Provision Newsletter

Have you spoken with a financial adviser recently?

It pays to be aware that if you receive a government age pension and set up or make changes to an account-based pension after 1 January 2015, you may be worse off. You have limited time to work out whether reviewing or setting-up an account-based pension before 1 January 2015 will help you—it’s a good time to seek advice.

What will the changes mean for you?

All account-based pensions (ABPs)—including allocated pensions—set-up after 1 January 2015 will be assessed the same way as other financial assets. So if you’re receiving a government age pension it may be reduced as a result. This also applies to those ABPs set up before this date that are not eligible to preserve the old rules.

If you’re eligible, it’s not too late to set up an ABP before 1 January 2015 under the current rules. In fact, doing so may preserve your government age pension entitlements.

 Are you eligible?

If you have money in super but you haven’t set up an ABP yet, you may be able to preserve or maybe even increase your government pension entitlements if you are:

• Male or Female and aged over 65 at 31 December 2014

• Receiving a government age pension by 1 January 2015.

When’s the best time to set-up an ABP?

As an example let’s take a look at Jane and Michael’s situation to see how the changes to Centrelink will work.

Jane and Michael are about to retire in November 2014 as they will reach age pension age of 65. They own their own home and have super of $$150,000 (Jane) and $135,000 (Michael)  and no other assets.

If they leave their money in super then Centrelink will deem it to earn 2%pa on the first $79,600 and 3.5% pa on the balance (ie income of $14,481). They are currently entitled to an age pension of $32,337 pa combined under the income test. If the deeming rate was to increase to say 4% and 5.5% respectively, then their age pension would reduce to $29,487 pa combined, a drop of $2,850. On the other hand, if  Jane and Michael used their super balances to start ABPs before 1 January 2015 and draw the minimum income of $14,250 combined, then only $31 is counted under the income test and they would receive the full age pension of $33,035. This is $698 pa more than if they left their money in super. The reason for this is that under the current income test for ABPs, an amount is ignored each year worked out by dividing the initial start balance by their life expectancy at that time. In this case Jane and Michael can draw up to $6,938 pa and $7,281 pa before anything is counted under the income test. And better still – if the deeming rate was to increase to say 4% and 5.5% respectively, then their age pension would not be impacted and remain at the full level.

But if they wait until 1 January 2015 to transfer their super money to ABPs, then they will be subject to the new deeming income test for ABPs, which will deem their ABPs  to earn 2%pa on the first $79,600 and 3.5% pa on the balance (ie income of $14,481). This is no different to leaving their money in Super and they will receive a reduced age pension of $32,337 pa.

What if you make changes to your existing ABP?

Any changes you make to your ABP after 1 January 2015 could make your ABP assessable under the new rules—for example, if you:

• Change your ABP provider

• Combine multiple ABPs or consolidate super into your ABP

• Add or remove a reversionary beneficiary (a person you’ve nominated to receive your pension income when you die)

• Cease receipt of a government payment Start a death benefit pension for anyone other than a reversionary beneficiary.

It’s important to seek financial advice about whether setting up or reviewing your ABP now will help you preserve any age pension entitlements you may have.

What you need to know

Any advice in this document is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on the advice, you should consider the appropriateness of the advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.

When I left work in 2007 the ASX was around 6500 and I’m still waiting to recoup my initial investment. We didn’t go into recession, our interest rates are at record lows, unemployment is manageable and we have a triple AAA rating. So why has the Australian market been wobbling around like a drunken sailor while overseas markets have improved?

It’s understandable to be concerned about market ups and downs, particularly when you’re retired. But there is a perception issue here. People often take the starting point of the ‘high’, ignoring that the high was far higher than you would have got elsewhere.

The graph below takes a different starting point. As you can see, an investor since 2000 would have been better off in Australian shares than in global shares. In 2007, global shares had just got back to where they were at the turn of the century, while Australian shares were double the levels in 2000.

The US sharemarket really span its wheels in the years leading up to the GFC. When the S&P 500 made a new high in 2007 it was only marginally above what it was in March 2000. In contrast, Australian shares had a fantastic run up to 2007. So our starting point before the GFC was a lot higher. We had a ‘higher high’.

Playing catch-up

The GFC saw both the Australian and the US markets fall about 55%. But since then our market has recovered more slowly and remains roughly 20% below its 2007 high. Let’s look at some reasons why.

• The natural ebb and flow of the markets. You typically find that you go through long periods of time when Australia is the place to be and then you go through long periods of time when the US is the place to be. The US had the tech boom in the 1990s while we were seen as old economy and out of fashion. And then it all reversed when their tech boom collapsed. We didn’t have any tech stocks and we got a huge lift-up from the commodities boom, emerging markets and the low Australian dollar—as recently as 2002 our dollar was at 48 US cents. Now the cycle has turned again.

• Our resources boom was underpinned by strong growth in China. But over the past few years there have been more question marks about China, with worries about Chinese economic growth and property weighing down our share market.

• When the US produces more oil and gas, it stays in the US and leads to lower prices. But when Australia ramps up its gas production, it leads to higher prices as that gas is destined for international markets. So their commodities story has been more positive whereas our recent commodities story has been more negative.

• The US dollar is still running at pretty low levels compared with its peak in 2002, while the Australian dollar is still running at pretty high levels after reaching a peak of US$1.10. This has impacted the competitiveness of Australian companies while their American counterparts get the benefit of a lower currency.

• There’s been a manufacturing renaissance in the US, with companies like General Motors expanding production, while in Australia GM is shutting down and vacating the market as a producer.

• And finally the US has had very easy monetary conditions, with zero interest rates and new money being printed through the Federal Reserve’s quantitative easing program.

You can’t ignore any of these factors in creating support for financial assets—for example, low interest rates have encouraged more Americans to put their money in the sharemarket.

Future headwinds

The slower bounce back in our market is indicative of a long-term change. We’re not down and out but it’s a lot tougher now.

The commodities tailwind has become a headwind. We still have to contend with a relatively high Australian dollar. And our household sector has a debt to income ratio that’s about 30% higher than the US.

All these are likely to act as a constraint on our markets. So for an investor looking for a diversified portfolio, there’s a case to have more in international shares than you might have had a decade ago.

But you need to be careful. It depends on what you’re after. If you’re looking for capital growth then there may be potential offshore. But in chasing that you could miss out on the higher income flows you may get from Australian shares.

Australian assets offer higher income generally. For example, our bond yield is 3.5%, while the US is 2.5% and Japan is 0.5%.

So it’s hard to pass the Australian market up even though it hasn’t recovered as quickly since the GFC.

And you can’t ignore the power of dividends. Dividends in Australia are much higher than the US and Australian investors also get franking credits, which mean the company has already paid tax. The dividend yield for Australian shares is about 4.5%, whereas in the US and other markets it’s nearer 2%.

So even investors who put their money down in 2007 should now be ahead if they reinvested the franked dividends they got along the way.

Safety first?

When you’re retired, perceptions change and it’s difficult to see the investment glass as half full. It can be tempting to look at the relative safety of defensive assets like bonds and term deposits.

And while there is some sense in becoming more defensive in retirement, you’ve got to be careful.

Historically we tend to think of bonds and term deposits as the place to go for yield. But the current bond yield is very low and so are bank interest rates.

One alternative investment option that seeks to deliver both income and capital growth is the AMP Income Generator.

The Income Generator takes account of the fact you’re going to get a pretty low yield from cash, bonds and term deposits, given the present low interest rates and market conditions, and therefore actively seeks out higher yielding opportunities like corporate debt or shares which offer income flows.

What you need to know
This document was prepared by AMP Capital Investors Limited (ABN 59 001 777 591, AFSL No 232497). This document, unless otherwise specified, is current at Monday 15 September 2014 and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after that date. While every care has been taken in the preparation of this document, AMP Capital Investors Limited makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

ipac asset management limited (ABN 22 003 257 225, AFSL 234655) (ipac) is the responsible entity of the AMP Capital Income Generator Fund (Fund) and the issuer of the units in the Fund. To invest in the Fund, investors will need to obtain the current Product Disclosure Statement (PDS) from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232 497) (AMP Capital). The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire, or continue to hold or dispose of units in the Fund. Neither AMP Capital, ipac nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document.

This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Some of my friends in their 30s have set up an SMSF. I don’t have a large super balance but want control. Is it worth it?

If you’re under 55 and thinking about setting up a self-managed super fund (SMSF) you’re not alone. SMSFs are being established by younger Australians in a shift in the age of those wanting control over their super. In March 2014, younger people represented 75% of new SMSF members[1].

Before deciding if an SMSF is right for you, consider some of the common questions AMP customers are raising with us.

How much do I need?

There are varying opinions about how much money you need to start an SMSF. Consider how much you’ll have if your super is combined with other potential fund members. And keep in mind that if your combined balance is less than $200,000 the ATO suggests an SMSF may not be the most cost-effective option—when compared to fees in retail, industry and corporate funds, SMSFs may cost more.

What age do I need to be?

By law you must be 18 to be a trustee of an SMSF although people under 18 can be SMSF members but conditions apply—for example a parent of a younger member may need to act as their trustee.  Generally, all members must be trustees of the fund.  They have legal obligations and are responsible for the management and decisions of the fund

If you’re under 55 you or your spouse may be actively contributing to super—and ideally you’ll have built up considerable super assets already. If you’ve also gathered investment knowledge and experience along the way, they’ll come in handy if you decide to manage your own fund.

What are the risks?

Generally the risks come with the increased responsibilities you’d have as an SMSF trustee.

Running an SMSF means you—along with other trustees—will be responsible for all of the decisions regarding the investments and activities of the fund.

If you’re pretty savvy when it comes to investing you may like the idea of selecting and managing investments from asset classes across the world. But the risk is your fund’s investment performance will ultimately rest with you and your fellow-trustees.

One of the most important duties of an SMSF trustee is to keep abreast of strict superannuation laws and understand how they’d be applied to you and your fund. Penalties for breaches were introduced on 1 July 2014 and can be applied to trustees (corporate or individual) but can’t be paid with SMSF monies. That means you could be personally liable for a penalty if your fund is found to be in breach.

What are the opportunities?

While there can be a lot of work involved in running an SMSF you have more opportunity in several areas.

You can pool your superannuation with that of up to four family members (including yourself). Not only does that provide the opportunity for costs savings—the bigger the fund balance the greater the potential for savings—but you also have full transparency of all the costs and returns for your super. That can help you manage your tax effectively too; another benefit of an SMSF.

An SMSF gives you ultimate investment flexibility too. So not only can the fund invest in direct property—residential and commercial—but it can borrow to invest. If you are a business owner your SMSF has the potential to buy premises that your business can lease back. Special rules apply so if this is an opportunity you’d like to explore, make sure you seek advice first.

SMSFs also provide flexibility in retirement. When it comes to accessing your money down the track—and how you’ll hand down your assets when you die—you have several options. It’s another area you’ll need expert advice in so speak with a financial adviser.

What next?

Before setting up an SMSF look into all your options. There are ways to manage the administration without using up all your spare time. You’ll need to consider your strengths and weaknesses and those of each trustee too—we can help you do this so contact us today to learn more about what might be suitable for you.

  [1] Those aged under 55 years establishing an SMSF, ATO Statistical Report March 2014.

What you need to know
Any advice on this page is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.

An impossible dream?

The thought of buying a home can be exciting and daunting. The deposit amount and ongoing interest charges can really add up, making home ownership seem out-of-reach—especially in today’s housing market.

It’s no wonder many potential home buyers are asking whether they’d be better off renting. The good news is renting and buying don’t have to be mutually exclusive. There are ways to use the benefits of short-term renting as a strategy to buy your own place—but you may find out it’s better for you to rent long term, and not buy.

Isn’t renting just throwing money away?

The answer is yes, and no. Yes, rent money can be dead money. Because if you just rent and don’t invest, your money can’t grow and you’re simply paying off someone else’s home loan or providing rental income for them.

But the non-deductible interest on a home loan can also been seen as a waste. And because renting is sometimes cheaper than paying off a home loan you may be able to make renting work for you.

The fact is renting (combined with investing) may work out better financially than buying your own home. Who’d have thought?

Here’s how it could work: say you pay rent and at the same time invest in shares or super. If you invest the difference between the rent you pay and what you’d pay on a home loan—depending on the performance of your investments—there’s a chance you’ll be better off than if you bought a home. You’d need to look into whether this would suit you though.

Renting and investing in property

If you don’t want to live in an area that’s currently affordable for you to buy in, you could consider renting in an area that better suits your lifestyle and aim to buy in an affordable area that may be a good investment.

You could end up with the best of both worlds: your loan interest payments and various expenses for your investment property may be tax-deductible and you can enjoy living in an area of your choice.

It’s one way to enter the property market and aim to build capital growth, rather than having to save a larger deposit for a property in a more expensive area. But you’d need to work out the costs involved and whether it’s an option you could afford.

What if I choose not to buy at all?

Some recent media reports suggest an investment in shares or super could work out better financially than buying a home. Because an investment in shares or managed funds could provide better returns than the capital growth of your own home.

And with super providing  tax concessions, it can be a very cost-effective way to build long-term wealth for your retirement.

The real value of buying

But aside from the potential financial benefits of renting and investing, owning a home is still part of the Australian dream. And as hard as it can be to get started, when you put your money into a home loan you’re effectively forcing yourself to save, build wealth and become better off.

And more than that, owning your own home means having the security of a home to live in, and control over decisions about it—you can renovate or maybe rent out a room to help you in the early days of your home loan.

Deciding on the best option

There’s a lot to think about when weighing up rent versus buy and what’s right for you—make sure you consider:

1. The purchase price of property and the on-going costs associated with home ownership compared with the cost of renting

2. Your lifestyle and flexibility needs

And remember that whatever you decide, you can be better off by planning ahead – you’ll also develop good financial habits along the way to help you build wealth.

[1] Reserve Bank of Australia, Is Housing Overvalued? July 2014

What you need to know
Any advice on this page is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.

The growth in online shopping has caused some to question how this will affect traditional retail stores, and what this effect will ultimately have on investments. In this article we examine some of the opportunities investors can consider in light of the rising trend of online shopping.

Companies that are able to capture new revenue through online spending will be rewarded

In all sectors internet shopping is rising at a rapid rate. While this rising trend has come from small beginnings, any time there is a disruptive trend, it’s important for investors to be astute and carefully watch those companies that may previously have been regarded as well-established and ‘safe’.

We believe the companies that will be successful will be those who are able to restructure their businesses in response to changing economic and consumer circumstances. This may include transitioning business models to accommodate online shoppers by improving websites, expanding product offerings, and focusing on innovative ways to deliver products from point of purchase to customers.

Consider businesses who sell exclusively online

Other opportunities for investors from online shopping include successful businesses that are exclusively online, such as Amazon and Overstock. In Australia, a similar business includes OzSale which has no traditional store, and whose business model involves selling solely online.

It’s not the end of traditional retail shopping!

While there is certainly a rise in online spending, we don’t believe that this heralds the end of traditional retail shopping. Many retail properties have embarked on redevelopment plans to transform centres into entertainment destinations and there has been an expansion of highly regarded global brands entering the Australian retail market.

Japanese retailer UNIQLO, Swedish retailing giant H&M and Spanish trend setter Zara have all set up shop in Australia. Many of these retailers have been motivated to open in Australia after seeing strong Australian buyer interest in their online sites. As such, the growing trend of online shopping has actually revealed to many global retailers that Australia is a bit of an untapped ‘Treasure Island’!

AMP Capital Shopping Centres Managing Director Bryan Hynes has said the quality of the international retailers coming to retail centres such as Macquarie Centre, New South Wales’ largest retail centre, only confirms the strength of redevelopment moves. This will transform the centres’ retail offering and customer experience.

For investors in listed and direct property the expansion of highly regarded brands seeking to do more retail business in Australia could support leasing activity, and as a result underpin the yield offered by these assets as landlords drive income growth by undertaking opportunities or expansion, refurbishment and development.

About the Author  Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

The outlook for banks

We believe that banks look fully priced for a rising market. The key weakness of the Australian banking system is a low level of deposits relative to loans. To cure this, banks are ‘overpaying’ for deposits, and it’s our view that this isn’t going to change any time soon. Indeed, this is a key reason why mortgage rates are higher relative to the Reserve Bank of Australia cash rate than recent historical experiences.

With ongoing regulatory change, and a high starting point, this means that, net interest margins and future return on equity may not be as good as they have been. (Net interest margins measure the difference between interest income generated by banks and the amount of interest paid out to their lenders such as through deposits.) As such, we think investors should prepare for a period of lower return on equity from bank stocks.

How exposed are you to bank stocks?

With more than 30% of the Australian share index made up of the ‘Big 4’ banks, it’s important that investors take steps to address this concentration of risk.

We took a look at the average super fund’s exposure to the sector as well as the average SMSF investor. While it’s hard to get exact data regarding SMSF investors’ exposure, we made the assumption that their Australian share holdings were invested in very large Australian listed companies, and mimicked the ASX20 Index. Using this approach, when it comes to investments in bank stocks, the average SMSF investor holds more than double the risk in their portfolios than that of the average super fund. And interestingly, it’s not just the banking sector that SMSF investors could have high exposure to. Their portfolios may also have a greater degree of concentration risk around Mining, Property Trusts, as well as Staples and Telecommunications sectors compared to the average super fund.

What should investors do about this?

Clearly, it’s important that investors take steps to manage any risks around high concentration. There are a number of ways exposure can be reduced:

• One way is to consider investing against global benchmarks where there is less concentration risk by sector.

• Another tactic is to give greater discretion to active managers who avoid ‘hugging’ the benchmark and invest only into stocks where they have high conviction on future returns.

• Further, goals based funds also tend to have significantly less sector risk, given their more holistic risk management approach, and, in some cases, active tail risk management.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.