgage-backed bonds. Most bond funds have modest investment minimums, so you may receive a lot more diversification for a lot less money than if you bought individual bonds.
Before making investment selections, professional portfolio managers and analysts have the expertise and technology to investigate bond issuers’ creditworthiness and analyze market data. Individual security analysis, sector allocation, and yield curve appraisal are used by fund managers to determine which stocks to buy and sell.
Bond funds allow you to acquire and sell fund shares on a daily basis. Bond funds also allow you to reinvest income dividends automatically and make additional investments at any time.
Most bond funds pay a monthly dividend, though the amount varies depending on market conditions. Bond funds may be a good choice for investors looking for a steady, consistent income stream because of this aspect. If you don’t want the monthly income, you can have your dividends automatically reinvested in one of several dividend choices.
Municipal bond funds are popular among investors who want to lower their tax burden. Although municipal bond yields are normally lower than taxable bond fund yields, some investors in higher tax brackets may find that a tax-free municipal bond fund investment, rather than a taxable bond fund investment, provides a better after-tax yield. In most cases, tax-free investments are not suited for tax-advantaged accounts like IRAs.
Is it possible to lose money in a bond?
- Bonds are generally advertised as being less risky than stocks, which they are for the most part, but that doesn’t mean you can’t lose money if you purchase them.
- When interest rates rise, the issuer experiences a negative credit event, or market liquidity dries up, bond prices fall.
- Bond gains can also be eroded by inflation, taxes, and regulatory changes.
- Bond mutual funds can help diversify a portfolio, but they have their own set of risks, costs, and issues.
In South Africa, how are bonds taxed?
It’s critical to understand how your investments will be taxed if you want to maximize your investment returns and meet your long-term investment goals. Every investment type has its own set of tax rules, and the many sorts of taxes you may owe are determined by your personal circumstances, the nature of your investment vehicle, and the underlying assets. Your marginal tax rate, the rate at which you invest, and the nature of the income you receive are all essential considerations. Because the amount of tax you pay affects your investment returns, it’s critical to know how you’ll be taxed ahead of time.
If you own bonds or have cash in the bank, the interest you receive will be taxed according to your marginal tax rate. Interest on South African Retail Savings Bonds, in your savings account (including your medical savings account), and in a stokvel are all examples of this. The tax band you fall into on the PAYE tax tables determines your marginal tax rate. As a result, the greater your marginal tax rate, the larger the amount of tax you’ll pay.
Taxpayers are entitled to an annual exemption on all interest income received, which is presently fixed at R23 800 for those under 65 and R34 500 for those over 65. Remember that any interest, even if it is below the threshold, must be disclosed for tax purposes. Keep in mind that the annual exemption does not apply to overseas interest profits, however you may be allowed to deduct any withheld foreign tax. Foreign interest profits must be declared in the Investment Income section of your tax returns when filing your returns.
After-tax money is used to invest in collective investment plans, or unit trusts. Any local or international dividends received on your investment which is the portion of profits that a company delivers to its investors are taxed at a flat rate of 20%, with the corporation automatically withholding and paying the Dividends Withholding Tax (DWT) to Sars. The corporation that pays the dividend withholds DWT automatically, thus the taxpayer does not need to file any additional tax information.
Remember that selling any investment results in a capital gains event, so make sure you understand the CGT implications before selling any unit trusts. The first R40 000 of a capital gain on a collective investment earned in a tax year is tax-free, after which earnings are taxed at a 40% inclusion rate, indicating that only 40% of the profit you generate over R40 000 is taxed. Capital gains are taxed at your marginal tax rate, which means that the highest CGT rate is 18%. Remember that a capital gains event occurs when you sell your unit trusts, not when you sell the underlying assets in your portfolio. Any capital gains from international investments will be converted to rands at the average exchange rate when you sell them.
A Real Estate Investment Trust (REIT) is a publicly traded real estate investment trust. South African Reits allow investors to participate in property assets around the country by purchasing shares in a JSE-listed property business, which includes retail, commercial, industrial, and residential properties. Reits are taxed differently than other publicly traded firms in that they do not pay corporation income tax and do not pay dividends tax. Keep in mind that if you invest in Reits as part of your unit trust portfolio, all Reit payouts must be reported on your tax returns and will be taxed at your marginal rate.
You will not be taxed on distributions if you hold Reits in a retirement fund, and the option to reinvest and compound these before-tax dividends within your retirement fund over time is a big benefit. Aside from that, any rental income from an investment property is taxed at your marginal rate.
Investors profit the most from pension, provident, and retirement annuity funds because all contributions are tax-deductible up to 27.5 percent of taxable income, up to a maximum of R350 000 per tax year. Furthermore, any growth gained in a retirement fund is not subject to CGT, dividend withholding tax, or income tax. As a result, investors might reap significant long-term tax savings via compounded tax benefits. When you withdraw money from your retirement account, you must purchase an annuity with at least two-thirds of your capital, and the income from this annuity will be taxed at your marginal rate.
A tax-efficient investment, a TFSA allows taxpayers to invest up to R36 000 per year, with a lifetime limit of R500 000. Even while a TFSA isn’t as tax-efficient as a retirement account, there are still tax advantages to saving in one. Because all investment premiums are paid with after-tax funds, no tax is due on interest or dividends, and no capital gains tax is due on disinvestment, your potential return is larger than with a typical unit trust. Because of the nature of a TFSA, frequent contributions will reduce compounding effects and your capacity to save tax-free in the future, therefore it’s best to invest in a TFSA for the long term. It’s also worth remembering that if you exceed your yearly contribution maximum of R36 000, you’ll be subject to a 40% tax penalty, so keep track of your annual donations.
An endowment is a policy offered by a life insurance firm that allows high-income people to receive tax benefits. Endowments are taxed at a rate of 30% in the hands of the insurance company, which means that if your marginal income tax rate is greater than 30%, you may be eligible for tax benefits since the favorable tax rate will reduce the amount of tax you pay on your investment increase. Endowments, on the other hand, can be fairly limited, as you must put your money away for a minimum of five years. If you possess an endowment, you are subject to a 30 percent tax on interest income, a 20% tax on dividends, and a 12 percent CGT rate.
In South Africa, how long does it take for a bond to be approved?
- Registering a bond, along with signing the Offer to Purchase and paying the deposit, is one of the most important steps in the home-buying process.
- A variety of attorneys may be engaged in the bond registration process, in addition to the buyer, seller, and estate agent.
- Depending on the type of sale, the transfer time can last anywhere from 6 to 12 weeks or longer.
Video summary
The registration and transfer of a bond takes at least three months. However, knowing what to do and where to seek assistance will make the process go much more quickly and smoothly.
Our simple guide will walk you through the entire process of registering your bond and purchasing a home.