General Information about Financial Advice

Super Check-up

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SuperGuru_150X150When your Annual Statement from your superannuation fund arrives it may be tempting to put it straight into the drawer.  Your superannuation is either already your most valuable asset, or will be by the time you reach retirement age. 

 

Your details

Firstly, make sure your details are up to date – your name, address, other contact details & your Tax File Number (TFN).  If your superannuation fund doesn’t have a record of your TFN, you may pay a higher rate of tax on your contributions.

Beneficiaries

Check your beneficiary and update them if needed.  A super fund may offer different types of nominations.

  • Non-binding nomination – You may direct the Trustee to whom your benefit is paid to, but the Trustees have the final decision.  They will take into account all claimants and check your will.
  • Binding nomination (lapsing) – The Trustees are bound to pay your benefit to who you have nominated, providing you renew every 3 years.
  • Binding nomination (non-lapsing) – The Trustees are bound to pay your benefit to who you have nominated, however you do not need to renew every 3 years.

Under Superannuation Law, the person(s) you nominate can only be a spouse (including defacto), Child (including adult children, step and adopted children), Financial dependent, or someone in an interdependent relationship with you at the time of your death.  Otherwise you can make the nomination to your estate (and ensure your will is up to date).

Insurance

Review your insurance cover.  Is your level of cover still appropriate?  Do you need to increase your cover to take into account a change in your income or commitments?

The most common types are Death only, Death and Total & Permanent Disablement (TPD), and Income Protection.  Some also offer Trauma cover.  The type of cover could either be:

  • Automatic insurance cover – This is a minimum level of cover without filling in forms.
  • Units – The value of each unit depends on your age (decreases as you get older) and the premiums remain the same.  You can increase the number of units you have.
  • Fixed – The level of insurance cover remains the same and the premiums increase as you get older. 

Investment Strategy

Does your investment strategy still suit your risk profile?  Your investment strategy should match your long term investment goals.  If you are considering an investment switch, it may be best to speak to a Financial Planner to explain the implications of your decision.

Fees

What are you paying fees for and how much are you paying?  Do the fees include financial advice or is that extra?

What about multiple super funds from previous employers?  Or do you have lost super because you changed your name or address.  If you have more than one fund, then each super fund will be charging you fees.  Most super funds can provide you with a “Combine your super form” which you will need to complete for each fund you want to rollover into to your existing super fund.

Employer Contributions

Have a look at your super contributions.  Are they up to date?  You can check your payroll slips and make sure that the amount being paid is the same as what is going in.  Superannuation Guarantee (SG) Contributions commenced from 1 July 1992.  At that time, employers either paid 3% or 4% (depending on total amount of payroll) of your gross salary into your super account.  Since then the rate has gone up steadily.  It was sitting at 9% for a while, but from 1 July 2013, employers need to pay 9.25%.  Under legislation, your employer must pay at least quarterly.  If not, follow up with your payroll office. 

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Generally, you’re entitled to super guarantee contributions from an employer if you’re 18 years old or over and paid $450 or more (before tax) in a month.  It doesn’t matter whether you’re full time, part-time or casual or a temporary resident of Australia.  If you’re under 18 you must also work more than 30 hours per week to be entitled to super contributions.  If you’re a contractor paid wholly or principally for your labour, you’re considered an employee for super purposed and entitiled to super guarantee contributions under the same rules as employees.

From January 2014, your employer will pay into a “MySuper” authorised account if you do not choose a super fund.  If you are eligible to choose a fund, your employer must give you a standard choice form. 

If your employer forwards member voluntary contributions into your super fund on your behalf, they must be paid into your super fund with 28 days of the end of the month in which they take it from your pay.

Add extra contributions to your super

Adding extra to your super early in your working life means that compounding interest will help your balance grow.  Your employer contributions will probably not be enough to ensure your final balance is enough for retirement.  There are several ways to add extra to your super:

Concessional (before-tax) contribution

Known as Salary Sacrifice.  You sacrifice part of your salary for extra employer contributions which are then taxed at 15% instead of your normal tax rate.

The general concessional (before tax) contributions cap for 2013-14 is $25,000.

However, from 1 July 2013 if you are 59 years old or over on 30 June 2013, additional concessional contributions will be able to be made to your super, with the cap increasing from $25,000 to $35,000.

From 1 July 2014, the higher cap of $35,000 will also apply to people who are 50 years or over.

Non-Concessional (after-tax) contribution

Also known as a personal contribution.  You can make a personal contribution to your super (even if you are not working) as long as you are under 65 years of age.  If you are age 65 -75 you can only make a personal contribution of you satisfy the work test. 

The non-concessional contributions cap for 2013–14 is $150,000.  If you are under 65 years old for at least one day of a financial year, you can ‘bring forward’ two years’ worth of contributions, giving you a total non-concessional contributions cap of $450,000 for the three years, rather than a $150,000 cap in each year of the three years.

This may enable you to:

  • Claim a Tax deduction if you are self-employed, up to $25,000 per year.
  • If you’re a low-to-middle income earner, the government could help boost your super savings through the super co-contribution and the low income super contribution.  However, if you claim a deduction for all of your personal contributions, you won’t be eligible for a super co-contribution.

Spouse contribution

A tax offset may apply to a spouse if a spouse makes a contribution to a non-working or low-income-earning spouse super fund, whether married or de facto.

 The spouse may be able to claim an 18% tax offset on super contributions of up to $3,000.  The maximum tax offset is up to $540 each financial year.

Financial Planning is about much more than retirement

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retirement-3Many people may think financial planning is all about retirement. It’s not. Financial planning is about making the most of what you have – at every stage in life. Whether it’s investing, superannuation or minimising tax; whatever your stage in life, financial planning can make a difference.

 

If you are interested in investing, there are several things you need to consider. For example, how long do you have to invest and how comfortable are you with fluctuations in the value of your investments? We can help you determine your time horizon and risk profile and then recommend the most suitable type of investments to help you realise your goals.

 

What about your super? Is it working as hard as you are? Your risk profile can also be applied to your superannuation investments. It’s a long-term investment, but it’s important to make sure it’s invested in the right way.

 

Limits to the amount of super you can contribute each year ($25,000 in concessional contributions for people under 60 and $35,000 for those aged 60 and over) means the earlier you start, the better. Contributing more to super will not only boost your super balance, it could even reduce the amount of tax you pay!

 

Everybody’s different – different needs, different goals and different circumstances, however, professional financial advice can help you at every stage of your life.

 

We can provide guidance on:

 

  •           Investments, shares, gearing and insurance
  •          Tax-effective superannuation strategies
  •           Centrelink and aged care strategies
  •          Estate planning strategies, and
  •          Portfolio administration.

 

To start planning for a successful financial future, call us today to make an appointment.

 

Source I IOOF

Understanding Geared Investments

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tmp8f99-1What is gearing?

Put simply, gearing is borrowing money to invest with the aim of magnifying, or ‘gearing’, returns. It is important to highlight that gearing investments magnifies losses, as well as gains.

One of the most common forms of geared investments is a mortgage on an investment property. The same principle applies to gearing shares; money is borrowed to invest and the shares are used to secure the loan, just as the property is used to secure a mortgage.

Margin lending and professionally-managed geared funds are two of the most common ways of implementing a gearing strategy in the sharemarket.

How does gearing work?

 
The key principle behind gearing is quite simple; the investment made with borrowed money is expected to rise by more than it costs to borrow the money.

Let’s say an investor has $10,000 to invest. Over the course of the year their investment rises by 10%.  This means their investment is now worth $11,000; a difference of $1,000

To illustrate how borrowing money can magnify returns, let’s say the same investor has $10,000, but this time borrows an additional $30,000, making a total of $40,000 to invest. The investment also rises 10%. This means their investment is now worth $44,000; a difference of $4,000.

While the magnification of returns is plain to see, it’s important to remember that the investment must rise more than the cost of borrowing. In this example, if the interest rate on the loan is 10% pa, the net return is the same as for an ungeared investment.

A geared fund therefore will not always magnify market gains. This is particularly the case in a low-return or high borrowing-cost environment.

As previously mentioned, gearing can magnify losses as well as gains.

This time let’s say the investment falls 10% in value. A $10,000 investment will be worth $9,000; a difference of -$1,000, while a $40,000 investment will be worth $36,000; a difference of -$4,000.

However, again it is again important to remember the cost of borrowing. If the interest rate on the $30,000 loan is 10% pa, that’s an additional $3,000 in costs; a total difference of -$7000.

These examples illustrate that while gearing may not always magnify gains, it will always magnify losses.

The effect gearing has on returns and the increased volatility is illustrated in Figure 1, which compares the calendar year returns of the Colonial First State Wholesale Geared Share Fund to its benchmark, the S&P ASX 100.

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Gearing concepts explained Loan to value ratio

 
The loan to value ratio (LVR), sometimes known as the gearing ratio, is the amount of gearing undertaken. The higher the LVR, the more risky the strategy becomes.

If an investor has $10,000 to invest and borrows an additional $10,000, the LVR is 50%. This is calculated because the $10,000 borrowed is 50% of the total investment ($20,000).

To securitise a margin loan, lenders will set a maximum LVR, usually around 75%. On a $10,000 loan this would involve borrowing $30,000 to make a $40,000 total investment (a $30,000 loan is 75% of a $40,000 investment).

Margin calls

 
If an investor takes out a margin loan to invest directly in shares, they are subject to the possibility of a margin call.

A lender can make a margin call if the LVR rises above a certain threshold. Using the example above, if the value of a $40,000 investment drops 10% to $36,000 the LVR becomes 83%.

One of two things must happen when a margin call is made:

• the borrower must make a payment into the loan to bring the LVR back within the threshold or

• the borrower must sell shares; the proceeds of which will go to repay the loan to bring it back within the LVR threshold. This has the undesired effect of crystallising losses in an investment portfolio.

Gearing strategies

Gearing in equity markets can be obtained by taking out a margin (or similar) loan to invest directly in shares, or through a professionally-managed geared fund. There are important differences between the two strategies.

Gearing within a managed fund

The manager of an internally geared fund arranges the borrowing within the fund. This means investors gain access to leveraged market exposure without being personally liable for the fund’s borrowings. There is no personal obligation to repay the debt, as the debt is incurred by the fund as an institutional borrower, rather than by an individual.

Large institutional borrowers can often access cheaper loan rates than are available to individuals. This typically results in a lower borrowing costs compared with other forms of borrowing, such as margin lending. However, there are fees and charges associated with investing in a managed fund which you need to consider Details of fees and charges are available in any fund’s Product Disclosure Statement.

The LVR is usually actively managed by a fund. Therefore investors don’t receive margin calls forcing them to take action, as can occur with margin lending. Most funds will actively monitor gearing levels to ensure they remain within a desired range.

Internally geared funds comply with the superannuation borrowing rules, and are generally permissible investments for superannuation. As many superannuation investors have many years, or even decades, until retirement, investments with long-term horizons, such as internally geared funds, may be a suitable part of an investment portfolio.

Internally managed geared funds are managed by investment professionals who will actively manage the investment decisions and gearing process. This reduces the paperwork and effort which is often involved in other forms of geared investments.

An internally managed geared fund will usually have broad diversification over many companies and sectors. This has the effect of lessening the impact of any individual stock’s or sector’s performance on the overall portfolio. The level of diversification in a managed fund can be difficult to replicate efficiently by individual investors.

Summary

 
Geared funds are not for everyone, and investors should ensure that they are comfortable with risks associated with geared funds and the potentially large fluctuations, both up and down, in the value of their investment. Investors should also consider an investment outlook of at least seven years. Because of the high risks involved with gearing, it is important to speak with a financial adviser before making an investment decisions.

Second Marriage?

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second marriageWhat are the estate planning implications?

Getting married, even if it’s for the second time, is a happy time but it does present some financial planning challenges.

 

 

Second marriages present some complex and contentious estate planning challenges.

While many partners in a second marriage want ‘their’ estate to be passed on to their own rather than their partner’s children, most do not take steps to ensure that happens. As a result, adult children from the first marriage often feel threatened by the second marriage and this can be a common source of disputes.

Feeling that their ‘rightful’ inheritance from their natural parent will be taken away from them and given to their step brothers and sisters often results in real tension between rival siblings both before and after death.

A vital first step to ensuring that assets are appropriately distributed is to have a Will in place. But it’s important to remember that marriage revokes any existing Will. So there is a real need to review your Will if you remarry.

The following are some of the issues you may need to address when making a Will:

  • You should ensure your surviving partner and any children from your second marriage will continue to have adequate housing, but at the same time ensure that the children from your first marriage are adequately provided for.

 

  • Ensure that, where provision has been left for your partner to continue to occupy the house after your death (often dealt with in the form of a right to occupy as distinct from transferring legal ownership in the house), adequate provision in the Will is also made to allow the house to be sold and provide aged care accommodation for your partner in the future. If the Will does not allow this, it may be necessary to apply to a Court for an appropriate order.

 

  •  Where you and your second partner’s assets are owned jointly and pass to the survivor on death, you should ensure that your half share will eventually pass to your children and not end up in the hands of step children.

 

  • Review the manner in which you own assets to ensure that they will be disposed of according to your wishes.

 

  • Check how your superannuation will be paid out on your death. There are very specific rules that govern the distribution of superannuation, so your superannuation nominations should be reviewed upon a second marriage.

Setting up a family trust is one way to isolate assets from the estate and potentially avoid these pitfalls.

Establishing a Testamentary Trust within the Will can also provide you with some flexibility as to how to deal with assets to provide for both a partner and children from your first marriage.

For more information on how to make sure your assets are distributed according to your wishes and your family’s and children’s futures are protected, speak to your financial adviser or a specialist estate planner.

Source | IOOF

1 Australian Bureau of Statistics, Disability, Ageing and Carers: Summary of Findings, 2003

This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial adviser before making any investment decisions.

Investing for the Long Term

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saving-for-LT-1Whether you’re an experienced investor or a novice dipping their toe in the water, there are some essentials to remember. This article will introduce some of the concepts you need to help you navigate the investment waters.

 

 

Investing over the long term can help you weather market fluctuation and make the most of compound returns.

 It’s never too early to start investing. Whether the amount is small or large, the earlier you invest, the more likely you are of achieving a greater end result.

 

Market cycles

Investment markets tend to move in cycles. They can vary from providing strong returns year after year, known as bull markets, to bear markets where stock markets are declining.

 

It’s important to recognise that investing is generally for the medium (3-5 years) to long-term (5+ years) and understand there will be periods of both out performance and underperformance. Those with shorter time horizons and lower acceptance of risk often opt for more defensive asset types that are less prone to market movement, such as cash and fixed interest.

 

While defensive assets may provide greater shelter from volatility, they generally provide lower longer term returns than the other asset classes such as property and shares. This may result in you not achieving all of your financial goals and objectives.

 

Time in the market

It can be tempting to react to market volatility by jumping in and out of certain investments. But timing the market requires you to make two correct decisions that are very difficult to make: exactly when to buy and exactly when to sell. Being out of the market at the wrong time, even if it’s for a short period can significantly reduce the overall performance of your investments.

 

Markets will always fluctuate but the longer you stay invested, the less affected you are by short-term volatility.

 

The power of compound returns

The power of compounding returns is the single most important reason for you to invest early. The interest your account earns on your original investment increases your account balance and ongoing investment earnings can be made on both your original investment and the interest your account has returned. In other words, you receive interest on interest. When your assets compound for a long period of time, this can give a substantial boost to your investment.

 

Asset performance over the long term

For example, if you decide today to invest an initial amount of $1,000 into a managed fund that earns 8% p. a. and then contribute $100 per month, in 10 years’ time, you would have $20,071. If you started investing the same amount three years later, you would only have $12,708. This is where the power of compound returns takes effect. Spending more time in the market, or investing earlier, can make a big difference to your overall investment returns.

 

Benefits of dollar cost averaging

Dollar cost averaging (DCA) is a strategy of investing a fixed amount at regular intervals. DCA lowers the risk of investing a large amount into a single investment at the wrong time. The benefit of DCA is that the timing risk is reduced and as a result the cost is averaged out over time.

 

Within managed funds, for example, unit prices can fluctuate in response to market movements. By making regular investments rather than a one-off contribution, the unit price evens out over time.

 

When followed strictly, this strategy can help you reduce risk and avoid costly emotional and spontaneous investment decisions that might see you selling at the bottom of the market and buying in at the top.

 

Source I One Path