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Estate planning in the new environment

The introduction of the transfer balance cap (TBC) on 1 July 2017 has had a severe impact on estate plans that include superannuation savings. 

         

 

Whereas it was previously possible that significantly greater amounts could be retained in the super system after death or disability (and SMSFs could be used as family “dynasty” vehicles), an important aspect of the purpose of the reforms to the law was to reduce “the extent that superannuation is used for tax minimisation and estate planning purposes” (see Treasurer Scott Morrison’s media release dated 3 May 2016).

What changed?

Among numerous changes, perhaps the most significant element of the reforms was that a cap of $1.6 million for the total amount of an individual’s super savings that could be transferred into the tax-free retirement phase. Although this measure immediately impacts on the retirement plans of individuals during their lifetime, it will also impact on the estate plans of individuals who have total super balances that exceed $1.6 million at the time of their death (whether in retirement or accumulation phase), or whose beneficiaries do (whether in their own right, or in combination with their inheritance).

Super death benefits may be paid as: a single lump sum, an interim and then a final lump sum, one or more retirement phase pensions, or combinations of all of the above. It’s a common wish of individuals that their super pension be paid to their beneficiaries in the same form after their death, for reasons such as asset protection and tax. Of course, this is only possible where it’s permitted and in accordance with the relevant trust deed, pension document and death benefit nomination. Importantly the recipient of such a pension must be a tax law dependant of the deceased.

What’s the problem?

Where these conditions have been satisfied, the maximum death benefit that can be retained by the new pensioner (whether as a reversionary or new pension) will be equivalent to their general TBC (which will ordinarily be $1.6 million). However, this outcome assumes that the new pensioner has no other retirement phase pension interests when they receive the death benefits. Where they do have other such interests, then they will already have an amount standing to the credit of their transfer balance account equivalent to the value of the assets supporting those interests (as at the previous 30 June). The consequence is that any additional amounts transferred to the retirement phase for that individual (in any super fund) must not result in their TBC being exceeded. Such excess transfers may result in the imposition of penalty taxes and interest, where they aren’t rectified within certain periods.

Is there a fix?

Fortunately, the reforms allow such rectification to occur within a period of up to one year from the date of death, but only where the new pensioner receives a reversionary pension. In addition, the existing law also permits the trustee of a super fund to pay a death benefit (without jeopardising its status as a death benefit) within a “reasonably practicable” period. As a result, there is an obvious opportunity for the new pensioner to re-arrange their affairs in anticipation of receiving the death benefit (or even after they’ve received it), in order to ensure that they don’t exceed their TBC. In particular, this action involves the new pensioner reducing their credit value of their TBA to nil (in cases where they have not yet received the death benefit) or to $1.6 million (in cases where they have). As a result, it is possible to ensure that an additional amount of up to $1.6 million is retained in the super system.

Of course, employing the above strategy has potential tax benefits. This means it is always possible that commissioner of taxation could successfully strike it down under the general anti-avoidance provisions of the income tax laws. Notably, such an outcome may not ensue, where the taxpayer’s purpose for entering into the strategy was predominantly for some other reason. It is the author’s experience the majority of individuals who seek to employ such arrangements do so because of family dynamics that are peculiar to them (for example because super death benefits were earmarked to be received by a particular family member), or for asset protection reasons.

What should I do?

Ultimately this aspect of the reforms means many individuals will need to revisit their estate plans to take into account how their situation may now have changed. A common perception is that this measure will not affect many individuals as the current balance of their super savings (or those of their beneficiaries) doesn’t exceed or near $1.6 million and is unlikely to do so. Unfortunately this analysis ignores the possibility of growth in those savings over many years and, very importantly, the fact most super interests include life insurance policies, the payment value of which will frequently cause balances to exceed or be around this threshold.

 

Chris Balalovski
​Partner, business services at BDO Australia.
July 25, 2018
smsmagazine.com.au

The good, bad, and potentially ugly for SMSFs

“Two hundred thousand dollars is a lot of money. We're gonna have to earn it”  Clint Eastwood said as Blondie in The Good, the Bad and the Ugly, on the work a gang of three were going to have to do to find a hidden fortune.

         

 

The recently released 2018 Vanguard/Investment Trends SMSF report offers insights into the hard work the nearly 600,000 Australian self-managed super funds are putting into growing their retirement savings.

The sector has grown rapidly over the past ten years and while growth in the number of new SMSFs being set up each year has slowed, it remains the largest sector of the superannuation asset pool representing just over 30 per cent of overall superannuation assets in Australia.

Two in five SMSFS now have balances of over $1 million, and the report offers an annual update on how trustees are managing this money, and what their issues and concerns are.

This year there were three notable themes running through the findings – impacts of regulatory change, the demand for advice, and portfolio construction challenges.

Regulatory change

Far from the lawlessness depicted in the spaghetti westerns of the sixties, trustees are operating in an increasingly complex regulatory environment.

Impacts of this regulatory change played out in this year’s findings, in particular due to several new rules coming into effect in July 2017.

Portfolio structures are being impacted by the federal government’s introduction of the $1.6 million cap for pension accounts and these changes are seeing SMSFs having to review their portfolios and potentially maintaining assets in the accumulation phase or increasingly looking to invest outside of their fund to address both the risk of exceeding caps and the regulatory uncertainty.

Clearly ‘concerns about regulatory change’ was the biggest challenge cited by trustees in managing their fund this year.

This is likely to become a greater issue in the short to medium term for SMSF trustees with the ongoing Royal Commission into financial services and Productivity Commission’s draft report into superannuation both likely to have considerable impact on the federal government’s policy agenda.

Advice

SMSFs who currently work with an adviser are increasingly saying they value their relationship with satisfaction scores on the up. This year 86 per cent of SMSFs rated their adviser good or very good.

Each year, this research highlights areas of advice which SMSFs would like to be able to access but currently are not – these are labelled ‘unmet’ advice needs.

In 2018 almost half of the respondents said they have unmet advice needs – notably in the areas of inheritance and estate planning, tax planning and investment selection.

A major barrier for trustees in seeking advice is the growing belief that costs are too high. 

The opportunity embedded within these results is how advisers can better demonstrate their value and justify the investment in advice, in addition to meeting some of the specific technical needs of this sector.

Managing the money

Many fund trustees operate with more sophisticated investment knowledge than they are perhaps given credit for, and by virtue of running an SMSF, they are more engaged than most with their own financial security.

However it shouldn’t be taken for granted that the industry’s interpretation of what constitutes a well put together investment portfolio is the same as the investing publics’.

For the first time this year the survey asked specific questions about both the level of diversification and the understanding of the concept among trustees, with a common concern over the years being that many SMSFs carry higher risk in their portfolios due to a concentration of funds in individual Australian shares and cash.

The survey asked trustees whether they agreed it was important for an SMSF to be well diversified and 82 per cent either agreed or strongly agreed. However, when asked how well diversified their SMSF portfolio is only 54 per cent responded that it was either well or very well diversified.

Digging a little deeper into what trustees considered to be a well-diversified investment portfolio, almost two-thirds thought a portfolio of 20 shares got the job done.

Given that the average SMSF has about 17 shares in their portfolio according to Investment Trends, that answer should not be surprising as it recognises the reality a lot of trustees seem comfortable with.

However, a 20-share-portfolio fails professional tests of diversification and would be classified as a relatively high risk portfolio given, in particular, the concentration of the Australian share market in resource companies and banks.

What was encouraging however from this year's trustee survey was a recovering interest in managed funds and a greater appetite for investing overseas, both of which go towards mitigating some of the risk from the lack of diversification.

A key question that remains for retired trustees is whether they have the appropriate level of diversification and risk protection built into a portfolio now in pension mode, because the impact of unexpected downturns in the domestic economy could be far more dramatic for those with a shorter investing timeframe and without the ability to replenish capital from employment.

 

This article first appeared in the Australian Financial Review on Tuesday, 3 July

Robin Bowerman
Head of Corporate Affairs at Vanguard Australia
09 July 2018
www.vanguardinvestments.com.au

SMSFs lose thousands in property, investment scams

SMSFs have been targeted by various property and investment scams this year, with hundreds of thousands of dollars already lost, warns the Australian Competition and Consumer Commission (ACCC).

         

 

This week the Australian Competition and Consumer Commission (ACCC) released statistics indicating that $26 million had been reported lost to investment scams in 2018 so far. This accounts for 84 per cent of the total losses recorded in the same period for 2017.

Speaking to SMSF Adviser, ACCC Deputy Chair Delia Rickard confirmed that at least 15 of the reports made to the ACCC in 2018 have involved SMSFs. However, she said SMSFs likely represent a far greater percentage of the total 1796 reports made, given the reporting form does not ask information about whether losses relate to an SMSF.

“We were given 15 reports that did reference SMSFs and from those 15 reports, ten of them involved losses of $810,000. However, I suspect that an awful lot of the total investment scams [reported] involved SMSFs,” said Ms Rickard.

The 15 reports that made reference to SMSFs involved scams related to property and shares, she said.

Ms Rickard said scams have been on the rise this year with the amount of money lost on an average month-on-month basis increasing 117 per cent compared to last year.

“Last year, Australians reported they lost $64.6 million to investment scams to Scamwatch and the Australian Cybercrime Online Reporting Network (ACORN). If the current trend continues, combined losses reported to Scamwatch and ACORN in 2018 could be in excess of $100 million,” she said.

“These scams are very sophisticated and the scammers are very convincing. People aged 45–64 are most at risk and make up more than half the reports sent to Scamwatch.”

The vast majority of investment scams, Ms Rickard warned, are still centred on traditional investment markets like stocks, real estate or commodities.

“For example, scammers will cold call victims claiming to be a stock broker or investment portfolio manager and offer a hot tip or inside information on a stock or asset that is supposedly about to go up significantly in value. They will claim what they are offering is low-risk and will provide quick and high returns,” she said.

“Scammers will spend significant time and effort grooming their victims to invest. They will use the right technical language and also offer professional looking websites and documents to convince victims they are legitimate.”

Cryptocurrency trading is one area where scams have grown significantly in the past 12 months, she said, and is now the second most common type of investment scam offer pushed on victims.

“The rise in popularity in cryptocurrency trading has not been missed by scammers who are latching onto this new trend to con people,” she said.

Binary options trading is another area where scams are prevalent, she said.

“This involves scammers pretending they can predict the movements of a commodity, asset or index prices over a short time. They direct you to a website with a login, account details and a trading platform,” she explained.

“They appear to put your money into the account and demonstrate a number of successful trades to encourage you to invest greater sums. Then your money begins to disappear and so too does the scammer.”

Ms Rickard said SMSF accountants and advisers can help SMSF investors to avoid scams by reminding clients to ignore calls and emails they receive out of the blue that promote new investment opportunities.

“Any claims like 'risk-free investment', ‘low risk, high return’, 'be a millionaire in three years', or 'get-rich quick' are also easy tells that you’re dealing with a scammer,” she said.

 

Miranda Brownlee
24 July 2018
www.smsfadviser.com

Statistics show SMSFs not just for the rich

The latest data reflecting the current position of the SMSF market has indicated these types of retirement saving structure are not purely the domain of extremely wealthy individuals as is often thought, the SMSF Association has said.

       

 

The most recent figures pertaining to the sector reveal there are currently 592,658 SMSFs servicing 1.12 million members. The average assets per member stand at $599,265, with the average assets per fund being $1.12 million.

However, the median statistics reflect a slightly different picture, with the median assets per member standing at $362,280 and the median assets per SMSF currently coming in at $641,983.

When examining the data to glean a more accurate assessment of the sector, SMSF Association head of policy Jordan George said more consideration needs to be given to the median statistics over industry averages.

“I think often when we talk about SMSFs the median figures actually are a bit more instructive because those average figures tend to get distorted a bit by some very large funds we do have in the SMSF sector,” George noted.

“So I think [the median statistic] is an important figure to look at when we’re having debates around SMSFs being superannuation vehicles just for the very wealthy or the very high income earners.

“The important statistics are those median figures and they do show [there is] around $360,000 per member or $640,000 per SMSF, [and this does not indicate they are] a vehicle for very high net worth people and a lot of our SMSF members who would be in retirement phase would potentially be relying on a part pension to supplement their SMSF income.”

With regard to the make-up of SMSF members, gleaned from the 2016 income year, George indicated there was significance in how many were close to retirement.

“There is a very significant number of members aged from 55 to 69. What we’re looking at there is over the next 15 to 20 years there is a significant proportion of SMSF members, just over 40 per cent, who are in retirement phase already or will be moving into retirement phase,” he said.

“That shows that the sector is ageing in terms of its demographic and it’s an important consideration for advisers to remember that the sector is going to have a far greater focus on retirement income over the next 10 to 20 years and we need to think about the challenges that come with that.”

 

Darin Tyson-Chan
July 24, 2018
smsmagazine.com.au

 

 

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Don't ever do a Budget again on the back of an envelope or using anything hand written. Via this site's financial tools, secure client portal or calculators you and your family can access very good online resources AND all information is kept for re-use over and over again. Do the hack work once online and you only have to adjust data from then on. Great for your kids as well.

These tools are an added service to help you, our clients, gain more from what we provide.

       

 

You may think that working on a Budget or cash flow isn’t your cup of tea but when things are tight or you need to look long term there is no better way to manage how your money is used. 24/7 access and if you have a question you don't have far to go to ask.

The following images are examples of what can be done, also there is a longer article about overall financial literacy following the first few points.

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When you feel the urge then a quick trip to our website is a good thing to do, it has all the tools you need and more. Also any information you add that’s relevant to other tools is automatically transferred saving you time and effort.

Give it a go. Start with a Budget or cash flow analysis or Super scenario. It may take a bit of time but even a few minutes here and there is good and everything you add will be waiting until the next time you log in.

Your Financial Planner

The power of financial role models

Role models are important in many stages of life. Be it school years, on the sporting field or in your career, having a positive role model, someone to compare yourself to and measure your progress against, can be a powerful and positive influence.

         

 

But what about your financial position? Do you have someone that you compare your financial well-being against?

If so, are you ahead or behind?

For people approaching retirement a sense of financial security is important not just in monetary terms but also in terms of their overall sense of happiness and well-being.

Stepping off the employment treadmill can be both liberating and a recipe for heightened levels of anxiety.

At Morningstar's annual adviser conference in Chicago this month, Sarah Newcomb, their senior behaviour scientist, gave a presentation on what she terms “the comparison trap” and looked at research that shows where people believe they rank relative to others has a greater effect on happiness than their absolute level of income.

Interestingly, she also pointed to research that people who spend a lot of time on social media sites can have lower levels of well-being and life satisfaction.

The glib answer to this is to stop comparing ourselves to others – and perhaps cut down the social media time – but the counter to that is a body of research that identifies what Newcomb says is an innate need as humans. To assess our social and personal worth when there is no objective means to do so, we look to people similar to us to inform an assessment.

In common parlance we know that phenomenon as “keeping up with the Joneses”.

What is interesting about this discussion is that it is not simply about the dollars. There is a significant emotional component involved when we are discussing financial well-being. Newcomb says we all probably know someone who is financially well off but not as happy or content with their lot as you would expect.

Rather than saying stop to the natural human trait of comparison, what the Morningstar research has tried to do is look at ways investors – and their advisers – can reframe the mindset to make it a more positive process. Because our tendency is to compare ourselves to people who have more, in Newcomb's words most of us appear to be actively making ourselves feel bad about our own financial circumstances by always looking up at people who have more.

While the concept of a role model/mentor is something that is positive overall, what the Morningstar research is pointing to is the need to thoughtfully pick the person you are going to measure yourself against.

As Newcomb says, by changing the target and direction of our social comparisons, we can create more positive emotions with our finances. “This might not change your economic reality, but it could improve your quality of life. And feeling more secure with your financial well-being could have beneficial long-term effects by eliminating fear-based behaviours, such as performance-chasing and panic selling, which could put you in a better position to achieve long-term investing success.”

 
Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
26 June 2018
www.vanguardinvestments.com.au

 

Why SMSFs want estate-planning advice

An estimated 77,000 self-managed super funds (SMSFs) have unmet needs for advice on estate planning.

       

 

The 2018 Vanguard/Investment Trends SMSF Report confirms that estate planning is among the highest unmet needs for advice. This equates to 13 per cent of SMSFs at the time of the surveys – a percentage that would be markedly higher among funds with older memberships.

Further, the research found that 10 per cent of SMSF trustees had concerns about the ability of other members to manage their super funds following the death or serious illness of the most dominant fund member.

The recognition of tens of thousands of SMSF trustees that they need professional guidance with their estate planning is driven by an array of factors. These include the burgeoning number of baby boomers nearing or already in retirement, the large proportion of retirement money held by SMSFs, and greater longevity.

Some 47 per cent of SMSF members were aged over 60 in March 2018 and 20 per cent were aged over 70, according to tax office statistics released over the past week.

SMSFs hold almost 60 per cent of overall superannuation assets invested in retirement products, according to the Superannuation market projections report 2017, published late last year by consultants and actuaries Rice Warner. This percentage has been rapidly growing.

As at least a starting point for estate planning, it is critical for SMSF trustees (together with all super members) to understand who is eligible to receive their superannuation death benefits. Another fundamental is to understand how different eligible beneficiaries may be taxed differently.

Superannuation benefits cannot be left indefinitely in an SMSF following death – even if the beneficiary is your surviving spouse and a member of the same SMSF. The amount must be paid out as a lump sum or continue to be paid as reversionary pension.

As part of their estate planning, many SMSF trustees prepare for the possibility that the most active member of a fund dies first. This is particularly an issue for two-person SMSFs where one member may be much more involved with their super.

Changes to superannuation laws provide a further motivation for SMSFs to gain estate-planning advice.

Specialist superannuation editor Stuart Jones writes in the Thomson Reuters Australian Superannuation Handbook 2017-18: “From July 1, 2017, estate-planning considerations have been further complicated by the introduction of a pension transfer balance cap.

“The death of a member in the pension phase,” Jones adds, “is a high-risk time for a surviving spouse (or other dependant) in terms of their potentially breaching their own $1.6 million transfer balance cap.”

A surviving spouse or dependant who had previously been well below the $1.6 million pension cap could “quickly find themselves” exceeding the $1.6 million cap with an excess transfer balance tax liability because of the deceased's super pension, he says.

Thorough estate planning by an SMSF and its members is a valuable legacy in itself.

 
Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.
22 June 2018
www.vanguardinvestments.com.au

 

Super set to play bigger retirement role

Statistical evidence shows superannuation is likely to play a more significant role than it currently does in the retirement income space for Australians, a senior financial services executive has said.

         

 

Statistical evidence shows superannuation is likely to play a more significant role than it currently does in the retirement income space for Australians, a senior financial services executive has said.

“So right now only 42 per cent of everybody over 65 is on the full age pension,” Challenger retirement savings chairman Jeremy Cooper told attendees at the most recent Randstad Leaders Lecture Series event in Sydney.

“That includes people who are 95, so that includes people who really weren’t in super at all.”

According to Cooper, logic would then dictate 58 per cent are currently entirely looking after themselves financially in retirement or perhaps receiving a part age pension.

Figures he presented showed the number of Australians drawing a full age pension has decreased from 45 per cent in 2010 to its current level of 42 per cent.

“The trend of this idea of fewer and fewer people being on the full age pension is going to continue,” he noted.

“And ASFA (Association of Superannuation Funds of Australia) is projecting that, by 2025, 70 per cent of people will be looking after themselves in retirement.”

He pointed out this trend is already having a real impact on the country’s superannuation system.

“What it means is that super is going to be called on to provide, if I can put it this way, more age pension-like solutions for the people who either aren’t getting the age pension at all or who are only getting a bit of it,” he said.

“They are going to be looking in their portfolios for something that is like the age pension. Along with the other things that they do, they need the longevity risk protection of the stable income that the age pension provides.”

 

Darin Tyson-Chan
June 28, 2018
smsmagazine.com.au

 

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