The truth about retail savings bonds

By Staff Writer
Nicolette Dirk, finance writer, Justmoney.co.za
 
In 2004 government announced that they would introduce retail savings bonds. Two bonds were suggested to be put on offer. Treasury introduced the existing fixed interest option and a new inflation linked bond that is protected against inflation.
 
Why were retail savings bonds introduced?
 
Simply put, the government introduced these types of savings vehicles in a bid to get South Africans to save more and to have an alternative form of savings offering to choose from. 
 
The National Treasury estimates about half of South African household savings enter the pension and retirement industry and only 10 percent of people can maintain their pre-retirement lifestyle after they stop working. About six million workers don’t have employer-sponsored retirement benefits.  
 
 “We intend to move progressively towards a mandatory system of retirement for all employed workers. Households must be encouraged to invest in their future,” Gordhan said in his budget speech earlier this year.
 
The National Treasury developed a retail bond which offers guaranteed returns, can be bought for R1 000 and carries no commission, agency or service fees.
 
With the retail bond, investors do not have to invest through a third party and have similar benefits as what government is paying in the capital markets. 
 
Government’s new top-up plan
 
The government’s new top-up retail savings bond will be launched in 2015. This will be aimed at people who want to make regular investments.
 
The new top-up retail savings bond will allow for regular deposits into a government retail bond. This will be accessible to community savings groups such as stokvels. Islamic investors are also set to benefit by the possible introduction of a sukuk retail savings bond.
 
Louise Van der Merwe, financial advisor at Wealthup, says that because of its R500 debit order rates, the top-up bonds can compete with unit trusts.
 
“If you invest in for example, a coronation fund, you will have the flexibility to invest a portion in a government fund. Investing in other companies like Old Mutual or Absa would give you the option of higher returns with more liquidity than if you only invest only in retail bonds,” he says.
 
How practical are retail bonds as a savings vehicle?
 
Van der Merwe says that consumers should keep in mind that with retail saving bonds there is a limit to your access of capital. There are also penalties if you make a withdrawal in the first year of investing.
 
“This is a concern when it comes to retail savings bonds because you would want to give your client a fund that provides flexibility,” says van der Merwe.
 
But if you seek the security of a fixed return, a retail savings bond would be suitable for you.
A 50-year-old looking to invest will be guaranteed their 8, 25% interest rate for the next five years. Van der Merwe says that where it does become risky is when inflation and interest rate surpasses your fixed interest rate.
 
For clients who also have a high tax bill, a savings bond would be impractical because you will be taxed on your return. Because you can only invest up to R5 million it would not be a suitable investment vehicle for bigger investors who also want some liquidity.
 
“Retails savings bonds should not be seen as a default option when it comes to investing. It is a practical option for people who do not have access to a financial advisor. It also offers higher returns than you money market,” says Van Der Merwe.
 
Is it still a safe investment vehicle after credit downgrade?
 
Last Friday ratings agency Standard & Poor’s (S&P) downgraded South Africa’s credit rating from BBB to BBB-. On the same day Fitch lowered its forecast for South Africa’s economic growth. Would it then still be safe to invest in a government-run savings vehicle? According to Van der Merwe South African local investors should not be worrying about last week’s rating.
 
“A government investment is guaranteed because government issues the country’s cash.  They will always have a mechanism to pay local investors. Government has an unlimited capacity to issue money,” says Van Der Merwe.
 
Van der Merwe adds that where there is a concern with the downgrade is the currency risk and what an extra downgrade would mean to the long-term investment horizon. Should we get another downgrade, South Africa will fall out of the range of international investors who buy shares from the JP Morgan Bond Index.
 
Economist Dawie Roodt says that a weakening currency and low growth prospects spells trouble for consumers already battling with the rising cost of living.

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