National Treasury’s Asset and Liability Management Division officially launched its Top Up Retail Bond on 1 April, offering investors a return of 8.75%, with interest compounded quarterly, over a minimum investment term of three years.
Treasury said the Top Up Bond was developed in response to public demand to be able to invest smaller amounts, and more frequently, and to enable informal groups, such as stokvels, to invest in retail bonds.
It said it will launch other “innovative”, low-cost products to encourage South Africans to save.
Whereas the minimum investment for the fixed-rate or inflation-linked retail bonds is R1 000, the minimum opening investment for a top-up bond is R500. Investors can top up their existing investment with a minimum of R100 at any time.
Treasury hopes the lower initial investment amount, and the ability to top up the investment, will make its retail bonds more attractive to younger investors. Currently, about 73% of the 53 000 active RSA Retail Bond investors are 50 years or older.
As with the fixed-rate and inflation-linked retail bonds, there are no fees or commissions on top-up bonds.
The interest rate is derived from the three-year rate interpolated from the fixed-rate nominal bond curve and will be reset quarterly.
Interest will be added to the capital amount at the end of March, June, September and December each year. Investors do not have the option to receive the interest.
One of the features of the top-up bond is that individual investors can switch a portion of their investment into an RSA fixed-rate or inflation-linked bond during the investment term, provided their capital balance is at least R1 000. However, they must leave a minimum of R250 in their top-up account.
Switching allows investors to move some of their capital into a 10-year fixed-rate bond to take advantage of the higher interest rate (currently 10%).
However, switches are subject to the minimum investment amount (R1 000) for fixed-rate and inflation-linked bonds, as well as the R250 minimum balance in the top-up account, so investors need at least R1 250 in their top-up account before considering a switch.
The option to switch is not available to informal groups, because only individuals can invest in fixed-rate and inflation-linked RSA Retail Bonds.
Another feature is that investors who, at maturity, choose to roll over their investment for another three years will have once-off “bonus” interest of 0.2% (20 basis points) added to the reinvested capital.
Early withdrawal penalties
Investors should be aware that penalties will be imposed if they make withdrawals before maturity. A withdrawal within the first 12 months will be permitted only on the grounds of “extraordinary changes” in personal circumstances and are subject to National Treasury approval. If the application is granted, the investor will forfeit all the interest earned.
If an early withdrawal is made after the first 12 months, Treasury said the penalty will be about the average interest the investor has earned on the amount withdrawn. The minimum withdrawal amount is R250.
Investors may be liable for tax on the interest earned, depending on whether they have used up their annual interest exemption (R23 800 for those below 65; R34 500 for those aged 65 or above).
On the death of an investor, Treasury will pay the investment into the estate’s bank account within 20 working days once it has received the required the documentation. No penalty will apply to these pay-outs made before maturity.
In October 2018, Treasury removed the option for holders of retail bonds to nominate beneficiaries, because this was not aligned with the Administration of Estates Act.
Existing RSA Retail Bond investors do not have to register again to invest in the Top Up Bond, but only complete an application form.
For more information or to invest, visit rsaretailbonds.gov.za. The terms and conditions governing RSA Retail Bonds and the application forms are in the Documents section.
“53 000 active RSA Retail Bond investors” Why???
Answer in the next paragraph: “As with the fixed-rate and inflation-linked retail bonds, there are no fees or commissions on top-up bonds.”
I presume Gavin is saying that 53 000 investors is a rather low number. I see that a few years ago (2015/16) there were about 400 000 living annuities in South Africa (“Living Annuity Statistics”, 11 Sept 2017, Moonstone). Allowing for people with more than one living annuity, we can assume over 300 000 South Africans with living annuities and I would expect the number of South Africans with unit trust investments would be at least 2 or 3 times higher than that, so I agree that only 53 000 with SA Retail bonds is quite low.
I think this illustrates that the ideal would be to abolish commissions on all investments and instead the investment advisor would charge a fee that depends only on the amount to be invested and the time the advisor requires to analyse the financial position of the investor and to research and recommend the best investments for the investor, with the fee charged exactly the same whether SA Retail bonds, unit trusts, an Endowment Policy or any other investment is recommended, thus avoiding any possible conflict of interest