Investment – Adelaide Financial Advice

What is the cost of complacency when it comes to your Superannuation?

November 7, 2019/in Financial Advice General Info /by Shellie Fisher

Many Australians, in particularly the younger ones, are so totally disengaged when it comes to Superannuation that they are not aware of what super fund they belong to, how many accounts they have with different super funds and how their super is invested.

Do you fall into this category?
Disengagement with super is highlighted by the fact that in 2017/18 the Australian Taxation Office was holding around $17.5bn of lost superannuation. This was spread over $6.2milion separated accounts, with the largest single account being $2.2m for a New South Wales individual.

Even if you don’t have any lost super and know how much you have, there are other things you need to be aware of that can have a significant impact on just how much you will have in super when you reach retirement.

Things like, how your super is invested, and the amount of fees you are paying can seriously impact how comfortable your retirement will be.

For many Australians, their compulsory superannuation contributions are being paid to a super fund nominated by their employer and is being invested in accordance with the funds’ default investment option. The super fund selected, and the investment option may be totally inappropriate for an individual member of the fund.

When we talk of investing money, we must take into account what is referred to as our “risk profile”. That is, are we someone who doesn’t like to take unnecessary risks with our money and therefore may be a conservative investor, or are we someone you is prepared to take considerable risk to see our super nest egg grow and therefore be a “growth focused” investor, or do we sit somewhere in the middle ground and are a “balanced” investor.

Many default superannuation funds have a balance investment of option as their default. But what is a balanced fund for one super fund may mean something entirely different for another super fund.

Being a member of a default balanced fund may be fine for someone who is willing to take some, but not a lot of risk in the manner in which their super is invested, but it may be totally inappropriate for a member who is approaching retirement and may feel more comfortable with a less risky approach to their investments, or for a younger member who has many years to ride out the ups and downs of the investment markets in exchange for a potentially higher return.

Selecting an appropriate investment option for their super becomes an important consideration for members of superannuation funds. An additional 1% or 2% annual investment return on superannuation savings can make a difference of hundreds of thousands of dollars for a young superannuation fund member, over their working life.

Another aspect of super that cannot be ignored is the fees being charged by super funds to manage your money. While fees for many super funds have been reducing over recent years, there are still many super funds that are charging fees in excess of those offered by their peers.

Just as an additional 1% or 2% of additional investment return can have a positive impact of a superannuation balance, paying higher fees than necessary can have a significant negative impact on superannuation savings over the course of a working life.

As a member of a super fund, you need to be aware of what is happening with your super.

Here are some questions to consider:

1. How many super fund accounts do I have? If more than one, should I consolidate them into one fund? This can save on fees – but check that you are not losing valuable insurance cover first.

2. Do I have any lost super? This can be checked by logging in to your MyGov account or asking your existing known super fund to check for you.

3. What fees am I paying for my super? In particular, am I paying fees for services I don’t need?

4. How is my super invested? Is it appropriate for my life stage and my own attitude to risk?

5. How has my super fund performed over time? Don’t simply keep chasing last year’s best performing fund but look to a super fund that provides consistent returns over a longer period and charges a fair fee for the services they provide.

For many people, analysing the appropriateness of their super fund will not be an easy task. However, help from a suitably qualified financial adviser to ensure you are, or get you back on the right track may be money well spent.

Source: Peter Kelly | Centrepoint Alliance

Is Transition to Retirement Still Viable?

July 18, 2019/in Financial Advice General Info /by Shellie Fisher

Superannuation law was amended in 2005 to allow people to access their super from preservation age, currently 55, but progressively increasing to 60, without having to retire. It became affectionately known as ‘transition to retirement’ but it actually has nothing to do with retiring.

Once a person reaches their preservation age, they are able to access their super even though they might continue to work on a part-time or even a full-time basis.

There are some restrictions that apply, including:

1. Superannuation can only be accessed as an income stream or pension. That is, the amount of super being drawn cannot be paid out as a lump sum, however the annual income may be paid as a single annual instalment. The investment product that pays the pension is often referred to as a transition to retirement pension (TTR), or transition to retirement income stream (TRIS).

2. The income that may be drawn each year is based on the TRIS account balance. The minimum income that can be drawn is 4% of the account balance, while the maximum is 10% of the account balance.

3. During the life of a TRIS, lump sums cannot be withdrawn from the account, apart from the annualised annual income payment.

In the past, one of the attractions of a TRIS was that the investment earnings achieved by the super fund on the investments supporting the TRIS were exempt from tax at the super fund level. Because the super fund did not have to pay tax, this translated to a higher investment return for the investor.

Unfortunately, this concession was withdrawn for TRISs from 1 July 2017. They are now taxed on the same basis as a superannuation accumulation account. That is, fund earnings are taxed at a rate of 15%, with a 331/3% discount available for capital gains.

Once a person reaches the age of 60, the income they personally receive from their TRIS is tax free in their hands, even though their super fund is still paying tax on the underlying investment earnings.

One of the very popular strategies adopted in the past was for people to commence drawing income from their TRIS and simply enter into a salary sacrifice arrangement with their employer. It was a highly tax advantaged strategy, particularly for high income earners when the superannuation contribution limits were much higher than they are today.

However, not all is lost.

Even though a TRIS does not offer the same tax advantages as it did in the past, they may still play an important part in personal financial planning.

Drawing income from TRIS, particularly if age over 60, may still provide some tax advantages when coupled with a salary sacrifice arrangement or making personal tax-deductible contributions. The general concept of transition to retirement is still relevant where an individual needs to supplement their existing income. This may occur when unexpected expenses arise, a job is lost, or a person chooses to reduce their working hours in order to ‘transition into retirement’ – the original intention for introducing transition to retirement.

Of course, transition to retirement has a downside, the earlier we start drawing down on our super, the greater the risk that we will outlive it.

Source: Peter Kelly | Centrepoint Alliance

Real Estate Investment – not that simple?

July 6, 2017/in Financial Advice General Info /by Fil-Battisti

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A large number of Australians have a diversified portfolio when they retire consisting of investments, including cash, shares and superannuation and in a substantial number of cases, an investment property.

During a person’s working life the investment property can provide a number of benefits including possible increases in the property’s value, a regular rental income stream and depending on the level of borrowings, a tax benefit via a common strategy called “negative gearing”.
I would like to discuss the treatment of an investment property under the Social Security Act, for the purposes of calculating a person’s age pension entitlement

A person’s age pension entitlement is based firstly on their age, and then on their assets and income.

For the purposes of this article, I will explain the assessment of the investment property under each test separately, starting with the assets test.

The investment property is an asset and the “net” value of the property adds to the total sum of all your assessable assets.

If you have borrowed money to purchase the investment property, and the borrowings have been secured by a mortgage against this property, the value of the investment property is reduced by the borrowings. For example, if the property is worth $500,000 and has an outstanding mortgage of $300,000, the net value of the property for the purposes of the asset test is $200,000.

However, if the borrowing of $300,000 is mortgaged against the age pensioner’s own primary residence – which is an exempt asset – then the value of the investment property is now $500,000 because the $300,000 has not been secured by a mortgage against the assessable asset – the investment property.

Even more confusing is the situation where the borrowings are mortgaged against both the age pensioner’s primary residence and an investment property. In this scenario, the borrowings are apportioned between the two properties based on the value of each. We know the investment property is worth $500,000, but if the pensioner’s residential home is worth $750,000, then only one-third of the $300,000 borrowing – i.e. $100,000 would be assessed as borrowings mortgaged against the investment property, reducing the value of the investment property to $400,000.

Now let us examine the treatment under the income test.

The assessment under the income test is a little easier to understand. The gross weekly rent being received is assessed as income. This income can be reduced by the expenses associated with the management and maintenance of the property. A good guide, if you have not completed a tax return is to maintain a deduction equivalent to one-third of the gross rent. A further deduction, which can be made from the net rent (after expenses) is the interest payable on the borrowings.

Interest paid on borrowings to purchase the investment property is a deduction from the rent, received regardless of which property the mortgage has been secured against. This is providing the purpose of the borrowed funds was to purchase the investment property.

At the beginning of this article I mentioned a tax strategy called “negative gearing”. This strategy allows for any losses incurred by your investment in the property to be used to reduce other taxable income.

This is not the situation under the Social Security Act. Any loss of the rent you are receiving may not be used to reduce the value of other income being assessed to establish your correct age pension entitlement.

Mark Teale | Centrepoint Alliance

Loans and encumbrances; a pension minefield

August 4, 2016/in Financial Advice General Info /by Fil-Battisti

For most people, being debt free in retirement is a priority. Others find the concept of ’good debt’ in retirement less stressful.

From an age/service pension perspective the correct structuring of good debt is important to ensure that any entitlement you may receive is not adversely affected.

When it comes to the Social Security Act – loans and encumbrances can be complicated and, in some cases, a little illogical. It is very important to understand that the taxation rules relating to debt are not necessarily the same as social security rules. For example; real estate investments can be considered.

So – let’s consider this real estate investment scenario:

An offer ‘too good to ignore’ comes your way and you decide to buy an investment unit down the road from where you live and rent it out. You then visit your bank (or your mortgage broker) to enquire about an investment loan.

The broker (or bank) are most impressed with you and decide that they will lend you the money to buy the unit. However; in addition to taking a mortgage out over the investment property they also need to secure the loan against your residential home as well.

From a taxation and a social security income perspective this is not an issue as (in both cases) the interest payable is deductible from the rent for the purposes of your tax and pension assessment.

However; there is one very important issue to consider. A person’s pension entitlement is also based on the value of their assets. The fact that the loan is secured against an exempt asset (family home), and an assessable asset means that the portion of the loan secured against the exempt asset (your home) is not used to reduce the asset value of the investment unit.

Care needs to be exercised here – as net rental income being received may not necessarily cover the reduction in a person’s pension in some circumstances.

When it comes to borrowing money to invest into shares or managed funds, the assessment side of things are slightly different.
The value of the asset shares, in this case, is reduced by the amount borrowed. For example – $50,000 is borrowed to purchase a parcel of shares valued at $100,000. Provided the loan secured against the shares – for the purposes of the assets test – the portfolio has a value of $50,000. The ‘hidden nasty’ here is that for the assessment under the income test, the whole value of the portfolio is viewed as a $100,000 share portfolio.
This is treated as a financial asset and it is this value that is subject to the relevant interest rates.

Unlike tax – the interest expense is not deducted from the income being deemed against the $100,000 portfolio.

“Oh…” I hear you say! And that is without even discussing the issues associated with loans to family trusts and companies, going guarantor, and associated loans.

When you are retired and receiving the Age Pension – borrowing and lending money (as well as going guarantor for loans taken out by your kids) can be a minefield with unwanted consequences.
So before you dive into the world of borrowing to invest – seek out the appropriate advice from an expert in the area.

Source: Mark Teale, Centrepoint Alliance

Investing for the long term

July 21, 2016/in Financial Advice General Info /by Fil-Battisti

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Getting your mental game right

One of the most influential figures of modern investment theory is Benjamin Graham. Among his numerous protégés is the most famous investor of all time, Warren Buffett. Benjamin Graham began his course at the Columbia Business School by saying “If you want to make money in Wall Street you must have the proper psychological attitude.” Or, as the equally famous baseball identity, Yogi Berra would say “90% of investment is half mental.”

The basic insight here is that most investment success (or failure!) is driven by emotion, rather than faulty logic. Investors are seduced by the ‘greed and fear’ cycle to buy (or sell!) investments at precisely the wrong moment. Just as markets peak, they experience all the euphoria and leverage themselves to the maximum to buy investments at their most expensive. Then as markets decline, they become increasingly fearful, capitulating at the bottom of the cycle. Observers of the recent ‘Brexit’ vote in the UK would do well to recall this truth. It is important to separate well-founded negative sentiment, based on a rational analysis of developments in relevant markets, from mere fear triggered by the uncertainty of dynamic world events.

By looking long term, you can see past the emotions of the moment and recognise the cycles as they occur. Instead of being a risk to your investment outcomes, the greed and fear cycle can begin to work in your favour. You then have the ability to follow the advice of Warren Buffett to “…be fearful when others are greedy and greedy when others are fearful…”

The power of compounding

The second advantage of taking a long term and patient approach to investment is that it allows you to unleash some seriously potent forces. Legend has it that Albert Einstein was once asked to nominate the most powerful force in the universe. He chose compound interest.

To see how this could be the case, consider the following scenario. Imagine you put aside $10,000 at the end of each year for your retirement. Imagine further that your investment is earning 7.21% p.a. (the average annual return of La Trobe Financial’s Pooled Mortgages Option since inception in October 2002).

After year one, you would have your initial $10,000 investment. After year two, you would have $20,721, being your contributions of $20,000, plus interest of $721. After ten years, you would have $139,543, being your $100,000 of contributions, plus $39,543 of accumulated interest.

Here is where things get really interesting. As your principal sum grows, you earn interest on the larger amount. That means that the amount of interest you earn grows each year. In year two (after making your initial investment) you earn $721 in interest. After year ten, you are earning $10,061 in interest on top of your regular contribution of $10,000. But after year twenty you are earning $30,244 in interest and after year thirty you are earning a massive $70,734.45. What’s more, your principal amount at the end of year 30 is $981,060, despite your total contributions coming to just $300,000.

As you can see, the longer you’re in the game, the more compound interest works for you. That’s why getting rich slowly never goes out of fashion.

Long term investment

In the context of long term investment, it is worth noting that the ASX and Russell Investments have recently released the 2016 Long Term Investing Report. This report looks at some of the key asset classes and their performance over longer term horizons (generally 10 and 20 years).

In this year’s report, the long term performance of the various asset classes were compared to a benchmark seen to be appropriate for a ‘reasonable’ balanced investor investing in a portfolio comprised of 70% growth and 30% defensive assets. This benchmark was set at a level of CPI plus 4% p.a. or an average of 6.6% p.a. over the 10 year period to end of December 2015.

What about SMSFs?

A new report challenges whether some SMSFs are delivering appropriate outcomes for investors. According to an article in the SMH, “Between 2010 and 2014, the bottom 10 per cent of SMSFs, those with balances of less than $100,000, have lost money every year since 2008, according to Australian Taxation Office figures. The ATO figures reveal that 44 per cent of SMSFs have on average not made a return over the past seven years.”

So what can these investors do? It’s actually not that difficult. They need to review their investment strategy. This is where the three golden rules of investment could be useful. Pick those investments that you understand, diversify your holdings and take a patient, long-term approach.

Source: La Trobe Financial

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