CONSOLIDATING DEBT. Other considerations Key considerations include:

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2 CONSOLIDATING DEBT Consolidating certain debts into your mortgage could enable you to save interest and pay off your debts sooner. With this strategy, you need to: increase the mortgage on your family home, and; use the extra funds to pay off other non-taxdeductible debts (such as a personal loan or credit card) where the interest rates are generally higher than home loan rates. By doing this you could potentially pay less interest, as the lower interest rate on your home loan will apply to all your debts, as the case study illustrates. Maintain overall loan repayments When consolidating debts, it s important you keep making at least the same overall loan repayments. Otherwise: it could take longer to pay off your combined debt, and; you could end up paying more interest over the life of the loan, despite the lower interest rate. Other considerations Key considerations include: You may need to pay refinancing costs, including loan application fees, stamp duty and early termination fees. You should ensure you have enough insurance to protect your income and cover loan repayments in the event of your death or disability. It s important your home loan offers features that can enable you to pay off the combined debt quickly, such as a 100% offset account 1 or a redraw facility 2. If it doesn t, you may want to consolidate your debts into a more flexible home loan.

3 Case study Carolyn and Ian are married with a young family. Their home is worth $600,000 and their debts total $415,000 (see table 1). They want to pay off their debts as quickly as possible and save on interest. After assessing their goals and current debt position, their financial adviser makes a number of recommendations. The first is that they consolidate their debts by: increasing their home loan from $400,000 to $415,000, and; use the extra $15,000 to pay off their personal loan and credit cards. By doing this, the home loan interest rate of 7.5% pa will apply to all their debts and the total minimum repayment will drop from $3,448 to $3,271 a month. Their financial planner also calculates that if they continue to pay $3,448 into the consolidated loan each month, they will pay off their debts sooner and save $17,914 in interest (see table 2). Note: If they make the reduced repayment of $3,271 per month, it will take them 20 years to repay their consolidated debt and the interest payments over this period will total $369,337, which is $27,741 more than if they hadn t consolidated their debts. This highlights why it s so important, when consolidating your debts, that you maintain the same total repayments rather than spend the interest savings. Table 1: Current Debts Debts Outstanding Balance Interest Rate Current repayments (pm) Home loan (20 year term) $400, % $3,153 Personal loan (5 year term) $10,000 13% $223 Credit cards $5,000 19% 72 Total $415,000 $3,448 Table 2: Separate loans vs consolidated loans Separate Loans 3 Consolidated Loan 3 Outstanding loan(s) $415,000 $415,000 Monthly repayments $3,448 $3,448 Remaining term 18 years 4 months 17 years 11 months Total interest payments $341,596 $323,682 Interest saving $17,914 A financial planner can help you assess all the issues that need to be considered and determine whether and how you could use your cashflow to pay off your home loan faster. ¹ An offset account is a transaction account that is linked to a home (or investment) loan and the balance is directly offset against the loan balance before interest is calculated. ² If your home loan has a redraw facility, you can make extra payments directly into your loan and withdraw the money if necessary. You should confirm with your lender whether any fees apply. ³ Assumptions: In both options, repayments of $3,448 are made for the life of the home loan. With the separate loans, payments are redirected to the home loan once the personal loan is repaid. Source: MLC. Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. Future Accountants and Adviser Pty Ltd is a Corporate Authorised Representative (No ) of MyPlanner Australia Pty Ltd AFSL No

4 DEBT RECYCLING As you pay down your home loan, you may want to consider progressively redrawing the equity you create to help you build long-term wealth. With this strategy, known as debt recycling, you: 1. Use the equity in your home to establish an investment loan (such as a line of credit) 2. Invest the borrowed money in assets such as shares either directly or via a managed fund, and 3. Use the investment income from the geared investment, as well as your surplus cashflow to reduce your outstanding home loan balance. At the end of each year, you then borrow an amount equivalent to what you ve paid off your home loan and use this money to purchase additional investments. This process is then continued each year until your home loan is repaid. After that, your surplus income can be used to acquire additional investments or pay down your investment loan. By using this strategy, you can: progressively convert your non-tax deductible home loan into a tax deductible investment loan, and build up an investment portfolio over time to help meet your long-term goals. Considerations for this type of strategy include: If you take out an interest-only investment loan, you can use more of your cashflow to reduce your home loan. Arranging a higher investment loan limit could enable you to avoid additional paperwork and fees when adjusting your loan balances each year. You should ensure you have enough insurance to protect your income and cover loan repayments in the event of your death or disability. Case study Greg, aged 45, and Jackie, aged 44, own a home worth $600,000 and they still owe $300,000 on their mortgage. Their after-tax salaries are $3,000 and $1,600 per fortnight and their combined living expenses are $4,800 per month. They want to maintain their lifestyle when they stop working. So, their financial planner suggests they

5 use debt recycling to complement the wealth they are accumulating in superannuation. They re comfortable with a total debt equivalent to 67% of their home value (i.e. $400,000). Given they currently owe $300,000, they use the equity in their home to establish an interest-only investment loan of $100,000 and invest the money in Greg s name in a managed Australian share portfolio. They also arrange for the investment income to be paid into, and the investment loan interest to be deducted from, their home loan offset account. At the end of the first year, after reducing their home loan by $40,299 they increase their investment loan by the same amount and use the money to purchase more units in Greg s share fund. They continue this process each year until their home loan is paid off six years from now. Then, for the next 14 years, they invest all their surplus cashflow (including the investment income and tax savings) in the share portfolio. The table below shows the benefits of this strategy over 20 years, when compared to paying off their home loan as quickly as possible and directing their surplus cashflow into a share fund once the home loan is paid off. By using debt recycling, Greg and Jackie will have an investment portfolio worth an extra $435,002 after Capital Gains Tax (CGT) and loans are paid (despite taking slightly longer to repay their home loan). After 20 years Debt recycling Repay home loan then invest Time taken to repay home loan 6 years 5 years, 9 months Value of investment portfolios (net of CGT) $2,612,423 $1,777,421 Outstanding debt ($400,000) Nil Net position after 20 years (after selling investments, repaying CGT and repaying loan) $2,212,423 $1,777,421 Case study assumptions: The Australian share fund provides an investment return of 9.4% pa (split 4.3% income, 5.1% growth and 77% franking). The home and investment loan interest rate is 7.5% pa. These rates are assumed to remain constant over the investment period. Greg and Jackie earn annual pre-tax salaries of $108,000 and $51,000 respectively. Salaries and combined living expenses are increased by 3% pa. CGT is calculated at a marginal tax rate of 47%, including the Medicare levy. A financial planner can help you assess all the issues that need to be considered and determine whether debt recycling suits your needs and circumstances.

6 DEBT MANAGEMENT USING CASHFLOW If you are currently spending less than you earn, you could use your surplus cashflow to save on interest and reduce your debt faster. Home loan interest is usually calculated on the daily balance, even though it may be charged against the loan less frequently. You can therefore reduce the average daily loan balance and save a considerable amount of interest by: redraw facility 2 ) to meet your living expenses during the month. The following should be considered when looking at using cashflow to reduce debt: Increasing the repayment frequency (e.g. from monthly to fortnightly). This can reduce your average daily loan balance even though the annual repayments remain the same. If you are considering salary crediting, check whether your payroll provider can pay your salary either directly into your home loan or a 100% offset account. Increasing the repayment amount. This involves using more of your surplus cashflow to pay off your loan sooner. Your lender may not allow you to make additional repayments into the fixed rate component of the loan. Crediting your entire salary automatically into your home loan or a 100% offset account 1 (if available). By doing this: Your salary hits your loan account sooner, having the same effect as increasing the repayment frequency. Your salary is immediately used to reduce the size of the loan, having the same impact as increasing the repayment amount. You may achieve a higher after-tax return than if your salary is paid into a cash account. This is because your salary will reduce the balance on which your home loan interest is calculated. As a result, you will effectively earn the rate of interest charged by your home loan and no tax is payable on these earnings. You can access your money (either from a 100% offset account or using the loan s You should ensure you have enough insurance to protect your income and cover loan repayments in the event of your death or disability. Case study Jessica and Roger have a home loan of $400,000 and are making repayments of $3,153 per month. Jessica receives a fortnightly salary of $2,700 after tax and Roger earns $1,800 after tax. Their combined living expenses are $5,000 per month (excluding loan repayments). The following table shows the results from three different strategies.

7 These include: Increasing the repayment frequency from monthly to fortnightly (by paying $1,455 each fortnight rather than $3,153 per month). Increasing the repayment amount by $20 per fortnight to $1,475. Crediting their entire salary into a 100% offset account and withdrawing money as required to meet their living expenses. By doing this, their entire surplus cashflow will be used to accelerate the repayment of their debt. By using the salary crediting strategy, Jessica and Roger could reduce their home loan term by over 5 years and save up to $198,875 in interest. Also, by paying off their home quicker, they ll build a considerable amount of equity in the family home each year. Assuming they then wish to build their wealth further, they could use this equity as security for an investment loan. Loan Term Total Interest Payments Before strategy 20 years $355,988 Changing payment frequency 19 years 2 months $327,721 Increasing regular repayments 18 years 8 months $317,021 Salary crediting 9 years and 10 months $157,113 Assumptions: The home loan interest rate is 7.5% pa. The home loan term is 20 years. Jessica and Roger earn annual pretax salaries of $94,850 and $58,550 respectively. Salaries and combined living expenses are increased by 3% pa. 1 An offset account is a transaction account that is linked to a home (or investment) loan and the balance is directly offset against the loan balance before interest is calculated. 2 If your home loan has a redraw facility, you can make extra payments directly into your loan and withdraw the money if necessary. You should confirm with your lender whether any fees or other restrictions apply. Source: MLC. A financial Planner can help you assess all the issues that need to be considered and determine whether and how you could use your cashflow to pay off your home loan faster.

8 BUSINESS INSURANCE Running a successful business takes time, money and lots of hard work. Insuring your business should be top of your mind when you re thinking about what might happen if you were totally and permanently disabled and couldn t work. No one wants to think about the what ifs but if you are a partner in a successful business, the what ifs can t be ignored. Perhaps you started your business with a group of friends and built your dream together? Perhaps you bought into the business, or inherited it from your family? Whatever your situation, the relationship you have with the key people in your business probably extends beyond your work. You ve shared the highs and lows of building and running a business as well as your personal ups and downs. You ve probably shared social occasions and know each other s spouse and children. In many ways, your lives are probably entwined. What if something happened to you or another partner in your business? What would happen to your business or family assets if you were to die or become permanently disabled? If you died, would your business partners be able to pay out your family/estate for your share of the business? Would your estate be liable for your business guarantees if you were to die or become permanently disabled? What would happen to your family if you were no longer bringing in an income? How would the business survive the loss of one of the partners? Now is the time to discuss the what ifs. It s also the time to put plans in place to decide what would happen if you or another business partner suddenly left the business or who would take over and how the business would be valued. Business insurance is not just about securing the future of your business it s also about securing the future of those you care about and who rely on you for financial support.

9 INCOME PROTECTION Who will look after your finances if you can t work due to sickness or injury? Health insurance may cover a proportion of your medical bills, but it won t cover your rent or mortgage and living costs. The majority of Australians have no trouble insuring their home and contents from fire, theft and weather damage. It makes a lot of sense to take out insurance on your home. amount payable is up to 75 per cent of your income. Things to consider when looking at income protection are: It s your biggest asset, right? Wrong... The average Australian could earn around two and a half million dollars in their lifetime, much more than the value of the average home. And yet the majority of income earners don t insure their largest asset their income earning capacity. 1 Your home, car, food, clothing, children s education all depend on your income. That s why for many the loss of income resulting from the inability to work due to sickness or injury can cause serious financial hardship. When you think of how your lifestyle could be affected, it simply doesn t make sense to overlook this important cover. Income protection insurance (also known as salary continuance) is designed to provide a regular income in the event that you are unable to work due to sickness or injury. Generally, income protection insurance provides a regular income during a period of disablement for up to a predetermined and agreed benefit period. The benefit The shorter the waiting period and the longer the benefit payment period, the more the insurance will cost. Income protection insurance is important when borrowing to invest (gearing), as it can help meet interest payments if you are unable to work due to illness or injury. Your insurance cover should be adequate for your needs. Under-insurance can present a serious problem. Workers compensation will only cover you for accidents or injuries that occur during working hours or for an illness that is a direct result of your employment. And, if your illness or injury is covered by workers compensation, be aware that the benefit is capped under the different state regulations. It s not just the bills When it comes to protecting your income, it s easy to forget that you re protecting more than your ability to meet mortgage repayments and put

10 food on the table. Your income isn t just about the bills it s about your future and how much you enjoy it. While your medical expenses might be covered by other insurance policies, income protection insurance can be used towards expenses like your mortgage or car payments. Income protection insurance makes sure you and your family don t have to lose your belongings or your home while you recover and try to get back to work. Also, if your disability will permanently stop you from engaging in your line of work, some income protection insurance policies will continue to pay out until retirement age. (Note: How long an insurance company will pay out depends on your individual policy. Some only pay for a year or so after the medical condition arises, so carefully compare income protection insurance policies before applying.) Even though income protection insurance might not pay the equivalent of your salary, it might pay enough that it will save your partner from having to take on another job to makes ends meet. Either that or it might be enough to enable them to stay home to help you through your recovery to get things back to normal as quickly as possible. Valuable features Your premiums are generally tax deductible making income protection Insurance cheaper. You can choose the waiting period that suits your needs. If you have money in the bank and manageable expenses you can reduce your premiums by choosing a long waiting period before benefit payments commence. However if you have large debts and couldn t easily cope with loss of income you can choose a shorter waiting period. You can choose a benefit period that suits your needs. You can cover your income right up until retirement age. Or only as long as you need to get past the years where you may accumulate the biggest debt. You can choose from a whole range of other benefit options, including the ability to increase your cover in line with inflation. How much is enough? To understand your needs, a financial planner will ask you to consider the following questions about your future: What does the future look like for you and your family? What plans are you making together that you don t want to have to break due to finances? Do you have plans to put your children through university, take holidays or buy an investment property? How much does your family s lifestyle cost you each month such as bills, mortgage payments, kids activities, etc? Do you have savings that you could easily access if you needed them? Once you ve started painting the picture of your family s future and the costs involved in raising a family and reaching your goals, you ll start to get an idea of how important insurance is to cover those needs!

11 LIFE INSURANCE Protecting loved ones is a natural instinct, but how can you protect them if you re not around? In the event of your, death life insurance helps your family maintain their financial position in the event of your death by providing your beneficiaries with an agreed lump sum. Life insurance can be critical for a secure financial future. In simple terms, you insure yourself for a particular amount and, in the unfortunate event that you die, the insurer pays that amount. The lump sum payment can be used to help with the repayment of debts, the covering of future needs (for example, the cost of children s education or long-term care), as well as providing funds for investment to generate an income or to keep your business afloat. We don t like to think about worst case scenarios but taking some time to consider the risks and having a contingency plan is like carrying an umbrella it can t stop the rain but can provide much needed financial protection during life s storms. Factors to consider when looking at Life Insurance are: You should make sure you have an adequate level of cover for your needs. Under-insurance can present a serious problem. Changes in your personal circumstances (i.e. taking on additional debt) often necessitate the need for higher insurance levels. Death benefits received via a superannuation policy may be taxed. Many, but not all, life insurance contracts allow a policy owner to nominate a beneficiary, or beneficiaries, to receive any life insurance policy proceeds being payable to the policy owner. Ensure you nominate your beneficiary and make changes as your circumstances change. Life insurance isn t complicated, and needn t be expensive. Even if you don t have dependants, life insurance can provide other benefits such as covering funeral expenses, tidying up your affairs, or providing someone you love with an inheritance.

12 MANAGING PERSONAL RISK Insurance forms a critical part of the financial planning process, providing financial security for you and your family. A sound financial plan will encompass both wealth creation and wealth protection. Life is full of unforeseen circumstances which can affect your plans. Insurance may help you to meet your financial goals and obligations if you lose your ability to earn an income. Insurance shifts the financial burden from you to the insurance provider who can afford to protect you because of the pooled premiums paid by their customers. Put simply, insurance is there to provide you with protection against the financial impact of an event such as death, disablement, serious illness or injury. Types of Insurance There are a range of insurance options available that can be tailored to suit your needs and personal situation. The most common types of insurance include: Income protection If you are unable to work due to illness or injury, income protection provides you with a monthly benefit. This is paid for an agreed period while you are unable to return to the workforce. The premiums that you will pay for this type of policy are generally tax deductible. If you hold your insurance within super, the superannuation fund can claim a tax deduction on income protection insurance premiums which can reduce the cost of the cover. Life insurance Life insurance helps alleviate the financial burden your family may be left with after your death. Usually paid as a lump sum, your dependants may use this money to assist with medical costs, funeral expenses or help secure their financial future. The cost depends on the amount of cover (age, gender and smoking status are also determining factors) you choose. The level of cover you have should be reviewed regularly to ensure it remains suitable. To decide on how much cover you require, you should consider the following: your children s school fees services you would require if you were unable to care for your children, such as a nanny how much your dependants would require to meet their day to day living expenses, and current liabilities, such as your mortgage. Total and permanent disablement (TPD) This is generally taken as an optional extra within a life insurance policy, but can also be arranged as a stand alone policy. In broad terms, it provides a lump sum in the event of a permanent disability that prevents you from returning to work. This lump sum can be used at your discretion to provide for your dependants, to compensate for the loss of

13 your income, repay your debts or cover capital gains tax liabilities. There are certain conditions that need to be met to receive a TPD benefit payment; these vary significantly between insurance providers. Before taking out TPD insurance it is important that you understand the conditions under which the insurance company will pay a claim. Trauma Trauma insurance is generally paid as a lump sum upon diagnosis of an eligible condition (e.g. cancer, heart disease), and the funds can be used at your discretion. You can use it to pay for additional medical care or to pay off the mortgage and relieve the financial pressure on your family. This benefit is paid to you when you are diagnosed with an eligible condition. This will ensure that you and your family have a lump sum to cover rehabilitation, carer costs or just day to day expenses when you most need it. Things to consider Should you get your life insurance within your superannuation fund? Many superannuation funds will provide you with the option of purchasing some level of insurance through the fund. You can potentially benefit from tax deductions and cheaper costs when you hold insurance within a superannuation fund. How much cover do you need and what type? You should ensure your cover is adequate and that you are not over, or under, insured. The kind of life insurance that you need depends on many factors such as your: lifestyle needs dependants, and personal financial circumstances. How are premiums calculated? Generally, premiums are based on the sum insured, age, sex, occupation, hobbies, smoker/non-smoker status, general health and option chosen. Premiums can be stepped (they change with age) or level (fixed for an agreed time), with assessment differing from insurer to insurer. Stepped premium your premium increases every year with your age. Level premium your premium generally does not change and is based on your age when the policy commences. While stepped premiums are usually lower in the early years, level premiums can be a more costeffective option if you retain the insurance for a longer period of time. If insurance cover is only required for a short timeframe, a stepped premium may be more appropriate and cost-effective. Source: Risk Adviser There is, however, often a wider choice of insurance cover available outside of your superannuation fund. Understanding insurance definitions It s important to understand your cover as it may help you avoid any complications if you or your estate need to make a claim. You should read and understand the product disclosure statement along with the entire policy document. If there s something you are unsure about, ask your financial planner to clarify it for you.

14 TPD INSURANCE Total and permanent disablement (TPD) is your financial back-up plan. It gives you the confidence to seize life s possibilities, knowing you ve made plans to secure your family s financial future... just in case! TPD insurance will provide a lump sum payment in the event you suffer an illness or injury which totally and permanently prevents you from working again. Broadly speaking there are two definitions of TPD: Own occupation The insured must show that they have a total and permanent disability that prevents them from working in their own occupation which they disclosed when applying for this cover. Own Occupation is a more liberal definition of disability because, even if you can work in another occupation, you may still be eligible to receive disability benefits. Own occupation coverage is often more expensive, and may only be available to individuals who have a clean medical history and work in a relatively risk-free occupation. Any occupation The insured must show that they are totally and permanently disabled and unable to work in their usual, or any other occupation for which they are reasonably suited by their education, training or experience. Any Occupation is often the cheaper option, however it can be more difficult to meet the requirements of this type of disability definition. Some insurers have a third definition available to clients a homemaker definition. Payment of benefits under this definition would be based on the proviso that the insured, through sickness or injury, is unable to do any normal physical domestic duties and will never be able to do so again. Factors to consider when considering TPD insurance are: Make sure you have adequate coverage. Changes in your personal circumstances often necessitate the need for higher covers of insurance. There may be taxation consequences where a disability lump sum superannuation payout is made. TPD insurance can provide a lump sum benefit which can be used in many ways, such as helping to pay for recovery and rehabilitation costs, such as refitting your home, enabling a partner or family member to reduce their work hours to care for you, paying for a professional carer or providing muchneeded funds to repay debts, and creating an ongoing income stream for the future.

15 TRAUMA INSURANCE It won t happen to me Maybe you re right. Maybe bad things only happen to other people. But that doesn t mean you want to risk being caught unprepared and uninsured. Some sobering facts: 134,174 people are expected to be diagnosed with cancer in % of those will live more than 5 years after diagnosis 1 Hospital departments in Australia dealt with more than 10 million patients in 2014/ in 4 hospitalisations required a surgical procedure. 2 Trauma insurance, also known as critical illness insurance, provides a lump sum benefit if the insured suffers a critical condition as defined by the insurance provider. Trauma insurance is designed to help you recover financially from a trauma or crisis, such as a heart attack, stroke, cancer or other life threatening conditions. Factors to consider when looking at Trauma insurance are: You should ensure your insurance cover is adequate for your needs. Under-insurance can present a serious problem. Critical illness cover is generally not held within super. However, this insurance type may be connected with other insurances that are held in super, which can reduce the administration and costs of implementing the insurances via separate policies. Workers compensation only covers work related injuries. Medicare and private health insurance do not cover all the costs. Health cover may be limited in the choice and flexibility of treatments. It often does not cover hospital and treatment expenses in full, and some conditions aren t covered at all. Out of pocket expenses such as the cost of a Carer and rehabilitation expenses aren t covered, nor is the income lost from time off work. Similarly, Government allowances and benefits often don t go very far in covering you against all the costs involved in a major accident or serious illness. Trauma insurance pays you a tax-free lump sum for a range of specified life-threatening illnesses or injuries. There are no restrictions on how the payment is spent.

16 RISK VERSUS RETURN Investment risk and return are closely related. In general, the higher the degree of risk associated with an investment, the higher the probability for greater returns, but also losses. Higher risk investments are more suitable for high growth or aggressive investors. Low risk investments on the other hand, such as cash, offer relatively lower returns because of the security of the investment and are more suitable for risk adverse or conservative investors. This is called the risk/return trade-off and is used as a guide to the asset allocation that is most appropriate for you. The long term risk/return trade-off between different asset classes is illustrated in the following graph: Types of risks Legislative risk is the risk that there are changes to government policy in terms of tax, superannuation and pension regulations, which are unforeseen at the time of the initial investment. Risk of not diversifying is the risk that if you put all of your investment into one asset class, a fall in that class will adversely affect the total value of your portfolio. With this in mind, any investments recommended should be consistent with your risk tolerance level. While most of us relate the term risk to the level of investment price fluctuation, there are many other factors to consider. This is primarily a concern if, at the time of the fall in the market, you need to draw on your capital. You may, therefore, be forced to sell some of your assets at the bottom of the market. Fortunately, each of the asset classes tend to run in different cycles, so if one is performing well, and another is not, your overall portfolio returns may be smoothed by investing across a number of different asset classes. Diversification is a strategy aimed at reducing the impact that any one asset class will have on your overall portfolio. Timeframe risk is the risk that your investments may not be suitable to your specific needs. It is

17 important to focus on two critical factors: your objectives and your timeframe for investment. Inflation risk is the risk that the value of growth in your income and investments may not keep pace with the rate of growth in prices (inflation). This is most likely to happen if you choose a very conservative investment. The risk is that you will achieve poor real return (inflation-adjusted return) on your capital. Market timing risk: Anticipating market movements can be extremely difficult, as no two business cycles are the same. A strategy of trying to time the entry and exit from investment markets will expose you to greater short-term volatility and there is a range of evidence to suggest such a strategy does not consistently add to returns over time. Generally speaking, it is time in the market that counts, not necessarily the timing. Investment risk: This is the variability, or volatility, in the level of investment returns. In general, cash is regarded as a low risk investment because investment returns are relatively stable. In contrast, shares and property are considered to be higher risk investments because returns frequently move up and down and investors are less certain of the return that they will receive. What you want to achieve from your portfolio will ultimately influence the style and level of risk that you will need to accept. At your review, your financial planner will consider the performance of investments and any changes in the asset allocation along with your objectives to determine any changes in risk within your portfolio.

18 INVESTMENT PLATFORMS Investing through a platform allows you to savour a smorgasbord of investment options, without being inundated by the administrative tasks associated with each investment. In simple terms, a platform is an administration service for your investments. Many people invest in a number of managed funds, resulting in a deluge of paperwork. Investing via a platform simplifies the management of multiple managed funds in your portfolio. Some investors also choose to invest through a platform to gain access to a range of investments that may not normally be available to retail investors. The benefits of investing through a platform include: Diversity and choice platforms allow you to spread the risk, investing in a range of asset classes through a variety of managed funds with some platforms also offering direct shares and margin lending (gearing). Depending on the complexity of the platform, this could give you access to a number of different fund managers, each providing a range of different investment options. Your investments are in one place without compromising on diversity, platforms can combine your investments under a single administration facility. You receive consolidated reports (simplifying your tax reporting), regular updates, and often 24- hour online access to your portfolio. In addition, the use of a consistent reporting style enables you to compare apples with apples when analysing the performance of your investments. Access to specialist and/or wholesale funds which would otherwise be outside your reach. For example, many wholesale funds have lower management fees but higher entry levels, such as a minimum investment of $500,000. While this puts the fund out of the reach for most individual investors, by using a platform, the minimum investment amount is generally a lot lower even as low as $1,000 in some cases. Flexible fees: some platforms provide flexible fee structures and certain fees may even be tax deductible. You retain control: over where your money is invested and, in consultation with your financial adviser, you can create the investment strategy that is best suited to your financial needs and goals.

19 As long as your money remains invested through the platform, you can instruct your adviser to switch investments or change your strategy at any time, online or over the telephone. Because of these added services and functionalities, however, you may incur an administration fee for using the platform. If you re thinking about investing through a platform, it s important to consider your circumstances. In terms of the fees/benefits trade-off, you should consider whether you will be better off using a platform or investing directly in the individual funds. Ask us for more information.

20 SAVING AND INVESTING Many Australians delay taking control of their finances because they don t have time, they find it too daunting or they may just not know where to start. The reality is that the sooner you take charge, the sooner you can start working towards achieving better results, especially in the long term. While this information highlights some factors to consider, and how these may impact your finances, it does not replace the need for ongoing financial planning advice that is tailored to your specific needs. Being a successful investor isn t difficult, but it is important to get the fundamentals right. So where do you start? In the short term, a savings safety net frees you up from the stress of living from payday-to-payday. Similarly, in tough financial times or when unplanned expenses arise, you can comfortably access your own savings instead of being forced to use more expensive options such as credit cards, loans and cash advances. In the medium term, a regular savings plan establishes a financial track record (which is essential when applying for finance), and can also help you to reach goals such as a holiday or a new car. In the longer term, effective saving and investing can help to improve your quality of life possibly supplementing your superannuation when you retire and allowing you to accumulate greater wealth. Getting started set goals If you don t set yourself personal financial goals, then how do you know what you are trying to achieve financially? Ask yourself what do you want to achieve? Remember, it is important to be specific and make your goals measurable so you can see the results. Ensure that the goals are attainable, realistic and within sensible time frames. If your goal is to save $40,000 in two years and you only earn $20,000 a year, then you re setting yourself up for failure. Once you have decided on your goals and their timeframes, then you can begin to make informed choices about how to work towards achieving them. Save first spend later Saving is easier if you commit to putting the money aside at the start of your pay period and spending what is left, rather than trying to limit your spending and saving the amount left over. An automatic deduction, either directly from your pay, or from your bank account a day or two after you get paid, is one of the easiest ways to set yourself up so that you save first. That way, you know exactly how much you have left to spend each pay period. Many people already do this as they have set up their mortgage payment this way.

21 Budgeting Budgeting is an essential tool to help you manage your personal finances and, most importantly, your cash flow. Budgeting requires you to list all your sources of income and all of your outgoing expenses. It is important that you re realistic. If you find you re spending more than you earn, the budget will help you to review your expenses and see what areas you may be able to reduce expenditure in immediately. Alternatively, if you have surplus funds, you can then use this money to establish a regular savings plan to work towards your personal financial goals. It s best to prepare a budget based on your pay cycles. If you have access to a computer, a spreadsheet is the best way to set up a budget so it can be updated if and when your circumstances change. If you re not sure what you spend, start by looking at bank balances and old credit card statements; you ll be surprised by what you see. Consolidate accounts Consolidating multiple accounts can reduce the fees and charges you incur and help you reach your goals sooner. Many of us have multiple accounts and probably don t even give it a second thought. For example, how many of us have two or more bank accounts? Or more than one credit card? Or even multiple superannuation funds as a result of changing jobs. If you re consolidating your superannuation, many funds offer investment choices, so you can still spread your risk within the one fund, without incurring multiple administration and management fees. Where to invest? For many people, a high-interest earning account or a cash management account, separate to your everyday banking, is a simple and effective way to start saving and to make your first foray into the world of investing. When you are ready to start looking at alternative investment options, there are four main asset classes to choose from: cash fixed interest property, and Australian and international equities (also known as shares). You can choose to invest directly in these assets such as purchasing an investment property or indirectly via a managed fund, which provides you access to multiple options, diversification and consolidated administration. Either way, your financial planner will be able to guide you towards the choice that is right for you. Ask us for more information. If you have multiple accounts with small balances and are finding it difficult to keep track of everything, now might be the time to consolidate and avoid paying multiple fees and charges.

22 SUPERANNUATION CONSOLIDATION How many super funds do you have? Chances are you are probably not keeping track of where your super money is invested. In fact, you could even be losing money right now. Consolidating all your super into one account puts you back in control of your retirement savings and it will save you account-keeping fees. If you have changed jobs, changed your name or moved house, chances are you may have lost track of where your super is invested. The Australian Taxation Office (ATO) estimates lost superannuation to be worth around $14 billion as at 30 June By tracking down and consolidating your super accounts, you will save having to pay multiple sets of administration fees. Over the years, this could add up to thousands of dollars towards your final superannuation benefit. Benefits of consolidating Reduced fees: paying only one administration and/or member fee means additional fees are not eating away your retirement savings. For example, if you re paying $5 per month in member fees on three different accounts, you re paying at least $180 per year in member fees. It s easier to keep track of the growth of your super savings by having your contributions go into one fund. What s more, you ll receive only one statement or fund update, meaning less paperwork to manage. It allows you to develop a focused and effective retirement investment strategy, as you don t have a number of neglected, smaller accounts that you lose track of, which get eaten away by fees and inflation. What should you do if you ve lost track of your super accounts? Lost super refers to super accounts where the member has simply forgotten about their account, or their fund has lost track of the member s contact details. In some instances, there may be super accounts in your name that you didn t even know existed. In Australia, complying super funds (funds which meet certain Government requirements) are required by law to notify the ATO of lost members. A member becomes lost when two written communications are returned to the super fund unclaimed. Lost members details are given to the ATO and their account balance is held by the super fund until claimed or, depending on the balance, it can be transferred to an eligible rollover fund.

23 If you ve lost track of one of your super accounts, you can start by calling the ATO s superannuation help line on and choose the lost members register option or visit Make sure you have your tax file number handy. Your financial adviser can also help you track down your super and consolidate it. Things you should consider Life insurance Your existing super fund may include life insurance, income protection insurance or other personal insurance. If you want to maintain the same or a greater level of insurance, check with your new super fund if this cover can be established before closing your existing super fund otherwise you may be in a position of having no insurance cover. Time out of the market It generally takes several weeks to close an existing super fund and transfer the funds to a new super fund. This is because the underlying investments in your existing super fund have to be sold and underlying investments in your chosen super fund purchased. During this time, a portion of your funds are likely to be invested in cash rather than your selected assets. This means if the value of your selected assets rise you won t get the full benefit, but if the value drops, you would receive a better return from the cash investment. Fees and costs All super funds charge fees. The fund s product disclosure statement outlines the fees and costs associated with exiting your super fund. Your financial adviser is not limited to any one superannuation provider; they can, therefore, provide you with advice on a range of superannuation funds and will always look to provide you with the most appropriate fund for your specific needs.

24 SELF MANAGED SUPERANNUATION The term self-managed superannuation fund otherwise known as an SMSF basically refers to do-it-yourself super. Having an SMSF means simply having control of how your superannuation is being invested, and it has recently become a popular method of saving for retirement. If you choose to go down this path, it s essential that you are aware of the administrative and compliance requirements of SMSFs. The information below should answer many of the questions and obligations specific to managing your own SMSF. Before you consider leaving your current superannuation fund to establish an SMSF, you should discuss your options in detail with a financial planner. What is an SMSF? An SMSF is a trust where funds or assets are held and managed on behalf of a maximum of four individuals, to provide future retirement benefits. Subject to certain exceptions, all members of an SMSF must be trustees of the fund or directors of the fund s corporate trustee. What are the benefits? The main rationale for establishing your own SMSF is the increased level of control you have, as well as the investment choice and flexibility. You become the trustee of your fund and therefore make decisions on your fund s investment strategy and the type of assets that are held within your fund. Your SMSF can also invest in almost anything, including investments not usually available in a public super fund (please note, however, that these investments are subject to certain limitations and legal restrictions). This will allow your fund s investments to be customised to suit the precise requirements of members, before and after retirement. Furthermore, similar to all complying super funds, an SMSF is taxed at a concessional rate. The top tax rate for investment earnings from your SMSF is 15 per cent. This tax concession, however, is only available for complying funds which are SMSFs that fulfil all the rules set out by the ATO, the Superannuation Industry (Supervision) (SIS) Act 1993 and the SIS Regulations. Things to consider Who are the governing bodies? The Australian Taxation Office (ATO) is responsible for overseeing the regulation of SMSFs. While the ATO s regulatory approach to SMSFs has been focused mainly on education and information, it is fast becoming more aggressive in its stance on fund compliance. Obligations and rules As an SMSF investor, you need to consider your fund s investment philosophy like any other super

25 investment, you will need to establish what the acceptable rate of return is and how much risk you are willing to take with your retirement savings. These are areas where professional management can be a good idea. As an SMSF trustee, you are required to regularly review the investment strategy of your fund and consider insurance for the members of your fund. Many investors who open an SMSF employ the services of specialist administrators to take on the difficult compliance activities on behalf of their fund. This is beneficial as they can still enjoy the investment control and flexibility without the added burden of administration. Your fund s compliance with superannuation law is vital and you are legally accountable for ensuring your fund complies with all the rules even if you pay for professional management. The main components of compliance for an SMSF relate to: how and when an SMSF is permitted to borrow in-house asset rules acquisition of assets from related parties, and conducting all dealings at arm s length. Sole purpose test The foundation of the SMSF regulatory system is the sole purpose test the sole purpose of your fund should be to provide retirement benefits to fund members. Separation of assets The assets of the fund must be separate to those of a business where one or more of the trustees are involved. For instance, if the trustee is declared bankrupt or if their business is placed in receivership and the assets are held in the name of that trustee, rather than being clearly held as a part of the fund, the fund risks the loss of the asset. The failure to separate assets is a clear contravention of SIS. Investments To assist in making sure the assets in an SMSF are available to produce retirement funds, SMSFs are limited in the investments they can make. However, one of the concessions that the SMSFs can enjoy, is the ability to invest up to 100 per cent of the funds assets in a business real property. The disadvantage of this, however, is the lack of investment diversification and liquidity. More restrictive rules apply to investments in personal use assets and collectables, that are in addition to the sole purpose test. Under the latter members cannot enjoy the benefit from the investment prior to reaching their retirement age. This means that unless strict conditions are met and must be removed from the fund like in the case of leasing the art to a member or related party, in line with the in-house asset and arm s-length rules the art cannot be displayed in the trustee s home or office. The in-house asset rules suggest that the particular investment can make up a maximum of 5 per cent of the fund s entire assets and the arm s-length requirement means that it should be leased to the related party at commercial rates. Trustee responsibilities It is of the utmost importance to meet trustee responsibilities, especially in regard to the SMSF holding its own bank account (and not personal accounts), and ensuring this account isn t overdrawn. SMSFs that comply with all regulations are demonstrating to the ATO that they are appropriately managed. It is also important to note that the costs associated with the management of the SMSF, including ensuring compliance with all regulations, generally means that fund members collectively need between $200,000 and $250,000 to make the exercise of establishing an SMSF worthwhile. This does not include the initial set up costs involved.