For many retirees who were unable to enjoy the wonderful retirement savings vehicle that superannuation now affords, the age pension is a major source of income for them. A bonus of part-pension eligibility is the prized ‘Pensioner Concession Card’ (PCC), even if the actual benefit is only minuscule.

Eligibility for the age pension is tested under both an ‘income test’ and an ‘assets test’ and the test that produces the lower benefit is the one that is used. Accordingly, the following traps need to be avoided.

Additional income

If you are assessed under the assets test then you can potentially earn additional income without having your benefit impacted. For instance, a home owning couple with $800,000 in assessable assets will receive an age pension benefit of $137 each per fortnight under the assets test. Under this scenario, their assessable income can be as high as $68,000 before their benefit reduces.

This potentially allows pensioners to undertake some form of work, if they are inclined, without having their age pension or PCC entitlement affected.

Valuing assets

The principal residence is not an assessable asset, however, furniture, vehicles, boats and caravans are. Many pensioners fall into the trap of valuing these assets at replacement value which could be costly as every $10,000 of excess assets reduces the age pension by $780 a year. To avoid the trap, furniture, vehicles, boats and caravans should be valued at what you expect to get from them in a garage sale, not what it will cost you to replace them.

Don’t spend just to get or increase the pension

There is absolutely nothing wrong with spending money on a holiday, renovating the home or enjoying a better quality of life. $100,000 worth of family home renovations increase your age pension by $7,800 per year, however, it will take almost 13 years of the increased pension to get that $100,000 back, not to mention the forgone return on that money. The benefits of renovating the home or travelling may be compelling, however, the main thing is to not spend money with the sole purpose of getting a higher age pension benefit.

Revaluations

Each year on 20 March and 20 September, Centrelink updates the value of market-linked investments such as shares and managed funds. Notwithstanding this automatic update, at any time the asset value can be updated. This means the rules favour pensioners because if the value of your investments rises, you can wait for Centrelink to run the automatic update in March and September. Conversely, if the value of your investments decline, you should notify Centrelink immediately which may lead to receiving a greater benefit.

Gifting

A pensioner can reduce their assessable assets by giving money away, however, it is important to seek advice. The rules allow gifts of $10,000 in a financial year with a maximum of $30,000 over five years. A pensioner could reduce their assets by $20,000 in a matter of days by giving away $10,000 just prior to 30 June and then another $10,000 on 1 July or thereafter.

Superannuation

Where a member of a couple has not yet reached age pension age, it can be beneficial to hold as much super in the younger person’s name in ‘accumulation’ mode as it will be exempt from Centrelink assessment. However, the moment that person is age pension age or a pension is commenced from that accumulation account, Centrelink will assess that asset.

Mortgaged assets

A common trap arises where a loan is used to purchase an investment property and the loan is secured by a mortgage against the pensioner’s residence. A debt against an investment asset is only deducted from the asset value if the mortgage is held against the investment asset. If the mortgage is secured against another asset, the full value of the investment asset will be assessed. The effect could be a complete disaster.

Bequests

Another trap can arise due to the significant difference between the asset cut-off point for a single person and that for a couple. At 20 September 2021, the single home owner asset cut-off point was $593,000, whereas for a couple it was $891,500. By leaving assets to each other, the surviving partner may lose entitlement to the age pension, hardly helping the grief being experienced at that time.

Jointly owned assets with adult children

A decision without proper planning can have consequences in the future. A scenario many of you have no doubt faced, especially in recent times, is helping a child to enter the residential property market for the first time. It might seem like a great idea at the time for a couple aged 55 to take on a 50% share of a house worth $400,000 to enable their child to borrow against their portion of ownership, but how might this look when you get to age pension age and you still own 50% of that property?

The value of the property could appreciate substantially over the next 12 years i.e; when the couple become eligible for the age pension, to the point that it results in their assets being above the asset test cut-off point.

If their 50% interest is then transferred to their child, not only will there be potential Capital Gains Tax implications but Centrelink will treat that ’gift’ as a deprived asset for the next 5 years, further adding to age pension eligibility woes.

In this instance, it would be far more appropriate for the couple to become a guarantor for their child, possibly putting up their own home as part security. The rules of the age pension are complex, sourcing appropriate advice could pay dividends!

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

From 1 October 2021, rollovers into and out of a Self Managed Super Fund (SMSF) can only be processed via ‘SuperStream’.

What is ‘SuperStream’?

SuperStream is the electronic system used to transfer money and data to super funds. It is used to process employer contributions to APRA-regulated funds and for rollovers between super funds.

The move to include SMSFs in SuperStream rollovers is welcomed by many SMSF fund members who have experienced delays in receiving rollovers into a SMSF.  The SuperStream protocols require paying funds to process the rollover of a member’s benefit electronically and within three days of receiving a valid request.

Many SMSFs have mature members who are not anticipating receiving any further rollovers hence, they have paid little attention to the SuperStream requirements.  However, if members decide to wind up their SMSF and rollover into a retail fund, they will generally need to register for SuperStream before the SMSF can process the rollover.  SuperStream, however, can be activated at any time and can be expected to be established within days.

ASIC’s requirement for a SMSF’s investment strategy to outline an exit strategy may require SMSF trustees to consider SuperStream as part of their next regular investment strategy review.

What is required for an SMSF to be SuperStream ready?

Most professional administrators are SuperStream ready, and many have been using SuperStream to process rollovers for some time. Where a SMSF doesn’t use professional administration services they will need the following:

• An electronic service address (ESA) which is provided by most SMSF software platforms, administrators, tax agents and some third-party suppliers. The ATO provides a list of ESA suppliers on their website – ATO ESA providers.
• A unique bank account recorded with the ATO.
• A Unique Superannuation Identifier (USI) which is the fund’s Australian Business Number (ABN).

Processing a rollover

The paying fund has three days from receiving an actionable rollover request to process the payment. If the rollover request has incomplete information, the trustee of the paying fund must request the required information within three days.  Additional time may be allowed if the paying fund needs to sell down assets.

Whilst the prompt receipt of rollovers into SMSFs is welcomed, there may be many practical reasons why a SMSF is not able to action a request to rollover into another fund within the three day timeframe.  In the absence of professional administration, it is not always possible to accurately calculate a member’s entitlement within three days.  In addition, the sale of assets to make the cash payment may take longer than the time allowed.

Where one member is leaving because of a dispute with another member, further difficulties in meeting the required timeframes may occur.

Another requirement of the SuperStream system is that the trustee of the receiving fund must allocate the rollover to the member’s account within three days of receipt of the funds. For SMSFs without professional administration, a minute regarding the allocation may be required.

Conclusion

SMSFs expecting to receive member benefits rolled over from another fund will need to ensure they are registered for SuperStream prior to the member requesting the rollover. Likewise, registration will be required before a SMSF trustee can rollover a member benefit to another fund.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

The receipt of inheritance brings both financial and emotional considerations.  Financially, an inheritance will more often than not improve one’s financial position by allowing debt to be paid down or the wealth base to increase.  Emotionally, the loss of a loved one is never easy, or the responsibility of applying the inheritance to ensure a ‘legacy’ is left may become a real burden.

For Age Pension recipients, there are additional considerations.

Centrelink assessment of an interest in a deceased estate

An individual’s interest in a deceased estate is an assessable asset once it is received or can be received.

It can take considerable time to finalise an estate, it is accepted that a beneficiary is unable to receive their interest in a deceased estate for up to 12 months from the death of the testator.  However, if the estate is finalised earlier the interest will be assessed from the date it is received or able to be received.

If after 12 months of the death of the testator the estate has not been distributed, Centrelink may consider the facts of the case to determine what is preventing the estate from being finalised.  If a beneficiary has contributed to the delay, their interest will be regarded as being available.

If the beneficiary is not the executor and the executor has discretionary power on how the estate is distributed, Centrelink will accept that the beneficiary has no control over the delay.  Also, Centrelink will accept that where the estate debts are yet to be paid the estate interest cannot be received.

Deprivation provisions are intended to limit the potential for recipients to avoid the assets and income tests. They apply to a person’s interest in a deceased estate or superannuation fund if the person:

• Waives their right to their interest in the deceased estate or superannuation fund and the person obtains no, or inadequate consideration.
• Directs the executor of the estate or trustee of the superannuation fund to distribute their interest in the deceased estate or superannuation fund to a third party and the person obtains no consideration or inadequate consideration.
• Gives their interest in the deceased estate to a third party after the estate has been finalised for no or inadequate consideration, or
• Gifts their interest in a superannuation fund.

Once a person’s interest in a deceased estate is assessed, the value of this asset or the deemed income may reduce that person’s age pension entitlement, possibly to zero.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

In what seems to be the ever changing world of superannuation, the Commonwealth Government has recently passed the following reforms:

Increasing the number of members for a Self Managed Superannuation Fund (SMSF) to six from 1 July 2021.

This is useful for a family business that wants the SMSF to own the commercial property out of which the business trades, thereby ‘keeping the wealth within the family’ rather than contributing rent into the wealth accumulation strategy of an external landlord.

Increasing the number of members in a SMSF will allow for the asset pool to increase thereby opening up investment options and strategies available to the fund in order to meet wealth accumulation objectives.

Extending bring forward rules for Non-Concessional Contributions (NCC) to those 65-66 years old from 1 July 2021.

From the 2020/21 financial year, people aged 65-66 were permitted to make a voluntary contribution into superannuation without having to satisfy the work test. This allows for a NCC to be made up to the now increased $110K maximum limit, per annum from 1 July 2021.

At the time of this introduction to allow those aged 65-66 to make a NCC, the ‘bring forward’ of two future years was not permitted, which of course was inconsistent with the spirit of superannuation. However, it was hotly anticipated that the restriction would eventually be removed, which it has now been. Two future years of NCCs can now be brought forward resulting in a maximum of $330K that can be voluntarily contributed into superannuation for those aged 65 and 66.

Extend pension drawdown relief by 50% over the 2021/22 financial year.

For the last two financial years, the minimum pension payment required to be taken by superannuants from their pension accounts was reduced by 50%.

This was a measure introduced to alleviate the pressure on pension accounts being drawn down unnecessarily, resulting in ‘forced’ asset sales to shore up available cash at a time when financial markets were depressed. In essence, the concept was aimed at increasing the ‘longevity’ of pension accounts.

This measure has been extended into the current 2021/22 financial year. This no doubt will be well received by those in pension mode that don’t require the otherwise ‘normal’ minimum withdrawal.

Superannuation guarantee increase to 10% on 1 July 2021.

This refers to the amount employers are required to ‘compulsory’ contribute into superannuation on behalf of an employee. Previously the rate was set at 9.5% of gross salary, it is now 10%.

Another change to be aware of is the increase in contribution caps for the two different types of contributions. As mentioned above, the ‘NCC’ cap has been increased to $110K per annum. Similarly, the ‘concessional’ or taxable contribution cap has been increased by 10% to $27,500 per annum.

There is further scope and incentive for those in accumulation mode to increase the amount that can be contributed into their retirement asset of superannuation. These are positive steps to alleviate gaps in the retirement system, which will make it fairer for everyone.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

David Booth is a US businessman, investor and philanthropist who has been involved in financial markets for 40 years.  Below are five lessons from his decades in the trenches which serve as a timely reminder.

Lesson 1: Gambling is not investing and investing is not gambling

A short-term bet is a punt on chance, nothing new here, however, if one treats the stock market like a casino and tries to time the market, then you need to be right twice in the game of buying low and selling high.  It’s very difficult to pick the right stock at the right time once let alone twice.

Investing on the other hand is a long-term game and while all investments carry risk, a long-term investor can manage those risks and be prepared.  Investing is buying a good quality business at the right price and holding it for a long time.  The bet you’re making is on human ingenuity to find productive solutions to the world’s problems.

Lesson 2: Embrace uncertainty

Over the past 100 years, the S&P 500, an index of the 500 largest companies listed on the US exchange has returned a little over 10% on average per year but hardly ever close to 10% in any given year.

Like most things in our lives, stock market behaviour is uncertain and whilst none of us can make uncertainty disappear altogether, dealing with it thoughtfully can make a huge difference to our investment returns and perhaps, more importantly, our quality of life.

Uncertainty can be dealt with by preparing for it.  It was Benjamin Disraeli,  former Prime Minister of the United Kingdom who was quoted as saying; “I am prepared for the worst, but hope for the best.”

If you’re prepared for uncertainty you can benefit from it when it comes along.  The recent ‘COVID’ crash presented some wonderful buying opportunities.  Without this level of uncertainty or risk, there would be no opportunity to do better than a relatively riskless return like that from a money market fund.

Lesson 3: Implementation is the art of financial science

All the research completed over the years into understanding markets and returns tell us there’s general agreement on what ‘financial science’ tells us, however, so much can be gained or lost in application.

Whilst it does help if you have one or two genuine superstars, successful sports teams execute their strategies with a greater level of consistency and discipline than the opposition.  Investing is no different.  Great implementation requires paying attention to detail, applying sound judgement and maintaining discipline through all stages of the cycle.

Lesson 4: Tune out the noise

If you’ve lived long enough you should know one thing, if an investment sounds too good to be true, it probably is.  Fads come and go and unicorns are not real.

There are a plethora of websites and pundits willing to hand out stock tips or predictions and there’s always that ‘friend’ or family member, a self-proclaimed completely fearless guru, who is happy to tell you what the next big thing will be.

Bottom line is if you don’t understand it or the person who is imparting their ‘wisdom’ can’t explain it to a sixth grader, don’t invest in it.

Lesson 5: Have a philosophy you can stick with

This one is an extension of those above.

During periods of extreme market volatility, you need to call on your levels of intestinal fortitude to avoid the trap of making poor decisions based on emotion.

We will remember the year 2020 for the rest of our lives.  It’s an example of how important it is to maintain discipline and to stick to your plan when things don’t go as planned.

By embracing uncertainty, you can focus on what you can control.  Whilst you can have some effect on how much you earn, you most definitely can control how much you spend, how much you invest and the risk level you are prepared to accept.  A professional you can trust can help here.

Discipline applied over a lifetime can have a powerful impact.  Look at those you know who are not and decide for yourself which path you would like to follow.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

If you’ve had a gutful of the dreaded COVID-19 virus and the media coverage it has brought with it, you’re not Robinson Crusoe.

Let’s put all of that negativity to one side and focus on real data which indicates to me that perhaps the tide is turning in a positive direction, which could be to the benefit of the thousands of part owners of the banks.

I’ll get to the point, home loan deferrals.

Back in March last year when the ‘you know what hit the fan’, the banks offered borrowers of both home and business loans the option to defer or ‘hit pause’ on their repayments for 6 months.

Data announced by the CBA in their full-year results back in August indicated that at the peak of home loan deferrals there were 154K loans on pause. At 30 June 2020, this had dropped to 145K, and at the end of July 2020 they were 135K or 8% of their book.

As reported in ‘The Australian’, data produced by regulator, the Australian Prudential Regulation Authority (APRA) indicated that at the end of November this number had dropped to just over 2%. At the same date, WBC’s deferred loans sat at 3%, NAB’s at just over 1% and ANZ’s had dropped to 3%.

It’s evident all lenders have experienced the positivity of this trend with the total value of the $2.7 trillion in loans across all lenders on deferral dropping from 10% in May – June 2020 to 1% currently.

How is this going to be of benefit to a bank shareholder?

Well, banks account for loan defaults by making a ‘provision’ for bad debts in their accounts. They book an entry that hits profit now and when the loan goes bad it is written off against the liability on the balance sheet. They essentially ‘provide’ for the likelihood of debts going bad without knowing what will actually go bad before it does go bad.

The CBA in their FY20 accounts made an additional $1.5 billion provision for the potential default of loans due to the impact COVID-19 was forecast to have on their loan book. This provision amounted to 15.8% of full-year net profit after tax. At the time of provisioning in June 2020, there was still a great deal of uncertainty around how bad the economic impact would be and by extension the number of loans that would go bad. Fast forward to today and it appears the fallout will be nowhere near as bad as what the CBA thought it might be when they made that $1.5 billion provision.

While the landscape is not as bad as feared, the CBA did not undo the provisioning in the half-year to 31 December but instead chose to be conservative and keep that powder dry due to the lingering doubts over the tourism, leisure and hospitality industries, those specifically hardest hit by COVID.

The CBA did increase their payout ratio to 67% for the interim dividend after the withdrawal of the 50% restriction imposed by APRA, however, there is still room for significant dividend growth in the full-year results which will be announced in August.  The other ‘Big 3’ are about to report their half-year results…we anxiously await their dividend announcements.

With the availability of franking credits attached to those bank dividends, yields can become even more compelling to investors, especially for self-funded retirees in the tax-free pension phase, given the average term deposit rate over the 12 months is ~0.50%.

On the back of improving economic growth as the vaccine rolls out, we could continue to see some air getting pumped into the share prices of the banks over the coming months, but we all know how things can quickly change for the worse.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

Much like how the Global Financial Crisis hit the economic wellbeing of many retirees so has COVID-19, with confidence in the quality of life in retirement and how long money will last being shaken.  Returns on cash and term deposits are negligible and that doesn’t look like changing anytime soon, which augurs well for growth assets given interest rates appear to be ‘lower for longer’.

Allianz Retire+ conducted some research during the pandemic some months ago and they received over 1,000 respondents from current and prospective retirees.  Here are some key findings.

1. Money is a recurring worry for retirees

24% of the respondents said they worried about making ends meet whilst 20% indicated money was a constant worry.

2. Spending even less on necessities, luxuries

75% of retirees said they were spending less on luxuries due to COVID-19. 68% of respondents said they were only buying necessities.

3. Many retirees did not feel financially secure

51% of those surveyed did not feel secure in their financial position.

4. Wealth destruction

36% of respondents said they had lost money during the COVID-19 market downturn. 13% believed they had experienced financial losses that would not be recovered during their retirement.

5. Vulnerable to another financial shock

61% did not believe their financial situation was safe in the event of another economic downturn.

6. Lack of control

45% did not feel in control of their financial future. Heightened market volatility was making many retirees feel they were at the mercy of global financial markets and unable to control their financial future.

7. Quality of life worries

34% of retirees worried about whether their finances would allow them to have a good quality of life.

8. Illness, market uncertainty top concerns

Top five concerns were:

• becoming ill (55%)
• unexpected costs (45%)
• losing a loved one (44%)
• not having enough money to live the life they wanted to live in retirement (34%)
• the risk of one-off market downturns (32%)

9. More conservative approach

62% of surveyed retirees said they were taking a more conservative approach to their retirement because of COVID-19. Given that many retirees already live conservatively, the finding added to the broader survey theme of retirees cutting back further and taking fewer financial risks during the pandemic.

10. Retirement expectations being downgraded

23% of retirees now had more negative expectations of their retirement due to COVID-19.

11. Wary of financial advice

23% of respondents sought financial advice, even though they were feeling less financially secure. Allianz Retire+ research consistently finds that retirees who used professional investment advice felt more confident in their financial position.

Some confidence has returned to markets over the last 5-6 weeks as vaccine rollouts appear to be close to happening.  The U.S election result has also calmed investors some. It would be interesting to view the results of the survey if it were conducted today.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

This may well be an understatement, but it has been an interesting year for financial markets, and it doesn’t look like it is finished yet.  Tensions between the United States (US) and China remain, which you would think will be tested further after the outcome of the US presidential election. But what does this have to do with investing?  Well, that depends on whether you want to think like an investor or like a gambler.

If your mindset is to achieve sustainable and growing returns over the long term then you’re thinking like an investor.

During COVID-19 lockdowns, the activity of speculating on the ups and downs of share prices has been prevalent.  This is essentially gambling and that’s ok, go your hardest if that’s a game you want to play, however, the only problem with gambling is, as most people know already, gamblers tend to lose.

An investor’s mindset is one of owning a piece of that business.  This requires owning a stock not for 10 minutes but for 10 years.  Only when you treat shares as an ownership stake in a business does one’s approach to allocating capital change.  Instead of betting on a price that shows up on a screen between 10:00 a.m. – 4:00 p.m. each day, you become interested in how the underlying business makes money, how it forms part of the business community and the economy and how it can grow over time.

Owning a business also affects the way you think about selling it.

If you owned a successful business here in Australia outright, would you sell it because of the concerns over who might win the US presidential election or because of a change in Europe’s inflation rate?  Probably not, however, because we don’t own a publicly listed company outright, the share price is subjected to those sellers who react irrationally on whether or not ‘The Donald’ will keep his job or get punted.

The consequences of buying and selling being based on emotion, impatience and fear is that share prices become yo-yos.  This can however, favour the investor who makes decisions based on the fundamentals of the ‘business’.  If the share price falls yet the fundamentals of the business have not changed, an investor thinks about owning more of that great business, not rushing to the exit.

If the idea of investing in a quality business appeals more to you than punting on where the share price will be today, tomorrow, next week or in six months’ time, you’re an investor.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

The June quarter inflation numbers were printed this week and as expected, it was not good!

The chart below depicts the current situation we find ourselves in thanks to COVID-19.

As you can see, the cost of living dropped an unprecedented (have we had enough of hearing that word lately?) 1.9% over the past three months to June resulting in the annual rate of inflation coming in at -0.3%.

Since 1949, this is only the third time inflation in Australia has been negative!

In a nutshell, this means people are not spending money.  Since people aren’t, or more correctly, haven’t been able to spend money due to the restrictions brought on by COVID-19, company profits will be lower and if profits are lower so will dividends.  As to what extent, we’ll find out in August.

A low inflation rate impacts interest rates and this is not good for term deposit holders. If inflation is low, so are interest rates to encourage spending. However, it’s just not happening. In these times return expectations from our investments need to be adjusted to align with the environment we are in, which is low-growth. This looks like remaining for some time and it is a global phenomenon.

To counter this in the United States, this is how they’re addressing the issue there:

For now, adjust your return expectations from your investments and strap yourselves in, there’s a long way to go!

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

In what seems to be the ever-changing world of superannuation, the Commonwealth Government has amended the regulations that result in closer alignment to the age pension age, which is a good thing.

The eligibility for the government age pension was increased from 65 in line with the following table:

Soon enough, the eligibility for the age pension will be upon turning 67, however, this is out of whack with the superannuation rules, which principally revolve around turning 65.

Under the current superannuation rules, once you turn 65 the only way you can make a voluntary contribution into super is if you satisfy the work test. This involves working at least 40 hours in a consecutive 30-day period in the financial year the contribution is made.

The current system disadvantages those retirees who have turned 65 as they are not yet eligible to apply for the age pension, however, unless they work, they are restricted from being able to make a voluntary contribution into super.  If an asset was realised or they acquire the winning lottery ticket a voluntary contribution into super is not an option.

It’s highly undesirable to expect a retiree to have to go back to work in order to be able to make a contribution into super hence, quite rightly, this mismatch in the system has been removed.

From the 2020/21 financial year people aged 65 and 66 will be permitted to make a voluntary contribution into super without having to satisfy the work test.  This will permit a ‘non-concessional’ contribution to be made up to the $100K maximum limit.

Similarly, the age at which the ‘bring-forward’ rule for non-concessional contributions is before parliament to be increased from 65 to 67.  The bring-forward rule permits two future years of non-concessional contributions to be brought-forward resulting in a maximum of $300K that can be voluntarily contributed into super instead of $100K.

These are positive steps to alleviate gaps in the retirement system that make it fairer for everyone.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.