1. Investment
Solutions Winter 2010
Year end
investment
boosters
What’s inside:
2 Snippets 6 Get debt smart and shrink your tax bill
4 Mind the gap 7 Market Commentary
2. Snippets
Avoiding
mortgage
stress Underinsurance
Many Australians have been lured into the
property market in recent months by low
interest rates and government incentives. But
in his first televised interview (broadcast by
remains a problem
Smaller families; living longer; the perception that insurance is
the Seven Network on 29 March 2010)
expensive; growth in super; are all factors contributing to a
Reserve Bank of Australia (RBA) Governor
decrease in the level of life insurance in the last 10 years according
Glenn Stevens warned official interest rates
to a recent IBIS World Report.1
will push towards more ‘normal’ levels as the
economy improves. It’s estimated that it costs Australian taxpayers more than $250
million a year to support the additional social security payments
True to its word the RBA upped the official
made to beneficiaries of people who were underinsured. Although
cash rate to 4.25% on 6 April 2010, the fifth
many people with life insurance through their super fund may think
increase since September 2009. Further rate
it provides sufficient cover for their death or disablement, generally
hikes could put property investors under
this is not the case and they tend to be underinsured.
‘mortgage stress’ — a term used when people
are paying more than 30% of their income on The report identifies a need for insurers to improve consumers’
mortgage repayments. knowledge and understanding of their insurance products and
continue to take steps to simplify them, if they are to successfully
Consider the impact of a rise of just 1.00% in
bridge the underinsurance gap.
dollar terms. On a standard variable
mortgage of $270,000 at 5% interest over 15 Talk to your financial adviser if you think you may be underinsured.
years, the monthly repayment would be
around $2,135. To meet repayments without
mortgage stress, you’d need a minimum
monthly income of $7116.
A 1.00% rise in interest would see the monthly
repayment increase to $2,278. To avoid
Pensions on the rise
On 20 March 2010, pension payments increased by $29.20 for
mortgage stress you’ll now need to earn over
singles on the maximum rate, up to $701.10 per fortnight.
$7593 a month.
Couples on the maximum rate saw an increase of $44 per
If you’re thinking of buying property it’s wise to fortnight, up to $1,057.
consider whether you’ll still be able to afford to
Although deeming rates (used to assess income you receive from
pay the mortgage when interest rates rise.
financial investments) increased from 2% to 3% on investments up
to $42,000 for singles and $70,000 for couples and from 3% to
4.5% on greater amounts, the income and assets cut-out amounts
also increased.
If you previously missed out because your income has been too
high, these changes could mean you now qualify for a part
pension. Even if you only qualify for a pension of just $1, you could
receive associated benefits such as reduced public transport fares
and cheaper prescription medicines.
Your financial adviser can help you work out if you’re eligible.
1
Insurance News, Financial Services Online, 20 January 2010
2 Investment Solutions – Winter 2010
3. Year end investment
boosters
There are tax-effective strategies that could help you
reduce your tax bill and give your investments a much
needed boost. Are you making the most of them?
Salary sacrifice During the year she’s made after-tax $540
$480
super contributions totalling $1,000. $420
If you’re paying tax at a rate higher than
Offset available
The maximum co-contribution $360
15%, contributing to your super fund $300
reduces by five cents for every dollar $240
using a salary sacrifice arrangement can $180
of income over $31,920. As Helen’s
give your super a boost. $120
income exceeds this amount by $60
Caroline earns $85,000 per year. If she $5,000, she’ll receive a reduced $0
$10,800
$11,100
$11,400
$11,700
$12,000
$12,300
$12,600
$12,900
$13,200
$13,500
$13,800
salary sacrifices $150 per fortnight, co-contribution of $834.
she’ll be contributing a net amount of
To qualify for the co-contribution, you
$127.50 to her super after paying 15% Spouse’s income level
must be an Australian resident and be
concessional tax. If she were to take
under age 71 at the end of the financial Joanne is a highly paid executive.
that $150 in her fortnightly pay, she
year. At least 10% of your total income Her husband, David, stays home and
would only receive $90.75 after paying
must be from running a business, or from looks after their children. David
tax at her marginal rate of 38%.
employment, or a combination of both. receives less than $10,000 income
If you’re likely to receive a bonus from
from investments, so Joanne
your employer you could save on tax if
contributes $8,000 to boost his
you salary sacrifice it. But you must Beware the
super fund. She will receive the
arrange the sacrifice with your employer concessional
maximum tax offset of $540 — a
before you receive the bonus. You can’t contributions cap
direct saving on her personal
salary sacrifice a bonus once it’s been
If you’re under 50, the maximum income tax liability.
paid to you.
you can contribute to super
Government co-contribution per year that will be taxed at Deductible expenses
the concessional rate of 15% is If you make interest payments on an
The government will match your after-tax
$25,000 ($50,000 per year if investment loan or pay income
super contribution dollar for dollar up to you’re aged 50 or older). The cap
a maximum $1,000 if you earn less than protection insurance premiums, you
includes the 9% super guarantee
$31,920 per year. This Government could benefit from prepaying up to
contributions your employer
contribution reduces if you’re earning 12 months of your tax-deductible
makes. If you exceed your cap,
more and cuts out when your earnings your excess contributions will be expenses before 30 June.
reach $61,920 or more per year. taxed at 46.5% (the concessional Max currently earns $100,000 per
$1,000
15% plus an additional 31.5%). year. In March, he took out a margin
loan of $30,000 to invest in shares.
Co-contributions
$900
In July, he’s going travelling overseas
$600 Spouse super contribution and he estimates his income will drop
You may qualify for a tax offset of up to to $20,000 for the next financial
$300
$540 if your spouse has less than year. If Max pre-pays the interest
$0 $13,800 in assessable income plus (8.2% for the financial year
$34,920
$31,920
$37,920
$40,920
$43,920
$46,920
$49,920
$52,920
$55,920
$58,920
$61,920
reportable fringe benefits and you 2010/2011) on his loan before the
contribute to their super. end of June, he can claim the $2460
Total income
You can receive an 18% tax rebate on payment as a tax deduction. As Max’s
Helen’s total assessable income at the the first $3,000 of spouse contributions marginal rate this year is 39.5%, his
end of this financial year is $36,920. you make. tax saving will be $971.70.
3
4. Mind the gap
Take the right steps now to bridge any gap in your retirement savings.
Your retirement may seem a lifetime The savings gap widens Calculating what you need
away or it could be just around the Research commissioned by the Of course the amount of money you’ll
corner. You could be dreaming of a trip Investment and Financial Services need will depend on your individual
around Australia or even around the Association (IFSA) revealed that the circumstances.
world. Your plans for the future will retirement savings gap had increased You’ll need to take into account your
need to include a sound financial plan from $452 billion in 2004 to $695 age, your income and your current
to if you’re to afford the lifestyle you billion in 2008 — a shortfall of $73,000 super balance. You’ll also need to
want and to make your dreams reality. per person2. decide at what age you’d like to retire
If you’re employed, it’s compulsory for and how much income you’ll need to
your employer to contribute at least 9% support your ideal lifestyle. And you’ll
of your salary to super (up to the need to consider how long your
maximum salary threshold amount of retirement is likely to last.
$40,170 per quarter). The research When you’re calculating how much
findings have prompted IFSA to repeat you’ll need to fund your retirement, it’s
its call to the government to lift the also important to consider inflation.
super guarantee by an extra 3%, to 12%. You may be able to buy a loaf of bread
So you should consider whether or not for less than $5.00 today, but what will
your current strategies to build your it cost in 20 years? You’ll be paying
super and other investments will inflated prices for everything you buy
generate enough income for you to live in the future, so your estimates need to
comfortably when you retire. According account for that too.
to the December Quarter 2009
Westpac-IFSA Retirement Standard,
that amounts to the equivalent of
$51,727 per year in today’s terms for a
retired couple.
4 Investment Solutions – Winter 2010
5. Will you have enough? 3. Salary sacrifice to super if you can
It’s never too early to start planning for
afford to 4.This tax-effective Check your retirement
strategy can give your super savings savings are on track
your future and everybody has to start
a real boost.
somewhere. It’s a good idea to talk to your
4. Consider investing in growth assets
The earlier you start, the more time financial adviser if you think your
such as shares. They have the potential
your investments have to grow. You’ll current investments won’t be
to grow significantly more than a term
have the option of choosing sufficient to fund your retirement.
deposit, for example, and the
investments with higher risks and Your financial adviser can help
imputation system makes shares a
higher potential returns, and you’ll you calculate how much you’ll
very tax-effective option. If there’s a
benefit from compound interest. need to get you safely through
market downturn you have the benefit
On the flip side, the later you start, the of time to recover from any short-term your retirement years, and how
more you’ll need to save each year to losses. you can get there, by using
‘catch up’. And you’ll need to invest very strategies that make the most
5. Try to pay off your debts as soon as
wisely to get that extra growth you need. of your super and boost your
you can5. The closer you are to
The following checklist should help retirement savings.
retirement, the more outstanding
you keep on track to a comfortable debts will take away from your A financial plan that’s tailored
retirement: retirement income. to suit your needs in both the
1. Make sure all your super is in one short and longer term can help
6. Save what you can while you have the
place. If you have multiple super you grow your wealth so you
opportunity. You may not get all the
funds, you’re paying multiple fees and can look forward to a future of
way to where you want to be but you’ll
these could act to erode your savings. dreams fulfilled.
still be better off.
2. If you’re earning less than $61,920,
make the most of the government’s
2
IFSA releases super adequacy report’: Financial Services
‘
Online, Superannuation News, 2 February 2010
co-contribution scheme3. 3
ee our co-contribution case study on page 3
S
4
ee our salary sacrifice case study on page 3
S
5
ee our article on debt on page 6
S
5
6. Get debt smart and
shrink your tax bill
We all have to live with debt at some point in our lives, but with
the right strategies you can pay off your debts faster and reduce
the amount of tax you pay.
Mortgage offset Gearing in joint names Borrowing to build wealth
If you have a home loan and a mortgage It’s common to invest a combination of If you wait until you’ve paid off your
offset account, you earn interest at the borrowed funds and your own money. If home loan before you start investing,
same rate as your home loan (which will you have a partner, splitting ownership you may not give your investments
generally be higher than interest on a of your investments could help reduce enough time to grow to meet your
normal bank savings account) and pay the tax you pay. long-term goals. By using ‘gearing’
no tax on it. (borrowing to invest), you can
Let’s say your home loan is $200,000 at Cath and Steve potentially pay off your home loan
6.24% interest. In a 31-day month you’d Cath pays tax at a marginal rate of years earlier and really concentrate on
be charged $1,059.96 in interest. You also 16.5%6, Steve at 41.5%6. They have growing your wealth.
have $15,000 in a normal bank savings $40,000 in savings and want to Gearing allows you to invest more than
account earning 4.5% interest per annum. borrow more money to invest. you could afford using just your own
Assuming tax at a marginal rate of 30%, They decide to invest the $40,000 money. This means you potentially get
you would have a net income of $40.14 in a managed fund in Cath’s name. higher returns if your investment
from your savings. But by putting your Cath allows Steve to use her increases in value. The cost of investing
$15,000 in a mortgage offset account investment as third party security (including interest) may also be tax-
instead, you earn ‘nominal’ interest on for a margin loan, so he can borrow deductible, which means your overall tax
your savings at the same rate as your $60,000 to invest in other assets7. bill is reduced. But gearing can be risky
home loan as the table below shows. Cath’s investment earnings will because instead of increasing, your
Because you don’t pay tax on the offset be taxed at her marginal rate, investment could fall in value.
interest, you could get almost double the which is much lower than Steve’s.
Time to review your debt?
amount. The offset interest isn’t credited Steve holds the geared
to your savings account; instead it’s taken investments in his name and It’s a good idea to review your debt as
off your loan interest, so in this example claims the interest payments as a your circumstances change throughout
you would only pay interest of $980.46 tax deduction. Because Steve’s your life. Getting married or divorced;
for the month instead of $1,059.96. marginal rate is much higher than buying a house; changing jobs;
Cath’s, he gets more benefit from inheriting money; getting ready to retire;
Using this strategy you could save
the tax deduction. all these life events can change your
thousands in interest payments and
6
ncludes a Medicare levy of 1.5%.
I debt position. Talk to your financial
reduce your loan term. And your savings 7
ssumes Steve and Cath’s investments have
A adviser about strategies to create a
are still at call if you need them. a security ratio of 60% wealthier future for you and your family.
Mortgage offset example
Interest on $15,000 Gross monthly interest Tax payable at your marginal Net income from savings
rate of 30%
Savings account @ 4.5% per annum $57.33 $17.19 $40.14
Offset account @ 6.24% per annum $79.50 Nil $79.50
6 Investment Solutions – Winter 2010
7. Market commentary
Provided by Advance Investment Solutions
— March quarter 2010
The global economic recovery continued in the last quarter led largely by strong
growth in the Asian emerging economies. However, sovereign debt concerns and policy
adjustments sparked an increase in asset market volatility. The short-term economic
outlook is positive, but investment market returns will reflect heightened uncertainty.
Economic overview — months. Equity portfolios should be declining towards 6.0% during anticipated
March 2010 quarter biased towards cyclical and growth equity market weakness. The Australian
stocks during this stage of the market credit market, although attractive, lacks
Global growth continues to be driven by
cycle, as a better equity earnings outlook sufficient liquidity to offer efficient
a pick-up in world trade and industrial
will be the primary driver of the market. diversification. The value-add through
production, reflecting the positive effect
active portfolio management is limited
of global stimulus measures. International shares when compared with international fixed
The Asian emerging world continued to Our analysis of the broad economic income markets. We expect the Australian
power along, led by a 10.7% year-on-year backdrop (including capital flows, sovereign yield curve to flatten over time
expansion in China. Growth expanded in market sentiment, equity earnings yield as official interest rates continue to rise.
most of the major advanced economies, relative to bonds and markets’ risk We expect Australian bonds to return
but continues to lag in the emerging world. appetite) point to further global equity around 4.0% over the next 12 months.
Strong growth in the emerging Asian market gains in the short term. We
economies has reduced the level of expect around 12% gains for unhedged Alternative assets
unused capital, pushing some asset prices global equities with country, sector and We anticipate returns of around 17% from
up sharply and raising inflation concerns stock rotation important at this stage of this sector through nimble and active
(China’s inflation is running at its fastest the economic cycle. strategy implementations. A good blend
pace in almost 15 months). In contrast, of both directional and relative value
Diversified property strategies need to be used throughout
underlying inflationary pressures are still
We expect this sector will generate the year. Long/short equities, long/short
largely absent in most major advanced
around 12% returns over the next 12 credit, convertible arbitrage and other
economies due to very high levels of
months. The risk of anaemic growth in relative-value strategies should all fare
economic resources and high
the Real Estate Investment Trust (REIT) well during periods of moderate financial
unemployment. In Australia, underlying
sector could continue, but we expect market volatility.
inflation has continued to trend down.
better returns in the global listed
In response to inflation concerns, China property market due to the diversification Commodities
has increased its banks’ reserve across regional, country, sector and We anticipate returns for this asset class
requirement ratio and tightened rules on stock-specific opportunities. of around 16% with supply/demand
personal and business loans. India raised imbalances and geopolitical uncertainty
official interest rates by 0.25% in March International bonds combining to keep key commodity
and Australia‘s official interest rates rose The estimated total return on fully prices elevated for some time.
by a further 0.25% in the quarter up to hedged currency international bonds is
4.0%. Whilst there were no changes to around 8% over the next 12 months. Currencies
official interest rates in other advanced This is relatively better than domestic We expect the Australian dollar to trade
economies, the level of extraordinary bond and cash returns. However, we higher in the short term, perhaps towards
policy measures have been reduced. expect short-term under-performance the 0.97 to 0.98 range and then decline
due to bond yields rising. against a strong US dollar that takes the
Outlook by asset class currency towards the 0.88 level. We also
Australian bonds expect the Australian dollar will be
Australian shares Our outlook for domestic bonds is stronger against the Japanese Yen,
We expect Australian equities to deliver negative in the short term. We expect British Pound and the Euro.
a total return of around 18% (including bond yields to rise, taking the 10-year
grossed up dividend) over the next 12 bond yield towards 6.5%, and then
7
