The season for cashed up aunties - is my advice sound?

[Nuzdeano]

Hi all,

I am looking for some feedback as to the advice I have given a relative in recent days.

Due to a loss in the family, I have a relo (Age 56) looking to invest about $1.2Million. She owns her PPOR.

She has seen a financial planner who has suggested putting it all into super "because it is tax free" however this option contains restrictions such as having to withdraw minimum pension levels based on her age. I think by age 90 if she takes up the super option, she is required to draw a minimum of 14% per annum as a pension which seems quite excessive.

She is looking for a 'set and forget' type investment. I have suggested that she forget this super option because it seems that the base will not grow much and if anything will be depleted over time.

I have suggested that she buys one IP worth say $300K to provide future capital growth (one IP shouldn't provide too much paperwork/management) and put the remaining $900K into blue chip ASX50 Shares with decent fully franked dividends. I figured that the dividends will just roll in and with this being her only income, she will receive a nice tax refund too each year from the franking credits.


Am I on the right track here?

Any ideas / suggestions on what you would be greatly appreciated.

Thanks
Dean

 

[stumunro]

As a fairly conservative approach, I think a cash deposit pays around 6.5% per annum which is around 78k per year!

Otherwise a few properties yielding around 5% less expenses wouldn't be a bad investment. . . Room to appreciate, and the capital is fairly safe.

Some others might be able to recommend some dividend shares, but her SANF has to be a factor, considering she isn't going to earn any more money and shares can be pretty volatile.

 

[Nougati]

I would definitely put some money into super as well. She can get up to 600K in over 2 years, tax-free in and tax-free out. Drawing a minimum pension is not a problem until age 65 as you can always put it back in until then. And the investments in the pension enjoy tax-free status as well...you can hardly beat that. Plus, within a SMSF she can still invest in the blue chip stocks you were talking about.

 

[stumunro]

Yeh you have to admit, the super tax free oppurtunities are hard to look past.

 

[twodogs]

Don't avoid super all together. Perhaps a financial planner is worth seeing, but only if they are a fee for service planner, otherwise the choice to put $1.2m in super may be biased towards their commissions and not your aunt's interests.

The rest in a mixed of property and MF to give some options as you described, sounds fine.

 

[jrc]

She wouldn't be able to put the whole amount into super in one go. She could put $450K in as an undeducted contribution. If this is invested in assets that give capital gain and she converts to a pension the capital gains would be tax free.

Also remember that after age 60 any pension or lump sum payments from super are tax free.

Look at some of Noel Whittaker's answers to readers in the SMH or Age newspapers and the Smart Money columnist in the Weekend Financial Review. That at least will give you an idea of some options and the questions your aunt needs to consider.

 

[Nougati]

people still see super as an investment class, such as shares or property, but it's just a vehicle, in fact the most tax-efficient vehicle there is, especially when you have reached retirement age.

you can invest in shares, property, managed funds, all within super!

 

[Sunfish]

Even if she selected the super she would then have to select a manager and which particular fund and it's and that becomes a bit bewildering.

I would advise my aunt to have a mix of 25% cash funds (would need the FP to check what TYPE of cash they hold), 25% hedged international share funds (they are super funds, of course) and the rest in dividend paying shares but widened to the top 200 but underweight banks. (surprise ).

This is not the definitive answer, just a starting mix.

 

[Nougati]

Sunfish, that's weher you are wrong like most people.

A super fund is not a managed fund, it is a vehicle that you use to invest in managed funds. If she for example established a SMSF, she could have cash, managed funds and property all within the same structure, and if she rolls it to pension phase straight away, she would never have to worry about tax ever again.

 

[Nuzdeano]

Thank you all for your interest and responses.

Some good advice there.

Nougati & stu, I see your point about the tax free benefits of super.

Maniyak, good point on whether the fin planner is charging a fee for the service or receiving on going comms. I will double check that.

jrc, i see your point about not being able to put it all into super, perhaps some diversification is required to help that SANF.

sunfish, ditto the diversification within super.

Thanks again all, that has opened my eyes alot further (i'm taking my blinkers off now).

Cheers
Dean

 

[Xenia]

I wouldn't waste one single cent in super! But in saying that, the fact that she HAS to ASK where to invest her money would suggest that super is the safest option for her!

The real estate market is a metaphore for your own mindset and if you can't see opportunity you probably dont have the right mental contex to invest!

 

[Sunfish]

Sunfish, that's weher you are wrong like most people.

Be careful when you say someone is wrong. They may not appreciate it, as I don't.

Re-read this: Even if she selected the super she would then have to select a manager and which particular fund and it's and that becomes a bit bewildering.
OK my editing was bad but I do understand funds.

And are you really going to recommend your retired aunt to open a SMSF? Learn some manners.

 

[alexlee]

Nuzdeano, have you asked your aunt what she wants to do with the money? There's no point in suggesting all these plans if she's just going to be scared of the risk (or think it's too conservative!)
Alex

 

[Nuzdeano]

Alex,

She wants to preserve the capital which we assume will grow over time and live off the returns of investing it whether that is an allocated pension from super, dividends from shares, rent from property or perhaps a cash deposit (no growth with cash if she spends the interest each year).

Dean

 

[redsquash]

Sunfish, that's weher you are wrong like most people.

A super fund is not a managed fund, it is a vehicle that you use to invest in managed funds. If she for example established a SMSF, she could have cash, managed funds and property all within the same structure, and if she rolls it to pension phase straight away, she would never have to worry about tax ever again.

Nougati you bare spot on . IMHO
a SMSF with the high, intial costs and on going costs , would still be the easy to go.
investing in shares or geared property is by far and away the best solution particularly since sept 2007 when the law on smsf and gearing of property changed.

 

[alexlee]

She wants to preserve the capital which we assume will grow over time and live off the returns of investing it whether that is an allocated pension from super, dividends from shares, rent from property or perhaps a cash deposit (no growth with cash if she spends the interest each year).

That's a generic answer that doesn't tell you anything. That's basically covered the entire risk/return spectrum. How much risk is she willing to take? She wants to preserve her capital. What does that mean? Does that mean she never wants to see the principle go down? Is she the type who will keep checking the balance on her accounts to see 'how she is doing'? Will she, for example, freak out if you tell her that her shares dropped 20% in a matter of months, as it has done recently? These are hard questions that, quite frankly, a family member is probably not the best person to discuss with.

Perhaps most importantly, how much does she need / want a year to spend? If it's, say, $50k, then with $1.25m assets excluding the PPOR you can be pretty conservative. If she wants $100k, then inflation becomes a bigger risk.

How comfortable is she with volatile share prices, for example? How long does she expect to live, and how realistic is she about what returns she can get from the portfolio?
Alex

 

[ethereal]

Hi Dean,

It is an interesting coincidence that I am helping a friend (not related) with a very similar problem if you can call it that. My friend is 54, widowed, owns PPOR and one IP, no debt and $850k cash. I met with her and her accountant 2 days ago to discuss options with super.

She will have a SMSF - cost to set up - $800, cost to run/annum - $1500.
Not sure if this is normal as the accountant is a friend of the family also.

Friend wanted to invest in shares, considering the SANF/risk tolerance, I helped her to open an account and put in 50k late last year to 'get a feel' for what it is like to experience the normal volatility that goes with direct share investing. Through the recent turmoil, SANF is all good, in fact she has been callng me saying she thinks it is a good idea to buy more while the market is down, so I believe she can cope.

What we are looking at doing is this,
* Keep IP (self managed) outside the SMSF. Use rent as income.
* Do not buy more property - she just sold a block of flats and does not want the tenant dramas. I don't blame her.
*contribute to SMSF $100k decucted?? to reduce CGT payable on sale of flats
*contribute max allowable undeducted ($450k?) this FY.
*Funds in the SMSF will be split about 50/50 cash/australian shares.
* shares will be selected from ASX 100, paying a good fully franked dividend (for income) and include resource stocks, such as BHP and RIO, (even though they do not pay a good dividend).
*Funds not in the SMSF will be used to improve her PPOR (and buy a plasma - you only live once I suppose) with the remainder invested in dividend paying shares due to the terrible way interest is hit with tax.

The accountant suggested some strategies for minimising tax for this FY, but many of them would increase the risks beyond what friend considers comfortable. One was to take out a $500k margin loan and prepay interest (potentially leading to yet another tax problem in future) and investing in Almonds for goodness sake, with a 12% entry fee. I reckon one may as well make pretty green confetti with $100 bills.

I would like opinions on how to go about buying the shares - dive in soonish with the lot or stagger the entry over months/years?

Louise

 

[Nuzdeano]

That's a generic answer that doesn't tell you anything. That's basically covered the entire risk/return spectrum. How much risk is she willing to take? She wants to preserve her capital. What does that mean? Does that mean she never wants to see the principle go down? Is she the type who will keep checking the balance on her accounts to see 'how she is doing'? Will she, for example, freak out if you tell her that her shares dropped 20% in a matter of months, as it has done recently? These are hard questions that, quite frankly, a family member is probably not the best person to discuss with.

Alex, Yes, she does not want the principle to go down. She is not the type to be checking balances every week to see how much she has gained or lossed. What is important is just to see a long term trend to grow the capital

Perhaps most importantly, how much does she need / want a year to spend? If it's, say, $50k, then with $1.25m assets excluding the PPOR you can be pretty conservative. If she wants $100k, then inflation becomes a bigger risk.

From our discussion, $50K will be enough for her to live on - will take on your comments about being conservative

How comfortable is she with volatile share prices, for example? How long does she expect to live, and how realistic is she about what returns she can get from the portfolio?
Alex

I have discussed with her that share prices will fluctuate and that her timing is excellent for buying shares, I have told her she should expect 7% return as a ball park figure. In terms of her life expectancy, who knows but she seems fairly healthy, i guess average life expectancy is mid 80's for a woman so another 20 years perhaps 30 years

 

[Nuzdeano]

Hi Dean,

It is an interesting coincidence that I am helping a friend (not related) with a very similar problem if you can call it that. My friend is 54, widowed, owns PPOR and one IP, no debt and $850k cash. I met with her and her accountant 2 days ago to discuss options with super.

She will have a SMSF - cost to set up - $800, cost to run/annum - $1500.
Not sure if this is normal as the accountant is a friend of the family also.

Friend wanted to invest in shares, considering the SANF/risk tolerance, I helped her to open an account and put in 50k late last year to 'get a feel' for what it is like to experience the normal volatility that goes with direct share investing. Through the recent turmoil, SANF is all good, in fact she has been callng me saying she thinks it is a good idea to buy more while the market is down, so I believe she can cope.

What we are looking at doing is this,
* Keep IP (self managed) outside the SMSF. Use rent as income.
* Do not buy more property - she just sold a block of flats and does not want the tenant dramas. I don't blame her.
*contribute to SMSF $100k decucted?? to reduce CGT payable on sale of flats
*contribute max allowable undeducted ($450k?) this FY.
*Funds in the SMSF will be split about 50/50 cash/australian shares.
* shares will be selected from ASX 100, paying a good fully franked dividend (for income) and include resource stocks, such as BHP and RIO, (even though they do not pay a good dividend).
*Funds not in the SMSF will be used to improve her PPOR (and buy a plasma - you only live once I suppose) with the remainder invested in dividend paying shares due to the terrible way interest is hit with tax.

The accountant suggested some strategies for minimising tax for this FY, but many of them would increase the risks beyond what friend considers comfortable. One was to take out a $500k margin loan and prepay interest (potentially leading to yet another tax problem in future) and investing in Almonds for goodness sake, with a 12% entry fee. I reckon one may as well make pretty green confetti with $100 bills.

I would like opinions on how to go about buying the shares - dive in soonish with the lot or stagger the entry over months/years?

Louise

Hi Louise,

Thanks for your response, a SMSF is a great alternative -that way she has more control rather than some financial planner placing restrictions on her for the long term.

In terms of diving in soonish, I reckon that is the way to go. The way I see it, shares have fallen so much already, there is a great opportunity to buy now - if they continue to fall the losses would be to a minimum and likely to rebound in any case.

Dean