Author archives: Alex Jamieson

AJ Radio – Episode 22 (Recorded 11th June 2019)

In this 21st Episode of AJ Radio we take a look at what investors should be thinking about before the close of the financial year. We also discuss some changes to Centrelink and the latest news on RBA and interest rate cuts. Finally, we also hear Alex’s insights learnt from the latest CFA Conference in London on emerging markets.

A new way to beat Centrelink’s Age Pension assets test limit?

Centrelink’s changes to the Age Pension assets test limit in January 2017 cut off access to the Age Pension for many retirees, when the maximum value of assets owned to obtain the age pension was reduced.

If you’re a retiree and this affected you, you are probably still seething about it. Or, if you are about to retire, you might have only recently discovered that you exceed the asset test limit.

Well, 1 July 2019 might just turn out to be the answer to your problem – provided you are smart with the structuring of your financial position.

Let’s recap quickly. Back in January 2017, the Australian Government decided to reduce the asset test limit that Centrelink uses to calculate eligibility for the Age Pension, from $1,175,000 to $823,000 for a couple who own property. For a property owner who is single, this went from $791,750 to $547,000. Note, however, this asset test limit excludes the value of your primary residence and since then, the asset test limit has been indexed, so today it’s sitting a little higher than these amounts.

For a lot of people who sat close to these limits, they lost access to the Age Pension. The government did provide some grandfathering relief, with a cut-back version to try to prevent Armageddon for retirees, but anyone else just turning the qualifying age for the Age Pension was left in the dark.

Let’s jump forward to 1 July 2019. What’s about to change? Well, the government has amended its superannuation and tax legislation, and part of the new measures that have been released include a range of options for retirees with retirement income streams.

Like most things, with changes to superannuation, old ideas have an uncanny habit of reincarnation. Here’s an example: The Transfer Balance Cap of $1.6 million introduced on 1 July 2018, was really just a new version of the old Reasonable Benefit Limits, which used to be in place back in the pre-Howard era – with a few variations.

Today, the asset test exemptions with the Age Pension, which back then applied to guaranteed lifetime annuities, is making a comeback with a fancy new name: ‘Pooled Lifetime Income Streams’. Welcome back, old friend, it is like it is the year 2000 all over again!

Now like any reincarnation, or as any great tech entrepreneur will try to convince you, this time is it is ‘new’, ‘improved’, and ‘different’. Not really. To be honest we liked the old version, but like any Apple or Microsoft upgrade, we learn to live with the new version, despite transition frustrations.

So, what does this all mean?

  1. If you sit close to the Age Pension asset test limit and you invest a portion in one of these new, bright shiny ‘income streams’, then this could allow you to claim a 60% reduction of the Age Pension assets test limit, depending on a range of factors that you need to meet.
  1. Will this income stream product ever expire? If you manage to hang around as long as one of my favourite sea creatures, the sea turtle, who lives up to 150 years, you will continue receiving an income stream that massively outweighs the money you spent on buying this product. The money just keeps coming in the door and never runs out. We might not be able to match the sea turtle in terms of life expectancy, but if you do have a history of longevity in the family and are likely to live longer than the average life expectancy age, this might be a worthwhile consideration.

So, what are the downsides? Any money you put into this product you may end up saying ‘Adios’ to; it is likely you will never have access to this capital again, and your estate will receive zip too. So there will likely be a need to balance these combined objectives.

The great news is, there are some solutions.

Like any great newfangled investment product or idea, it is really important you don’t dash out and try to do this yourself. This area of investment is incredibly complex and a massive amount of modelling and analysis needs to be done. So before you jump into a change in strategy, I recommend you dust off that Y2K era Motorola Razor mobile phone and give AJ Financial Planning a call.

How to beat regulators on the $1.6 million cap limit on superannuation

If you have more than $1.6 million in super, presently you might find that you are unable to make any further after-tax contributions (non-concessional contributions) into your super.

This cap limit is based on a per person limit and was introduced as a result of the government’s idea of restricting how much one person can have in their super at retirement at a reduced tax rate of 0%.

In essence, if you have $1.6 million in super and are drawing an income stream, you might find that this is taxed at a 0% tax rate on any income, capital gains or earnings within the super fund. Any amounts that sit above this limit of $1.6 million could be taxed at 15%.

This legislation was introduced to target people who normally squirrel away larger amounts into super in the lead-up to retirement.

We often find a lot of people who are 50 years or older naturally start to think about super and retirement, and tend to stuff larger amounts into their super in the lead-up. This legislation acts as a natural headwind to this late ‘mercy dash’ towards retirement saving.

So, what can be done about this limit if you find you are hitting the $1.6 million brick wall?

Here are a couple of suggestions:

  1. The cap relates to $1.6 million per person, so if you have a partner who sits under this cap you could simply push some of your funds over to them. To do this, however, a range of complexities must be considered to see if you can step through this door.
  1. Starting early can help, too. If you think about how much you will put into super over your working life, for most of us there is a ‘bulge’ at the end, due to rapid savings that take place in the years approaching retirement. By smoothing the contribution amounts over a longer time, it allows you to maximise the power of compounding this capital. Simply by starting contributions earlier could allow you to smash through the $1.6 million cap limit without breaking a sweat. Of course, before you jump into this option you need to consider the trade-offs, such as less access to capital or paying off your mortgage sooner.

These are just a couple of options we look at when coming up against this problem. We often use a range of other solutions for clients who are contemplating this issue.

Like any tax problem, remember what Kerry Packer famously said:

“I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn’t minimize their tax they want their head read. As a government I can tell you you’re not spending it that well that we should be paying extra.”

Unlike the complex tax problems of a billionaire such as the late Kerry Packer, however, this strategy is fairly simple in comparison: to simply achieve the objective of eliminating the possibility of 15% tax being paid on your superannuation.

Like any great investment or retirement planning strategy, before you jump in and try to do this yourself, please seek professional guidance from a suitably qualified financial planner and, of course, I recommend AJ Financial Planning.

How to beat Labor’s proposed changes to the franking policy and stick it to the man!

The media has been a flurry recently about Labor’s proposed changes to franking credits. There has been public outrage over this, and the sad reality is that this policy will have little impact on the uber-rich; those most affected will likely be the same group of people who lost their age pension a few years back when the asset test limit was changed. You can start to understand why retirees are fed up.

Australia’s franking policy is unique by global standards. Many Western countries simply don’t  have a franking credit policy. Consider the US, for example, where companies pay a set rate of company tax, then push out their dividend and the shareholder pays the full rate of tax again on any income they receive from the dividend, without any consideration to what the company has already paid. The US government holds out both hands and says thank you very much to the company and the shareholder for this double taxation.

To my mind, Australia’s franking credit policy is equitable, but it has resulted in the Australian market becoming distorted around a company’s dividend policy. This has resulted in Australian companies paying out much higher dividends than we might see in overseas markets.

Let’s look at an example: If you take the Australian iShares Core S&P/ASX 200 ETF, the historical dividend yield at the time this article was written was 4.31%. Compare this to the US share market, which says the iShares S&P 500 ETF is around 1.80%. You can start to see the difference resulting from the franking credit policy.

To be clear, Labor’s proposal is not to remove the franking credit system entirely, but appears to be considering removal of the refund aspect for people who are potentially ineligible for Centrelink benefits and earn less than $80k in taxable income.

Politicians think about borders and territories as a closed loop, the modern world however is a lot different. In Australia, capital sees no such barriers. Presently, Australian companies are taxed at around 27.5% – some less depending on which ones are doing the Irish loop and those marketing department wink-wink in Singapore. This is the potential franking credit which the rate of tax a company pay that might be tossed out the door into the political coffers if the changes come in for some people.

As they say, when one door closes another one opens – so what are the options available to Australian shareholders?

So, what to do? Well, any self-respecting capitalist would take their money and tell the government to stick it! You can simply say you know this is unfair, take your bat and ball, and until it changes go play elsewhere.

But go where? Well, the EU’s commission in their digital tax plan looked at global digital businesses such as Google, Amazon, Facebook, etc., and found that they pay an effective tax rate of around 9.5%. This is much lower than the 27.5% business tax in Australia …

I can hear you saying it already: “But the dividends paid here in Australia are deliciously high and overseas they are so low!”

Let’s “compare the pair” as the super industry funds famously suggested.

Imagine it’s early 2009 around the bottom of the GFC crash – that’s a fair starting point, when the mighty Commonwealth Bank of Australia shares fell as low as $28.98. Since then, it has increased to a whopping $71.66, an increase of 147%. Remember to also add all those luscious dividends that shareholders received along the way of 6%–8% p.a.

Now let’s compare this to a company that pays a 0% dividend. Instead, they plough the funds back into their company to grow it into the future at a particularly high rate of return, or to instigate buybacks of shares to reduce the number of shareholders when the share price dips below fair value of the company.

So, which company to choose? Let’s go with Amazon. It was battered by the retail crisis during the GFC. At that time, the share price was around USD61.70. Today, however, Amazon shares are worth USD1,627. This works out to be an increase of around 2,536% over the same period.

Instead of receiving a dividend, as a shareholder you could have simply just sold down a little bit of the shareholding along the way as you needed the income. If you are a retiree in the pension phase and under the $1.6 million cap limit, there’s no capital gains tax so this income would potentially be tax-free.

Yes, you gave away a little bit on lost income tax paid by the company, but on the bright side you received a better return with an organisation that might be going places.

Remember, often a high dividend-paying company really represents low growth opportunities. They decide they can’t use the money to grow, so they give it to their investors instead!

Naturally there are ethical considerations with this approach; some might be upset about becoming a shareholder in a company that pays a low tax rate and is therefore not paying its fair share. Others might have issue with the uneven playing field aspect – that larger companies have an advantage over the smaller players. There are always alternatives and other options for investment.

This is just one great investment idea that AJ Financial Planning has in mind to combat such a legislative change. We have many more up our sleeves if these changes go through.

It is important, however, that before jumping into the deep end to devise such a strategy, or even think about buying any of the shares mentioned in this article, you should speak with a professional, practising financial planner as there are a range of complexities to consider. Of course, I recommend you contact us at AJ Financial Planning.

AJ Radio – Episode 21 (Recorded 19th February 2019)

In this 21st Episode of AJ Radio we look at forecasts and what we can expect in 2019 for the markets, economy and everything financial. We also flashback to last years forecast episode on February 14th 2018 to see if our market predictions were correct.

How can I tell if my super fund provider is in financial difficulty?

I recently reviewed Media Super’s Annual Report after reading a media article that reported them purchasing a 429-year-old violin as an investment. I thought this was an odd investment for a regulated super fund. Was this a responsible decision given the opaque market of collectables and the high transactional costs associated with such investments? And, how did this get past APRA? It triggered me to investigate Media Super’s investment policy.

At AJ Financial Planning, we spend a lot of time digging around in annual reports so I decided Media Super’s might provide some insight in their investment strategy.  Despite being pretty heavy documents, annual reports traditionally follow a simple format for listed companies. However, I soon realised that Media Super’s report was particularly different to that of a normal listed company.

Whilst looking for the investment report, I noticed that all the financials for this company were crammed into page 78 of the 80-page document. The report also bundles members’ assets in with their financial positions, making evaluation of the fund’s business achievements and solvency even more difficult to accurately determine.

As I read the report, I could not help but wonder why this financial information wasn’t featured more prominent in the earlier pages of the document. After all, an annual report is supposed to provide peace of mind to members of the super fund that the business is solvent and operating in an appropriate manner.

So, where does Media Super’s business really sit? Here is an extract of the profit and loss statements from this report from their 2018 annual report.

As you can see, there is not a heap of detail, but I noticed that the fund, not the members, appears to have made a loss of $14,896,000 in 2018. I went back and looked at the 2017 report, and this recorded an even larger loss of $20,966,000. Looking at these numbers, I would have thought the directors would want to spend some time explaining these losses – if they have been perhaps misinterpreted in some way.

Media Super has reported however that they have $40,099,000 in net assets, in addition to the trustee operating account, reserves and operation risk reserve, so they are not about to run out of money tomorrow.

But it does raise a more serious question about the regulated format of the annual reports a super fund produces and the role ASIC and APRA have in evaluating if the reports provide members with enough necessary information about the solvency of the company and also the performance of the fund’s investment choices.

So next time you are considering switching or looking at your super fund provider, you might want to look beyond the investment returns of the fund and think about whether the provider is actually making a profit or loss. Equally, it might also be a concern if the fund appears to be too profitable, as this could be an early warning sign that they are gouging their members’ contributions.

Like all great investment ideas, it is important that you seek professional advice from a practising financial planner before making any changes to your superannuation fund and, of course, I recommend you contact us at AJ Financial Planning.

Bestsellers on retirement or investment planning: fiction or non-fiction?

A few years back, I attended an executive course run by University of Nebraska, Omaha. It took place just prior to the annual general meeting of Berkshire Hathaway, also in Omaha Nebraska. The focus of the course was to explore a range of fundamental valuation techniques and hear from key executives within Berkshire Hathaway.

Now for those who might not have heard of Warren Buffett, he is among the richest people in the world and Berkshire Hathaway is his company. He is also regarded as one of the greatest investors of all time.

During this event, I was privileged to hear Susie Buffett speak. Susie is Warren’s daughter and it was incredibly interesting to hear her personal perspective of growing up with her father.

In Susie’s presentation she commented on Buffettology (Simon & Schuster UK 2012), a book written by Mary Buffett – Warren’s former daughter-in-law – and David Clarke, a successful portfolio analyst, about Warren’s investing theories. Susie expressed some frustration about the book, suggesting it is fiction rather than non-fiction in genre.

From time to time in the many years I have been a financial planner, books on investing or retirement planning sometimes hit the bestseller lists. Not that often, though, as these topics are typically rather dry. Like any fad, we see a bunch of people try to follow the recommended steps and methods in these books, which profess to provide all the elusive answers to investing and retirement.

In reality, when people try to implement these plans, they often fall short of the promised outcomes described in the book. Then, financial planning professionals like me are left to pick up the pieces.

I think the problem is that people often forget there is a distinct difference between a financial journalist and a practising financial planner.

This can be an easy oversight. If someone in the media writes about a certain topic, it follows that they must be an expert. Right? But what they are actually an expert in? A financial journalist is trying to keep and grow his readership by providing interesting, insightful and entertaining content in the areas of finance and investing. This is vastly different to the skill set required to provide personal financial advice on a day-to-day basis.

While there are a number of publications by financial journalists that are wonderful for providing critical analysis and are incredibly insightful and thought-provoking, these writers have the maturity to understand what their skills are and, like any profession, they also know their limitations. A few, however, try to do both.

So why do many bestselling books on investing or retirement planning miss the mark? I feel the main reason is they are trying to make the content entertaining and, in some cases, oversimplify or too broadly generalise a concept to the point that it gives the reader some idea but, in most cases, not the full details.

Just think about a book you love that was made into a movie. It is just never as good, is it? The main reason for this is usually that the story needs to be condensed, while the level of visual entertainment needs to be heightened.

To be clear, I am not against people educating themselves on retirement and investment planning; however, like any topic if you are wanting to increase your knowledge the books you should be reading are generally not on the bestseller list; rather, they are academic-type textbooks that might be thought provoking, but typically not an easy read and rather heavy going. 

A handy benchmark is that if you can read more than one chapter at a time without having to consider the information before you move on, you are probably reading the wrong book.

Like all great ideas, aside from bestselling books on investing or retirement planning, it’s important to always seek professional guidance from a practising financial planner and, of course, I recommend AJ Financial Planning.

What next for Australian property?

There have recently been many articles in the media regarding changing property prices. Unlike shares, which can be accurately tracked day-to-day, property is historically an opaque market with less visibility on price movements. However, over the past few years computers with sophisticated programming have been able to track property markets more accurately and provide an increasing level of transparency. This has led to a range of property research reports providing up-to-date information on the markets and as a result, this information has flowed through to media publications reporting ‘booms’ and ‘busts’ that now rival the extremes previously associated with the share market.

Over the years I have often heard people say, ‘Oh, property always goes up’. So, when this recent downturn occurred it might have come as a surprise to some. In fact, these days we are reading or hearing about people who have purchased property, held onto it for five to 10 years, and seen little or no capital growth. And this isn’t just in one market; it’s in growth corridors, large high-rise developments, in different states and territories, metropolitan, regional … Clearly, the good old days of property being a ‘sure thing’ are now long behind us.

The graph below shows ‘Real Residential Property Prices for Australia’.

As you can see, we have experienced downturns in property for the following periods:

1. Q4 2003 – Q3 2005

2. Q4 2007 – Q1 2009

3. Q2 2010 – Q3 2012

4. Q2 2017 – ???

Interestingly, most of the pullbacks have lasted on average around two years. Historically, each pullback has ranged between –3% to –8%. And as household debt levels have slowly risen over time, so too have the more serious repercussions of the downturn for homeowners. It’s worth remembering that the most valuable lesson in leverage is that it can magnify the upside, but also the downside. Early drawdowns were around 3–4%, while more recent ones have been around 8% as household debt has spiralled upwards.

In recent times, we have been alerted to a reduction in borrowing capacities. This was first reported earlier this year by UBS analysts, as banks slowly changed their borrowing assessment methodology to consider individual spending patterns rather than applying a basic assumption of living expenditure. This has led to a potential reduction in borrowing capacities of around 20–40%, to around 80% of the mortgage market being serviced by the major banks.

So, what does all this mean? Well, a person on a gross income of $150K can now borrow around 34% less than before, and is effectively limited to a loan of around $538K.

Coupled with the impact of a slowing source of overseas buyers, we can see why recent moves in property prices have taken place.

How far will this drawdown go? Well, each state, city, region or suburb is unique in its own price movements; however, I would not be at all surprised if we find these overall figures continue to at least a 10% drawdown before this latest down-cycle is complete.

It’s important to realise that in property, as in all markets, a pullback doesn’t mean there won’t be opportunities. It is likely, however, that simply throwing money into the property market with a view to making a profit is going to be more challenging. We need to be a lot more selective in acquiring property and also the decisions we make around the timeframes for holding periods.

Like all great investment ideas, before you consider purchasing property, it is important that you seek out and obtain profession financial planning advice from a practising financial planner and, of course, I recommend AJ Financial Planning.

AJ Radio – Special Edition on Insights from CFA Annual Conference New York 2018

Our own Shaun Gilbert recently attended the the CFA Annual Conference in New York.  Hear his insights on how effective company acquisitions are, what can we expect from the trade war between US & China, how to spot a recession, and lots more.

Does your retirement super need to be ‘Zengosaidan’?

I often like to read ‘peculiar’ books that give me some insights into different ways of thinking. I recently came across a book review in The Monocle Minute. It inspired me to buy the book: A Monk’s Guide to a Clean House and Mind by Shoukei Matsumoto (Penguin Books 2018). Now, I am not Buddhist, but I did find this little book an interesting read. In particular, it spoke about the concept of Zengosaidan, which is defined as ‘… a Zen expression meaning that we must put all our efforts into each day so we have no regrets, and that we must not grieve for the past or worry about the future … Don’t put it off till tomorrow …’

I found this idea thought-provoking – particularly when I consider my daily work, which is retirement planning. Because at some point, most people in Australia will stop working and retire. For a lot of them, they will need an asset base to fund this stage of their life. Best-case scenario, they will be 100 per cent reliant, or partially reliant, upon these funds.

However, despite this reality many people drift through life without placing much emphasis on, or at least paying attention to, the preparation required for saving for later life.

Now, I am not saying everybody needs to become an expert in retirement planning. I think the important distinction is we should become engaged with our impending retirement and ensure that when the day arrives, we have no regrets.

We often take a ‘no regrets’ approach to life experiences such as holidays, ticking off the bucket list or achieving other major lifetime goals. However, shouldn’t we be turning our attention towards what steps might need to be taken to ensure that our retirement savings are maximised during our career and particularly in the lead-up to retirement?

Today, the only discussion we often hear about retirement is having ‘no regrets’ about spending the kids’ inheritance and driving off into the distance.

It’s probably time this conversation matured.

I think this philosophy of ‘no regrets’, or Zengosaidan, needs to be front of mind as we approach retirement. For example, consider the following mental checklist:

  • Do you have enough to live on in retirement – for the whole of your retirement?
  • Have you maximised all possible options within your retirement strategy to ensure that you are well placed when you retire?
  • Looking at your retirement picture, what are the financial trade-offs if you make particular financial decisions today?

Believe it or not, virtual reality can make this process a lot easier. In a few years’ time I will be able to sit with a client, get them to put on a virtual reality headset, and then pull up a picture of what they might look like at retirement age. This might help them appreciate what they need to do to help the older-looking them in retirement. Potentially, we can create a real-live model of what retirement will look like if they do nothing, compared with what it will look like if they put into action the recommended steps to maximise their financial position opportunities.

Until this technology catches up with us, though, we will need to use our own imagination for the time being. I think, however, it is important that you keep in mind the following: When you stand at the threshold, about to take the leap from your working life into retirement, and reflect on what you have achieved, you want to be confident that you have optimised your financial situation, so the next chapter of your life can be everything you wished for and more.

Like all great ideas, it’s important that when you think about retirement planning, you don’t go it alone and seek advice from a practising and suitably qualified financial planner and, of course, I recommend AJ Financial Planning.