Plan for the day the world recovers
OFFICIALLY, the effects of the global credit crunch ended when South Africa came out of recession two years ago. But slowly we have learnt that the local economy has recovered. How is this possible?
The popular definition of a recession is two consecutive quarters of year-on-year negative real growth. So, if there is a bumper year one, then the economy has to go a long way to keep it up in year two. And if there is a recession in year one, then, doing just a little better in year two is enough to bring the economy out of recession. So the slightest improvement has politicians shouting, "Recession over, vote for me!" when nothing has really changed.
South Africa's national budget carries an official health warning that its continued resilience assumes that there is an orderly resolution of the European crisis. But we can take it that 2012 is going to be tough for everyone.
The consumer debt level is currently 75% of GDP - and 14% of the national payroll is spent on debt repayment.
We have forgotten how to save. We still live on memories of 20% interest rates from two decades ago, when Chris Stals ran the Reserve Bank. Investment was easy back then. But today's lousy pre-tax 6% won't cover the 5%-plus inflation rate forecast until 2014.
This year we will have to learn how to save without earning fully taxable interest. Only about three million South Africans claim a tax deduction on their retirement savings. Out of 50 million! What will become of the rest?
Simple tax investment strategy starts with recognising the distinction between taxable interest and partially taxable capital gain from equities. But that's not good enough.
If there is to be any prospect of a retirement that goes beyond a staple diet of Epol, then tax-deductible investment must be coupled to tax-free growth.
It is possible through a pension, provident or retirement annuity fund. But not that easily. There are other welcome refinements on the way. The introduction of dividend tax on April 1 2012 means that retirement funds will become tax havens.
This year will also see the welcome limitation of taxation on foreign dividends to 10%. It fits very nicely with the concept of creating a rand-hedge in investment strategy.
In spite of the carnage on world markets, there is still plenty of opportunity to position a retirement plan for the day the world recovers. Some say that is as good a bet as Lotto. Maybe. But if you don't have the ticket, you will never claim the prize.