GPL Financial Group GPL Partners

June 2019

Your personal financial register

Have you written a personal financial register, listing your super and non-super investments, your other assets, your income and any debts?

         

 

This fundamental task for managing your personal finances, investing and saving for retirement would often be left on a must-do-tomorrow list – and perhaps never done.

Behavioural economists typically rank investor inertia and procrastination high among behavioural traits that are enemies of investment success. And never getting around to preparing a personal financial register would often be part of that inertia.

A personal financial register – updated as your circumstances change – is critical for a range of personal financial issues. These include saving for retirement, preparing a personal financial plan, setting your portfolio’s asset allocation, controlling your spending and estate planning:

  • Preparing a financial plan: A good starting point for preparing a comprehensive financial plan, perhaps with the guidance of an adviser, is to prepare a personal financial register. You can then make more informed and realistic decisions – including about your long-term goals, targeted returns and tolerance to risk – for your financial plan.
     
  • Setting your portfolio’s asset allocation: An up-to-date list of your super and non-super investments is necessary to set an appropriate asset allocation for your portfolio. Repeated research, including by Vanguard, shows that a diversified portfolio's strategic asset allocation – the proportions of its assets in different asset classes – is the main cause of variations in its long-term returns.
     
  • Keeping your personal spending under control: A basic rule for investment success is to try to spend less than you make so as to have money left over to invest. An accurate personal financial register should help you to take a realistic approach to spending given your income and assets.
     
  • Saving for retirement: A financial register is necessary for estimating how much you will need to save for retirement. You can then plan how to save to meet your savings goals.
     
  • Spending in retirement: Without a personal financial register in place at the eve of retirement, retirees may have a poor understanding of how far their financial resources will stretch. This may lead to overspending or being too frugal given the state of your finances. And you may miss opportunities to more efficiently manage your investments and spending in retirement.
     
  • Estate planning: Having an up-to-date personal financial register is a central part of estate planning together with such tasks as making a Will and nominating beneficiaries for your super savings. A financial register should give you and, eventually, your intended beneficiaries a better understanding of your finances.

As Smart Investing has discussed, the last baby boomers celebrate their 70th birthday within the next 15 years as a growing proportion of the population reaches old age. This should underline the need to save for retirement and for estate planning – and that should include having a personal financial register.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
20 May 2019
 

ATO figures show jump in starting balances for SMSFs

The ATO’s statistical overview of SMSFs for the 2016–17 financial year indicates that funds that were established that year had assets of just over $500,000 on average, a substantial increase from the previous year.

         

 

The ATO has released an annual overview of the key statistics for the SMSF sector for the 2016–17 financial year, based on 2016–17 SMSF annual returns.

The overview indicates that at 30 June 2017, SMSFs had assets of just over $1.2 million on average, an increase of 10 per cent over the previous year and 27 per cent over the previous five years.

“Average assets per member grew to $652,000 at 30 June 2017, an increase of 11 per cent over 2016 and 29 per cent over the previous five years,” the ATO stated.

The ATO figures also showed that the average amount of assets held by SMSFs in the year they were established has been growing in the financial years to 2016–17.

“SMSFs established in 2016–17 had average assets of $521,000, an increase of 38 per cent from $379,000 for SMSFs established in 2015–16 and 54 per cent from $338,000 for those established in 2012–13,” the ATO said.

Use of service providers

The data for the 2016–17 financial year also showed that SMSFs used the services of around 5,600 SMSF auditors and 13,600 tax agents.

The figures indicated that 52 per cent of SMSF auditors performed between five and 50 SMSF audits, while 28 per cent of SMSF auditors performed between 51 and 250 audits.

Five per cent of SMSF auditors conducted more than 250 audits, representing 49 per cent of total SMSF audits in 2016–17.

Almost all SMSFs used a tax agent to lodge their return, with 99 per cent of SMSFs using a tax agent to lodge their 2016–17 SMSF annual return.

Investment performance and asset allocation

In the 2016-17 financial year, the average return on assets for SMSFs was 10.2 per cent, a significant increase from the 3.1 per cent return in 2015–16.

“This is consistent with the positive 9.1 per cent investment performance by APRA funds and the trend of positive returns over the five years to 2016–17,” the ATO noted.

At 30 June 2017 SMSFs held 80 per cent of their assets in direct investments at 30 June 2017, compared with 20 per cent in indirect investments such as managed investments and trusts.

The top five SMSF investments were cash and term deposits, Australian-listed shares, unlisted trusts, non-residential real property and limited recourse borrowing arrangement (LRBA) assets.

At 30 June 2017, 9 per cent of SMSFs reported LRBA assets, increasing from 7 per cent in the previous year and from 3% in 2012–13.

Corporate trustee versus individual trustee

ATO data for 30 June 2018 shows that the majority of SMSFs now have a corporate trustee with 59 per cent using this structure.

“Eighty-one per cent of newly registered SMSFs in the three years to 30 June 2018 were established with a corporate trustee,” the ATO said.

 

Miranda Brownlee
14 May 2019
smsfadviser.com

 

ATO updates valuation guidelines for pension reporting

The ATO has updated its valuation guidelines in order to clarify when a reasonable estimate can be used for valuing pension assets when reporting to the ATO.

       

 

The ATO has updated its valuation guidelines in order to clarify when a reasonable estimate can be used for valuing pension assets when reporting to the ATO.

In an updated version of its valuation guidelines, the ATO has clarified that SMSF professionals and their clients can use a reasonable estimate for determining the value of assets that support a pension when reporting to the ATO. However, there are other situations where a reasonable estimate cannot be relied on.

The ATO reminded professionals and SMSFs that the market value of the assets that support a pension or super income needs to be determined on either the commencement day of a pension or, for ongoing pensions, 1 July of the financial year in which the pension is paid.

“Similar to valuing assets for the purpose of financial reports, the valuation can be undertaken by anyone as long as it is based on objective and supportable data,” it stated.

“Where the nature of the asset indicates that the valuation is likely to be complex, you may also consider the use of a qualified independent valuer.”

The ATO said it is expected that the SMSF trustees know the value of the assets in their fund.

“This does not mean that an external valuation needs to be performed for all assets each year. However, an external valuation of an asset such as real property may be prudent if you expect the valuation is now materially inaccurate or a significant event has occurred since it was last valued,” it said.

The ATO stated that it is acceptable to use a reasonable estimate of the value of the account when a pension is commenced partway through the year.

“It is also accepted that a reasonable estimate value of the account balance can be used when calculating the value of a pension for transfer balance cap purposes and the pension commenced on 1 July, you need to report the event to us by 28 October and a full valuation of the assets supporting the pension is not possible by this date,” it stated.

The ATO noted that it may be difficult to value assets such as private company shares by the date the TBAR is due.

“Although a reasonable estimate of the value of a pension can be used in the circumstances described above, you cannot rely on this reasonable estimate when preparing the SMSF’s financial accounts and calculating the SMSF’s entitlement to exempt current pension income (ECPI),” it warned.

 

 

Miranda Brownlee
28 May 2019
smsfadviser.com

Average age for establishing SMSFs sitting at 48.9: Report

         

 

The latest SMSF Benchmark Report from Class indicates that there is a continuing trend towards younger age groups setting up SMSFs, which follows similar findings from recent ATO statistics.

In its latest SMSF Benchmark Report for the March quarter, SMSF software company Class analysed 26,100 funds comprising 46,943 members, which were newly established on Class within a five-year period spanning from 2014 to 2018.

Analysis of the data found that the average age of members establishing SMSFs was 48.9, with a small difference occurring between gender.

While the average establishment age based on the data set did increase from 48.6 in 2014 to a high of 49.5 in 2017, it has now fallen back to 48.9, the report said.

“There is a continuing trend for members of new SMSFs to be from younger age groups,” the report said.

“One factor that may see this trend continue is the proposal to increase the superannuation guarantee from its current rate of 9.5 per cent by half a percentage point from July 2021, until it hits 12 per cent in 2025.”

This will enable the younger workforce to accumulate greater super balances at a younger age over time, Class said.

SMSF statistics released by the ATO last week similarly indicated that around two-thirds of all new SMSF entrants are under the age of 50.

The Class report also showed that, while the average individual member balance of a newly established fund is around $225,000, the average fund balance is nearly $406,000, ranging from $355,000 for a single-member fund to over $500,000 for four-member funds.

The analysis also indicated that males have a 42 per cent higher balance on average compared with females when funds are established.

However, the gap is significantly lower across all SMSFs at 21 per cent, indicating that the gender gap does narrow over time, the report said.

 

 

Miranda Brownlee
06 May 2019
smafadviser.com

 

LRBAs, guarantees in need of review after property market falls

With property markets taking a tumble in recent times, some SMSF clients may need to review the loan arrangements and guarantees they have, particularly where the loan-to-value ratio has significantly dropped, says an industry lawyer.

           

 

Speaking in a seminar in Sydney, DBA Lawyers director Daniel Butler said the property market has been under some stress recently, and while it may see a bit of a rebound with Labor’s property tax changes off the table, some SMSFs may be impacted by the recent fall in property values.

Mr Butler said the ATO has previously raised concerns about the amount of property loans held by SMSFs and guaranteed by assets outside of super such as the family home.

“If the market collapses, this is going to affect retirement savings and personal assets,” Mr Butler said.

Mr Butler explained that there were two types of guarantees: unsecured guarantees and secured guarantees.

“We have noticed a movement out there, typically with non-bank institutions, that they want that guarantee to be supported by a security or a charge or mortgage over the home or property owned by that guarantor,” he said.

While the fact that it is a limited recourse loan means that the security including any related guarantees should be limited to the value of the acquirable asset, but often they are not.

“You have to read and check it. I read one the other day that said that any asset you hold on trust is also up for grabs. Some of them also say, well, if it’s interest and cost and damages, we can also claim that back, even default interest,” he said.

SMSF professionals and their clients need to be very mindful of the extent of these guarantees, he cautioned, particularly if the client is entering negative equity.

The documents that deal with the guarantee for the loan arrangements may need to be reviewed for those clients who are in that risk category, he advised.

“That would be those that bought an apartment and it’s now close to negativity equity and the they’re getting light on the loan-to-value ratio (LVR) because the property value has sunk but the loan is still there and they’re no longer over their 70 per cent threshold,” he said.

This also needs to be looked at with related-party loans, because if the LVR is no longer under the 70 per cent, then they may need to restructure.

SMSF practitioners should offset their liability by encouraging their clients to get these documents reviewed. 

 

 

Miranda Brownlee
22 May 2019
smsfadviser.com

Australia – How are we going as 2018-19 ends?

         

 

One great source of data about Australia. Become better acquainted with the country we love.

An up-to-date snapshot of Australia's vital statistics.  

Please click on the following link to see all this interesting information. The areas covered are:

  • Overview
  • Markets
  • GDP
  • Labour
  • Prices
  • Money
  • Trade
  • Government
  • Business
  • Consumer
  • Housing
  • Taxes
  • Climate

 

Access all this data here.

 

 

tradingeconomics.com/australia

What it will take to close the super gap between men and women

There’s a lot of talk about in how to close the super gap between men and women, with women often retiring with far less than men.

         

 

The main drivers of this are due to women both earning less and  taking time out of the workforce to care for children and other family members.

In a previous column, I discussed steps women and their partners can take to close this gap.

A new report from Women in Super and research firm Rice Warner reinforces the risks that the gender gap poses for women and offers data on the roots of the problem.

Previous research showed that because women have less in super and rely more heavily on the age pension, they are more likely than men to face financial insecurity and poverty in retirement.

As you can see from the Rice Warner data in the chart below, the super gap starts to widen when women are in their 30s, suggesting that taking time out of the workforce to rear children diminishes income and super contributions.

The research also demonstrates that women start out their careers with pay that is close to their male counterparts, only to see a gap emerge as women enter their 20s and 30s. The source of this divergence is not clear, but one likely cause is that women are more likely to leave work to take care of children or family members, missing out on years in the workforce when promotions and pay raises are most likely.

Investment research shows that men tend to invest more aggressively than women, but Rice Warner said this difference did not contribute significantly to the super gap.

The positive news is that women are taking action to close the gap. They contribute more to super, especially as they approach retirement, which boosts their balances at a crucial stage.

Many women don’t earn enough to make extra contributions, however, and those who do likely can’t compensate enough for years of reduced earnings and super guarantee payments. The roots of the super pay gap are many — gender inequality, the challenges and costs of child care and super policy. Fixing the problem will require changes on all those fronts.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
21 May 2019
vanguardinvestments.com.au

 

Recession on our mind

When do we know for certain that we are on a path toward recession and that what we are experiencing is not simply a reversion to trend? How can investors prepare?

             

 

Those questions captured the minds and emotions of investors and pundits alike through the first quarter of 2019.

While some of the global economic data released over in Q1 was disappointing, we are not put off. The theme of Vanguard’s 2019 outlook was ‘down, but not out’ as we anticipated some deterioration in economic growth indicators. Holding that view is easier said than done when consumption, income, housing, and manufacturing indicators in several nations signal weakness. Almost in spite of the uncertainty, however, share markets in Australia and overseas returned over 10% for the first quarter.

It was hard – even for the most steadfast of investors – to ignore the debate around the economic cycle once the US Treasury yield curve briefly inverted in the final weeks of March. When short term interest rates are higher than long term rates, investors become pessimistic about what could happen in the next year, yet optimistic when looking five to ten years into the future. Traditionally, this pattern has preceded every major US recession in recent memory, so quite understandably, investors are taking these warning signs seriously.

Central banks only added to the feeling that economic storm clouds are gathering. Ironically, their actions might have been intended to instill confidence in their respective economies, but markets, especially bond markets, had none of it. The US Federal Reserve revised its vaunted ‘dot plot’ to suggest that interest rates would be on hold for the rest of the year; they had previously signaled two more hikes. Locally, the Reserve Bank of Australia became more tentative in its official policy communications. Even the Reserve Bank of New Zealand changed its tune and openly discussed the possibility of a rate cut. Investors are now asking; “What do the banks know that we don’t?”

Economic and market outlook

This questioning comes at a precarious time for the global economy, as we recently passed the 10-year mark from the onset of the Global Financial Crisis. Those who say the US economic expansion must end soon, simply because the expansion has been remarkably long, overlook Australia’s record-setting recession-free expansion in their review of the global economy. Investors feel that we are close to crossing a line, albeit a blurry one, between economic growth reverting to trend (2% in the US, 2–3% in Australia) and an outright global slowdown.

Part of this concern is driven from a tightening of financial conditions. According to our analysis, financial conditions and heightened anxiety over economic policy probably contributed to some of the decline in US GDP growth for the last quarter of 2018. In a recent research note, Known unknowns: Uncertainty, volatility, and the odds of recession, we estimated that these shocks could have subtracted as much as 0.4% from 2019 GDP growth.

 

Inevitably, with each new development in this cycle, we are asked by investors what they can do to prepare. Regular readers of Vanguard’s commentary will not be surprised by our answer: revisit asset allocation, diversify, and review active risks in your portfolio.

Attempting to time markets can backfire and lead to long term under-performance, as our analysis shows in the figure and table below. The questions investors ought to be asking are: ‘If a recession occurs, how should I respond?’, ‘Am I adequately prepared?’ and, ‘Does my financial plan reflect my comfort with uncertainty?’ rather than ‘When will the next recession occur?’

Adequate preparation, whether increased savings, a new asset allocation, or even a conversation between an adviser and their client, is the best way to prepare. The market will take us for a ride as it tries to guess (with limited success) what will happen in 2019. If we stay calm and adhere to a long term approach, we limit the effect of the market’s fits and tantrums on our journey toward investment success.

 

Matthew Tufano, Economist
14 May 2019
Vanguardinvestments.com.au