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SMSFs warned on ‘ticking time bomb’ with outdated deeds

A surprising number of older SMSF deeds pre-dating the 2008 financial year still remain, some of which contain inappropriate clauses exposing members to unforeseen risks, an industry lawyer warns.

         

 

DBA Lawyers senior associate William Fettes said while reviewing and updating a trust deed can be a costly exercise, it is generally recommended that SMSF trust deeds are updated every four or five years or when there is a major legislative change.

The last major legislative change to superannuation that warranted a wholesale update, he said, occurred in mid-2007.

“[So] I think these pre-FY 2008 deeds are very much in the category where it's a no brainer — it's strongly encouraged that you would get an update,” said Mr Fettes.

“The ones that are even older than that are going to be worse. They really can be ticking time bombs. For example, where you've got some sort of principal employer entity there that's associated with the fund.”

The client may not realise it, he said, but if they, for example, deregister that company, some deeds have provisions that say the fund just has to be wound up.

“There's no way around it, and you end up tainting the fund significantly without even really realising it,” he said.

“Occasionally you can resurrect the company in order to try and fix that, but that's a whole big exercise in itself to deal with ASIC around resurrecting a company, and so it can be a real ticking time bomb for clients that have those really old deeds and so we still see plenty of that around.”

While it may not be strictly necessary for a trust deed to be updated following the more recent changes to the system, SMSF trustees may still want to in order to take advantage of certain strategies, he said.

“There is an argument that you can be fully compliant with the law because a lot of the major [changes] that were implemented with the tax provisions, around the transfer balance cap, the different interactions with the caps and a lot of the other concessions, are imposed by tax law. But you're not going to have the type of flexibility and features that you necessarily want in order to take full advantage of the best strategies and so forth.”

 

By: Miranda Brownlee
22 NOVEMBER 2017
smsfadviser.com

Realism vs reality – working part-time as retirees

Are you planning to boost your retirement income by doing some part-time work once you eventually retire? Perhaps you have included the expectation of some paid work in your calculations about how much you need to finance your retirement.

       

 

If so, this leads to another question: How realistic is that expectation?

A Vanguard research paper, Retirement transitions in four countries, may help provide some answers.

More than 5560 pre-retirees (who are planning to retire within 10 years) and recent retirees (who retired over the past 10 years) age 55-75 took part in the study covering Australia, the United States, United Kingdom and Canada. This includes 743 Australian pre-retirees and 703 Australian recent retirees.

In short, the researchers wanted to compare the expectations of pre-retirees with the experiences of recent retirees – including in regard to doing some work as a retiree.

Researchers found that pre-retirees were up to four times likely to say they expect to work in retirement compared to the proportion of recent retirees actually working. Consider the findings:

  • Australia: Pre-retirees expecting to do paid work at least once a week in retirement (42 per cent). Recent retirees actually working at least once a week (11 per cent).
  • United States: Pre-retirees expecting to do paid work at least once a week in retirement (42 per cent). Recent retirees actually working at least once a week (14 per cent).
  • United Kingdom: Pre-retirees expecting to do paid work at least once a week in retirement (40 per cent). Recent retirees actually working at least once a week (10 per cent).
  • Canada: Pre-retirees expecting to do paid work at least once a week in retirement (47 per cent). Recent retirees actually working at least once a week (14 per cent).

These findings raise another question: Why is there this gap between expectations to work in retirement and actually working?

“There are several possible reasons for this difference,” the researchers write. “Pre-retirees may feel they need more sources in retirement, and so expect to work.

“It could also be true,” they add, “that recent retirees had the same idea [as pre-retirees], but then, upon retiring, realised that the work was no longer necessary in retirement. Pre-retirees may also be overestimating their ability to find suitable work.”

Whether retirees do some work much depends on such factors as employment opportunities, health and family obligations – and whether they actually want to do paid work after getting a taste for retirement.

A message is that you should be particularly cautious about counting on part-time work as a retiree to boost your retirement income.

 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
13 November 2017
vanguard.com.au

Address Under-insurance at Personal Finance Level – Global study

Income protection insurance should be presented as part of personal finances and Governments should be pressuring insurers to provide transparent and easy to understand products, a new global study into income protection under-insurance has stated.

         

 

Zurich Life and Investments Australia, CEO, Tim Bailey

The study, conducted by Zurich Insurance Group and the Smith School of Enterprise and the Environment, University of Oxford, examined gaps in income protection (IP) insurance in 12 countries, including Australia, and found that Government, insurers, employers and intermediaries had a role in promoting IP cover to consumers.

The study examined what measures were available to each group to close the current gaps in income protection cover and stated “Governments could play a useful role here by putting pressure on the financial industry to create and promote income protection products that are transparent and easy for consumers to understand.”

Additionally, the study also stated that life insurers could also contribute and “…these need to get better at explaining to consumers the benefits of income protection”.

“Insurers can also help by making financial planning relevant to households…”
“Insurers can also help by making financial planning relevant to households, for example, by presenting income protection within the context of overall household finances,” the study stated.

Addressing the area of employer actions, the study suggested enrolling people in income protection insurance programs automatically and then ensuring they made regular contributions to cover the cost as one possible solution, combined with formal financial education and personalised advice that integrated goal-setting.

Zurich said the findings of the study show the need for urgent solutions particularly where extended working lives were putting individuals at increased risk of becoming disabled during their career.

Commenting on the findings Zurich Australia Life and Investments Chief Executive, Tim Bailey said, “Our research shows that several factors are aggregating to put the financial security of many Australians at risk as they age. Unfortunately, this is at a time when governments in developed nations are generally spending less on welfare benefits in response to the increasing cost of an ageing population. This presents a real challenge to society. We all need to act to foster and implement solutions”.

“Inadequate and/or inappropriate life insurance cover could expose Australian families to the serious risk of depleted household budgets, and the erosion of savings accounts and retirement balances. The burden of guaranteeing long-term financial security is simply too great for many individuals to bear,” he added.

 

November 17, 2017
riskinfo.com.au

For the young it a question of engagement

Robyn Bowerman relates a chat he had with a young relative who was starting a new job.  A case for starting to save from the outset.  The importance of asset allocation.

         

 

Starting a new job can be equal parts high stress and high excitement.

A young relative recently embraced the excitement of gaining their first full-time job – a rite of passage into the world of independent adulthood in many ways.

She also took the time to pause – if only momentarily – to consider superannuation.

Not surprisingly for someone working in a range of part-time jobs while studying at university she found she had multiple super funds. Step one was a no-brainer – consolidate them and reduce the multiple sets of fees both on the funds and on multiple insurance policies.

The online consolidate instructions to enable her target fund to do the hard work of going out and rounding up her other bits and bobs of super was simple and effective. Job done.

Step two began to look much more challenging – there were text messages and Facebook alerts now competing for what seemed an ever diminishing level of attention.

Yet there was so much to cover – the importance of setting long-term goals, investment choices, the need for discipline, the enormous power of making extra contributions and finally – but no means least – unlocking the secrets of asset allocation to tailor your investment portfolio to your personal risk level.

But the clock was clearly ticking so it was mutually agreed we would cover just one of these important topics that day and the others would be revisited in instalments at a date to be arranged. After all there is only so much excitement a 20-something can handle in one sitting.

So my 45-minute lecture on the importance of the asset allocation decision, it's power in driving the portfolio results and why oodles of academic research tells us this is the pre-eminent decision we all make as investors was condensed into a 5-7 minute version aka speed dating investment style.

Two things emerged from this rather pressured exercise. The young generation of today are clearly a lot more adept at multi-tasking than my much older generation because while answering multiple electronic signals there did seem to be some understanding that as a young investor in a super fund you will not be able to access the funds until well into your 60s – that part both registered and almost shut down the conversation immediately – and when it came to asset allocation why not take the high risk/higher potential reward option?

Great question. Why not indeed. So let us look at the various investment options the super fund offered on the choice menu. While not as extensive as some it had all the usual suspects in the lineup – a range of premixed diversified funds targeting the spectrum of risk profiles as well as funds focussing on specific asset classes like Australian shares, international shares, property both local and international and a range of fixed income options. There were also options to pick funds with an ethical, social and environmental screens.

Then we started to delve into the notion of rebalancing. While not an onerous or difficult concept to grasp the idea of revisiting the super fund portfolio once a year was met with a level of incredulity … I have to review it every year for the next 40 years …really? Why can't the super fund just do it for me?

Well it can, and that's where the conversation pretty much ended and the social media interaction resumed normal service.

Now to some in the super industry that exchange points to one of the fundamental flaws in our superannuation system – the lack of engagement of fund members in making their own investment decisions.

The reality is that within super around 80 per cent of people are in the default fund offer. And some highlight that as a measure of low engagement with super.

Yet research that Vanguard published earlier this year – How Australia Saves 2017 – that was done in conjunction with industry fund Sunsuper showed that rather than being an issue the fund members in the default investment fund actually enjoyed higher returns over the 10-years ending June 2016 than those people who made direct investment decisions.

This may surprise some people but it points to the challenge every fund member faces. When making your own investment selections your first point of comparison should be against your fund's default offering that is generally being managed by a full-time team of investment professionals.

The core strengths of the Australian super system are its near universal coverage, mandatory contribution regime and choice architecture. Low engagement may well be the trade-off we have to accept for the high level of coverage but alternatively perhaps we are measuring the wrong thing by focussing so heavily on engagement in investment decisions.

Because there is no guarantee that when people make choices they are guaranteed to make better choices.

 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
20 November 2017
vanguard.com.au

Made in Albania? How globalisation is creating challenges for Chinese policymakers

Is cheap manufacturing starting to move away from China?

Earlier this year I moved with my family from China to California to begin an exciting new chapter of our lives.

This isn't the first time I've lived in the US. I came here in 1997 for my postgraduate program and I stayed in the States for six years.

       

 

Return to sender

Last time, on visits back home to China, friends and relatives always expected me to bring gifts. Back then as a student I was on a limited budget so I went to places like Wal-Mart but pretty much everything was made in China, particularly after China's accession to the World Trade Organisation in 2001.

It made it a little difficult to buy gifts as people in China asked me why I brought them something all the way from the US that was actually made at home!

But this time around, I've seen country of origin labels from all sorts of places in the shopping malls—not just Vietnam, Indonesia and Sri Lanka but also Latin American countries like the Dominican Republic and even emerging European economies like Albania and Hungary.

So what's happened over the past 20 years?

One key trend is increasing globalisation. As the world's factory, China used to dominate global manufacturing but in recent years we've seen a boom in global trade with supply chains extending to all corners of the world. And as China has become more expensive, manufacturers have looked for ways to lower their costs.

Another trend is technological change. We're all increasingly familiar with self-checkouts at supermarkets. But self-service powered by technology is spreading. I recently went to Washington DC on a work trip and there was no-one at the hotel reception desk at night. I just punched in my details and received the door key—it was all automatic.

Incidentally, if you're interested about the impact of technology on the way we work, I encourage you to ready this fascinating piece by Vanguard Chief Economist Joe Davis about how robots will build better jobs.

Adding more value

Here in the US, these twin drivers of globalisation and technology are combining to reduce pressure on inflation and increase choice for consumers. But back home in China they are creating challenges for policymakers.

Exports have traditionally been a big driver of growth in China. Before the GFC, net exports were about 8% of GDP and that's come right down over the past decade to 2-3%. While this is partly due to the post-GFC weakening in global demand it's also because China is losing its competitiveness in low-end manufacturing.

Over the past 10 years, China's currency has appreciated, and labour and lender costs have risen significantly.

So as the era of cheap labour comes to an end in China, the challenge is for China to move up the value chain, not by making shoes or clothes or lower-end electronics but by building more critical parts of the product.

Look at the way iPhones are put together. China exports iPhones but most of the value-add doesn't happen in China. Instead, China imports the parts from Taiwan and South Korea and assembles them. So China really doesn't gain as much as it could.

While there are encouraging signs, with higher end machinery exports increasing as the share of clothing and textile exports come down, there's more work to do.

China's original transformation from a low income to a middle income economy was powered by cheap labour. But now to escape the middle income trap the key is to innovate and be more creative like neighbours Japan and South Korea.

Spoilt for choice

Looking to the future, protectionism is still a concern as the US renegotiates trade deals. But meanwhile we're likely to see globalisation continue as manufacturers look around for lower costs, depressing global inflation in the medium term and giving central bankers a challenge to reach their targets.

And back in the stores around my new home town in California, it means that next time I go shopping I'm likely to be continue to be spoilt for choice.

 

Qian Wang
​20 November 2017
Vamguard.com.au

Australia’s vital statistics

A truly fascinating set of numbers about our great country.  Almost 150 different items covered. 

         

 

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

 

Our Advent calendar for 2017

On behalf of all our staff we wish our clients a Merry Christmas, happy New Year and a great holiday period.

Come back each day for an inspirational quote or poem about Christmas, summer and life in general from the likes of Banjo Paterson or Charles Dickens. 

       

 

Open the Advent Calendar

 

 

 

 

 

 

 

What the gig economy may mean for your super

Keith Richards of The Rolling Stones probably wouldn't define the gig economy as a market where buyers and sellers of services and goods are matched or organised through online platforms. This is a definition that the Association of Superannuation Funds of Australia (ASFA) uses in a discussion paper released late last month.

         

 

The Rolling Stones, true veterans of the gig economy, first played together 55 years ago, about three decades before the creation of the web.

In the broadest sense, participants in the gig economy work at a series of jobs or tasks – sometimes called a portfolio of work – rather than as part-time or full-time employees. It doesn't necessarily have anything to do with online markets.

Yet in reality, people who earn their livings from doing a number of tasks instead of being full-time employees are increasingly obtaining their work through the internet.

This particular ASFA discussion paper, Superannuation and the changing nature of work, focuses on the more specific definition of the gig economy as involving online platforms that match and organise mainly freelance work, car transport and food delivery.

ASFA estimates that about 100,000 workers or 0.8 per cent of the workforce use web-based platforms to regularly obtain such work, often as independent contractors. And the gig economy is “set to become more pervasive”, expanding into a wider variety of occupations and industries.

No matter whether we are talking about the gig economy in its narrowest or broadest sense, its burgeoning growth means that you, some members of your family or at least someone you know are increasingly likely to join it.

Even those who have spent long working lives as employees for a single employer are much more likely to ease their way towards retirement by joining the gig economy for at least a few hours a week.

And if you work in the gig economy – whether through on or offline arrangements – the impact on your retirement savings is likely to be similar, depending on individual circumstances such as if you are an independent contractor.

From a retirement-savings perspective, the biggest difference with much of the gig economy is that the superannuation guarantee (SG) contributions are not paid for independent contractors and other self-employed individuals.

Employers are, of course, legally required to pay compulsory super contributions to those classified as their employees, again whether working full or part-time (with certain exceptions including for very low-income earners).

Of course, some members of the gig economy are legally classified as employees (depending upon the arrangements and the nature of the relationships) and should receive compulsory super contributions. As ASFA observes, this can be a “legal grey area” in regards to some workers in the gig economy.

Critically, an employer is not obliged to pay SG contributions for employees earning less than $450 a month. Yet employees in the gig economy might work for a number of bosses in month, earning less than $450 from each.

In turn, the self-employed are not compelled to put money aside for their own retirement. It is hardly surprising that vast majority of the self-employed have little or no super.

In its discussion paper, ASFA raises whether compulsory super should be extended to the self-employed (including independent contractors) and whether the $450-a-month threshold for employee SG contributions should be removed.

While these policy issues are being debated, a pressing issue for the self-employed (whether or not in the gig economy) is to take the initiative and ensure that they are voluntarily saving for their retirement.

 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
10 October 2017
vanguardinvestments.com.au

US Fed policy: Normalisation begins

Commentary by Vanguard Global Chief Economist Joe Davis.
Figures cited are in Australian dollars, at September 2017 exchange rates.

         
 
As Vanguard forecast last year, the United States Federal Reserve is entering on “Phase Two” of its path to policy normalisation: the reduction of its balance sheet of about $5.6 trillion in securities (mostly US government bonds) acquired as part of the Fed's economic stimulus efforts during and after the global financial crisis.
 
Our anticipation that 2017 would mark the transition from Phase One (raising the US federal funds rate, an influence on interest rates worldwide) from 0%–0.25% to 1.00%–1.25%) to Phase Two was based on a view that the US labour market would continue to gradually tighten this year and financial conditions improve, even without a strong rebound in inflation. That outlook has been generally on point.
 
Shrinking the Fed's balance sheet
 
Most market observers now anticipate an appropriate, gradual and smooth unwinding of the Fed's balance sheet that is unlikely to give the financial markets pause. I agree with “appropriate” and “gradual.” The third adjective, “smooth,” is what worries me.
 
To be fair, the Fed has taken a number of steps to mitigate market impacts:
  • A transparent forward-guidance strategy.
  • A slow schedule for unwinding – initially by only about $7.5 billion per month of US Treasury notes and $4.9 billion of mortgage-backed securities (MBS). This will eventually rise to about $37.7 billion per month and $24.9 billion per month, respectively, compared with average daily trading volume of almost $625 billion in the Treasury market and almost $250 billion in the MBS market.
  • An intent not to sell securities but simply to decrease the amount it reinvests from maturing securities.
  • A likelihood of settling on an optimal balance-sheet size that is significantly higher than precrisis levels (we expect it to be in the $3.7–$4.4 trillion range, up from about $995 billion).
 
Total assets on the Fed's balance sheet
(Figures in trillions of AUD)
 
Note: Data are from 1 January 2007 through 23 August 2017. Sources: Vanguard and Federal Reserve Bank of St Louis. Figures are at September 2017 currency exchange rates.
 
Phase Two risks
 
To be clear, we believe that the Fed's course of action in beginning to taper its balance sheet is appropriate given the state of the US labour market and the strength in financial conditions. But I believe we should all be prepared for a potential uptick in volatility during this monetary policy phase. No major central bank has yet successfully reversed quantitative easing, or QE (the Bank of Japan's balance sheet is higher today than a decade ago), so we shouldn't take for granted that this will be easy and uneventful.
 
With the balance sheet at an unprecedented size (see chart above), passing this second milestone without materially affecting financial conditions or roiling the markets could well prove a bigger challenge for the Fed than starting to raise rates. Because the Fed's QE programs helped to stimulate asset prices and the search for yield (sometimes clinically referred to as the “portfolio rebalancing effect”), I believe it is reasonable to expect some choppy waters in the months ahead as some of the oxygen is let out of the system.
 
Where we're headed
 
The Fed would clearly like to return to more normal monetary policy conditions and has taken pains to lay out how it expects to get there. Phase Two is part of that plan. Most believe that the well-telegraphed tapering of the balance sheet will be a “nonevent.” Many economists, including those at the Fed, see Phase Three – resuming the course of rate hikes – occurring as early as December 2017.
 
Our view is different. For some time, we have felt that Phase Two would be followed by an “extended pause” in rate hikes, leaving short-term rates near 1.25% through the middle of 2018, if not longer. Whether our long-held view proves correct will depend on a range of factors including the pace of future inflation, how quickly the unemployment rate declines below 4% and how supportive financial conditions are to the economic recovery.
 
Our outlook
 
The Fed is unlikely to raise the federal funds rate as it begins tapering its balance sheet. Nonetheless, Phase Two should still be viewed as a “tightening” in monetary conditions as it will reduce total Fed balance sheet assets following several rounds of QE. In my mind, QE has been a factor in the strong performance of various investments over the past several years, including equities and bonds. Risk appetites, as measured by cash flows, have been strong across the globe, and investors have been rewarded for bearing that market risk.
 
But the combination of fully valued asset prices and low levels of market volatility has generally not been indicative of strong future returns. In a future blog, I will address the question of whether (and by how much) the US equity market has become overvalued.
 
Needless to say, we continue to maintain a guarded market outlook at Vanguard, and we urge investors to stick to their balanced, long-run plan whether or not my worries materialise. Let's hope I am wrong.
 
 
Commentary by Vanguard Global Chief Economist Joe Davis.
Figures cited are in Australian dollars, at September 2017 exchange rates.
26 September 2017

Raft of superannuation measures enter Parliament

The government has introduced a number of bills into Parliament relating to contributions including the removal of an employer loophole with salary sacrifice arrangements.

           

 

Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) Bill 2017 entered the House of Representatives today and is aimed at improving choice for members and the integrity of salary sacrifice arrangements.

The bill amends the Superannuation Guarantee (Administration) Act 1992 (SGAA) to ensure that employees under workplace determinations or enterprise agreements have an opportunity to choose the superannuation fund for their compulsory employer contributions.

If passed, the measure will apply to new workplace determinations and enterprise agreements made on or after 1 July 2018.

The bill also removes a loophole from the legislation that allows unscrupulous employers to use their employee’s salary sacrifice contributions to pay their own Superannuation Guarantee (SG) obligations and ensures that SG is paid on a pre-salary sacrifice base.

The government also introduced Superannuation (Excess Non-concessional Contributions Tax) Amendment (National Disability Insurance Scheme Funding) Bill 2017, which increases the superannuation excess non-concessional contributions tax from the current rate of 47 per cent up to 47.5 per cent for the 2019-20 financial year and later financial years.

The third bill that was introduced, the Superannuation (Excess Untaxed Roll-over Amounts Tax) Amendment (National Disability Insurance Scheme Funding) Bill 2017, makes changes to the rate at which excess untaxed roll-over amounts are taxed.

The bill amends the Superannuation (Excess Untaxed Roll-over Amounts Tax) Act 2007 to increase the rate at which excess untaxed roll-over amounts tax is payable on an individual’s excess untaxed roll-over amounts from 47 per cent to 47.5 per cent.

By: Miranda Brownlee
23 OCTOBER 2017
smsfadviser.com

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