The first budget for the new coalition government has as expected provided some significant changes as well as confirming changes that had been widely anticipated.   This summary will look at the following major changes grouped into three main areas – tax planning, retirement planning and government benefit planning.  The full summary can be found at our 2014 Budget - Personal Finance Summary page.

An article published in the Australian Financial Review last week provided some revealing data about average fee levels in the superannuation environment – Wake up to Super Fees.

The article reported the following broad fee levels:

Average fees charged by MySuper schemes for not-for-profit industry schemes             - 1.01%

Average fees for comparable retail funds                                                                   - 1.32%

Total fees charged on actively managed retail default funds with $100k balance                           - 1.10% to 2.39%

Total fees charged on actively managed retail default funds with $250k balance                           - 1.05% to 2.33%

Total fees charged on passively managed retail default funds with $100k balance                         - 0.55% to 1.09%

Total fees charged on passively managed retail default funds with $250k balance                         - 0.52% to 1.04%

The article goes on to debate that the performance of a particular fund is not just about fees.  There can be no question that the end outcome for a member of a super fund is the net return after fees and taxes.  However whether an active or passive approach will achieve that outcome will be the topic of endless debate.

The research we have considered at A Clear Direction clearly suggests that keeping costs low should lead to a better outcome, on average.  Investment approaches that utilize a passive, index based approach to building portfolios generate lower costs for clients and in our opinion provide better long term outcomes.  This is why index funds are at the core of our investment philosophy for building client portfolios.

So how do the fees stack up for A Clear Direction’s approach?

The ARF article suggests that the typical default balanced fund mix is 30% defensive and 70% growth. Based on a 30 / 70 asset allocation mix (30% invested in cash & high quality fixed interest, 70% in growth assets such as shares and property) the indicative administration and investment fees that clients of this firm are charged are:

$100k portfolio                     0.79%

$250k portfolio                     0.78%

Please note that here are adviser fees on top of those amounts, as there would be if an adviser was involved with any of the average industry fee levels mentioned earlier.  We believe that our fee level compares very favourably to the fees across the superannuation industry and therefore puts clients ahead of the game in terms of long term net returns after fees and taxes.

Regards,

Scott

It has been a number of months since we updated the website with Scott Francis' articles published in the Eureka report.  We have now caught up and welcome you to take a look at these pieces - 17 in total.

For many years I have followed the writings and podcasts of Paul Merriman, a financial adviser based in the USA.  Recently Merriman has retired but continues to write and publish on financial advice particularly investment advice topics.  In a recent article 10 do's and don'ts for retirement investors he looks at 5 key dos and 5 key dont's in retireement.  Even though the comments are focussed on retirees in the US the broad concepts are just as relevent for us here in Australia.  So here are the 10 items for your consideration:

Retirement do’s

1. Do take advantage of “the only free lunch on Wall Street” by building a diversified portfolio of mutual funds (managed funds in Australia). This will reduce your risk and probably increase your returns.

2. Do buy funds with the lowest possible expenses. The average equity fund charges more than 1.3% a year, yet you can get most of the asset classes you need in good funds for a full percentage point less than that. This is equally important for bond funds.

3. Do buy index funds instead of actively managed ones. This will be a big help in achieving both of the prior “do’s” I mentioned.

4. Do invest in equity asset classes with long histories of successful returns. Based on years of careful study by academics I trust, this means U.S. large-cap blend, U.S. large-cap value, U.S. small-cap, U.S. small-cap value, international large-cap blend, international large-cap value, international small-cap blend, international small-cap value, and emerging markets. And for tax-deferred accounts only, it means U.S. REITs. (In Australia the asset classes include Australian large-cap companies, Australian value style companies, Australian small-cap companies, International large/value/small cap companies, emerging markets and Australian and international REITs)

5. Do invest in the most tax-efficient manner. Unless you have unusual circumstances, that means maximizing your IRA and 401(k) accounts and (when you’re living off your money in retirement) using up your taxable accounts first. (In the Australian context this is about effectively utilising superannuation and superannuation pension accounts)

Retirement don’ts

1. Don’t pay a sales commission to buy or sell a mutual fund. The commission is money that’s gone forever from your nest egg, and it inevitably and permanently diminishes the return you will get. (In Australia you can no longer buy funds that have commissions attached but any existing managed funds may still maintain a commission structure.)

2. Don’t buy funds in asset classes with low expected returns or high levels of risk relative to their expected returns. Among the most prominent examples of asset classes you should avoid are commodities, gold and technology stocks. In addition, I think you should steer clear of pure growth funds, whether they invest in large-cap, midcap or small-cap stocks — and this includes international funds as well as U.S. funds.

3. No matter how much you are attracted to an active manager, don’t buy actively managed funds. This is really another way of stating my third point above. Actively managed funds are guaranteed to have higher expenses than index funds, and their returns aren’t likely to be as high as those of index funds.

4. Don’t speculate with your portfolio, even a small part of it “for fun.” If you have a properly diversified portfolio along the lines that I recommend, your investments will include all the “great opportunities” you will ever need. Speculating and playing the market will almost surely reduce your long-term returns. 
   
   If you absolutely can’t resist trying your luck, then spend (notice I am not saying “invest”) a bit of money that you can afford to lose and buy a lottery ticket.

5. Don’t get snookered into thinking you have found a guru or anybody else who knows what will happen to the market in the future beyond statements such as “Stocks will go up in the long run.” Many people claim to have that knowledge, but nobody does. The sooner you can accept this fact the sooner you will be in touch with reality. 
   
   When you are in touch with reality, you are likely to invest more intelligently and productively.

These are great insights from a man with many more years of experience than me and well worth consideration for you investment portfolio.

Regards,

Scott

However, a major issue I have with the “Big Bucket” investment approach offered by these and other superannuation offerings comes to when you want to start drawing down on the balance to sustain your cost of living and lifestyle in retirement.

By Big Bucket approach I mean whereby you have a range of investment choices which hold a diversified pool of assets and you get to choose one or two of these choices.

The problem comes once you start to draw down.  A few years ago you did not have the choice of targeting where to draw your payments from so you were forced into selling down a percentage of all the asset classes held in the fund.  This thankfully has improved so now a member could have a cash option and draw all payments from there along with a balanced, moderate or conservative diversified option.

So a suggested structure within these big bucket fund is to have a holding of cash alongside a diversified investment option matching your required asset allocation.

This all sounds pretty reasonable.  The problem in the structure is that the investment earnings generated by a particular investment option are not able to be directed back into the cash option to top it up.  Rather they get automatically re-invested back into the investment choice from which they were generated.  The end result is that you quickly see the cash component dwindle.

So what this means is that a member has to manually sell down assets from the diversified balanced, moderate or conservative option to top up the cash account.  What you are doing is selling a range of asset classes.  This includes selling down growth style assets such as shares and property.

If those investments have been steadily growing this is not a problem as we would be undertaking effective rebalancing.  Unfortunately when growth asset markets are struggling, selling down these assets is locking in the losses or poor performance that has occurred.

Take the past 5 years as an example.  We are still well away from seeing shares and listed property assets regaining the levels of late 2007.  If we are forced sellers now we are locking those paper losses into real losses.

In my opinion a much more effective arrangement is to take control of where the income generated by assets is invested and in doing so reducing the need to be forced sellers of assets at a point in time.

Another interesting side issue is to know where administrative fees are being taken from in “Big bucket” accounts.  Most likely it is across the investments proportionately.  Here is another situation when you can become forced sellers when ideally it would be better not to do so.

At A Clear Direction we believe that you can have the benefits of a low cost superannuation service along with the necessary control to make sure you are not forced into making poor investment decisions along the way. 

One participant to the article suggested they had $7.6 million in their fund and were paying fees of approximately $100,000 per annum.

So I decided to look at what the fees would look like in 2 superannuation accounts of $3.8 million each using the cheapest available administration service I have at my disposal for that amount. 

The following table sets out the total fees for the combined $7.6 million portfolio across a range of asset allocations:

These numbers are based on using the standard investment philosophy suggested by the firm.  If a client wanted to through in a direct shareholding component to the portfolio the investment manager costs would fall further.

Keep in mind that the members no longer have the responsibility of being trustees of their own fund plus they have shaved off more than $65,000 from their cost base. 

I think this shows that the cost basis of A Clear Direction’s approach is extremely competitive for large portfolios and also puts into question the oft quoted perception of lower fees in SMSFs.

If you think you are paying too much please get in contact.

Regards,
Scott

In the present political climate it is easy to get caught up in the debate over whether it is the right time for the government to be moving to a fiscal surplus.  Rather than focus on the politics of the Budget, we think it is best to focus onthe practical implications and look at how changes impact on individual financial planning strategies.

The budget has provided a number of significant changes impacting on financial planning strategies.  These have been outlined in this summary.  The major changes include:

• Deferral of higher concessional contributions cap for individuals aged 50 and over from 1 July 2012
• Higher tax on concessional contributions for very high income earners from 1 July 2012
• Mature age worker tax offset (MAWTO) to be phased out from 1 July 2012
• Increased Medicare levy low income thresholds from 1 July 2011
• Means testing of net medical expenses tax offset (NMETO) from 1 July 2012
• FTB Part A increase
• Family Tax Benefit (FTB) A eligibility from January 2013
• Supplementary Allowance
• Schoolkids Bonus
• Aged care reform from 1 July 2014
• Accelerated real estate review from 1 July 2012
• Reduced payment period of Australian Government Payments for people who are temporarily absent from Australia from 1 January 2013
• Australian residency requirements for the Age Pension from 1 January 2014
• Removal of the capital gains tax discount for non-residents
• Changes to tax rates for non-residents
• Company Loss Carry Back
• Small Business Immediate Write-Off Extension
• Previous proposals shelved
  • Reduction of the corporate tax rate to 28%. The corporate tax rate will remain at 30%.
  • Standard tax deduction of $1,000 for work-related expenses and the cost of managing tax affairs.
  • 50% discount for the first $1,000 of interest income.

The following changes announced since last year’s budget have also been confirmed

• Confirmation of changes to marginal income tax rates & thresholds
• The minimum draw down relief for superannuation pension holders will be extended next year with minimums being 75% of the original rules and returning to the normal rates from July 1 2013.
• Changes to co-contribution arrangements
• Superannuation guarantee rate to progressively rise from 9% to 12%
• Maximum age limit for the superannuation guarantee to be abolished
• Low income superannuation boost
• Allowances & supplements  to reduce the impact of the introduction of a price on carbon

Each of the above items has been addressed in a little more detail our 2012 Budget - Personal Finance Summary.

The key strategy considerations stemming from these changes include:

• Those in the workforce who are 50 or older to reconsider salary sacrifice strategies to ensure that concessional contributions in excess of $25,000 are not made and how to be prepare to make the most of increased contribution thresholds come July 2014.
• Those earning more than $300,000 of income to consider whether superannuation contributions need to be lifted to replace the extra tax payable on concessional contributions.
• Non-residents to take extra care in the disposal of assets with realisable capital gains.
• Salary sacrifice strategies to be re-assessed under the new marginal tax threshold levels and rates.
• Personal superannuation contributions in order to access the government co-contribution need to be re-assessed in light of the changed thresholds and rate.
• Those turning 70 to consider the benefits of the continued superannuation guarantee contributions.
• Continued consideration of pension payment draw downs if looking to draw only the minimum allowed.
• Small business owners to consider the timing of discretionary capital purchases.

The end of the financial year is an ideal time to consider your financial structuring for the year ahead.  However if you have not yet put plans in place for this financial year it is not too late to put them into action.  Here are some strategies to consider and as always, please seek individual financial advice before taking any action.

• Making a personal contribution of up to $1,000 into super to receive the government co-contributions.
• Making non-concessional contributions into super to get these assets into a tax friendly environment

a.     This can include an in specie transfer of assets if you use a fund that allows this

• Making a concessional contribution into super to reduce tax payable on income and get assets into a tax-friendly environment
• Making a contribution into your spouse’s super fund if they are a low income earner and by doing so receiving a tax offset whilst also getting assets into a tax friendly environment
• Bringing forward any relevant tax deductions

• Making the most of the income tax cuts
• Reductions in tax payable on interest income
• Further restrictions on the government co-contribution
• Clarity for SMSFs on instalment warrants
• The benefit to investors from a reduction in company tax rates
• Future increases to contributions going into superannuation

We have just emailed out our summary of the 2010 Budget as it relates to  personal finances and financial planning strategies.

This year's budget has provided a number of significant changes impacting on financial planning strategies.  These have been outlined in this summary.  The major changes include:

-          Confirmation of income tax changes from July 1^st 2010 increasing the effective tax free threshold from $15,000 to $16,000 for those earning $30,000 or less, the bottom of the 30% marginal tax rate threshold increasing from $35,000 to $37,000 and the current 38% marginal tax rate being reduced to 37%.

-          A 50% discount commencing July 1^st, 2011 on the tax payable on the first $1,000 of interest income generated by bank, credit union and building society accounts along with income from bonds, debentures and annuity products.

-          A $500 standard deduction for work related expenses starting 2012-13, increasing to $1,000 for 2013-14 to simplify tax returns and lead to tax savings for many individuals.

-          Superannuation guarantee contributions to rise from the current 9% to 12% by July 2019.

-          A $500 superannuation tax rebate, commencing July 1^st, 2012, of the contributions tax for those with incomes of up to $37,000.

-          The superannuation guarantee age limit to rise from 70 to 75 starting July 1^st 2013.

-          A reduction in the company tax rate from 30% to 29% in 2013-14 and 28% in 2014-15.

-          The company tax rate reductions to be brought forward for small businesses with the rate of 28% applicable from 2012-13.

-          Small businesses to be able to immediately write off asset purchases of less than $5,000 compared to the current limit of $1,000.

-          A permanent extension from 1^st July 2012 of the eligibility for those over 50 to receive $50,000 of concessional contributions into super p.a. as long as superannuation balances do not exceed $500,000.

-          The Net Medical Expenses Tax Offset to increase from $1,500 to $2,000