Plan 2 Prosper

No doubt for many of you the demands on your time and funds haven’t reduced since this time last year, but as the common saying goes “if we keep on doing the same things we are likely to keep getting the same results”.

Another client recently reminded me of an article I wrote in September 2008:

http://plan2prosper.com.au/articles/2008/09/wealth-creation-and-kershaw-gardens-what-is-the-link

They said despite the strong performance of equity markets since March 2009 there is still a lot of fear and uncertainty in many people’s minds. During their regular relaxing walk through Kershaw Gardens they felt comforted while reflecting on my view that the Kershaw Gardens story is very similar to what the story of wealth creation is like – if you let it be. Within the gardens, trees that were looking sickly prior to December due to environmental conditions have picked up considerably and were full of new growth with our recent rain.

It reminded me of a Chinese Proverb also about trees:

The best time to plant a tree was 20 years ago. The 2^nd best time is now.

The best approach for anyone contemplating further wealth creation will depend on his or her own personal and financial circumstances, but the key message is that you must do something! There are many strategies that wealth creators can access if they don’t have vast sums of money or other resources available to them.

It is important to regularly review your plan (equate this to planting your own tree). This helps you take advantage of any current or future opportunities created by:

• Your changing life situation and goals
• A changed economic or legislative environment
• Emerging investment markets and new products

If you have any doubts about your ability to do this, or you would like advice and assistance to guide you through the many options, act now to get the knowledge and mentoring that you need.

Where to from here?

If you would like to discuss the topics raised or if you would like more information, speak to your financial adviser or contact Dan Smith of Plan 2 Prosper on 07 49265 570.

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Dan Smith is self employed and is for many families their trusted Financial Planner based in Rockhampton. He has clients in various locations throughout Australia but predominately in Central Queensland and specifically the geographic area encompassed by the Rockhampton Regional Council.

This information is intended to only provide you with general information and, while the sources for the material are considered reliable, no responsibility is accepted for any inaccuracies, errors or omissions. Before making a decision based on this information, you must consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain professional financial advice specific to your circumstances.

Dan Smith and  Dancin Pty Ltd ABN 71 531 338 371 trading as Plan 2 Prosper are Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749 trading as MLC Financial Planning, an Australian Financial Services Licensee, with its Registered Office at 105 – 153 Miller St, North Sydney NSW 2060

There has been strong growth in real property investment by self managed super funds (SMSF’s). Many funds hold such property as their only substantial asset – a position which has the potential to cause material difficulty should a benefit payment or rollover to another fund suddenly be required, such as upon an irreconcilable family breakdown (divorce), sudden death or major disability of a member.

For trustees of SMSFs, managing your own fund and getting it right is very important. There are many rules and regulations in the various laws that govern super that are designed to protect your retirement income. As a trustee, you need to adhere to the rules and know that you are ultimately responsible for the running of the fund, even if you use tax, financial and super professionals to help to manage it.

Statistics regarding death and illness are often quoted when advisers tell clients about the need to establish life, TPD, trauma or other risk cover. These same statistics can be quoted in support of the need to maintain liquidity in a SMSF. As with risk cover, the purpose of liquidity is to be prepared for the unexpected, such as death or sudden illness, rather than death in accordance with current actuarial life expectancy table.

Life is uncertain, and SMSF Trustees need to be prepared for the unexpected by retaining a reasonable portion of SMSF assets in liquid assets. (more…)

Often when we talk about superannuation we imagine steady returns as the fund grows onwards and upwards toward our retirement. Reality, as we have experienced in recent times, can be very different because results tend to vary from year to year – and the results are not always positive.

Superannuation is not an investment – ??

People often talk about superannuation as if it is an investment. However, superannuation is not in itself an investment – rather, it is a concessionally taxed structure in which investment assets are held, which is set up to encourage Australians to save for retirement. A flat tax rate of 15% levied on fund income and capital gains means that most people who earn over $34,000 per annum are able to achieve better after tax returns than investing in the same assets outside of superannuation.

However, superannuation does have its drawbacks – money is generally locked away until you are able to meet a condition of release, such as retirement, and there are restrictions on how the money can be invested.

Public Perceptions and Education

For many Australians, superannuation is all too hard. It is often easier to accept whatever they are given, ie the default fund under fund choice and the default investment option. Many super fund members do not realise they may be able to choose their super fund and their underlying superannuation investments.

An ongoing quest by advisers, superannuation funds and the government aims to enable ordinary Australians as superannuation fund members to:

• understand asset classes and risk and return
• accept that short-term returns can be volatile in assets where long term returns are higher
• appreciate the value of dollar cost averaging (most employees unknowingly use this technique when their employers pay superannuation guarantee contributions quarterly or more frequently)
• understand normal business and investment cycles 

Impact on retirement plans

A period of negative returns has shcked many people who were planning to retire in the near future. With around 4 years of double-digit returns, some people had become blasé and felt retirement planning was easy. They may now be disillusioned and looking for options.

A common cry my colleagues and I hear (as Financial Advisers) is ‘I’ve lost my money’. To be more precise, a the individual superannuation fund member would have purchased assets and these purchased assets have reduced in value. If the individual doesn’t panic and sell these assets … they would not have actually lost any money. The restoration in value of the assets owned will depend upon the economic recovery and the quality of the assets.

Some choices for people near retirement to consider in a volatile market are:

• defer retirement by working longer – perhaps moving to a less stressful job or one with shorter hours
• increase contribution levels to superanuation
• invest more agressively for higher returns when the markets recover
• accept a lower standard of living in retirement

None of these options may be completely palatable, but they do reflect some common realities which many people need to consider.

Most issues can be addressed by good forward planning …  which can assist to minimise any disruption to the achievement of an individuals goals and objectives. Regular review and open honest discussion with an adviser you trust are of the utmost importance if you are concerned about your capacity to achieve your goals and objectives.

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In challenging economic times, the Federal Government last night handed down one of the most eagerly anticipated budgets for many years. In the end, there weren’t many surprises with most of the major initiatives carefully ‘leaked’ in the days leading up to the official release.

Items released which were of particular interest to Financial Advisers and their clients include:

• Halving the cap on concessional super contributions
• Temporarily reducing the super co-contribution
• Halving the minimum drawdiwn rates for account-based super pensions for 2009/10
• Removing tax defferal for shares issued under Employee Share Schemes
• Retention of previously legislated personal income tax cuts and low income tax off set changes
• An increase to the maximum Age Pension payment for couples and singles
• A phased increase in the age pension to age 67
• Introduction of a Government funded paid parental leave scheme
• Introduction of a means test for private health insurance rebate
• Abolition of the Pension Bonus Scheme (excluding registered participants)
• Removal of Tax-Free super/pension payments from the Commonwealth Seniors Health Card income test.

As we have observed in recent times these announcements may have further fine tuning before they receive the majority vote required to progress through the lower and upper house and be passed into legislation.

We know any announcements made by the Rudd Government regarding the 2009 Budget is something you’ll be watching closely to see how it affects you. We have sourced information through our strategic partnership with MLC, which we are happy to be able to pass on to you.

Video:

•  In the Budget 2009 Video, technical expert Gemma Dale analyses and explains the key budget measures and how they are likely to affect investors.

Articles:

• What next for self-funded retirees? Hit hardest by the global financial crisis, the article looks at why in most cases switching to a more conservative strategy is not the answer. Also spotlighted are to discuss which could help ease the pressure for account-based pension holders.
• The upside of a recession. Theres not much to like about a recession, however this article uncovers four benefits which you could be taking advantage of.
• Clever Year end Strategies. This article outlines four strategies which boost superannuation savings and save tax.

It’s important to consider this information in the context of your own personal circumstances and objectives… or in language we all understand better … Like with most things, what is right for you, may not be what is right for your mate in the smoko room or over the back fence.

While it is important to have an adviser (or counsel of advisers) whose technical abilities you respect, it will prove far more important to have an adviser whom you trust – literally with your families financial life. Do not care what they know, until you know they care. Thank you to those who are trusting us at the moment.

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The current slowdown in the Australian economy is likely to result in a greater number of business failures and unemployment that could ultimately lead to bankruptcy.

In this post, the treatment of superannuation in the event of bankruptcy and what amounts can potentially be clawed by by the bankruptcy trustee will be briefly explored.

What is protected?

Prior to 1 July 2007, a bankrupt’s interest in a regulated superannuation fund up to their Pension Reasonable Benefit Limit (RBL) was classified as ‘exempt divisible property’ and was protected from creditors. With the abolition of RBL’s from 1 July 2007 theoretically the amount that can be protected  from a bankrupts creditors is no longer limited.

This includes:

• the interest of a bankrupt in a regulated superannuation fund;
• any lump sum benefit paid to the bankrupt from such an interest on or after the date of bankruptcy

What is not protected ?

Superannuation benefits paid in the form of a pension however, do not receive the same level of protection as lump sums.

This is due to the fact that pension payments are not considered to be ‘exempt divisible property’ but are instead classified as ‘income’ – which receives only minimal protection. The amount of ‘income’ that is protected from creditors each year is based on the number of dependants of the bankrupt, as per the following information sourced from Insolvency and Trustee Service Australia website ( www.itsa.gov.au ) :

• 1 Dependant   –>  Income Limit of $41,823.60
• 2 Dependants  –> Income Limit of $49,351.85
• 3 Dependants –>  Income Limit of $53,115.97
• 4 Dependants –>  Income Limit of $56,043.62
• More than 4    –>  Income Limit of $56,880.10

The bankruptcy trustee can generally claim 50% of the income which exceeds these levels.

While these are general principles, certain amounts contributed to super – either by, or on behalf of the bankrupt – in the lead up to bankruptcy can still be ‘clawed back’ by the bankruptcy trustee. This is generally the case where the contributions have been made with the intention of defeating creditors.

Whether contributions are recoverable or not will generally depend on when the contributions were made (before or after 28 July 2006). Should you desire more information on this please contact us.

Conclusion

While it is possible that certain contributions can be clawed back by the trustee in bankruptcy, the balance of the client’s superannuation interest is generally protected from creditors. For this reason, people seeking to use superannuation as an asset protection strategy, should ensure they make consistent and ongoing super contributions to avoid any issues with the ‘claw back’ provisions.

Working with a client to develop a financial plan requires a certain amount of looking into the future. There is no certainty about what th efuture will hold, so assumptions will need to be made. These assumptions may be about:

• the client’s situation (eg. health, income, dependants) and goals (retirement date, income needs)
• the economic environment, including tax, superannuation and social security
• investment returns

Together the client and the adviser will need to better understand the client’s attitude to investment risk as well as the unceretainty of future returns. Once a plan is put in place, it is imperative that the client participates in periodic reviews of the implemented financial plan so as to provide the opportunity to assess its progress and make changes where relevant.

Consider these changes that have affected many peoples established financial plans in recent years … who would have thought when compulsory superannuation was introduced in 1992 that now:

• super after age 60 is generally tax free
• reasonable benefit limits (RBLs) have been abolished
• assets test exempt income streams can no longer be commenced
• official interest rates would rise to 7.o% in February 2008 and fall to 3.25% a year later
• the exchange rate of the Australian dollar in terms of the US currency woul dbe 97.86c in July 2008 and then fall to 68.84c as at 20 March 2009

When a financial plan is reviewed and identifies deficiencies in client goal attainment … the plan may be revised to:

• meet the clients new situation or new goals
• take advantage of new opportunities or avoid threats presented through/by legislative change or adverse economic circumstances
• cater for a change in client’s attitude to investment risk.

The end of the long bull run in investment markets is an extreme example of a situation where assumptions made in a financial plan might not come to fruition (at least in the short term). 

While the adviser may recomend a course of action involving various strategies and products, the client must make an informed decision to accept the recomendations and ‘own’ their financial plan. In the early rapport building stages, the adviser will generally know more about the legislation, products and possible strategies … whereas the client will know more about their own situation – their fears, goals and attitudes. Over time, the adviser will start to understand the clietn and will expect the client to have a better understanding of financial issues, strategies and products.

A client may say they understand share markets rise and fall in value. However, it is something different to see the value of their own investments rise and fall. This is real ‘in-your-face’ education. One of the Adviser’s roles is to ensure the client is coached through these ‘lessons’ and has a better understanding of financial returns from a long term perspective.

No one can really predict the future … current media headlines are almost universally negative, so it’s not surprising that absorbing these will probably add to downhearted feelings. Previous posts have commented on surrounding yourself with positive news and positive people … even when listening to the destruction caused by Victorian fires and North Queensland flooding there were still many positively inspirational messages provided by those people facing some relatively tough challenges. In uncertain times, most people look for signs that the future may be more predictable and certain … while no one knows the future, retaining a positive outlook and encouraging people to manage what they can control (look at things like Debt Management, cash flow, access to liquid assets and personal spending patterns) is an important message. Economies and markets are cyclical and we can expect them to self-correct over time with the help of government intervention and renewed consumer confidence … so c’mon Get Happy.

When the markets turn as volatile and confusing as they have been over the last year, even the most patient of people will begin to question the wisdom of the financial plan they have been following … we can certainly empathize with people who find the current environment troubling and disturbing … we’d like to help, if we can and to that end here’s what we offer:

A cup of coffee and a 2nd opinion

By appointment, you’re welcome to come in and sit with us for a while. We’ll ask you to outline your financial goals and your understanding of what your existing financial plan is intended to do for you. Then we’ll review your financial plan for and with you.

If we do not believe we can add value to your situation, we’ll gladly tell you so and send you on your way.

If, on the other hand, we think we are able to add value, we’ll explain how in plain English and, if you like, recommend alternative financial strategies to assist you to achieve your goals.

Either way the coffee is on us.

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As part of the Government’s wider initiative to give equality to same-sex couples, legislation has been recently passed to amend superannuation (and related) tax laws.

A major element of this reform is a change to the definition of both ‘spouse’ and ‘child’ to ensure same-sex partners and their children can receive equivalent tax treatment with respect to death benefits afforded to other spouses and children.

These amendments have been introduced with retrospective effect from 1 July 2008.

The new rules give equal status to same-sex partners by amending the definition of spouse to include a person who:

• is in a relationship that is registered under a State or Territory law (whether that person is the same sex or a different sex), or
• although not legally married to the person, lives with them on a “genuine domestic basis in a relationship as a couple” (ie it’s no longer required they are living as husband and wife).

The definition of ‘child’ has also been extended to recognise the children of same-sex couples.

The main areas impacted by this change that you may need to review if in a same-sex relationship include:

• Beneficiary Nominations : You may now be able to nominate your same sex partner as a spouse and also nominate the children of your relationship as beneficiaries.
• Spouse Contributions : A same-sex partner will now be able to contribute to their partner’s superannuation account as a spouse. From 1 July 2009, they may also be able to qualify for a contribution tax offset of up to $540 each year.
• Nomination of reversionary pensioner : If you have applied for a pension, a same sex partner may now be nominated as a reversionary beneficiary for their partner’s superannuation pension.

What do you need to do, if these changes relate to you? Review your existing superannuation account(s) to see what changes you may now make to reflect your current circumstances and desires. If you would like assistance in working through the paper challenges that this may bring, please contact us or your funds current adviser for assistance.

In my opinion Superannuation continues to unfairly cop a hammering in most sectors of the media due to the follow on effects of the investment volatility of recent times … in the media a real distinction ought to be made between Superannuation as an investment structure and the underlying investments held in an individuals Superannuation fund.  

Whether you are in your first job after leaving school or only a few years from retirement, it pays to understand how superannuation works. By the time you are ready to retire, your superannuation could have grown to be one of the largest assets you will have in your life. Superannuation is an investment in your future … it’s important to understand why you need it, what you’re entitled to, how you can contribute, the choices you can make and how you as an individual can best manage your superannuation investment up to the point in time you retire; and the fulfilling life you choose to live in the period that follows. (more…)

Our conviction and belief (and one of those things which helps me sleep at night during the current market volatility) is that regardless of what’s happening in the market, investment fundamentals don’t change.

Perhaps, if you have also subscribed to MLC’s Market Watch you would have read the post on Investment Fundamentals. If you haven’t visited the Market Watch website and viewed that post, I’d encourage you to do so. 

I had also been speaking with some past colleagues about their own experiences over the past 25-35 years … the challenges faced, the lessons learnt, ‘tactical’ positions taken (which made them feel better at the time but were proven to over time not make much of a difference at all) … I shared with them a print out of the Investment Fundamentals article and as they read it, their body language spoke volumes. Smiles and nodding of heads …

My past colleagues agreed with the observations from Mr Scurrah, “to take a long term view of your money, set a strategy for the long term and stick to it … however difficult it becomes ignore short term noise created by market volatility”.

Many previous posts made capture the essence of what I would like to again convey … rather than rewriting I’ll beg your indulgence and redirect you to posts that spring to mind: Headlines, Fear and Reassurance ; Dollar Cost Averaging ; Market Volatility – the fundamental things still apply.

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The media continues with stories of doom and gloom. You’d have to be on Mars not to know that we’re experiencing some of the most volatile markets in history. Let’s not kid ourselves…this is not fun!

The essence of chess is time … a point Bobby Fischer always used to be fond of emphasizing. Give an inferior position an extra tempo and it may suddenly become tenable. Now what seems like the worst time to get into any market with long term capacity for growth can, in reality, be the best time. Successful wealth makers today realise that they can use time to their advantage.

In fact, a weak market is a wealth creator’s paradise, because a weak market is a buyer’s market, and one of the first steps to any wealth creation project is securing the right level of diversification on the best possible terms. History shows markets go up, they go down and then they go up again. When one market is weak, another is performing stronger.

When liquidity starts to free up, money will begin to flow through to markets shunned by investors in our current period of heightened fear.

As recently as 3 months ago, investors could achieve close to 8% return on cash. This meant decisions to hold cash or term deposits rather than long term growth assets seemed easy. With interest rate movements downward, income returns from cash are now nearly 40% less and still falling.

The ‘flight to safety’ has distorted asset prices and made government guaranteed assets very expensive, while other income and growth assets are now relatively cheap. A very low ‘risk free’ rate also makes valuations for shares and other growth assets appear much more attractive. The current dividend yield for the Australian share market of nearly 7 % is now higher than the yield investors can achieve from Term Deposits, even before allowing for the benefits of franking credits.

Over the past year, share markets around the world have fallen around 40% on average, and experienced extraordinary levels of volatility along the way. While this has tested the resolve of even the most experienced investors, those who shun the markets at these levels, risk missing the opportunity to buy growth assets cheaply and the rebound as the markets recover.

Our belief is that this is a golden time to act – perhaps a once in a generation opportunity.

Maybe it is not the time to sell existing growth assets held, but it is certainly a great opportunity to secure new ones. Now this acquisition strategy is not for everyone – you must have the necessary resources, funds and wherewithal to buy and also the appetite to hold firm during any further volatility that may occur.

The best approach for anyone contemplating further wealth creation through investment in growth assets will depend on his or her own personal and financial circumstances, but the key message here is that you must do something! There are many strategies that wealth creators can access if they don’t have vast sums of money or other resources available to them.

Successful wealth creators know that times of opportunity like this only come along once in a while, and they’re taking action so they don’t miss the boat. Regardless of your immediate financial situation, this is the perfect time to reconsider your own capacity to leverage your habits and resources into current or future income.

If you have any doubts about your ability to do this, or you would like advice and assistance to guide you through the many options, act now to get the knowledge and mentoring that you need.

There is no time to waste – and there’s no time like now !

Where to from here?

• Contact us
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