28
Aug 2015

Does your super reallly cover you for income protection?

Does your super reallly cover you for income protection?

Written by Hudson Adviser Ivan Fletcher

We only have to look back at the QLD floods to know that QUALITY (fine print if you like) matters a great deal. There is no point in having cheap insurance if it does not protect you in your hour of need.

Too many times I hear the words “I’m covered by my super” with very little understanding of what level of cover there really is or the quality it provides (likelihood of paying up).

The following table provides a short summary of some key issues to consider. You can find more detail on these subjects below the table.

 

  Product Features for Income Protection
In Super Outside Super (Stand Alone)
1 Wave of waiting period for some minor injuries (e.g. broken bone) (if 30, 60 or 90 days) No Yes
2 Lump sum payment for critical illness (e.g. Heart attack, stroke, certain cancers) No Yes
3 Can offsets deprive you of payment even after serving your waiting period? Yes No
4 Personal tax deduction No Yes
5 Cover beyond 2 years No (in most cases) Yes

 

Automatic payments & wave of waiting period for some minor injuries:

The most common example is a bone break. Under a good stand-alone policy, these injuries are defined for an immediate lump sum payout regardless of the waiting period or your return to work. For example, a broken ankle might not stop you from returning to your office job after a week or two. However, your stand-alone policy will pay you for six to eight weeks income (even though you have a waiting period (no more than 90 days), and even though you might conscientiously return to work in two weeks.  Super will pay nothing in these circumstances.

 

Critical illness payments:

This is a similar situation as is for minor injuries, but with much more severe consequences personally and financially. For example, a heart attack or stroke could give you a six month immediate benefit (again regardless of your waiting period (if 90 days or less), and regardless of your return to work in a shorter time frame. Super will only pay you for the weeks you are off work (after you have served your waiting period and any other offsets have been applied – see point below),

 

Offsets – Can they deprive you of your entitlement to claim?

Do you want to use up your entire annual or long service leave before your waiting period even commences? Super may force this upon you. This is your super fund ‘offsetting’ the need to pay you when you have other entitlements to exhaust first.  

Further, if you are in some sort of legal dispute over fault / cause of your injury (e.g. workers compensation or automobile accident), super will not pay you if you are being compensated elsewhere (i.e. they offset their obligations against other sources of payment to you). This issue is further aggravated if legal proceedings drag out and you may be left in limbo whilst legal proceedings drag on with no income from anyone. In some instances you may get some access to your policy under super and then have to pay it back should you be compensated from another source (e.g. workers compensation) – here is the offset at play again.  

Under quality stand-alone policies offsets don’t apply, allowing you access to your claim regardless if you receive compensation through some other form. 

 

Tax deductions:

Income Protection Insurance is tax deductible if held and funded in your personal name. For most of us that is at least a 31.5% or 38.5% tax refund. You cannot claim this under superannuation owned policies. All of a sudden, the seemingly higher cost outside of super may no longer be more expensive (and in many cases cheaper in after tax terms). 

There is argument for sacrificing extra to your super to cover insurance premiums. Most people fail to follow though on such intentions and instead erode their forced retirement savings with premiums.

 

Do you think it is possible you will need to claim your income protection for more than two years? 

Consider this - many insurers report that one in five claimants are still on claim after the first two years (e.g. a brain tumour, major car accident or back injuries).

 

For your super funds it is very likely that no one will ever even provide you with the terms and definitions for you to consider when you sign up and tick a few boxes to include some cover. Our insurance expert Peter Dale, who has over 40 years experience in the industry has read many of these terms and conditions and the above examples are just some of the common situation where insurance policies in super (and ultimately you) are found wanting in your hour of need.

Again, I remind you of the many QLD flood victims who were not able to claim while others were. Insurance is a subject where QUALITY matters a great deal.

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28
Aug 2015

Market volatility update

Market volatility update

Written by Stephen Halmarick, Head of Economic and Market Research, and Belinda Allen, Senior Analyst Economic and Market Research at Colonial First State Global Asset Management

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 26 August 2015. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs.


Overview
The last few weeks - and especially the last few days - have seen an extraordinary level of instability and volatility in global financial markets, particularly in equities and some emerging market (EM) currencies.

 

Key factors behind the market volatility
Much of what has taken place in global financial markets over recent days and weeks has been driven by fresh concerns over the pace of growth in China and further volatility on Chinese equity markets.  

 

Chinese policy makers appear to be prioritising the slowing economy and stabilising the currency over protecting the equity market – as a result of the apparent lack of immediate policy action on the latter, the Chinese equity market continues to fall sharply and this has led to falls in global equity markets. There have been no other signs of a broader global economic slowdown.

 

Outlook for the Federal Reserve and US monetary policy
The start of the US monetary policy normalisation process (i.e. raising interest rates) was always going to be challenging for financial markets.

 

Since the onset of the Global Financial Crisis (GFC) in September 2008, all the world’s major central banks had been working in the same direction – easing monetary policy by lowering interest rates and when rates reached zero, they undertook Quantitative Easing (QE) programs of various shapes and sizes (i.e. in the US, UK, EU, Switzerland and Japan).

 

The ongoing recovery in the US economy, especially through 2014, meant that the US could cease its QE program (in October 2014) and then start thinking about raising interest rates. 

 

Of course, the US Federal Reserve (the Fed) has not yet raised interest rates – although Fed officials are still talking about a potential rate hike this year.

 

An equity market event
It is important to note that recent market developments have primarily been an equity market event – rather than a bond market event. Yes, bond yields are lower, but this likely reflects declining Fed tightening expectations and lower commodity prices and not something that is broader.

 

So it seems accurate to describe recent events as a correction in equity markets (and a severe one at that), not the start of another GFC.

 

Expect further policy easing in China
While there is evidence of a slowdown in the Chinese economy, the Chinese authorities still have plenty of room to ease policy. Further interest rate cuts, reductions in the Reserve Requirement Ratio (which would allow the banks to lend more money) and further currency depreciation are all in play. 

 

Markets should expect further policy easing from the Chinese authorities in the days, weeks and months ahead.

 

The other positive for markets is that although the Fed has ended its QE program and is expected to begin raising interest rates before year-end, both the European Central Bank (ECB) and the Bank of Japan (BoJ) are still undertaking aggressive QE programs and if anything, these asset buying programs could be increased in the months ahead. The scale of the ECB and BoJ QE programs will more than offset the end of the US QE program.

 

Recent developments

Here is the state of markets as of midday (Sydney time) on Wednesday 26 August:

  • On Tuesday evening during European market time, the People’s Bank of China (PBOC) lowered both its benchmark lending rate and deposit rates by 25 basis points to 4.6% and 1.75% respectively.  The Reserve Requirement Ratio (RRR) was also cut by 50 basis points. This was a clear response to sharp falls on Chinese equity markets, with the Shanghai Composite Index down 7.6% on Tuesday following a 8.5% fall on Monday. In early trading on Wednesday the index is up 0.8%. Further easing measures in the rest of the year are still expected.

  • The oil price is trading at $US39 a barrel, after reaching $US38 a barrel on Tuesday, the lowest since 2009, exacerbating the sell-off already taking place in energy stocks and global commodity markets.

  • Global equity markets have weakened significantly over the past three days, albeit showing some signs of stability on Tuesday night.

  • The US S&P500 was down 3.2% on Friday and a further 3.9% on Monday on high trading volumes and down 1.4% on Tuesday. The fall on Tuesday came in the last hour of trade and despite strong gains in Europe. The S&P500 has fallen 11.2% in August.

  • On Monday the Dow Jones Index fell 1089 points on the open before closing 588 points down and has now recorded its biggest three-day fall in record. The Dow Jones also fell 1.3% on Tuesday.

  • The lower oil price impacted bond markets with 10-year US bond yields moving below 2% (from its high of 2.48% in June) in early trading on Monday, the lowest since April 2015 as markets push out the prospect of the Fed lifting rates in September. However on Tuesday the 10-year bond yield rose 7 basis points to 2.07%.

  • European markets also have fallen, with the Euro Stoxx 50 down 5.4% on Monday. However European markets rose strongly on Tuesday, with the Euro Stoxx 50 up 4.7% for the day, reacting to easing measures out of China.

  • The ASX200 fell 4.1% on Monday –to its lowest level since July 2013. On Tuesday, the ASX200 rose 2.7% and, as at 12pm Wednesday is roughly flat. For the month of August, the ASX200 is down 9.9%

  • The AUD is trading at $US0.713, its lowest level since April 2009, and has been on a steady depreciation path for the past year. AUD falls sped up post China’s easing measures announced Tuesday night.

  • Significantly, some currencies have seen a ‘flight-to-quality’ rally, with the Japanese Yen around $US119 against $US125 at the start of August. The EUR is back up around $US1.1530 from closer to $US1.10 at the start of the month.

  • Pressure has also been felt, however, in a number of emerging market currencies, with the Vietnamese authorities allowing the Dong to depreciate by 3.1% against the USD over the course of August, while the authorities in Kazakhstan allowed the Tenge to freely float leading to a depreciation of around 30% in the currency last week. The Malaysian Ringgit has depreciated by around 35% so far this year and is approaching levels last seen in the 1996 Asian-crisis period.

  • There has been some widening in US High Yield credit, mainly led by widening in energy names.

It is important to note apart from China there has been no signs of renewed economic weakness in the US, Europe or Australia.

 

What does the market volatility mean for your investments?

 

Accumulators:
It’s time in the market, not timing the market, that’s important. So if you can ride out the volatile times, you could have a smoother return over the long term. Diversifying your investments can help to defend against volatility and reduce risks. You can diversify across a variety of investment options.

 

It’s also important to manage your expectations. A slower global economic growth rate means a period of lower returns on traditional asset classes. Returns in the decade leading up to the recent Global Financial Crisis were abnormally high, so it’s important you don’t use these returns as the norm. It’s also a good idea to be aware of your own tolerance to risk so that you can assess new investment opportunities as they arise. So don’t be discouraged when you hear the word "volatile". Talk to your financial adviser today, to see what type of action best suits your investment plan.

 

Pre- and post-retirees:
If you’re in retirement or nearing retirement, it is understandable you want to protect your investments. After all, your investment returns play a vital role in funding your retirement. In times of volatility it’s easy to react emotionally. But now is the time to keep a level head and stick to your long term investment strategy. Trying to time the markets and responding to every market movement could leave you considerably worse off. It’s a good time to speak to your financial adviser and remind yourself that markets do recover. Don’t let short-term volatility get in the way of your longer-term needs.

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28
Aug 2015

The share market......what's going on?

The share market......what's going on?

Written by a Hudson Editor Hayley Mcleod

There is a great deal of talk and speculation surrounding the recent market downfall but at the end of the day it is a correction. We have had them before and we will have them again.

The best advice we can give you at the moment is DON’T PANIC. While the Chinese economy has slowed, resulting in the current falls, there is no crisis. With G20 finance ministers and central bankers meeting in Turkey next week senior economic figures in China have assured leaders that the world’s second largest economy is still strong and that the Chinese government is doing everything in its power to reinstate positive growth.

Since 1980 the market (as represented by the broad US based S&P 500) has only dropped more than 5 per cent 28 times. The chart below shows what usually happens within a week of a market correction (when the S&P 500 drops more than 5 percent) is that there will be a period of calm followed by a growth of around 1.65 percent in the four weeks following. It is important to note that over the next 12 weeks markets will usually see a growth of around 5 percent.

 

SOURCE: BloombergBusiness

While on average the growth over the 12 week period following a major drop is positive there has been precedence for negativity. In 1987 on the week ending the 16th October the market fell 9.12 percent and within the 12 weeks following dropped a further 13.90 percent. This is contrary to the norm and during the GFC on the week ending the 6th March the market fell 7.03 percent but in the following 12 weeks had made gains of 34.50 percent.

The current market fall has been the result of a flow on effect with US and European markets selling off heavily and the Australian resource sector suffering from a drop in iron ore prices.

We encourage all members to ride the wave that is the share market and look at all investing from a long term perspective. Those who have cash to invest should look at buying into the market while it is at these lower levels while those who have investments should watch their portfolio stabilise, as the table above indicates.

If you have any questions please do not hesitate to contact your adviser.

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