GPL Financial Group GPL Partners

Archives admin

Life’s financial turning points: good and not-so-good

The marriage and divorce statistics for 2015 sadly suggest that 43 per cent of Australian marriages may end in divorce. Significantly, this number-crunching does not include separations of de facto couples.

 

     
   

 

Unfortunately, the breakdown of a relationship is a reality for many couples and it is a reality with typically damaging financial and emotional consequences.

We face a series of widely-shared financial turning points during our lives. Yet how we handle them obviously differs widely.

ASIC's personal finance website MoneySmart has long published a comprehensive feature, Life's events – last updated this month – with tips about how to deal with our financial turning points, the good and not-so-good. And unsurprising, the breakdown of a personal relationship numbers among the life events on ASIC's list.

Financial turning points include receiving our first pay, joining our first super fund, leaving home for the first time and entering a personal relationship. Among the others are buying our first (second or third) home, dealing with serious illness in our families, coping with a partner’s death, losing our job and eventually retiring.

A decision to begin saving seriously to meet our long-term goals and the creation of our first financial plan are high among our key financial milestones.

Thinking about the feasibility of ‘downsizing’ to a smaller home as we age is becoming more common and finding suitable age care is climbing higher in the list of life events with the ageing of the population.

There are straightforward ways to help prepare for financial turning points such as budgeting, saving, investing, obtaining adequate insurance, considering quality professional advice when necessary and estate planning.

How we cope as investors with sharply rising or sharply falling investment markets can be a life-changing event. Investors who set an appropriately-diversified strategic portfolio, and who remain disciplined and focused on their long-term goals are best-placed to cope with market upheavals.

It is critical to try to stop one life event having negative implications for another life event. For instance, a failure to remain disciplined during a fall in share prices of the magnitude that occurred during the GFC may reduce your standard of living in retirement – even though that retirement may be many years away.

Planning for life's financial events is at the core of sound financial planning.

Robin Bowerman
​Head of Market Strategy and Communications at Vanguard.
5 April 2017
www.vanguardinvestments.com.au

Global economy synchronised and thriving

The global economy has maintained steady growth in the second quarter of 2017, providing a solid foundation for risk assets such as equities and corporate credit which further encourages investors to build a diversified portfolio, according to JP Morgan.

 

     
   

 

Speaking at a media roundtable event in Sydney this week, JP Morgan global market strategist for Australia Kerry Craig said while 2017 held many uncertainties, such as European political outcomes or the decisions of the US Federal Reserve, it was expected to be a constructive year for risk assets including global equities, corporate credit and emerging market (EM) debt.

“Suddenly we are at a point which is very different to where we’ve been for a very long time – everything became more co-ordinated and synchronised in terms of outlook,” he said.

“There are a lot of positive opportunities coming through internationally for investors outside of the US, with the longer term view being that they should actually look at the global economy.”

Focusing on the domestic market, Craig noted that Australia had fallen behind the rest of the world, which could be a direct response to the absence of a fiscal boost.

“While the rest of the world is looking great Australia is lagging a little bit because you haven’t had that fiscal boost come through,” he said.

The underperforming labour market saw the Australian unemployment rate rise to 5.9 per cent in February, creating a push for the government to introduce improved policies in the upcoming budget.

“The market will be looking for that infrastructure spend and looking for what’s going to happen with tax cuts and any changes around the interest in the housing market,” Craig added.

“The RBA [Reserve Bank of Australia] can only do so much about addressing demand. They can’t increase supply – it’s the government that needs to do that through infrastructure, whether it’s the release of land or changing rules about why interest-only loans are so attractive for business.”

The firm also suggested corrections in the market should be welcomed by investors as an opportunity to deploy cash and allocate towards risk assets in their portfolios.

“We believe corrections in markets in the months ahead could be attractive entry points to build a stronger portfolio which benefits from the solid global growth environment,” Craig said.

 

By Leanne Abbas  
13 Apr 2017
financialobserver.com.au

Almost the world’s best for retirees

What are the best countries for a comfortable retirement? What countries have the best retirement-income systems? It seems the answers to these questions are rather positive for Australian retirees.

           

 

The recently-published 2017 Best Countries survey from US News & World Report, BAV Consulting and the Wharton School at the University of Pennsylvania ranks Australia as the world's second-best country for a comfortable retirement – behind New Zealand and ahead of Switzerland, Canada and Portugal in the top five.

Survey respondents aged 45 years and up ranked the best countries for retirement on seven attributes: affordability, favourable tax environment, friendliness, “a place I would live”, pleasant climate, respect for property rights and a well-developed public health system.

The questions were asked in the context of where a person would consider moving to upon retirement if cost were no object. It is worth noting that the Best Countries survey did not seek views about the adequacy of a country's retirement-income systems.

Up to approximately 21,000 survey participants from around the world were asked to grade countries under such headings as best countries overall (Australia came eighth with Switzerland taking first place), best countries for women (Australia sixth), quality of life (Australia fourth), best countries to invest in (Australia 22nd) and best countries for a comfortable retirement.

The latest Melbourne Mercer Global Pension Index, as discussed by Smart Investing late last year, once again ranked Australia's retirement-income system third out of 27 countries assessed (accounting for 60 per cent of the world's population) in terms adequacy, sustainability and integrity. While Australia was given a B-plus, the front-runners – Denmark followed by the Netherlands – received A grades.

Australia's high rating in the pension survey was largely due to our “robust” superannuation system and Government-funded age pension, but “there was work to be done” to achieve an A grade.

Irrespective of each country's social, political, historical and economic influences, the pension report stresses that many of their challenges in dealing with an ageing population are similar. These include encouraging people to work longer, the level of retirement funding and reducing the” leakage” of retirement savings before retirement.

Although the suggestions of the Global Pension Index are directed mainly at government and the pension/retirement sectors, individuals may pick up useful personal pointers from most of its suggestions to, perhaps, discuss with a financial planner. In other words, consider taking a personal perspective on this global retirement-incomes challenge.

These personal pointers may include:

  • Think about whether to work until an older age than initially intended. The longer a person remains in the workforce, the greater the opportunity to save for what will be a shorter and therefore less-costly retirement. (An individual's ability to work longer will much depend, of course, on personal circumstances including health and employment opportunities.)
  • Try to save more in super within the annual contribution caps. And if self-employed, consider making voluntary super contributions. Unlike employees, the self-employed in Australia are not required to save in super.
  • Think carefully before accumulating pre-retirement debt with the purpose of repaying it with super savings – it could reduce your standard of living in retirement. This is part of the pre-retirement “leakage” referred to by the Global Pension Index.
  • Take your superannuation pension rather than a lump sum upon retirement if possible. This will keep your savings in the concessionally-tax or tax-free super system for longer and, most importantly, make your retirement lifestyle as comfortable as possible for as long as possible. The report for the Global Pension Index suggests that one possible way to improve Australia's retirement-income system might be to compel super members to take part of their super as a pension.

It's comforting that thousands of people around the world regard Australia as one of the very best places for a comfortable retirement if they could afford to shift to another country after leaving the workforce and cost was not a barrier. And it must provide a degree of comfort that Australia's retirement-income system is “relatively well placed” in the worlds of the Global Pension Index.

Unfortunately, other research has long shown that a large proportion of Australians have inadequate – often grossly inadequate – retirement savings.

As global retirement-income systems grapple with the demographic shift of an ageing population with declining birth rates and seemingly ever-greater longevity, individuals should be doing as much as they can to maximise their own retirement savings.

 

Robin Bowerman
​Head of Market Strategy and Communications at Vanguard.
19 March 2017
www.vanguardinvestments.com.au

Calls for calm over pending CGT amendments

SMSFs awaiting legislative amendments in relation to the CGT won’t necessarily be ruled out of the relief should the amendments fail to pass Parliament before 30 June as the legislation will likely be backdated, according to the SMSF Association.

         

 

SMSF Association head of technical Peter Hogan says the recent LCG confirmed that the transitional arrangements are intended to provide CGT relief for funds to reset the cost base where they move from current pension phase to accumulation phase.

He said members using the segregated method may continue to receive a transition to retirement, not only for 2016-17 but also past 30 June 2016 into the 2017-18 financial year.

“The ATO’s view makes it clear that the relief is intended to be applied to the situation and that consequently the government is considering legislative options to clarify this,” Mr Hogan said.

Where the technical difficulty lies, he explained, is the fact that there’s no automatic conversion of the transition to retirement either to an account-based pension or to an accumulation account with the way a transition to retirement income stream is currently defined in the legislation.

“In other words, the only way that a transition to retirement income stream can cease, is if you commute it, the way the definition currently stands,” Mr Hogan said.

“So clearly any amendment that is made will need to [allow for] an automatic conversion of the TRIS back to something which is not in retirement phase, and which is in accumulation phase.”

Mr Hogan said there is concern, however, given that these necessary amendments that will need to apply from 30 June onwards, the amendments won’t be passed as legislation before this date.

“These things do take time. We do have three or four months so I’m possibly being overly pessimistic, and with a bit of luck we may well see some draft legislation which may get through Parliament in time to meet the 30 June deadline,” he said.

“We may not see the legislation before 30 June which often happens in these sorts of circumstances.

“So that’s a watch this space to see if we do get the change of rules through Parliament before 30 June or not.”

Mr Hogan said this should not be a barrier to accessing the CGT relief even if the amendments aren’t passed before 30 June, with the legislation usually backdated in these types of situations.

“I think there is a clear intention indicated in the LCG, and with the explanatory memorandum and the original legislation, that it’s intended that CGT relief should apply in these circumstances and so any legislation, even if doesn’t get through Parliament before 30 June, will be backdated back to an appropriate date. So that the CGT relief will be available,” he said.

Mr Hogan also reassured SMSF practitioners and trustees that the Commissioner of Taxation has indicated that as long as the physical CGT elections are made in the preparation of accounts, the ATO will be satisfied.

“So it’s not something that they necessarily need to bed down in a hard and fast way before 30 June this year,” he said.

“Clearly, it would still be a good idea for trustees to minute the fact that a decision has been made to act on the CGT relief, that the trustees may wish to take appropriate action in order to claim the capital gains tax relief.” 

 

MIRANDA BROWNLEE
Tuesday, 21 March 2017
smsfadviser.com

 

Dollar-cost averaging for millennial investors

It's hardly surprisingly that a personal finance article in Forbes magazine places the classic and straightforward investment practice of dollar-cost averaging high among a list of tips to help millennials become better, more disciplined investors in 2017.

           

 

Dollar-cost averaging simply involves investing the same amount of money into shares or other securities at regular intervals – whether prices are up or down.

Investors practising dollar-cost averaging automatically buy more, say, shares when prices are lower and fewer when prices are higher. In short, purchasing costs are averaged over the total period that an investor keeps on investing, thus the name dollar-cost averaging.

Yet the core attribute of dollar-cost averaging is not so much the price paid for securities; it is the adherence to a disciplined, non-emotive approach to investing that is not swayed by prevailing market sentiment.

Dollar-cost averaging can assist investors to focus on their long-term goals with an appropriately diversified portfolio while avoiding emotionally-driven decisions to buy or sell – in other words, trying to time the market. As Smart Investing repeatedly emphasises, investors would rarely succeed consistently at market-timing.  The Forbes article, Five tips to make you a better investor in 2017, reasons that dollar cost averaging strategy may be well suited to millennial investors given their long investment horizons and their perhaps relative inexperience in investment markets. As a financial planner quoted in the piece comments: “The logic here is, if you're in your late twenties or early thirties, the fluctuations of the market on one given day are unlikely to have serious consequences to the retirement money you'll need to withdraw 30 years from now.” Novice investors were “too easily” influenced by market movements.

And given their long investment horizons, millennial investors are well placed to benefit from the rewards of compounding as investment returns are earned on past investment returns as well as on the original capital. (See Save early, save often, Smart Investing, January 29.)

The use of dollar-cost averaging does not necessarily mean, of course that investments will succeed; nor does it protect investors from falling share prices.

Australian super fund members who have compulsory and/or voluntary contributions regularly paid into their super balanced accounts are practising a form of dollar-cost averaging. The higher the regular contributions, the greater the potential effectiveness of dollar-cost averaging over the long term.

The vast majority of investors practising dollar-cost averaging would invest regular amounts from their monthly salaries. Yet a related issue concerning dollar-cost averaging can occur when an individual has a large amount of money to invest, perhaps from an inheritance, a bonus from work or some other windfall.

Several years ago, a Vanguard research paper found that, given certain assumptions, investing a big lump sum all at once had a better chance of producing higher long-term returns than drip-feeding the money into the market using dollar-cost averaging. This finding was based on historic long-term returns from share and bond in Australia, US and UK. As the paper emphasises, investment of a lump sum gains exposure to the markets as soon as possible.

Another consideration is that dollar-cost averaging may address concerns of a risk-averse investor about investing a big sum into the market immediately before a possible sharp fall in prices. It is a way for such an investor to ease their way into the markets.
For most investors without a huge windfall to invest, a critical role of dollar-cost averaging is to help keep us focused on the long-term in a disciplined, non-emotional way. It is one of investment's emotional circuit breakers.

 

Robin Bowerman
​Head of Market Strategy and Communications at Vanguard.
19 March 2017
www.vanguardinvestments.com.au

Big insto addresses CGT misconceptions

One technical consultant has stressed that while the CGT relief elections are technically only required before the lodgement of the tax return, there may still be critical action that needs to be undertaken before 30 June for segregated funds.

           

 

Speaking at an SMSF Association seminar, BT Financial Group senior technical consultant David O’Connell said while the ATO has said that elections should be made in the approved form by the date of the return for 2016-17, there may be critical preparation that needs to be done for clients with segregated funds before 30 June 2017.

r O’Connell said it is important to remember that the preparation for the CGT relief will be different depending on the structure of the fund.

“If the fund uses the segregated method, and you have to do something [to comply] before 30 June, then you need to prepare for it before 30 June,” he explained.

“When you’re dealing with the $1.6 million transfer balance cap and you have to commute out an amount as well, that’s the process you’re going to drive all the CGT relief from.”

If the fund is using the proportional method, on the other hand, or they have a transition to retirement income stream that can just continue to run and receive payments and there’s no new application for a pension, then there is more time to address the actions that need to be taken in response to the relief, Mr O’Connell said.

“In both cases, you actually tick the box beside the asset when you make the election so that is when you’re doing the return,” he said.

“So with a TTR where you don’t actually have to do anything before 30 June, you don’t have to actually have to do anything until you nominate the assets at the time of the return.”

 

MIRANDA BROWNLEE
Wednesday, 22 March 2017
smsfadviser.com

SMSFs urged to review segregation clauses in trust deed

With the rules around segregation changing, SMSF trustees wanting to run separate investment portfolios for different members may need to check the current terms in their deed allow for this, says an SMSF admin firm.

             

 

Heffron SMSF Solutions head of customer Meg Heffron says while a fund’s ability to segregate its assets will change from 1 July 2017 for those with larger balances, this will not impact their ability to run different investment portfolios.

“It doesn’t change the trustee’s ability to allow members to choose specific investments to underpin their account. It just means that arrangement can’t be reflected in the fund’s tax return,” Ms Heffron said.

Many trust deeds treat segregation and member investment choice as the same thing. However, “ruling funds out of some valuable strategic planning opportunities,” she said.

“[The deed needs] to make it very clear that the two things are different and that you can run a different investment portfolio to someone else without segregating the asset.”

 

MIRANDA BROWNLEE
Monday, 20 March 2017
smsfadviser.com

Fit for purpose? The super story so far…

We’ve come a long way since the mandatory superannuation guarantee was introduced in the early 1990s. 

           

 

Australia’s super system is now the world’s fourth largest private pension industry, with $2.1trn under management at June 2016.

But the super system is still immature. It took 20 years for SG to reach 9.5%, and will take until 2025 to get to 12%, assuming policy continuity. So it will be well into the 2030s before Australians have spent their full working lives with SG coverage of at least 9% of their salaries.

This means that for most of today’s retirees, the age pension continues to be the main source of retirement income, with approximately 80% coverage. But future retirees will be much more dependent on their own super savings, with social security falling back to more of a ‘safety net’ function over time. 

And this profound change in the dynamics of the super system is happening faster than many people expected.

From wealth accumulators to income generators

Until now, the primary focus for wealth providers has been maximising net investment returns through the accumulation phase. But things are changing, driven by the wave of baby boomers entering retirement.

Some stark numbers from the Government’s most recent Inter-Generational Report highlight the issues:

  • Longevity continues to increase, with male life expectancy at birth now 91.5 and female 93.6, with this projected to rise to 95.1 and 96.6 by 2055.
  • The ratio of workers to retirees continues to decrease, from 7.3 to 1 in 1975 to 4.5 to 1 in 2015 and a projected 2.7 to 1 in 2055.

These changes are leading to a greater focus on fiscal sustainability of the super system, exemplified by a number of recent policy changes.

  • Increased preservation age (from 55 to 60) and age pension eligibility (from 65 to 67).
  • Tightening of age pension means tests.
  • Various measures to rein in super tax concessions in the 2016 Federal Budget.
  • Promotion of longer workforce participation.

So as the super system matures and the population ages, the Government is looking to shift the industry’s focus from accumulating capital to generating income, from maximising returns to managing liabilities and from building wealth to drawing down.

Key changes emanating from the Financial System (Murray) Inquiry and other policy reviews are now poised to produce policy outcomes that will transform the retirement product landscape in Australia.

ABPs dominate the current scene

Currently, retirement product selection is almost entirely driven by the tax-free status of eligible retirement income streams from age 60.

However, there is only a very limited range of products that qualify, with the vast majority of these (around 95%) being account-based pensions (ABPs). While these offer great flexibility, investment choice, access to capital and bequest benefits, they expose investors to investment, longevity and sequencing risks. 

Some recent research also suggests that ABPs often lead to unnecessarily frugal drawdown behaviours, with retirees being anxious about the risk of outliving their savings. At an overall system level, the Government contends that super assets are not being efficiently converted into retirement incomes due to a lack of risk pooling and over-reliance on individual ABPs.

So the government has recently expanded the definition of products that can qualify for tax-concessions in the retirement drawdown phase, and is planning to introduce Comprehensive Income Products for Retirement (CIPRs), as laid out in the long-awaited discussion paper released at the end of last year.

Like to know more?

I often wonder how the experience of Australian retirees (and those about to retire) compares with their counterparts in similar countries. A recent Vanguard research paper examines this in detail—take a look here. It makes for interesting reading.

 

Paul Murphy
08 March 2017
www.vanguardinvestments.com.au

 

ATO finalises guidance on transfer balance cap

The ATO has released a final version of its law companion guideline on the transfer balance cap, which provides positive clarifications for the SMSF sector.

         

 

Late last week, the ATO issued the finalised LCG 2016/9 Superannuation reform: transfer balance cap.

You can access the full guide here.

Mostly, the finalised guidelines are a confirmation of what was already issued in the draft guidelines in November last year.

“It is positive from the point of view of ratifying what we already knew, it’s nice to have that confirmation,” said Perpetual’s Colin Lewis, who is generally pleased with the comprehensiveness of the LCGs issued by the ATO.

The final version of the guidelines appears to take a more cautious approach to the transitional rule, which applies to individuals who are over their transfer balance cap by less than $100,000 as at 1 July 2017 and remove the excess by 31 December 2017, explained SuperConcepts’ Peter Burgess.

“The draft guidelines said individuals with pension balances approaching $1.7 million should carefully monitor their pension balance and ensure it doesn’t exceed $1.7 million as at 1 July 2017. The final guidelines refer to $1.6 million as the relevant threshold,” Mr Burgess said.

“Essentially, what the final guidelines are saying is that whilst you will not be liable to pay excess transfer balance tax if you exceed the transfer balance cap by an amount equal to or less than $100,000, and you remove that excess by 31 December 2017, there may be other implication as a result of you exceeding the $1.6 million transfer balance cap,” he added.

“For example, you will not be eligible for any proportional indexation should you ever commence a second pension after 1 July 2017 and if you don’t remove the excess by 31 December 2017, you will be liable to pay excess transfer balance tax.

“So individuals should be cautious, ‘lower their eyes’ and focus on the $1.6 million as being the relevant cap rather than automatically factoring in the transitional $100,000 amount.”

Mr Burgess pointed to a positive development in the explanatory memorandum, which says any breaches of the transfer balance cap committed prior to 1 July 2018 do not count as a ‘first strike’ when assessing the 30 per cent tax rate to apply to any subsequent transfer balance cap breaches.

“Under the legislation, a tax rate of 30 per cent applies to additional excess transfer balance tax assessments the individuals receive, as opposed to 15 per cent for the initial breach. However, an assessment that applies to an excess transfer balance period beginning before 1 July 2018 does not count as an earlier assessment for the purposes of assessing subsequent breaches at the 30 per cent rate,” he said.

“So whilst an individual, who is eligible for the $100,000 transitional measure, may not be entitled to any future indexation of the cap, at least their excess pension balance won’t count for the purposes of determining the 30 tax rate to apply to any subsequent transfer balance cap breaches.”

The final guidelines also provide more details about how the transfer balance cap will be applied in the event of divorce and provide further confirmation that a reversionary pension must automatically revert in order to be eligible for the 12-month grace period.

“In other words, if the trustees have any discretion over how the death benefit can be paid, and they ultimately decide to pay the benefit as a death benefit pension, a credit will appear in the recipient’s transfer balance account on the day the pension commences and the credit value will be the value of the pension at that time. If the pension automatically reverts, the credit only appears in the recipient’s transfer balance account 12 months after the date of death and the value of the credit is based on the value of the pension as at the date of death,” Mr Burgess said.

 

KATARINA TAURIAN
Tuesday, 14 March 2017
smsfadviser.com

ATO reports on top contravention areas for SMSFs

Important information:  The ATO has released data that shows where the highest proportion of contraventions occurred in the year leading to 30 June 2016, and how many were rectified.

           

 

As part of its statistical review for SMSFs, the ATO reported that for the year ending 30 June 2016, 7,900 SMSFs had auditor contravention reports (ACR) lodged with 20,500 contraventions. 

“This was a decrease from the previous year of 4 per cent in the number of SMSFs with an ACR and a decrease of 7 per cent in the number of contraventions,” the ATO said.

In the year to June 2016, just under half of all contraventions were reported as rectified, the report said.

“The most commonly reported contraventions continued to be loans or financial assistance to members at 22 per cent, while in-house assets and separation of assets constituted 19 per cent and 13 per cent respectively,” the ATO said.

“In monetary terms, the latter two contraventions represented 29 per cent and 25 per cent of the reported contraventions up to 30 June 2016 respectively.”

The ATO also revealed data on the investment performance of SMSFs in SMSFs: A statistical overview 2014-15 which shows the average return on assets for the year ended 30 June 2015 was 6.2 per cent.

The average SMSF member balance was $590,000 and the median balance was $355,000, an increase of 21 per cent and 26 per cent respectively over the five years to 30 June 2015. 

The average female member balance increased 24 per cent over the five-year period, while the average male balance increased 17 per cent over the same period.

Female member balances remained below that of males, however, at $498,000, with the average balance for male members at $633,000.

Over the five years, there was also a 7 per cent shift of funds moving into the pension phase. However, the majority of SMSFs remained in the accumulation phase at 52 per cent.

 

MIRANDA BROWNLEE
Tuesday, 28 February 2017
www.smsfadviser.com

Page 34 of 41« First...1020...3233343536...40...Last »