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Asset allocation as you age

How age changes investing preferences.

         

 

Vanguard's latest edition of How Australia Saves – a report which takes a deep dive into how Australians are managing their superannuation savings – confirmed that the vast majority (87%) of super members have their retirement savings sitting in the default options of their superannuation fund.

This reliance on default funds is both a strength and weakness of the Australian super system.

A strength is that the same research shows that in most cases, the default option outperformed those, without professional planning help, who built their own asset allocations based on the available investment options on the menu in their super fund. And importantly, those invested in the default options had less risk baked into their portfolios than the individual portfolios.

A perceived weakness with both mandatory contributions and default options, is that they have the effect of driving disengagement by Australians with their superannuation.

However not everyone in the default options is disengaged – a number certainly will have decided that the default option's asset allocation is right for them.

But an interesting question, and potentially a greater weakness of the system, is whether the asset allocation of a typical default fund suits members of any age.

Age is a pretty powerful filter for investment decision-making. Financial advisers sometimes say that if they had to build a financial plan based only on one piece of information that your age would be that critical data point.

If you consider two super members. One is 25 years old and has started their first full-time job, the other has just celebrated their 64th birthday and is planning their life after full-time work about a year from now.

Both are invested in the same fund's default balanced option and therefore have exactly the same asset allocation in their investment portfolio – the same percentage exposure to both growth (equities /property) and fixed income (bonds) and cash assets.

Yet our 25-year-old may have their money invested for the next 70 years. Our near retiree realistically has a time horizon of more like 20-30 years.

In addition to their age difference, their ability to recover from severe market shocks, like a global financial crisis, is also very different.

For the 25 year-old, a GFC like event would barely show up as a blip on their fund's performance chart as they approach retirement in 40 years' time. For the 64 year-old the consequences and impact of a GFC event on their retirement lifestyle could be much more immediate and dramatic as they enter the drawdown years. Technical folks call this sequencing risk.

Each of these members could choose to move away from the default by opting for one of the other risk-based portfolios – typically ranging from conservative or stable to high growth – and align their asset allocation more closely with age and therefore risk profile.

But given what we know about disengagement or inertia in superannuation, most people do not do that.

A new breed

A new generation of default options are emerging in the Australian market where the asset allocation is driven by the age of the member rather than targeting a certain level of risk for the portfolio investment mix.

In the US, such products called 'target-date' or lifecycle funds have become a dominant choice for default portfolios.

Vanguard in the US is a major provider of investments and record keeping services to the retirement industry, and has recorded a 50 per cent rise in the use of target-date funds over the ten years between 2007 and 2017. Now about three quarters of all retirement savers in the US use these types of funds.

Target date funds are not all built the same. Vanguard's approach is to segment investors into four phases, the first of which caters for younger investors (under 40) where a higher allocation to equities – around 90 per cent – is used.

The second phase moves the asset allocation to a 50/50 split between growth and income investments for people aged 41-65 – an asset allocation that is very reflective of many of the balanced default funds available to Australian super members.

Phase three is when investors are in the early years of retirement and again the asset allocation to riskier assets is reduced, while the fourth phase is for members who are in the later stages of retirement, with the portfolio keeping just a modest exposure to equities within the portfolio.

Back to basics

If you take the concepts which a target date fund presents in terms of asset allocation principles, they are simply providing an automated way to dial back market risk as an investor ages, in addition to recognising the increasing importance of capital preservation as you age.

The aim is avoid extreme asset allocation decisions – either too aggressive or overly conservative – and avoid the impact of poor portfolio construction due to inadequate diversification.

These are sound, fundamental principles which can be leveraged by anyone considering their appropriate asset allocation to complement the goals they are saving towards.

Your asset allocation – how you allocate money to each asset class – is one of the most important decisions faced when constructing an investment portfolio – and there is a wealth of evidence showing it has the biggest influence out of all investment decisions on the performance of your investment.

This article was first published in the ASX Investor Update newsletter on 12 June 2019

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
18 June 2019
vanguardinvestments.com.au

 

Big four firm outlines new financial year checklist for SMSFs

With the new financial year starting, one of the big four accounting firms has highlighted the key areas on which SMSF professionals should focus their attention for SMSF clients.

       

 

With end of financial year planning now out of the way, Deloitte Private partner Liz Westover outlined some of the areas that might need to be reviewed with SMSF clients for the 2019–20 financial year.

Minutes for withdrawals above the pension minimum

Speaking at a recent Chartered Accountants Australia and New Zealand event, Ms Westover said where clients are planning to withdraw more than the pension, there may be certain minutes that need to be made.

“If you’re above the minimum and you want to treat some of them as lump sums from accumulation and so on, then get your documents in place because the ATO has a view that they must be prospective, they can’t be retrospective,” Ms Westover said.

Update clients on the new rates and thresholds

SMSF professionals should also ensure their clients are up to date with the rates and thresholds for the 2019–20 financial year.

“The ATO released this months ago, but there are plenty of organisations that just have a two-page list of rates and thresholds that you might want to distribute to your clients,” she said.

Sort out data feeds

Ms Westover said using proper SMSF administration software can create a lot of efficiency for SMSF firms, but practitioners need to ensure that the data feeds are actually in place.

“Now is a good opportunity to get clients to sign authorisations to get those data feeds in place,” she said.

Contributions splitting

Contributions splitting is a good strategy for evening up the balances between spouses, she said.

If an SMSF client made contributions last financial year, then this financial year they can make an election to split up to 85 per cent of those concessional contributions to their partner.

“So, if I’m looking to bring my partner’s balance up, then that’s a great way to do it. It’s a bit of a slow burn, but if you’re talking to younger clients where they can benefit from that over time, contribution splitting can be a good way to build up that second person’s balance,” she explained.

Determining lodgement dates for 2019–20

If it’s a new fund, then the client’s lodgement date will be in February, or if there are funds that were late last financial year, then they will have an October deadline, Ms Westover explained.

“Most clients will generally be in that May–June bucket, but as you’re planning your work, if you just get a good sense of when funds are actually going to be due for lodgement, that can help you work through your workflows and make sure that nobody is late,” she said.

“The ATO has a very strong focus on non-lodgements at the moment.”

Individual versus corporate trustee

While the ATO’s statistics show that 81 per cent of funds are now being set up with a corporate trustee, she said, there are still a lot of funds around with corporate trustees.

“I won’t set a client up [in an SMSF] without a corporate trustee. Nevertheless, we are still in a situation where 59 per cent have corporate trustees and 41 per cent have individual trustees,” she said.

While the process of changing a fund with individual trustees to a corporate trustee is a lengthy process, she said, the new financial year may be a good opportunity to revisit this with clients that still have individual trustees and encourage them to switch to a corporate trustee.

“Everyone has a fresh mind in the new financial year, so that might be a great exercise to actually do,” she said.

Addressing potential residency issues

If SMSF professionals have clients that are heading off overseas on secondments, they will need to consider how this might impact the fund and whether it will jeopardise the fund’s residency status, Ms Westover warned.

“I had a client recently who joined his mum’s fund because he wanted to help her out in terms of the investment side, which was fine, but then he decided he was going to move overseas and semi-permanently, so we had some real issues around the fund in terms of residency and what we did,” she said.

“We talked him through what all the implications were, what he could actually do, and in the end we made the decision that we were going to get him back out of the fund, and in actual fact he was in a better position to help his mother with some of the investments out of the fund than he was being in the fund because he didn’t have control over then.”

One of the other options would have been to turn the fund into a small APRA fund, she said.

“He didn’t want to do that one, but it’s important to have those discussions with your clients. Are you moving overseas and what impact is it going to have on your fund?” she said.

Estate planning

Ms Westover said estate planning is probably the single biggest issue for SMSF clients, especially following the implementation of the super reforms on 1 July 2017.

Previously, it didn’t matter how much clients had in their income streams, she said, as they could just have a reversionary pension, and in their mind, it was sorted.

“Now we potentially have to pull a lot of money out of super as a result of the transfer balance cap provisions, so you need to be thinking about how to deal with the accumulation accounts. I might have a reversionary pension in place on the income stream account, but what about the accumulation account, do I need a binding death benefit nomination?” she said.

“I still see a lot of clients who do not understand that superannuation does not automatically form part of their estate and that their will won’t have any jurisdiction over their superannuation benefits. I’m actually quite astounded by the amount of times that I still see that.”

 

Miranda Brownlee
28 June 2019
smsfadviser.com

 

Super growth reducing age pension drawdown

Less than half of new retirees accessed the age pension last year and of those who did, only one-quarter drew a full pension, according to new research from annuity provider Challenger, which claims superannuation is working on a mass scale.

         

 

The research, released by the Challenger Retirement Income Research (CRIR) team, found only 45 per cent of people who had turned 66 and were eligible for the age pension were claiming it and only 25 per cent of this age cohort were accessing a full age pension.

The CRIR team stated the data, which was drawn from the Department of Social Services from December 2018, also showed 70 per cent of all age-eligible retirees currently receive some form of age pension, but only 42 per cent were on the full age pension, however, this latter figure was an overall average and included retirees in their 90s who never had any form of superannuation.

“The apparent success of super in building savings at retirement is likely to be delaying age pension access for most people. As super balances continue to grow, most retirees can expect to spend longer in retirement before they receive any age pension,” the research said.

The CRIR team claimed superannuation was working on a mass scale and its success in creating retirement savings was not limited to a single sector or a handful of funds.

“While some funds have been particularly successful in building balances for their members approaching retirement, the rising tide of time in the system is lifting average consolidated balances across the system,” the report noted.

The CRIR team added the average retirement-phase member balance across all large Australian Prudential Regulation Authority (APRA) funds at June 2018 was $281,253, but this figure was not for consolidated balances, which were on average for a person with super aged 60 to 64 just over $300,000. When combined at the household level among couples entering retirement, this balance was more than $400,000.

These figures would, however, lead to an interaction with the assets test, which has its lowest threshold starting at $258,500 for a single person and $387,500 for a couple, and where a 7.8 per cent a year taper rate begins.

“This means that the average large APRA fund member in the retirement phase does not get the full age pension,” the report noted, adding access to the pension would increase as they spent their retirement savings from year-to-year.

 

 Jason Spits
June 26, 2019
smsmagazine.com.au

 

 

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?

         

 

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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

 

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