e

The Importance of Financial

Planning
Frank Gayton, National Practice Manager, Industry Fund Financial Planning

ey

white
ver

The Challenges of Growth

 Disclaimer
e

This material provides general information only. It is not based on your

specific circumstances. Before making a decision you should assess
your own financial situation and needs, and if necessary, consult a
financial adviser.

ey

white
ver

The Challenges of Growth

 The Importance of Financial Planning
e

•
Retirees today are facing unprecedented financial challenges in

dealing with
–
Appropriate asset allocation in current volatile times
–
Longer life expectancy
–
Consistent changes to laws
ey –
Centrelink complexity
white
ver –
Volatile markets
–
Income tax minimization opportunities
–
Difficulty in locating experienced advisers who are committed to
providing the “best advice” possible
–
Industry Funds v Retail funds

The Challenges of Growth

 Asset Allocation
e

•
Markets have been exceptionally volatile

•
Retirees who have been invested into equities have suffered
massive declines in value: falls of >15% are common
•
Many are not even aware of the losses to date as they cannot
comprehend statements
ey •
Our experience is that most may express understanding of risk, but
white in fact do not comprehend what this means
ver
•
The lesson we have learnt: most retirees are not comfortable with
losing any money

The Challenges of Growth

 Life Expectancy
e

•
In theory, life expectancy tables have not changed

•
In practice, many are living much longer
•
My oldest client is now 94
–
At age 89 we set up an annuity for 5 years (her life expectancy)
–
This expires in one month and income will stop
ey
–
Fortunately we had other investments otherwise she would have
white
ver lived her greatest fear of “outliving her capital”
•
My rule of thumb is to work on clients living at least 5 years longer
than life expectancy
–
65 y.o. male life expectancy is 17.7 years – plan on 22.7 years
–
65 y.o. female life expectancy is 21.15 years – plan on 26.15
years

The Challenges of Growth

 Changes to law
e

•
Only constant re Superannuation has been change

•
Example: as from 1/7/09: all withdrawals from Superannuation will
count as income
–
E.g. $20,000 cash withdrawn to buy new car, will probably be
assessed as income of $769 per fortnight
ey –
This could result in a single person losing $295 per fortnight of
white Age Pension for one year – yet assets have not changed
ver
•
Many other changes continue to induce mental fatigue and
suspicion amongst retirees

The Challenges of Growth

 Centrelink complexity
e

•
Centrelink is complex – amazingly so for ESL pensioners

•
Many simply cannot comply with Centrelink requests
•
E.g. who understands work credits for a Disability Support
Pensioner?
•
Unfortunately many Centrelink offices are skilled at losing paperwork
ey –
Record for one of my clients is 5 times
white
ver

The Challenges of Growth

 Volatile markets
e

•
We have all seem markets decline

•
Virtually nobody predicted such a fall
•
Most retirees were relying on financial planners to protect their
investments
–
Many planners were ill-equipped to cope with events as
ey focussed on sales: for many it is no sales no income
white
ver
–
Outcome was that many retirees lost large amounts
–
One of the worst: decline of $150,000 in 6 months on investment
of $800,000 with annual fees of $20,000
–
4/08: Planner recommended switching investments into
“separately managed account” so as to take advantage of the
excellent equity opportunities emerging!
•
MANY RETIREES HAVE NO IDEA HOW MUCH THEY’VE LOST!

The Challenges of Growth

 Income Tax Opportunities
e

•
Allocated Pension income is tax-free after age 60

•
This encourages planning
•
Let’s look at an example
•
Fred aged 60, salary of $80,000 with $300,000 in Super – Fred
needs $52,000 per annum or $1,000 per week
ey •
Let’s look at current situation vs recommended situation with
white
ver
planning

The Challenges of Growth

 Planning for Fred
e

Fred Now After advice

Gross salary $80,000 $80,000

Non-commutable TRAP Allocated $0 $30,000

pension
ey Salary sacrifice $12,847 $56,766
white
ver Assessable income $67,153 $23,234

Tax & Medicare $15,153 $1,234

Net income $52,000 $52,000

Net additional super contributions $10,920 $18,251

(less 15% contributions tax)

The Challenges of Growth

 Planning for Fred
e

Fred Now After advice

Gross salary $80,000 $80,000

Non-commutable TRAP Allocated $0 $30,000

pension
ey Salary sacrifice $12,847 $56,766
white
ver Assessable income $67,153 $23,234

Tax & Medicare $15,153 $1,234

Net income $52,000 $52,000

Net additional super contributions $10,920 $18,251

(less 15% contributions tax)

The Challenges of Growth

 Income Tax Opportunities
e

•
Amount of tax paid reduces

•
Total tax saving is $10,932 p.a. or $210 per week
•
Fred could even contribute $1,000 after-tax to qualify to receive the
Government Co-contribution of $1,500 this FY
•
Receiving advice enables tax paid to be legally reduced – it is even
ey possible for Fred to avoid paying any income tax or Medicare with
white the correct advice and provided he could live on $904 per week
ver
•
Imagine what can be done with a working couple
•
Who is likely to pay for and receive advice?
•
Does this disadvantage the less well-informed?

The Challenges of Growth

 Advisers
e

•
Current legislation requires that advice is “appropriate”

–
Does not require that this be in client’s “best interest”
•
Most advisers are paid by some form of commission
•
Advice is influenced by income to be received
•
Many advisers achieve very large incomes because of trail
ey commissions: $500,000 p.a. is not uncommon
white
ver •
Why would any recipient of this largesse want to change?
–
They will milk this as long as possible, but…
•
Some are waking up to the threat of Industry funds to their income
•
Peter sold his business because “the Industry funds are coming!”

The Challenges of Growth

 Industry Funds v Retail
e

•
Never underestimate the skill and persuasiveness of retail financial

planners
•
Many have been around for a long time and are excellent at what
they do
–
Consider “Storm Financial” and “Westpoint” - greed is a great
ey
motivator!
white •
Most Industry Funds will provide a better outcome for members –
ver
research has proven that over virtually every time period, but …
•
Industry Funds do not have the distribution retail funds do

The Challenges of Growth

 Industry Funds v Retail
e

•
My predictions:
–
Unless Government abolishes commissions on SG contributions,
many planners will continue to prosper on mandated
contributions
–
Consumers will continue to be disadvantaged
ey –
Planners will continue to prosper
white
ver
•
Question 1: does the SG legislation require employers to pay 9%
•
Does an SG contribution reduced by commission satisfy the SG
legislation requirements?

The Challenges of Growth

e

ey

white
ver

The Challenges of Growth