What Are RSA Retail Savings Bonds?

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.

What are the RSA Retail Savings Bonds’ risk factors?

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.

When compared to equities, the risk is usually modest because the interest and principal investment will be reimbursed as long as the relevant governments do not default on their bonds.
Bonds can be a great way to diversify your portfolio. They frequently outperform other asset types while others are underperforming.
Because bonds are purchased and traded on the open market every day, they are liquid and easy to redeem early.
If interest rates rise or inflation expectations rise, bonds may lose value on the open market. Because increased interest rates or inflation make the fixed interest offered by bonds less appealing, this is the case.
Long-term returns on riskier assets, such as shares and real estate, are often lower. Bond returns, on the other hand, tend to outperform cash deposits over time.
Bonds may be at risk if the government issuing them experiences a fiscal crisis, raising concerns about whether debt obligations will be met.
There’s a chance the government won’t be able to pay you. They may be forced to default. In 2001, Argentina defaulted on its debt. The South African government’s finances, on the other hand, are in better shape, and the possibilities of this happening are slim. They do, however, exist.

Inflation is currently at 4%, and it is predicted to be low (about 5% each year) over the next year or two. This means that the gross return on a two- or three-year bond should be on line with long-term inflation forecasts of 2% to 3%, but keep in mind that this is before any tax implications.

Inflation is your number one adversary. As an investor, you must ensure that your assets at least maintain pace with price rises. This investment will “lose buying power” if inflation rises above 11.5 percent (it is now under 4 percent). That is, once again, highly implausible.

Is it safe to invest in RSA retail bonds?

There isn’t any danger. Your money is safe since RSA Retail Savings Bonds cannot be used as collateral for any loan. Because RSA Retail Savings Bonds cannot be sold on the open market, you are protected from market risk. There is no reinvestment risk if you want to reinvest your interest.

Is it wise to invest in retail bonds?

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.

What do retail bonds entail?

An RSA Retail Bond is a fixed-interest investment with the South African government that pays a fixed rate of interest for the duration of the bond. It has a guaranteed rate of return, may be purchased for as low as R1 000, and has no commission, agency, or service fees.

1. Retail savings bonds with a fixed rate

You can choose between dividends (rolling maturities) of two, three, or five years.

2. Retail savings bonds with a fixed rate

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.

What is the procedure for paying RSA retail bonds?

There are two types of bonds available: a fixed-interest option and a new inflation-linked bond that is inflation-protected.

The National Treasury created a retail bond to encourage households to start saving alongside businesses and government. It delivers guaranteed returns, may be purchased for as low as R1 000, and has no commission, agency, or service fees.

In addition, rather of investing through a third party, the Retail Bond allows investors to take management of their own savings portfolio. The RSA Retail Bonds offer competitive rates and perks similar to those offered by the government in the capital markets. Individuals, like enterprises and corporations, will now have access to those benefits.

Retail Savings Bonds promote personal economic empowerment by providing a safe and secure alternative investment instrument that provides consistent and reliable returns, as well as fostering healthy competition among investment instruments in the marketplace, all to the benefit of the individual investor.

The RSA Retail Savings Bonds’ simplicity and dependability should contribute to greater financial and economic knowledge in South Africa as a whole over time. As a result, South Africans from all socioeconomic backgrounds would have the opportunity to become financially empowered, a development that should encourage a savings culture and economic maturity.

Process

Directly at the National Treasury, 240 Madiba Street, Pretoria, 0002 (Cnr Thabo Sehume and Madiba Street).
On the interest payment date, both interest and capital are deposited straight into your bank account, ensuring no delays.
Option for interest payments semi-annual or monthly payments (monthly repayments for over-60s only)

Is it true that RSA retail savings bonds are tax-free?

Taxation Interest generated on RSA Retail Bonds will be subject to the normal requirements of the Income Tax Act. A specific amount of interest earned is tax-free under this Act. You should consult your tax expert to see if you qualify for an exemption.

Who is eligible to purchase RSA Retail Savings Bonds?

Fixed Rate RSA Retail Savings Bonds are available to anyone with a valid South African identity number and a bank account with a South African bank. If a minor (a person under the age of eighteen) applies for an investment, a parent or legal guardian must countersign the application form.

Can a business purchase RSA Retail bonds?

Is it possible to utilize a debit order to invest in Retail Savings Bonds on a monthly basis?
In the event of my death, may my beneficiaries continue to invest in Retail Savings Bonds?
Is it possible to use the value of my RSA Retail Savings Bonds or the interest payment as collateral for a loan?
Do my underage children have to pay tax if I buy and register retail savings bonds for them?

Government programs and projects provide information on investing in RSA Retail Savings Bonds.

No, these investments are exclusively available to individuals and cannot be purchased by group schemes, social clubs, corporations, or other legal entities; only natural persons are eligible to purchase them.

No, you can invest once or as often as you want, depending on your financial condition. Please keep in mind that each investment must be a minimum of R1 000.00 when made at various times. The maturity date and/or interest rate for each investment will be different.

No, for reconciliation purposes, you must apply each time you invest in Retail Savings Bonds. We will have money in our account but no application to match it if you do not apply.

No, the investment will be paid out to the Estate or the selected beneficiary in the event of death (s).

The Fixed Rate Retail Savings Bond series includes bonds with periods of two, three, and five years. The Inflation Linked Retail Savings Bond series includes bonds with maturities of three years, five years, and ten years. You may, however, withdraw your money after 12 months of investing, but you will be charged a penalty fee.

You cannot transfer your rights to a third party since RSA Retail Savings Bonds are non-tradable securities.

Because the investments will cover a portion of the budget deficit, the monies will be used for education, security, school construction, and road construction, among other things.

Do my underage children have to pay tax if I buy and register retail savings bonds for them?

As a consumer, you are protected by the Consumer Protection Act, Act 68 of 2008. The Act established the National Consumer Commission (NCC), which has jurisdiction throughout the Republic of South Africa. Provincial Consumer Affairs Offices across the country can provide you with information and protection.

More consumer rights FAQs can be found on the National Consumer Commission’s website.