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Don’t overlook retail savings bonds as an investment

By Opinion Time of article published Mar 15, 2021

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By Anna Rich

THE option for South Africans to save in government-backed RSA Retail Savings Bonds has been running since 2004.

In exchange for your investment over two, three, five or 10 years, you are paid interest at a rate that is set at the start. As at March 6, the total assets held in these bonds was R8.7 billion.

Over the five years from 2014 to 2019, RSA Retail Savings Bond investors who reinvested their interest saw compound annual growth of up to 10.31 percent, according to the bond fact sheet. And this is not eroded by fees: there are no performance or management fees.

So should they be part of your savings and investment plan? It comes down to your individual circumstances. To structure the best investment strategy for a client, a financial planner creates a well-diversified portfolio that meets their needs, says Siba Njoba, wealth manager at Imvelo Wealth Solutions.

“RSA retail savings bonds can add diversification to a client’s portfolio,” she says. “A financial planner’s approach is holistic. We take a client’s risk tolerance, time horizon for investment and goals into account,” Njoba says.

And there’s more to consider: “Access to the investments, penalties on cancellation, tax implications, age, and other factors are considered when recommending a solution.”

Financial planners can only provide advice on product categories they are registered for, says Njoba. “If a client is keen to add retail savings bonds to their portfolio, advisers can generally help with finding factual information on them, not offering advice.”

If you’re looking for capital preservation with a guaranteed rate of return, or want inflation-linked returns to ensure that your investment keeps its purchasing power, these savings bonds are a match, says Njoba.

Another consideration is the term of the bond.

“This needs to be aligned with your savings goal, whether that’s saving for a car, or for your children’s education.”

THE RISK FACTOR

Every investment – bonds, cash (in the bank), money market, property, equities – carries various types of risk, on a spectrum from low to high.

“RSA Retail Savings bonds are backed by the government and should have a lower level of risk compared to bonds in the market,” says Njoba.

On whether it might fail to honour the repayment on maturity, or interest payments to savers, the National

Treasury says: “It is highly unlikely for the National Treasury to default on its debt, which includes both repayment on maturity and interest payments.”

It adds that “National Treasury is a trusted government institution”, and points to the uptake of government bonds issued on the secondary market by both local and international buyers, including pension funds, hedge funds and multilateral organisations.

This shows the confidence local and foreign institutions have in the ability of National Treasury to honour the payments on government bonds, including RSA Retail Savings Bonds.”

Retail investors are always the first to be paid if problems arise, says the Treasury. “Therefore, if the economy collapses, investors’ money would be most secure in government-issued bonds such as RSA Retail Savings Bonds.”

Are these safer than saving with a bank? “Bank deposits are very safe, but banks can and do fail from time to time,” says the Treasury. “It is also worth noting that money invested by investors in banks or financial institutions is typically invested on the investors’ behalf in wholesale government bonds and other stocks, which means that RSA Retail Savings Bonds are the safest.”

The minimum investment in RSA retail bonds is R1 000, the maximum, R5 million. Only lump-sum investments are available – although you can take out further bonds.

However, says the Treasury, “a top-up product – still in development – will allow investors to make regular deposits into the initial amount invested. Once it is finalised, this will be communicated.”

TYPES OF BONDS

There are two types of bonds:

Fixed-rate retail savings bonds: The Treasury’s aim for these is to provide reliable interest income. Current rates are 6 percent for the two-year fixed rate bond, 6.75 percent for the three-year, and 8 percent for the five-year.

The going rate at the time you invest is the rate for the term of your investment. However, you can reset the interest rate after a year, to benefit if it becomes more favourable (though you then restart the term).

You choose whether to receive the interest on the twice-yearly payment dates, or to reinvest it.

Investors over 60 can reinvest the interest, or receive it monthly. The Treasury sees this “pensioners’ bond” as a supplement to a pensioner’s riskier living annuity.

Inflation-linked retail savings bonds: These provide returns guaranteed to beat inflation annually. The investment is adjusted for inflation twice a year, according to the Consumer Price Index on those dates, so it grows with inflation.

The fixed interest rate (currently 2.5 percent for the three-year, 3.75 percent for the five-year, and 4.75 percent for the 10-year bond) is applied to the inflation adjusted capital amount. On this type, you can’t reinvest the interest.

Setting up a bond can be done through the SA Post Office, telephonically, on the RSA Retail Savings Bond website – or even at the National Treasury.

PERSONAL FINANCE

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