If there’s an expense that you foresee in the future, say in two to five years’ time (school fees, a round-the-world trip, emigrating overseas and so on), you may want to consider investing your money in RSA Retail Savings Bonds, which are offered by National Treasury.
This investment is an attractive option if you are a medium-term saver and offers you the opportunity to lock your money away for a reasonable rate of between 7.75% and 8.25% . Obviously, the longer you are prepared to put your money away, the more interest you will get under this government-approved savings scheme that was launched in 2004.
When it comes to interest, it beats most of the basic savings and money market account rates offered by banks. Nedbank’s JustInvest money market deposit account, for example, offers rates of between 5.50% and 6.75%. However, the 5.50% rate with the JustInvest deposit account only kicks in if you have at least R5 000 in the account.
There are also cash deposit fees that may apply to the JustInvest account, whereas you don’t pay this if you invest in retail bonds.
And while some banks are offering more competitive fixed deposit rates, like Standard Bank, which is currently offering a promotional rate of 10% for its 60-month (five-year) fixed deposit account (offer ends July 31 2017), there are often major minimum investment strings attached. For example, Standard Bank’s offer is only available to investors that can deposit between R50 000 and R5 000 000.
If you invest in retail bonds there are no charges, commissions or other costs that eat into your capital and you only need a minimum of R1 000 to purchase a bond. Your investment portfolio may be increased at any time by buying more retail bonds. Unfortunately, you can’t invest more than R5 000 000 in them.
ACCESSING YOUR MONEY
The downside of retail bonds is that you must lock your money away for some time to benefit from the attractive rate and zero fees. A penalty does apply if you want to draw your money early, which you can after 12 months.
“The penalty will depend on how much you withdraw and will be calculated based on the amount. You can access your money at any time but a penalty does apply,” explains Lindokuhle Matle, director at RSA Retail Savings Bonds.
“With retail bonds, liquidity can be an issue. With unit trusts on the other hand you can cash them in and access the money within a couple of days at the most. If you know you are going to be strapped for cash it could not be ideal,” warns Elize Botha, managing director of Old Mutual Unit Trusts.
PLAGUED BY TECHNICAL DIFFICULTIES
Last month Treasury had to admit that it had been experiencing technical difficulties over a couple of weeks. It outlined that it was having issues with its helpline, queries, emails and website. When City Press called the retail savings bond helpline an automated voice system still referred to the technical difficulties and apologised to investors.
Treasury said the technical difficulties were because of the RSA Retail Savings Bonds directorate migrating to a new back office system, and Matle reiterated this.
She added that the website was functional again, that investors could see their profiles and that they were also getting vital emails with tax certificates attached.
Matle said the automated message on the helpline would remain until they were 100% confident that all technical issues had been ironed out, which she hoped would be in six to 12 months’ time.
Investing in RSA Retail Savings Bonds is fairly easy: you can buy them at any SA Post Office branch, at most Pick n Pay outlets or online.
You can also visit National Treasury offices in Pretoria or call them directly on 012 315 5888.
Terms and Rates:
2-Year Fixed Rate; 7.75%
3-Year Fixed Rate; 8%
5-Year Fixed Rate; 8.25%
At present, it’s not possible for investors to invest in retail savings bonds through a tax-free savings account (TFSA). When asked if Treasury was missing a trick, Matle said: “We definitely want to launch a TFSA and it’s in the pipeline. Part of the reason we migrated onto a new back office system is so we can launch new products.”
Matle says Treasury also wants to launch a top-up bond into which investors can put as little as R500 and top it up in R100 increments: “When you currently invest, each investment is treated differently with a different start and maturity date. With the top-up bond we want to give investors the ability to consolidate all their investments, and there will be other features too.”
Matle hopes that the top-up bond will appeal more to lower-income earners, younger investors and stokvels.
RETAIL BONDS VS STOCKS AND SHARES
The majority of retail bond investors are pensioners – with 80% of investors aged 50 years and over. Pensioners tend to be cautious investors, but this may not always be a good strategy because even in retirement you could still have many years ahead of you.
Savings need to stay ahead of inflation, which is currently at around 5.3%, according to the SA Reserve Bank.
However, for retirees, inflation can be higher as medical costs make up a significant portion of monthly spend and the premiums often increase way above inflation.
Commentators agree that retail bonds are a good investment, but they shouldn’t be solely relied upon.
“If interest rates aren’t going to increase while you are invested in retail bonds then it’s a good investment. However, an equity portfolio will definitely outperform the retail bonds’ performance in the long term but perhaps not over the short to medium term. It all depends on your circumstances,” says Botha.
But RSA Retail Savings Bonds do provide guarantees, whereas equities don’t offer the same in times of trouble. In spite of the “junk” status bestowed on South Africa by two ratings agencies, Matle maintains that these bonds are safe. “If you were to save today we will guarantee that capital and the interest that you’ve been awarded, regardless of the economic environment and any changes that may come,” she says.