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Is A Self-Managed Super Fund Right For You?

Australian Securities and Investments Commission (ASIC) recently released a report after reviewing 250 self-managed super funds (SMSF) files. These SMSFs were randomly selected based on Australian Taxation Office (ATO) data.

The report highlighted a poor standard of advice provided on SMSFs. They found 91% of the files reviewed were non-compliant. Non-compliant advice included process failures, poor record keeping and increased risk of financial loss for lack of investment diversification mainly due to a single investment property.

An SMSF allows a member to purchase property within the superannuation environment and I am often asked about how to facilitate this. However, what most clients do not realise is that property is capital intensive, costly to maintain and tends to offer a very low income. An SMSFs sole purpose is to provide retirement benefits for the members or their dependents. Therefore I have to ask my clients, is property appropriate for your retirement when you need to draw an income?

At The Investment Collective, we assess the appropriateness of an SMSF for every client.  We look at many factors and alternatives and then provide a detailed analysis for our clients’ to make an informed decision. If you have thought about establishing an SMSF you should consider the following:

  • The balance of your superannuation
  • Costs involved to set up and running an SMSF
    • According to ASIC a starting balance below $200,000 the setup and operating cost are unlikely to be competitive with other options
  • Willingness and ability to manage the SMSF and meet trustee obligations
  • An investment strategy that suits the needs of members
  • Members Insurance needs
  • Lack of government compensation available for SMSFs

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

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Why You Need To Know How Much You’re Spending

In any review of a client’s circumstances and strategy, as their adviser, I am invariably going to ask the following question, ‘how much are you spending’? What I’m trying to confirm is whether a client has enough money coming in to pay for what they tell me is important to them, now and into the future.

You may find this strange, but most people don’t really know how much they are spending. Sure, most will have an idea (often the wrong idea), and some (the minority) will have detailed out on a spreadsheet.

However, an accurate and truthful answer to the question is critical. Without it, we have no real way of knowing how successful, or otherwise, the strategies we’ve put in place are likely to be. We also have no real way of identifying additional resources that may be applied to help to achieve outcomes we’re looking for.

So, what’s the best way of working it out? Well, as noted above, some people maintain detailed and meticulously spreadsheets. This is fine, but generally more than required. A simple review of monthly credit card and bank account statements (over say a 6 month period), will give most people a sense of where the money is going. Personally, I use Quicken software in which I record all credit cards and banking transactions to help me monitor the cash flows of my little household (my wife hates this!).

Knowing where the money’s going, may not sound particularly exciting; however, it’s absolutely a fundamental part of planning for your financial future.

If you would like to learn more about our personal financial planning services, please contact us today. One of our advisers would be delighted to speak with you.

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Scams: A Very Helpful Gentleman

“What’s the matter Joe, you look upset?” I asked. Joe is a longstanding client of The Investment Collective. He’s a sharp minded, sprightly nonagenarian who still lives in his own home and is fiercely independent.

“Well,” Joe said forlornly, “I recently received a letter telling me that the NBN was coming down my street. I was trying to work out what I needed to do, when a very helpful gentleman from ‘Telstra Platinum’ service called me. He told me that he could have me connected to the NBN in about 30 minutes. All he needed was remote access to my computer, and I gave it to him.”

Within 30 minutes $9,000 had been withdrawn from Joe’s bank account. He’d fallen foul of a telephone scammer. Joe managed to get down to his bank on the same day. They closed his bank account and assured him he would receive his $9,000 back.

Joe isn’t out of pocket, however, his confidence has been severely shaken. He’d asked himself, how could he, of all people, have been so gullible as to unquestionably pass over control of his computer to a ‘voice’ on the other end of the telephone line?

That ‘voice’ was friendly, courteous, helpful, and beguiling. It was able to disarm Joe’s otherwise critical faculties. Also, it belonged to a person that had no qualms whatsoever in stealing from Joe. If it can happen to Joe, it can happen to me, it can happen to you.

Be careful!

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When To Seek Financial Advice

Who should see a financial adviser?

“I don’t have any money to invest so there is no point in my seeing a financial adviser.”

“We manage our own finances so we don’t need to see a financial adviser.”

“We struggle to make ends meet, so we haven’t got any spare income to do anything else so we won’t be seeing a financial adviser.”

“I’m only in my 20s, 30s, I don’t need to see a financial adviser.”

“It’s too late for me to see a financial adviser as I’m retiring in 6 months’ time.”

All of these thoughts are far from the truth.

When should I seek financial advice?

There is a general perception that financial planning is only for people who have money to invest. That if you don’t have any spare cash and are having difficulty in making ends meet, financial planning isn’t for you.

Having a personally tailored financial plan will assist you in every facet of your financial lives regardless of your current financial situation.  In fact, your financial plan will help you achieve other personal goals simply because these goals are planned for.

Your financial adviser will assess your entire current financial situation. This means the adviser will be obtaining information on your earnings, what it costs you to live, the value of all your assets including superannuation, and of course, what you owe.  The adviser will also assist you in identifying what you want to achieve, both now and into the future.  We consider your life risk requirements so that your family and wealth are protected in the case of death, serious injury or illness.

Once the data has been collected and analysed, the adviser will write your financial plan.  The plan will include a summary of the current situation and this in itself can be an eye-opener for the client because many of us do not take stock of our overall financial picture.  Taking into account your goals and objectives and the things that have been identified during the collection and analysis step, the adviser will make recommendations to improve your situation and to help you to meet the goals you have identified.

Sometimes the recommended strategies can be confronting, but always valuable.  For example, if cash flow is a problem for you, the plan will include budgeting advice and strategies.  If you have surplus funds for investment, the plan will include recommendations as to how those funds should be invested.  If you are nearing retirement, the plan will address streamlining and consolidating your financial affairs ahead of retirement and strategies to maximise potential Centrelink payments.

There will be recommendations to adjust the investment option in your superannuation if it does not match the risk profile identified during discussion. If you have debt, there will be advice as to how best to manage that debt and if a restructure is required. If your life risk protection is inadequate, we will include recommendations to bring this protection to the correct level.

Your financial plan will also contain information on any ongoing costs you may incur if you accept the proposals, and there will be comparisons and projections between the current situation and the recommended strategies, including current and future costs.

So, when you should see a financial adviser? The answer is – as soon as possible!

For young people, a tailored financial plan will set them on a path to growing their wealth, perhaps via a savings plan.  For pre-retirees, it is essential that you consult with an adviser to ensure that what you have worked a lifetime for will support you in the way you want during retirement.  Centrelink payments and health care cards are very important and this is a major part of the planning for those either in or nearing retirement.

If our recommendations are accepted and you proceed with the plan, we manage the implementation of the plan and if there is an ongoing component, this activates. Centrelink management is part of the ongoing work and it can be invaluable to retiree clients to have this onerous task managed.

Beginning the process of seeking financial advice is very simple.  It is a matter of contacting either our Rockhampton or Melbourne offices with a request to see an adviser.  Your meeting confirmation includes a list of things to bring with you. From there the adviser will lead and guide you through the process.

What are you waiting for?

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What To Know: Interest Only Loans

Interest only loans have been a popular choice for property investors for tax purposes, and first home buyers and other borrowers looking to minimise the repayments on their debt.  Many purchasers use Interest only loans to ease the financial burden of servicing their loan.

Due to the growth of the property market in recent years, the average loan size has increased, and Interest only loans can be a short-term option to reduce the repayments and improve affordability.  This type of loan is a popular choice for property investors to lower the repayments, while hopefully the value of the property increases in value over the longer term.  Many lenders offer Interest only options on their products for up to 5 years.

On a loan of $300,000, the monthly repayment on an interest loan would be approximately $500 less per month than an equivalent Principal and Interest product at the same rate.  There can be significant savings on repayments for an Interest only loan in the shorter term, but there are also some longer-term issues:

  • As the name suggests, you are only paying back the interest on the debt. You are not making any progress on your mortgage!  At the end of the Interest only term based on the example above, you still owe $300,000.  If you selected a Principal and Interest loan (at the same rate), you would have reduced your loan by nearly $30,000.
  • Property investors and homeowners expect that the property will increase in value over time. With an Interest only loan, you will have equity in the property without paying any principal.  However, if your property doesn’t substantially increase in value over the Interest only term, you will not have gained any equity in the property.
  • At the end of the Interest only period, the loan repayments will ‘rollover’ to an increased Principal and Interest repayment. Many borrowers may be unprepared for the additional financial commitment, and will experience ‘Mortgage Stress’.  If the borrower’s circumstances have changed since the loan was established, and they cannot extend the Interest only period, it may be difficult to refinance to another Interest only loan.  The only option may be to sell the property.

As of 2015, Interest only home loans represented approximately 40% of the residential loans in Australia.  From March 2017, the lending regulator, Australian Prudential Regulation Authority (APRA) introduced restrictions on new Interest only loan business.  APRA has limited Interest only lending to less than 30% of new loans written.  The restrictions were imposed In order to limit riskier forms of lending practices, which allow borrowers to pay for escalating property prices, while not reducing their debt.

The restrictions introduced by APRA have led to rate increases on Interest only loans, and tougher requirements for customers applying for Interest only loans.  Interest only loan applicants may be subject to increased scrutiny such as more thorough income verification and higher loan servicing standards.

There have been several headlines recently in relation to the issues with Interest only home loans ‘rolling over’ to Principal and Interest loans after the interest-only period expires.  The Reserve Bank of Australia has estimated that over the next 3 years, approximately $360 billion of Interest only loans will convert to Principal and Interest Loans.  This will increase the repayments by approximately 1/3 or $7,000 p.a. on average for a $400,000 loan.

The rollover to Principal and Interest repayments may leave many borrowers struggling to meet higher repayments.  The most vulnerable will be homeowners with a high Loan to Valuation Ratio (LVR) who will find it harder to refinance or sell the property to extinguish the debt.

If you need assistance with your home loan or lending needs, please contact one of our lending specialists to determine the costs and benefits, and to discuss your options.

Please note that the above has been provided as general advice. It has not taken into account your personal or financial circumstances. If you would like more tailored advice, please contact us today, one of our friendly advisers would love to speak with you.

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Insurance Is Not A Dirty Word

Let’s be honest, have you ever cringed when you hear the word insurance? I’m not specifically talking about life insurance, I mean all insurances. This includes home and contents, motor vehicle, health, life, public liability; they all get wrapped up into one ugly, frustrating ball of confusion. In addition to this, we have the all-encompassing doubt that if we go through the process of applying for cover, are the insurance companies even going to pay out?

In October 2016, ASIC was tasked in developing a report following the scandals involving life insurance companies not paying claims. The result of this report uncovered a number of interesting findings. Some of you may be shocked to know that out of the total 11 insurers investigated, only an average of 7% of claims were declined and an average 76% were approved in full.

The statistic that I found most interesting was the rate at which claims were being declined on policies with no adviser linked. A staggering 12% of non-adviser claims were declined compared to only 7% of claims held with an adviser.

During my short time as an adviser, I have assisted a number of my clients through claims, all of which have been successful. I’m not going to deny that the claims process can be tedious and sometimes drawn out, but can you imagine going through this all by yourself?

The role of a Risk Adviser is among other things, to assist a client through one of their most harrowing times to ensure the cover you’ve funded is paid to you in your time of need. We are there to take away the burden and stress of speaking with claims assessors and insurance companies so you can focus on taking care of yourself and your family.

So if you’ve been considering life insurance but haven’t yet made the right moves or don’t know where to start, contact The Investment Collective and speak to one of our friendly specialist Risk Advisers.

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

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Electric Cars

Should we go out and buy shares in Tesla? We have had a few questions from clients asking for ethical investments in their portfolios and Tesla is a name that comes up amongst these discussions. Tesla heavily promotes itself as the green future of transport. So, is this a ground breaking technology that will save the environment? Let’s take a look under the hood.

No prizes for guessing what powers an electric car and surely electricity is cleaner fuel than petrol, right? Teslas are charged via a hook up to a power outlet in your house and that electricity comes from a power station which, for the most part, is generated from burning coal. There are also losses in transmission along the power lines, and losses in the battery as it is charged. I have not included those losses in my calculations below as they are difficult to quantify.

I will base my comparison on the amount of Carbon Dioxide (CO2) that is emitted. There are plenty of other pollutants for both Electric cars and Petrol engines but for the purpose of this assessment we will just look at CO2. The average amount of CO2 per kilowatt-hour of electricity generated varies from state to state due to the differing ways electricity is generated. In Queensland, it averages out at 0.79kgs of CO2 per kilowatt hour, whereas in Victoria it’s a whopping 1.08kg of CO2 per kilowatt hour. Down in Tasmania it comes in at 0.14kg of CO2 per kilowatt-hour due to the use of hydroelectric power.

If we look at the Tesla Model 3 (below), which is a similar size to a Toyota Corolla, it has a range of 352kms on a full charge and its battery power is 57kwh. Therefore, a full charge in Queensland will emit 129g CO2 per kilometre and in Victoria that would increase to 177g CO2 per kilometre. That is about 100 litres of CO2.

According to the Green Vehicle Guide (www.greenvehicleguide.gov.au) published by the Australian Government, a bog standard Toyota Corolla 1.8l Manuel will release about 196 grams of CO2 per kilometre in an urban environment. So, based on the Tesla emissions of 177g CO2/km above, there really is not a lot in it for Victorians.

Ideally, if you own a Tesla, you need a solar panel on the roof of your house and a battery to store the energy during the day so you can recharge overnight. Then you really are a greenie.

Please note, the above had been provided about general advice. If you would like more tailored advice about investing or any financial services, please contact us today. One of our advisers would be delighted to speak with you.

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Your EOFY Super Checklist

With the close of another financial year upon us, apart from being one year closer to retirement and living the dream than you were 12 months ago, it’s an opportune time to attend to one or all of the following:

1. Give your super a free kick

Now is a good time of the year to make additional contributions into super especially if you intend to claim those contributions as a tax deduction as well as lodging your tax return early in the financial year.

Why is that, you may ask?

Well, any surplus cash you have sitting in a bank account earning an abysmal rate of interest can be contributed into super before June 30 as a “personal” contribution and claimed as a tax deduction.

Providing you haven’t exhausted your $25K concessional contribution cap, that increased tax deduction, all things being equal, will most likely result in you obtaining an increased refund from the ATO once your tax return is lodged and assessed.

The benefits are twofold; you get an increased tax refund which can be directed however you wish whilst increasing the wealth you have accumulating in super.

2. Share the wealth

If you have a partner you should be thinking about your finances together and make the most of opportunities that present.

For instance, if your partner has taken time out of the workforce or is a low-income earner, there’s every chance their super could do with a boost.  If your partner earns below $37,000 you can claim the maximum tax offset of $540 if you contribute $3,000 into their super before 30 June.

You get $540 off your tax bill whilst increasing the wealth accumulating inside super.

3. Check in on your goals

As we traverse life our needs and circumstances change, hence it is important to check in on your life and financial goals every 12 months to see how you’re tracking.

Are you on target for making your dreams a reality or do expectations need to be revised to take account of changes to your circumstances?

In relation to your super, at the end of the day, your super is your money.  You are ultimately responsible for how it performs and grows.  You need to ensure it is being invested wisely and in line with the timeframe you intend to access it.

As we enter winter and move another year closer to retirement, check in on one or all of the above…you might just get a good outcome in the future and surprise yourself.

Please note the above has been provided as general advice. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak with you.

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Investing For Your Children & Grandchildren

I’m often asked how best to invest for children and grandchildren. My clients are looking for the best long-term strategy to provide a gift to their children or grandchildren on their 18th birthday.

The best gift we can give children is educating them about the value of money and the benefits of saving and investing.

Prior to choosing an investment, we need to consider a few aspects including tax, fees and the complexity of the structure.

A major consideration for parents and grandparents is the tax rate children have to pay. To prevent Australians investing money in their children’s name to save tax, special rules apply to income earned by children under 18. Income derived from investments and savings account is taxed at 66 percent once it exceeds $416 a year until it reaches $1,445, after which 47 percent tax applies.

We can safely say that investing in the child’s name will incur the highest marginal tax rate.

The simplest approach is to invest in your own name, preferably the lowest earning parent or grandparent.

  • You pay the tax at your marginal rate
  • The first $18,200 earned is tax-free
    • You may be eligible for the low-income tax offset
    • If you meet the age requirements for Age pension, you may be eligible for the seniors and pensioners tax offset
  • Income derived from the investment may have franking credits

Another structure that can be used is a family trust, however, they are costly to establish and maintain, and time-consuming to administer.

As you can observe, the decision on the most appropriate investment vehicle for your children or grandchildren can vary depending on your circumstances. It is best to speak to your financial adviser at The Investment Collective.

Please note that this article is provided as general advice, it has not taken your personal or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Share Market Seasonality

Come across the aphorism “sell in May and go away”?  Perhaps heard reference to the “Santa Claus rally”?  Many people believe there are seasonal patterns to share prices.  Some months are typically good with prices going up, and some not so good with prices going down or sideways.  Let’s look at some history using the S&P/ASX 200 Index.

This index shows the aggregate performance for the biggest (by market capitalisation, worked out by multiplying the number of shares on issue by the price per share) 200 Australian Stock Exchange (ASX) listed enterprises.  This index only shows price movements (does not include dividends) and the larger companies carry more weight in the index than the not-so-large ones.

Of course, if the index of 200 companies is going up this does not mean all the companies in the index are going up.  Only that a larger number of market capitalisation went up.  Individual companies may have their own seasonal price patterns.  However, let’s keep it simple and look at the S&P/ASX 200 Index (also known by its ASX code XJO).

This chart shows the average (arithmetic mean) of monthly price movements for the index for the last 12 years (May 2006 to April 2018).  The figures on the right edge of the chart show the average level of the index at the end of each month, using a figure of 100.0 as the starting point.  So, if the average of the index at the end of December is 101.2 this means the average price increase for the month of December for the period examined was 1.2%.  The figure for November is 98.4 and this means the average price decrease for the month of November for the period examined was 1.6%. The blue diamond above the April bar shows the result for April 2018 – a better than average one.

Based on the last 12 years the month of April has been a good one for the price of the S&P/ASX 200 index.  April 2018 was a better than average one.  Based on the last 12 years the averages for May and June have seen decreases.  This certainly does not mean that May and June 2018 will be negative ones, only that May and June have been weak months on average over the last 12 years.  No suggestion that any portfolio changes would be necessary.

We can look in more detail at these historical data in future articles.  For instance, a different chart will show the best and worst performances for each month as well as the average.  For something a bit outside the square, we can also arrange the data so it looks at performances on dates divided up on an astronomical basis (Aries, Taurus, etc.) rather than calendar months.  Keep watching for future articles.

Please note this article is providing general advice and information. It has not taken your personal or financial circumstances into consideration, if you would like more tailored financial or investment advice, please contact us today. One of our advisers would be delighted to speak with you.

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