Are you receiving a pension from your superannuation? Are you planning to apply for the age pension or are already receiving the age pension? If so, there are some important changes that are taking place from 1 January 2015 that may affect you. The current Centrelink assessment works as follows: Presently, when Centrelink looks at your personal situation, they look at your personal assets and the income you receive to determine how much age pension you can get. If you have assets or income above the minimum thresholds your age pension will be reduced by a set amount, until at a certain level (depending on a variety of factors) you will have too many assets or too much income to receive the age pension. Some assets have exemptions, such as your home, which isn’t counted for the asset test. Some income also has exemptions, or different ways that it is counted, for example:
Financial assets outside of super such as cash and shares are ‘deemed’ to receive a certain income, rather than you actually recording the income that you physically get.
Pensions from income streams have a certain level called the deductible amount (similar to the tax free threshold) where only income above this deductible amount is counted for the income test.
So what will change? Pensions and income streams from superannuation that start after 1 January 2015 will no longer have a deductible amount, and instead, will instead have the income deemed in the same way as other financial assets. Pensions started before 1 January 2015 will be ‘grandfathered’ and treated by the current legislation. What does this mean in practice? With the current legislation many pensioners have only a small amount of their superannuation pension counted for the income test, or even no income counted at all if they draw a smaller income than the deductible amount. Lets put this in an example. Barry is a 67 year old man who has $300,000 in super and he starts an account based pension from super today. Based on his age his deductible amount is $17,657 so only the account based pension income that he draws above this amount will be counted for the Centrelink income test. Under the new legislation Barry’s $300,000 will be deemed to receive income according to the current deeming rules. With the current legislation, if Barry is married the first $77,400 of his financial assets are deemed to receive 2% income, and the assets above this amount are deemed to receive 3.5%. Financial assets include cash, term deposits, shares, managed funds and – with the new legislation – your superannuation funds. So if we simplify things, and say that Barry has more than $77,400 of assets elsewhere then his $300,000 in superannuation will be deemed to receive 3.5% income i.e. $10,500. So how is Barry affected? If Barry draws more than $10,500 + $17,657 = $28,157 from his super fund as a pension he will be better off under the new legislation as he will have less income counted via the Centrelink income test. If Barry draws less than $28,157 from his super fund he will be better off under the current legislation. Every situation will be different, but in many if not most cases, the new legislation will be disadvantageous for pensioners and will result in a higher amount calculated under the Centrelink income test, and a lower age pension received. What can you do now? If you are looking to apply for the age pension in a few year’s time, or if you are currently receiving the age pension, you should consider the benefits of the following strategies:
Move assets held outside of superannuation into superannuation if you are eligible to make contributions
Look at the possibility of moving some superannuation assets from one spouse to another if this will give a beneficial result under the Centrelink income test
Reset your superannuation income stream or be sure to start it on 1 July 2014 or at least before 1 January 2015
Given the complex nature of these Centrelink calculations, we would recommend speaking to a financial adviser before making any decision that could significantly affect your retirement income. We invite you to contact our office on 03 9077 0277 for a free initial consultation with one of our financial advisers to discuss how the new Centrelink rules will affect you.
Two weeks ago, I attended a medicate specialist appointment with a neurologist to discuss a CT scan of my brain and check everything was ok.
Despite his enormous IQ, his bedside manner certainly needed some improving. Lets just say my 4 year old son had better social skills than this medical genius! As I walked into his consulting suite, his opening remarks were a smart statement and question around why was I not retired if I was a financial planner? I looked at him a little surprised as I was there to speak to him about my health rather than discuss financial planning matters. However, I pushed aside my urge for normal pleasantries, as I could tell quickly that he was wanting to engage in some type of banter. So I replied…. …..If I was to retire at my current age, then I would look to sit on the couch for the next 49 years based on my current life expectancy…..that’s a lot of TV watching don’t you think?….I think I might get bored! Thankfully the neurologist didn’t have another smart comment to reply, but it certainly raised an interesting question when it is time to retire?
In a couple of weeks time I head off to the annual general meeting at Berkshire Hathaway to hear Warren Buffet speak and provide some valuable insights about the economy and the markets etc. The interesting thing about Warren Buffet’s board of directors is that of the 13 board members Warren is 83, Charlie is 90, David Gotesman is 87, Donald Keough is 87, Thomas Murphy is 88, Ronald Olson is 72, Walther Scott is 82, and the rest are aged between 50 and 60 years of age. Even if I look at the next generation of successful entrepreneurs like Eton Musk who is aged 43 and has a net worth of $8.2 billion, why does he not throw it all away and sit on a couch and watch TV for the next 44 years? The names I have listed above in the eyes of this medical specialist would each have sufficient resources to buy any island in the south pacific and live out their remaining years basking in the sun….so what really causes these people to work when financially they don’t need to?
The answer is simple – they enjoy their work! Buffet often remarks that he feels 20 years younger than what is stamped on his drivers license and he skips to work each day! In other words one could say that he truly enjoys his life’s purpose and has so much more to give! If you are not into the high powered executive life, you only need to travel 10 hours to Japan for another example.
The community called the Okinawans are a rare group of Japanese people with more people aged over 100 years than anywhere else in the world. The fascinating finding here is that most of the Okinawans work well into their 90’s doing traditional work like fishing and faring etc. Retirement can be defined (yes I actually looked it up) as to ‘remove’ or ‘withdraw’. As such, is it possible that one might just not want to remove or withdraw from what they do? What if one was enjoying the ride of life and work and didn’t want to get off? Similarly, what if we put this in the perspective of a musician that never wants to stop playing their music and the thought of never playing agin would bring them great sorrow. Are musicians meant to stop once they are at a certain point or certain age? No, its a part of them. Equally for those listed above, working is exactly the same as it is their passion.
So next time you are thinking about retirement, you may start to think differently now to the opinion of my neurologist as its only time to retire when you feel its time to withdraw from what you are doing. If you need help too in defining what the next phase of your life might look like, feel free to contact AJ Financial Planning. Oh….by the way, my results came back all clear – just a false alarm!
There has been a saying when it comes to investing, a lot of people expect to do exceptionally well when they first start investing. The reality with most early newbies can often be a mixed experience and a mixed result, if proper preparation or guidance is not provided.
When it comes to investing in shares, it is always easy to enter with very few barriers. You can open a basic share trading account and trade for as little as $1 in brokerage. When a newbie starts investing they think about the millions they are going to make, but few think about the exit strategy and what that might look like when things don’t go according to plan. The major obstacles in most cases in the psychology of crystallising a loss or potentially being wrong.
A long time ago before kids, when time was plentiful and in no shortage, I used to play golf. I often found that the game was a great equaliser. You might hit a perfect round one week and leave the course believing that you had finally mastered the game. Then, the very next week, you would turn up expecting to replicate the similar magic, only to have a horror round. As such, the game quickly brought you back to reality.
Investing, if you are not careful, can have a similar impact, particularly if early on you have a wonderful result in a speculative investment. Immediately you feel that you have the “midas touch” – the ability to turn everything you touch into gold. I believe it is at this point in time that you need to be most careful with your mental and psychological approach to the market.
We have often seen people take unnecessary and extreme risks with investments, as they have taken a double or nothing approach.
So when it comes to investing, it is particularly important to look not at only your ‘attack strategy’ -how to capitalise on a particular investment, market or sector, but it is equally as important to think about your ‘defensive strategy’ – how will you behave when things don’t go to plan and what should you do.
Sometimes the best defensive play is to simply just remove the biggest inhabitant to minimising loss. This might be a little hard to take but in some cases it might just be the you, the investor. When one loses money the investor’s psychology can run wild. To date, I have not met anybody who is over the moon with excitement when they have made a loss on their investment. Crystallising this can sometimes be even harder for some.
The easiest way to sometimes combat this is to simply insert a trailing stop loss each time you invest in the share market. This does two things from an investing perspective. The first, and most important, is that it automatically removes decision making around if you should or should not get out. The second is it provides a reset button on your strategy to review and revisit the approach.
A trailing stop loss simply follows behind a share. If you imagine a dog walking along, the leash is the share price and the dog racing along in front of you. The stop loss continues to follow along and enjoy the ride.
If the share price turns and then starts to drop you have the ability to exit the position at a pre-agreed percentage. The other advantage is that you have protected your profit.
Now like most great ideas there are some elements to consider with this strategy. For example if you have held a stock forever and sitting on a significant capital gain this could trigger a nasty capital gains tax bill, and you might think twice about this strategy.
Alternatively, if you set your trailing stop loss too tight then you may be bounced out only for the position to turn around and head back up. It is amazing how many people set their stop loss positions at even number such as $1 or $2.
Like all great investment ideas, if in doubt you, might want to speak with AJ Financial Planning to find out a little more of how to implement such a strategy into your portfolio.
Australia’s superannuation savings have swelled post the GFC to $1.8 trillion with one third of these assets now held in Self-Managed Superannuation Funds (SMSF) – making it the largest and fastest growing segment of the super industry.
So,why are more than 5,000 Australians turning to SMSF each month as their preferred choice to house their super nest-egg savings?
The simple answer is control. A SMSF is not a one-size-fits-all approach which allows investors and Financial Planners to tailor strategies for investment management, risk management, retirement planning and estate planning that may potentially best meet their individual and family’s needs.
A SMSF enables one to invest in a wider range of asset classes rather than possibly just owning a managed fund type of investment. For example, SMSFs have the flexibility to invest in cash in major Australian & overseas institutions to source the most competitive & safest interest rates available. Other examples of direct investments include shares, both listed & unlisted, bonds, residential property, collectibles and business real property.
Investors and Financial Planners can directly target pockets of growth in the market & reduce or avoid exposure to investments with weaker fundamentals – a strategy that can be difficult to achieve with an ‘own everything’ approach of some very large pooled investment funds.
Unlike a regular retail superannuation fee, a SMSF can adopt a fee structure that suits the individual. SMSFs will often have a relatively flat fee structure which means costs are not increasing as a percentage of their assets. This creates significant economies of scale as we project the future growth of superannuation balances as a whole into the future.
When it comes to insurance in a retail super fund, sometimes investors take only the default level of cover based on a member’s age. The issue with managing risk this way, is that it doesn’t take into account a member’s individual circumstances which can be quite different depending on life stage, number of dependents, debt position and investments outside of super. SMSF members have the ability to compare all of the major insurers on the retail market and select a risk management strategy that is competitive based on age, gender & occupation, flexible enough to enable member’s to split the ownership inside & outside super, as well as access to multi-policy & multi-life discounts where applicable.
There is no question that this is an exciting area. If it has been a while since you have looked at your superannuation fund it might be worth speaking with AJ Financial Planning to see if it still is the best one for you.
This is a common question that we hear from clients…. “Should I be using my spare cash to make extra mortgage payments, or should I look to get the tax benefits from salary sacrificing?” Unfortunately there isn’t a clear answer, as it depends on your financial circumstances… but let me explain further.
Briefly, salary sacrificing is when instead of receiving part of your salary in cash you invest it into your super fund. This can reduce the tax you pay on the salary you contribute whilst, at the same time, your super is accumulating further funds in preparation for your retirement.
So the main benefit of salary sacrificing is the tax deduction that you receive. You need to pay 15% superannuation contribution tax on the salary sacrificed amount, so if your marginal tax rate is above 15% there should be a benefit for you.
Pay down mortgage
For the vast majority of people, their mortgage is not tax deductible and this means that you are paying the interest from your after tax or ‘net’ salary. To get an idea of the true cost to you, you therefore need to take into account the tax you pay. So let’s say you earn $10,000 per month and you want to use one month’s salary to reduce your loan. You don’t reduce your loan balance by $10,000, as you need to pay tax on this income. You will actually only reduce the loan by $6,150 (based on a marginal tax rate of 38.5%).
Which is better?
This is going to depend on your marginal tax rate, the current interest rate of your mortgage and the investment return you can get on the funds invested in your superannuation fund.
For example: using the figures above for someone earning $10,000 per month, salary sacrificing $10,000 is going to have $8,500 invested in superannuation (after 15% superannuation tax). At the end of the year these funds will have grown ideally to $9,000 or $9,500 if we assume an investment return of 5.9% – 11.8%. So from our gross monthly income of $10,000 at the end of the year we hope to have somewhere between $9,000 and $9,500 based on our investment return assumptions.
With the same situation if we decide to reduce our debt, we will reduce the loan by $6,150 after paying income tax. This will save us the interest on the loan of say 6%, which is a saving of $369. So our total benefit is $6,519, which is a lot lower than the salary sacrifice benefit of $9,000 – $9,500.
In this case, on a pure numbers basis it is better for the person to salary sacrifice. In reality we should consider other points as well such as:
Your age. The younger you are the further away you are from getting access to your superannuation, so there is some benefit in reducing your mortgage and your risk, even if it doesn’t give you as good a result ‘financially’.
Your debt levels. If you have a high debt level compared to your assets you may be better off reducing your debts with some or all of your spare cash.
Your financial goals. For some people being debt free is very important, but for other people they look at their net wealth after taking into account all assets and debts.
Without going into too complex of an analysis, if your marginal tax rate is 30% or above you will normally be better off on a numbers basis by salary sacrificing. If your marginal tax rate is below 30%, the best option will depend more greatly on interest rates and investment returns.
This article should be considered general advice and is not intended to relate to your personal situation. If you would like specific advice about your personal situation, please call our office on 03 9077 0277 to organise an initial meeting to discuss your financial goals and how we can help you achieve these.
Mentally our minds calculate numbers in sequential order and we like to extrapolate using the same pattern. An example of this is simple arithmetic could be 10, 20, 30 …. the next number most would guess would be 40.
The issue with investing in a lot of cases is that the investment markets don’t necessarily move in sequential orders – thus creating complexities for our normal lateral day-to-day thinking. The other issue is with the compounding of an investment return, in that numbers also don’t move in sequential order.
A classic example of this problem is as illustrated below:
The above calculator assumes that if you invested $100k and this capital grew at 10% in value each year that the investment would be worth around $732k million in 20 years time.
The interesting thing with this mathematical calculation, is that it has taken 16 years to reach $500k. However between years 16 and 20 the capital value increases from $500k to $732k in just 4 years!
The problem in understanding compounding interest is in sequential calculations. When the above investor started out they began with $100k and in the 1st year in the above example they made $10k in earnings. In the second year they made $11k. What happens then is the investor then extrapolates this data out in the sequential ordering of adding around $10k per year (give or take a couple of dollars either side). With this thinking, it would mean that they would have accumulated $200k in just over 20 years (which is $10k times 20 years plus the original capital of $100k) giving a total investment amount of $300k.
This is obviously in start contrast to the actual final result in the above example.
So when analysing patterns and sequential mathematics, investors can quickly get very frustrated as they are not seeing the immediate results from the capital. However I believe with compounding interest it certainly has its benefits it just may take some time to see it and then, like a rocket, it just takes off!
This week I was driving back from visiting a number of clients who live in country Victoria’s Gippsland area. On my way back to the office, I passed a large brown coal power plant and I started thinking about this sector…….. and in particular….. if it is a growing or declining industry?
I realised too that there is a lot of parallels between this industry and Warren Buffet’s textile investment. Let me explain….
Warren Buffet’s company “Berkshire Hathaway” started originally as a US textile mill. He has been quoted as saying that this was possibly one of his worst investments. The reason being, is that the textile industry whilst cheap at the time of acquisition, was also in a declining industry in the US. Buffet has also famously said “If you get into a lousy business, get out of it….if you are wanted to be known as a good manager, buy a good business…”
Not surprisingly, Warren Buffet eventually closed the textile mill, however kept the name as a constant reminder of his lesson.
There are a number of lessons one can learn from this experience. The first might be to act very cautiously around a cheap investment or asset. It is important that the investment has a future and a prospect for growth in the future – otherwise you may find that although the asset is cheap ,it might also be a “value trap” similar to Warren Buffet’s textile mill.
In many ways, this brown coal power factory I was passing by is in my opinion similar, to the textile industry for Buffett. At some point the alternative power sources will prove more efficient and more cost effective. In this industry it is not a matter if it will be replaced, but more a case of when will it occur. In other words it is a declining industry.
It does however raise a larger question about the investments which you might hold. Are they too in a declining sector? Most people might quickly respond stating “not mine!”, however since 1900 in the US there are only 3 companies which remain today. So I believe it is not a case of if your investments will decline, but more a case of when. Understanding the date stamp on your investments and the future prospects for growth are very important when managing your investments.