SMSF Trustee + Investor Expo
Prime sponsored the 2 day SMSF Trustee + Investor expo on 21st & 22nd June which was an event dedicated for individuals managing their super, thinking of doing so, or simply a self-directed investor. The SMSF team, Olivia Long & Karen Dezdjek were on the ground networking with clients and potential clients on the two days.
Written by Michelle Bromley CFP® – Director, Private Client Adviser
“What we want to know is, do we have enough to retire on? How long is our super going to last?”
This is possibly the most common question asked in retirement planning. The difficulty is that there isn’t a firm answer, as much depends on the rate of return (after fees and taxes) earned by the portfolio and the rate at which you draw down on your capital (how much you spend).
This article will help you to get an idea of how long your portfolio might last in retirement, assuming you don’t need to make lump sum withdrawals for unforeseen expenditures.
Fred and Mary are both about to turn 65 and intend to permanently retire. Together, they’ve accumulated around $1,000,000 in super and have heard that this is the ‘magic number’ needed to fund a comfortable retirement income, “…but we aren’t sure what that means!”.
“We currently spend around $70,000pa to live, and we’d like to do some travelling so want to allow an extra $20,000pa.”
They also want to know how long their super might last if they reduce some risk in their portfolio by adopting our recommended asset allocation for a ‘Moderate’ risk profile versus their current ‘Balanced’ asset allocation.
Fred and Mary’s portfolio is aligned to Prime’s ‘Balanced’ Risk Profile Portfolio. We’ve published our Risk Profile Investment Performance to the end of April 2019 (pre-tax and franking credits):
Accounting and advice fees, less an adjustment for franking credits, reduce the expected 1 year returns in the above table by up to 1.5%.
Range of Outcomes
Using expected returns (after fees and franking credits) and a range of drawdown percentages indexed to 2%pa for inflation, provides a results matrix showing an indicative number of years of capital longevity.
The table below does not take into account other income sources, like the Age Pension.
Fred and Mary want to spend $90,000pa (9%) of their starting capital and to have their income keep pace with inflation, at a rate of 2%pa.
Fred and Mary are surprised that their super might only last around 12 or 13 years. “That leaves us without any capital in our late 70’s, and Mary’s parents are both still alive and well in their late 80’s. We don’t want to end up trying to survive solely on the Age Pension – $36,300 a year is only about half what we need!”.
Fred and Mary might not be able to afford to draw their desired level of income in retirement. If they want their capital to last into their 90’s, they may need to reduce their spending plans.
Currently, Fred and Mary can’t get any Age Pension but it’s likely that they will qualify in a few years from now. To maximise longevity of their capital, they should reduce their pension drawdown in line with the increase in their Age Pension entitlements.
Planning for your Retirement Lifestyle
As part of our retirement plan for Fred and Mary, we were able to do some detailed projections to show a possible range of outcomes for different strategies and levels of income.
If Fred and Mary draw $90,000 versus $70,000 pa (indexed) from super, and they also spent any Age Pension entitlement they might get in future, their super would likely run out earlier than they would like.
However, when we reduce the drawings from super in line with their increasing Age Pension entitlement and show a strategy that allows for some travel in the first 10 years, the results show that Fred and Mary’s capital could last much longer.
What to do?
Talk to your adviser about what retirement planning strategies you could employ to increase the longevity of your capital. Things you might want to think about include:
- Paying off your mortgage.
- Downsizing your home.
- Keep funds aside for emergencies.
- Creating a budget for ‘needs’.
- Allowing for ‘wants’ too (Holidays, Cars, Children’s Weddings).
- Exploring Centrelink benefits
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL No. 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the relevant Product Disclosure Statement (PDS) of any financial product discussed in this article before making any decision to acquire it. Please refer to our FSG (available here) for contact information and information about remuneration and associations with product issuers.
An unexpected breakdown in US/China trade talks saw global equity markets suffer their worst month this calendar year. Investors dumped equities in favour of safe haven assets such as government bonds and raised cash. The MSCI World Index fell -4.27% in AUD.
Global bonds rallied with US 10-year Treasury yielding 2.13% whilst Australian 10-year government bonds tightened 33bps yielding an all-time low of 1.45%.
US (-6.5%) and Chinese (-5.8%) equity markets drove global share markets lower. China’s reported backpedalling on trade terms was met with the Trump Administration’s decision to increase tariffs on US$200b of Chinese imports from 10% to 25%. An Executive Order restricting US companies from transacting with Chinese telco Hauwei further escalated tensions.
The Australian equity market outperformed with the ASX200 Accumulation Index adding 1.71% in May.
A Federal Election result that few saw coming boosted returns locally. Having raised cash prior to the Election we are now more optimistic on the strength of the local economy for next year. We are revisiting our longer-term thesis here and considering greater exposure to domestic Australian cyclical businesses that we think will benefit from a local recovery. BLD is a recent recommendation we like even more now.
Large caps performed strongly with the banks rallying heavily following Labor’s proposed abolition of the Liberal Government’s negative gearing and franking credit policies.
Elsewhere, insurers Medibank (MPL) and NIB (NHF) bounced 15-20% as a future cap on premium increases under a Labor Government was avoided.
Oil prices fell sharply with escalations in the trade war and smaller than expected declines in US crude inventories leading to an oversupply. Brent and WTI fell 15% to $61 and $53/barrel respectively.
Iron ore rallied 10%. China’s iron ore imports continue to climb with steel output rising to record levels. Supply side issues in Brazil and Australia also contributed to iron ore trading $105/tonne.
Contributors to performance in May were Boral (BLD) +12% and Telstra (TLS) +8%. BLD rode the tailwind of a Coalition victory with sentiment on the construction sector improving. TLS benefitted strongly from the news that the TPG and Vodafone merger had been blocked by the ACCC.
Detractors were BWX (BWX) -23% and Pendal (PDL) -20%. BWX announced a further earnings downgrade and a new incoming CEO. We are hopeful the restructure and rebasing of earnings expectations can finally translate into improved performance. PDLs 1H results were weak with cash earnings and performance fees falling significantly. PDL pays a 7% dividend and trades at a significant discount to its peers and we believe performance will turn around.
We were active across the SMAs in May. The Growth SMA reduced its position size in APT and exited SEK. We also purchased VAS following the results of the Federal Election. The Diversified Income SMA added BLD to the portfolio and the Defensive SMA reduced some of its MXT exposure to take advantage of the discount on offer in the rights issue. The international SMA went unchanged. On a risk profile performance basis our 5-year numbers continue to perform well against their respective benchmarks.
Risk Profile Portfolio Performance Figures as at 31 May 2019
Prime SMA – Model Portfolio Performance Figures as at 31 May 2019
On 1 July 2019 your client’s insurance cover may be changing!
Written by Olivia Long, Managing Director – Strategy & Operations SMSF
In February this year, the Government passed legislation which prevents trustees of APRA-regulated funds from providing insurance to members with inactive superannuation accounts, unless a member has directed otherwise.
It is a common practice for many individuals with an SMSF to also have a secondary APRA-regulated fund which provides them with insurance.
This may be done for two key reasons:
- To access insurance policies provided through large superannuation funds which are often cheaper.
- To keep legacy insurance policies which may offer better benefits or lower premiums than new policies, especially for older members.
In these circumstances, it is most likely that people holding these polices through an APRA-regulated super fund will consider that their SMSF is their primary superannuation account and therefore receives all their contributions and roll-overs.
It is usually the case that people will leave enough money in their APRA-regulated fund account to cover the cost of insurance premiums. Where required they may rollover funds from their SMSF to their APRA-regulated fund or make a contribution to pay for insurance premiums and administration fees to keep their insurance policy.
Under the new legislation, members may lose their insurance cover if their APRA-regulated fund is considered inactive because it has not received a contribution or a rollover for a continuous period of 16 months.
At 1 July 2019, if an APRA-regulated fund is considered inactive for 16 months a member’s insurance will be terminated.
APRA-regulated funds had until 1 April to identify members who have been continuously inactive for six months or more and now have until 1 May to inform those inactive members that their insurance will soon be switched off unless they elect to retain it.
We are concerned that insurance will be unknowingly closed for these accounts because members have not checked their correspondence, especially for those who rely on this insurance held separately.
This could have a devastating impact on policy holders or their beneficiaries if their insurance cover was unknowingly terminated. Furthermore, it may be extremely difficulty or costly to try and access insurance at a later stage of life.
Have you advised your clients?
It is important that if they wish to maintain their insurance cover that they take necessary steps as soon as possible. This includes either:
- Providing a direction to an APRA-regulated fund that they wish to ‘opt-in’ for their insurance cover to be maintained.
- Making a contribution or rollover to an ‘inactive’ APRA-regulated fund so that the period for which the fund starts to be inactive is reset. However, it stressed that these clients also ‘opt-in’.
How can we help?
If you would like further information please feel free to call either Karen Dezdjek or myself.
FY19 Tax Reports Webinar
To assist you in preparing FY19 tax compliance documents for your clients, we recently hosted a brief webinar where a Macquarie Group representative provided step-by-step instructions through accessing tax reports via these platforms.
If you missed it or would like to view it again, click below.
R&D and EMDG Updates
Written by Simone Quin, Partner – Accounting & Business Advisory
The recent election lead to the legislation of changes to the program lapsing. With government reforming, there may be some delay in re-introduction of the legislation, if at all. The proposed changes broadly included:
- Changes to the rate, for companies eligible for the R&D tax incentive refundable rebate – from 43.5% to the company tax rate plus 13.5%. For companies with an aggregated turnover that is less than $20M, this would have meant a drop in the overall R&D tax incentive rebate from 43.5% to 41%.
- For companies with turnover of greater than $20M, proposed changes involved stepped rate that increases as R&D intensity increases.
- Cap on the total amount of R&D rebate to $4M per year (with clinical trials being excluded from this cap).
Applications for 2017-18 continue to be processed and at this stage there has been no final announcement about the amount of grant funding available for applicants.
For any enquiries or support:
Wrap Tax Website – tools to support you
The Macquarie Wrap Tax website is a public site available for advisers, clients, administrators and accountants that provides:
- Assistance with the release and interpretation of tax reports
- Status updates on reports
- Resources and guides
- Technical information
Prime Capital Market Observations
Written by Tim Bennett, Managing Director – Capital & Roger Cameron, Partner – Capital
Prime Capital’s team works with business owners, executive management and investors across a wide range of business sectors, industry verticals and transaction types. This broad exposure provides the Prime Capital team a diverse view of general market conditions impacting a wide portfolio of businesses at any one time.
Over the last quarter Prime Capital has observed a wide spread commonality of impact associated with several key events. Whilst these events have resulted in a short-term ‘softening’ of financial performance in the lead up to 30 June, there is now a solid platform of business confidence from which to explore transactions into FY20.
Extended Easter/ANZAC day break
It is safe to say that the impact of what quickly became a ten day ‘national holiday’ week, whilst anticipated, was largely underestimated by the business community. This was exacerbated when taken in conjunction with “dovetailing” into the election runway (see below) immediately thereafter.
Across the board, businesses all had some form of “soft” April-May. In some cases, this has impacted transactions as companies face the prospect of missing their FY19 budgets, incapable of making-up the shortfall caused by this abnormal period.
Federal Election Result
More so than usual, due to various policy positions, there was heightened uncertainty and lack of business confidence associated with an expectation of a new Labour government.
Prime Capital observed a range of businesses experienced a further ‘slow down’. Again, this was relatively consistent across most sectors. After a somewhat surprising election of the Morrison government, the Prime Capital team has witnesses a rebound in business confidence, with a range of clients reporting confidence in immediate to longer term prospects.
How Prime Capital responds to external dynamics like these
It is not uncommon for external dynamics like the two highlighted above to impact the transactional environment – albeit this period was abnormal. When this happens, a crucial part of the Capital team’s role is to work collectively with clients to both rationalise and normalise this abnormal impact. In a number of cases, this has resulted in Prime Capital working with both existing and prospective clients to provide objective advice in terms of re-positioning businesses for transaction timing – whether this be a sustained current year FY19 outcome – or taking a more measured approach to commencing a transaction in the new financial year.
With the election result now behind us, in conjunction with the abnormal Easter-ANZAC impact well understood, the focus now is on the FY20 year ahead.
On a platform of renewed business confidence and certainty – and in conjunction with the finalisation of FY19 results and FY20 budgeting, for some now is an ideal juncture to consider transactional solutions.
With a typical transaction taking 4-6 months, whether it be planning or commencement in the next 1-2 months – this provides business owners the appropriate windows to achieve outcomes in the FY20 period.
If you consider current economic timing (and client circumstance) is likely to be suitable for one of your client relationships to contemplate a transaction -and you would either like to discuss how an engagement may suit your client’s needs, or discuss the market observations of the Capital Team, please reach out to one of them.
For any enquiries:
Disclaimer: This information on this page contains general advice and is been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (‘Prime’) . Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. You should obtain and read the relevant Product Disclosure Statement (PDS) of any financial product discussed in any articles mentioned before making any decision to acquire it. Prime is bound by the Australian Privacy Principles for the handling of personal information.