australian 20170729 033 1 · 2017. 7. 30. · amp financial planner at wealthpartners financial...
TRANSCRIPT
When considering whether to hold life insurance inside or outside super, you need to factor in your personal circumstances, your insurable need and the tax consequences applicable to the premiums, and more importantly the death proceeds.
A major advantage to you of structuring yourinsurances under super is that the premiums are paid from your accumulated super fund balance, or from pre-tax super contributions. If you were paying for life insurance outside of super you would have to fund the cost from your after-tax dollars.
Often the premium costs of life insurance held in an employer super fund are at group rates, and so should be priced at a lower rate than what you can secure via individual retail cover outside super.
Before making any changes, check the levelof cover you have, compare the features and benefits of the cover and the terms and conditions of the insurance contract.
While funding insurance costs from super asopposed to post-tax cash flow is attractive, it does come with some negatives that need to be considered.
The purpose of super is to fund retirement. Insurance costs will eat into your retirement savings and impact on your long-term rate of saving for retirement.
If your employer pays your insurance premiums as an employee benefit under super, the cost of the cover will count as a contribution towards your super concessional contribution cap of $25,000.
This may limit your ability to salary-sacrificesuper contributions.
Generally speaking, in the event of death, insurance proceeds on policies self-owned outside super are tax-free to beneficiaries. However with super, you need to be very careful as tax treatment will vary depending on who you nominate as beneficiaries. If proceeds are payable to a tax dependent — a spouse, child under 18 or someone financially dependent upon the member — the proceeds are tax-free. Assuming your parents do not rely on you for ongoing financial support, if proceeds are payable to a non-tax dependent such as your parents or a charity, the death benefit proceeds are taxed at 15 per cent. Or, where the super fund has claimed a tax deduction for the insurance premiums, the proceeds are taxed at 30 per cent.
These tax consequences are quite substantial.You may argue that you’re dead, so what? But ultimately this becomes a question of who you want to benefit: your beneficiaries or the ATO. By careful planning you can manage this risk and provide as much benefit as possible for those you wish to provide for.
It is important to understand the tax consequences on your death for beneficiaries and also the options you have with insurance to minimise the tax impact. If you are in the position of knowing you will die in the foreseeable future, it is particularly advisable to learn more about the options available to you on payout of the insurance benefit. You may be able to manage how and to whom the proceeds are paid via your death benefit nominations. Better to give to charity or loved ones than Canberra.
Visit the Wealth section at theaustralian.com.au to send your questions to Andrew Heaven, an AMP financial planner at WealthPartners Financial Solutions.
THE COACH
With the 2018 financial year underway, it’s worth examining the for-ces that could determine whetherthe Australian stockmarket re-peats its circa 13 per cent return of2017.
For those with less patience,the executive summary goessomething like this: valuations re-main relatively stretched acrossthe broader universe of high-qual-ity companies (typically this limitsfuture returns), and this is occur-ring at a time when the prospectsfor many domestically focusedbusinesses give cause to be lesssanguine. Rising non-discretion-ary household costs, combinedwith weak wages growth, leavesless discretionary spending ca-pacity. As such, discretionary re-tailers and product manufacturersare vulnerable to weakening de-mand.
Fuelled by the speculative bub-ble in residential property, risinghousehold debt levels, combinedwith a falling savings ratio, haveprovided households with the
Consumer headwinds to weigh on retailers
flexibility to maintain their con-sumption levels until now. Debtmust reach a ceiling and the pro-cess of deleveraging includes re-duced consumption and regul-atory or prudential responses.Should the pendulum swing to-wards parsimony, it will do so atthe same time that the real econ-omy has to deal with the imbalan-ces associated with rapid houseprice inflation, including residen-tial construction overactivity.
Another source of structuralweakness stems from very lowwage growth — much lower thaninflation. And given that weakbusiness confidence is producingexcess labour supply and a highlevel of underemployment, wagegrowth is unlikely to come to therescue of highly indebted house-holds.
The latest mortgage cycle saw asignificant increase in the pro-portion of new mortgages writtenon an interest-only basis. In fact,data produced by APRA revealsnew interest-only mortgages in-creased steadily from a low 21 percent of total new mortgages in 2011to a peak of 42 per cent of total newmortgages in June 2015.
Many, if not most, interest-only mortgages revert to principaland interest after five years. Cus-tomers who reach the end of theirfirst term will then need to refi-nance their mortgage for anotherfive years and many will only beable to afford interest-only mort-gage repayments.
But the introduction of a 30 percent cap on the proportion of newmortgages that can be written by
banks as interest-only from July 1,2017, will force some householdsto begin to repay principal on topof their interest payments. Thiscould represent an increase in re-payments of as much as 40 percent. And that will occur evenwithout an increase in interestrates. Additionally, the house-holds that are less likely to be ableto refinance their mortgages togain the benefit of another inter-est-only period are more likely tobe those that are already financial-ly stressed.
For those that are able to refi-nance a new five-year interest-only mortgage, we believe theywill have to do so at a rising costrelative to the RBA’s official over-night interest rate. This is becausethe banks use pricing to allocatethe limited amount of new inter-est-only mortgage product cap-acity, and to offset likely increasesto risk weights on more vulnerablemortgages such as investmentproperty mortgages that are de-pendent on rental revenue to meetserviceability requirements.
Record debt combined withrising rate charges will have a ma-terial impact on discretionaryspending by households. Accord-
started the process of progressiveclosures of baseload coal powerplants. When combined with ris-ing spot gas prices on the eastcoast, energy costs have risen sub-stantially in the past six months.As of June, higher wholesale elec-tricity prices were being reflectedin higher retail prices, with rises of20-30 per cent common.
In addition to its impact onconsumers’ wallets, rising powerprices will affect domestic busi-ness profitability. This will bemore significant for energy-inten-sive business — for example,large-scale manufacturers andminers — squeezing margins and/or forcing price increases.
It is in these periods of costpressure that a focus on investingin high-quality companies withpricing power is paramount.
Retailers targeting cost-con-scious consumers are likely to seea more significant impact from ris-ing non-discretionary householdcosts. Stuart Jackson, the Mont-gomery (Private) Fund’s portfoliomanager, reckons discount de-partment stores such as Kmart,Target and Big W, The RejectShop, Specialty Fashion Group,Super Cheap Auto, Noni B, Domi-
nos, and Coca-Cola Amatil are allin the firing line. Retailers focusedon more mature customers —those with increased debt — in-clude department stores likeMyer.
The final headwind that is like-ly to materialise in the 2017-18 fin-ancial year is a downturn inresidential construction. Growthin this sector has supported econ-omic growth, taking the mantlefrom mining investment followingthe end of the resources boom.The recent downturn in residen-tial building approvals data, how-ever, indicates that in six to ninemonths, residential constructionis likely to begin to slow and turnnegative toward the end of calen-dar 2017, turning an economic tail-wind into a headwind.
We continue to believe thatasset prices remain elevated. Elev-ated share prices imply strongearnings growth. For several keyeconomic sectors, growth is be-coming much more difficult.
Roger Montgomery is founder andchief investment officer of the Montgomery Fund.
www.montinvest.com
Low wage growth and higher costs will dampen spending
ROGER MONTGOMERY
Fintechs target tech-savvy millennials with growing online financial services
Millennials, a demographic groupborn between 1980 and 2000,make up one of the largest livinggenerations and have now over-taken the baby boomers.
Millennials are likely to fallinto three categories: • Inheritors: With wealthy par-ents, they are major consumerswhile they wait to inherit.• Strivers: Coming from a moremodest background, they arestudying, saving and working hardwith ambitions for promotion.They will borrow to support theirlifestyle, not unlike inheritors. • Given-ups: They are more likelyearning a low salary but continueto consume as much as the othertwo categories. Buying a house isnot on the agenda, so they do notsee the point in saving.
Millennials have been calledthe “smashed avocado” gener-ation, as some would rather spendmoney on brunch and takeawaycoffees than save, for various rea-sons, depending on the categoryto which they belong.
While millennials may havewider lifestyle choices comparedwith their parents, they are the un-lucky generation in the housingstakes. Buying a house for many isan unattainable dream. But con-versely, growing up in the internetage has opened a treasure chest ofopportunities that were not avail-able to previous generations. Andthe arrival of the smart-phone has revolutionised theway people communicate, bank,shop, and more. In particular, thepossibilities of online investing,lending and saving are changingthe way they and future genera-tions manage their finances.
With the arrival of financialtechnology, or “fintech”, whichoffers new solutions for financialservices using technology and in-novation, the opportunitiesabound for the tech savvy gener-ation. Fintechs are targeting thosethat have fallen out of love withbanks and other traditional finan-cial services. And 71 per cent ofmillennials, according to Viacom’sMillennial Disruption Index,would rather go to the dentist thanto the bank.
3. Digital Wallets: Managingfinances electronically is possible,with apps such as Pocketbook pro-viding a free way to budget andmanage finances, allowing real-time control of a person’s money,along with a “safety” budget fea-ture that allows setting of theamount that can be safely spent onnon-essentials. Meanwhile, Sto-card allows users to store all loy-alty cards in their smartphones,collect points and rewards, andmonitor transactions. 4. Investing: Easier ways to investat lower costs are likely to increasethe appeal to millennials, who areunlikely to ever meet a traditionalfinancial adviser.
Acorn is a micro-investing appthat links to an investor’s bankaccount and credit card, roundingup daily purchases and automati-cally investing the small changeinto a diversified portfolio of ex-change traded funds.
All the investor has to do ischoose the diversified investmentoption. FirstStep is another appthat offers automatic investing ofvirtual loose change from elec-tronic transactions into three in-
vestment options that invest inETFs. Atlas Trend allows smallamounts to be invested in globaltrends.
Not just for millennials
By removing the inefficiencies oftraditional financial services, deal-ing directly with the source ratherthan the intermediary and often alower cost solution, millennialsare getting a better deal from fin-techs, especially with a quickerturnaround. Who wants to waittwo weeks for a personal loan,earn paltry returns from bankdeposits or pay over-the-top feesfor financial advice?
Millennials are not the onlyones rejecting conventional mod-els of finance, as the proliferationof fintech solutions increasesappeal to other generations.
Disclaimer: Fintechs men-tioned in the article or in the listabove are not recommendationsbut for reference use only.
Rosemary Steinfort is research manager at Directmoney.com.au/invest
ROSEMARY STEINFORT
Below is a list of four types offintechs and some examples: 1. Robo-advice: This providesfinancial management advicewith minimal human inter-vention, usually for a lower cost. Itis especially attractive for thosewho cannot afford to pay a finan-cial adviser, which can cost up to1 per cent of savings. Companiessuch as BigFuture provide a freeapp that allows easier navigationof a person’s finances by keepingall their assets in one location,while BetterWealth offers onlinefinancial advice customised to the
investor, and InvestSmart is a freeautomatic investing service thatprovides a supermarket selectionof products. 2. Peer-to-peer lending: Anothertype of fintech, peer-to-peer ormarketplace lending is useful formillennials. Typical marketplacelenders such as DirectMoney orRateSetter provide simple, flexiblepersonal loans for creditworthyborrowers. Some P2P lendersallow borrowers to take out a loanthat can be used to fund stampduty or furnishings, as well asbridge the deposit gap.
A close look at local fintechsCompany Category What they doAcorn Australia Investing Micro investing by allowing small change to
be invested in a diversified portfolio
BetterWealth Robo-advice Online adviser personalised to suit the investor, using ETFs
BigFuture Robo-advice Free applications that can help you manage your financial future.
FirstStep InvestingA mobile app that lets you automatically invest the virtual loose change from your everyday electronic transactions
Goodments Investing Online investing that matches investors with their values to create a portfolio
Six Park Investing Online low-cost investing adviceSource: Australian FinTech
ing to the recent National Census,34.5 per cent of households have amortgage, while 11 per cent haveone or more investment propertymortgages.
The RBA’s 2014 breakdown ofhousehold debt by income and ageprovides some clues on whichdemographics will be more ex-posed to rising rates, and growth indebt has been the most significantin the 35-44 year old, 45-54 yearold and more recently, the 55-64year old demographics.
Significant increases in house-hold utility prices will add tohousehold stress. The closure ofthe Hazelwood power station has
Rising stress
Source: ABS; RBA
175
150
125
100
75
50
2004 20171991
%Debt to household disposable income
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WEEKENDWEALTH THE WEEKEND AUSTRALIAN, JULY 29-30, 2017theaustralian.com.au/wealth 33
I have read that I should always hold my life insurance inside superannuation. Why is this and what is the difference between owning insurance inside and outside super? I have death and total permanent disability insurance provided by my employer via a super fund. I am 38, single, with no kids. On my death I plan to leave my estate to my parents and charity. I have sufficient disability cover to pay off my mortgage if I can’t work again.
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