16
Oct 2015

ALL Hudson members must read this

ALL Hudson members must read this

Written by Hudson Editor Hayley Mcleod and Advisers

Hudson members pay for a lifetime membership with us but unfortunately many believe that if they do not have disposable income to invest we cannot help them; but this isn’t the case.


We have had several members ring in recently who are paying high home loan interest rates or high premiums on their insurance policies and by working with the team here at Hudson we have been able to reduce these expenses and thus save them hundreds, if not thousands of dollars a year. 

Our advisers at Hudson can also work with you towards planning for your retirement. I am 34 years old and my husband and I are already working towards a profitable and relaxing retirement, knowing that by the time we retire there may not be such a thing as the “age pension”. 

If you feel that budgeting isn’t your strong suit then we can definitely help you achieve your financial goals via our budgeting spreadsheets and advice.

How we can help you if.....

You are under 30 and don’t have a home loan:

When you are under 30 and don’t have a home loan, for most, saving is their first priority. Your Hudson adviser can help you work on a budgeting strategy in line with your income and living requirements while helping you save for your first home or an investment. Once you have that initial deposit our award winning mortgage brokering team can help you get the best rate for your loan. 

Over 30 and have loans but no savings:

You are over 30 and have a home loan, possibly school fees and are struggling to make ends meet. You would like to invest but don’t think you will ever have the funds available. Have a chat to one of our advisers to discuss the options available to you. We can discuss salary sacrificing, budgeting and ways in which to restructure your loans to maximise your savings potential.

This is the time in your life you should also be looking at the insurance options available to you and your family to protect your income in the event of illness, disability or death. 

Over 60 with a home loan and thinking about retirement:

A great recent example of a member’s phone call to one of our adviser’s. We have a lot of members 60+ who have set up Pensions and enjoyed "savings" in a tax free environment. They have not missed out on the cash flow front as they have used their pension to shore up any salary sacrifice contributions or have simply not salary sacrificed and contributed their pension straight back to Super. Here is one such recent example: 

Member X: 
  • Age 60
  • $175k in their Super in accumulation phase.
  • Income of $78k p/a.
  • They were not salary sacrificing.
One of our adviser’s has converted Member X’s $170,000 of Super to Pension phase. The investment mix remained identical. We structured it so that the pension account paid the maximum allowable of 10% to be paid fortnightly. The maximum is 10%, so this is $17k p/a, or approx $655 p/f. We also instructed Member X's paymaster to salary sacrifice $26,000 a year, or $1,000 per fortnight. In doing this, M X's take-home-pay however only dropped by $655 (because it would have been taxed at 34.5%).

As such Member X's pension income approximately matches and, therefore, replaces the shortfall in his take-home pay.

The difference, however, is that for the $1,000 per fortnight salary sacrificed Member X pays 15% contributions tax into Super, AS OPPOSED TO 34.5% income tax. This is effectively a guaranteed return of 19.5% on $26,000 p/a, i.e. over $5,000 a year.

While Member X continues to work, this is $5,000 a year that is clawed back from the ATO in a completely legitimate fashion. It could be a suitable strategy for anyone over the age of 60 that is still working.

We also have access to exclusive residential properties available to purchase “off the plan” that could be included as part of your retirement strategy.

Post retirement:

We can discuss with you the many options available for you to not only invest your superannuation with a diversified portfolio but ways in which you can keep some or all of your assets and still receive the age pension. 

Here are a few investment options available using the example of Reginald Ready……

In current conditions, it’s all about saving money where you can, but also capitalising on opportunities as they arise and as you can afford them. This week we look at Reginald and changes he can make in his portfolio to maximise his cash flow and improve his overall structure. He is also wanting to accelerate his asset position over the next 14 years and structure his existing assets more effectively so that he is making the most his current position.

Reginald is 41 years of age, single with no dependents, earning wages of $74,000 per annum as an engineer with the following assets and liabilities:

Over 3 different accounts*

* has a total of $200,000 life and TPD insurance across his superannuation accounts - no other personal insurance. Reg is fairly confident about the security of his current employment position. He has a surplus cash flow of approximately $10,000 per annum. He has nominated himself as a growth investor and is comfortable using the equity in his principle residence for additional investment assets. 

Let’s look at Reg’s finance structure

He currently has a principle and interest loan of $260,000 against his main residence and is benefiting from a 0.5% discount of the standard variable interest rate via a major lender. So no change required here. 

However, he also has a $20,000 cash buffer in a high interest bearing account earning 3.25% per annum on which he ultimately pays tax. A more effective use of this $20,000 is to use a 100% offset account against the $260,000 – there are several benefits in taking this approach: 
  • The principle on the $260,000 is reduced by the $20,000 offset account to $240,000 (interest therefore only accumulates on the $240,000 balance of the loan).
  • Repayments continue to be made on the entire $260,000.
  • The $20,000 ceases to generate taxable income as it was doing in the high interest bearing account.
SO – why generate interest at 3.25% before tax from the $20,000 when Reg could offset debt and effectively get a 5.24% return tax-free? 

$20,000 @ 3.25% = $54.16 per month less tax @ 31.50% = $37.10 per month
VERSUS
$20,000 @ 5.24% = $87.33 per month
Saving = $50.23 per month

Let’s look at Reg’s margin loan

Reg currently carries a margin loan of $70,000 against his shares of $180,000. He established this margin loan against existing shares he held, prior to purchasing his current principle residence.

Whilst margin loans are an effective way to leverage, particularly for individuals with only cash or shares available to be used as security, there are a number of issues to consider. The biggest threat for those with a margin loan is the margin call. As we are witnessing in current times, that risk of margin call is raised when the share market drops and the margin loan as a percentage of the investment value increases. The only remedies for the margin call are to reduce the loan amount using cash, by pledging additional securities or, worst case, by selling investments.

The other big factor regarding margin loans is the higher interest rate – currently 7.99% which is almost 3.00% above the average bank’s discounted variable interest rate.

For individuals who have equity in property, they can access this equity instead of using a margin loan to leverage shares. Things to consider are:
  • Whether a bank will lend you the money, based on your current assets and liabilities position and serviceability requirements.
  • Whether you are psychologically comfortable using your property as security for the borrowings.
Reg has confirmed he is comfortable using his home as security for investments, and given his income and asset position, will not have a problem accessing his equity. 

SO – why pay interest at 7.99% on $70,000 with the added risk of margin calls, when Reg could use the equity in his principle residence to payout the margin loan and pay interest at 5.29%?


$70,000 @ 7.99% = $466.08 per month 
VERSUS
$70,000 @ 5.29% = $308.58 per month
Saving = $157.50 per month

Let’s look at Reg’s superannuation funds

Reg currently has a superannuation balance of approximately $110,000 currently spread over three superannuation accounts. One of the most overlooked issues regarding superannuation is consolidation. Because of the nature of superannuation funds you will almost always be liable to pay fees and charges for the account – from yearly membership fees, to account keeping fees and ongoing management fees. As Reg has superannuation across several accounts his fees and charges are eating into his total superannuation balance.

So consolidating the funds into just one entity will more often than not reduce fees (not to mention paperwork). He has three options regarding under which structure to invest his funds:
  • Self-Managed Superannuation Fund – the Australian Tax Office suggests that in order for a SMSF to be competitive and feasible when compared with an APRA-regulated fund, the account balance needs to be around $200,000. So on fees alone, a SMSF is not advisable for Reg. Other issues to be considered regarding this type of superannuation fund is the amount of time needed to devote to managing your own super, as well as the skills required.
  • Industry Superannuation Fund – industry super funds are widely regarded as being low cost, but often the investment choice is sacrificed. Industry superannuation funds are a good choice for individuals with a lower account balance, where a pre-determined investment option would suffice, however, it may not be appropriate for those with larger account balances who want greater relative control over their investment options.
  • Retail/Wholesale Superannuation Fund – although these products may be slightly higher in overall fees, with a balance of over $100,000 Reg is able to access Wholesale ongoing fees (a significant saving). The other advantage to these products is the broad range of investment choice – often in excess of 100 different investment options, ranging from conservative through to boutique, specialised and even geared options. This can be particularly beneficial for individuals with larger account balances who wish to tailor a more specific portfolio.
As Reg is a growth investor, looking for ways to maximise his assets over the next 14 years, there is scope for him to consider a Wholesale superannuation fund with more flexibility and capacity to leverage. 

Let’s look at Reg’s personal insurances

Along with budgeting, personal insurance is one of the most underrated steps in the financial planning process, but is the cornerstone in creating and protecting wealth.

Reg currently has $200,000 worth of life and total + permanent disability cover via his superannuation funds. As he has no dependents, his level of life insurance cover should at the very least be equivalent to his debt level so as to extinguish it in the event of death. So this needs to be addressed.

Reg has no income protection insurance. This is an absolute must for someone in his position. As clichéd as it sounds, Reg’s biggest asset is his ability to generate an income. Without this income, Reg’s financial position will be severely impacted – his debts will still need to be paid and his lifestyle expenses will still need to be met. Income protection premiums are tax deductible and Reg can use the savings we have identified in other areas to fund this valuable expense. We will explore Reg's finances in further detail next week.... stay tuned! Read in full + comments 0 Comments

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