Ten Tips for Managing Debt

Posted on June 27, 2024 by Arrowroad

Introduction:
There may be times when you add up all your debts or look at your credit card statement and have a bit of a panic. To help you manage your debt position, here are ten quick and easy tips.

1. Consolidate Your Debts:
Pool all your debts into one. This can reduce your overall interest cost, especially if you combine high-interest credit cards into a line of credit facility. However, if the line of credit is attached to your mortgage, you might be eating into the equity on your home, which may not always be wise.

2. Use a Consolidated Cash Account:
Set up your income sources, including your salary, interest, dividends from investments, and rental income, to be paid into one consolidated cash account such as a cash management trust (CMT) or high-interest cash account. Organise for all loan repayments to be deducted from this account automatically, taking the worry out of paying on time.

3. Draw Up a Budget:
Knowing what you spend, what you earn, and the difference between the two is crucial. Detail essential and non-essential expenditures. If you fall short of meeting bills and debt repayments, you’ll know where to cut back. The reduction may only need to be temporary until your debts are under control.

4. Use Taxation Benefits:
While tax alone shouldn’t drive investment decisions, lower tax can help boost your effective returns. Consider how you can maximize the tax effectiveness of your investment decisions. For instance, the 50% reduction in taxable profit if you sell an investment held for at least 12 months can increase returns, aiding in debt repayment.

5. Be Smart with Lump Sums:
When receiving a lump-sum payment like a tax return, inheritance, or windfall gain, resist the urge to splurge. Use the money to reduce your debt to more manageable levels for long-term satisfaction.

6. Get Smart with Credit:
A credit card with an interest-free period and a drawdown facility on your mortgage can be advantageous if used wisely. Pay your salary into your mortgage and use your credit card for all expenses, then draw down from your line of credit each month to pay the credit card bill just before the interest-free period ends. Ensure you don’t spend more than your mortgage input to avoid financial setbacks.

7. Be Wary of “Interest-Free” Offers:
These offers can be traps as the interest rate on outstanding balances at the end of the interest-free period is typically high. Penalties may also apply for late payments. Ensure you have adequate cash flow to repay the loan before the interest-free period ends.

8. Be Cautious with Short-Term Lending Facilities:
Payday lenders and money exchange services can be very costly. These should only be used as a last resort due to their high-cost loans.

9. Keep an Emergency Fund:
Maintain a small cash reserve for unforeseen circumstances. This will protect you from having to resort to costly, short-term lending arrangements.

10. Automate Your Debt Payments:
Talk to your employer about having your salary paid into multiple accounts, including debt accounts, for better income flow management. Alternatively, set up automatic deductions from a nominated account to pay outstanding debts. Ensure the account has enough funds to avoid dishonour fees from the bank.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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Understanding Transition to Retirement Pensions

Posted on June 26, 2024 by Arrowroad

If you have reached your preservation age, you can use a transition to retirement pension to access your superannuation as a non-commutable income stream while you are still working. This may be particularly attractive if you have reduced your working hours and need to top up your income to maintain your standard of living.

What Is a Transition to Retirement Pension?

Transition to retirement pensions allow you to access your superannuation as a non-commutable income stream after reaching preservation age, but while you are still working. The aim of these income streams is to provide you with flexibility in the lead-up to retirement. For example, you may choose to reduce your working hours and at the same time access your superannuation as a transition to retirement pension that can supplement your other income. It may also allow you to salary sacrifice or claim tax deductions for contributions to give your retirement savings a boost.

Not all superannuation funds offer transition to retirement pensions, so you need to check with your own fund to see if they do. You can also start one in a self-managed superannuation fund.

Are There Any Special Characteristics?

These pensions are essentially like a normal account-based pension, but with three important differences:

  1. Non-Commutable: They cannot be converted into a lump sum until you satisfy a condition of release, such as retirement or age 65.
  2. Withdrawal Limits: You have a minimum pension amount you must withdraw each year, but you can only withdraw up to 10% of the account balance (at 1 July). No lump sum withdrawals are allowed.
  3. Tax on Earnings: The earnings continue to be taxed at 15% in the fund, regardless of the start date.

What Is My Preservation Age?

Your preservation age is generally the date from which you can access your superannuation benefits and depends upon your date of birth:

Date of BirthPreservation Age
Before 1 July 196055
1 July 1960 – 30 June 196156
1 July 1961 – 30 June 196257
1 July 1962 – 30 June 196358
1 July 1963 – 30 June 196459
After 30 June 196460

How Are Transition to Retirement Pensions Taxed?

The earnings on investments that support a transition to retirement pension are taxed at the normal superannuation rate of 15%.

In relation to the income payments you withdraw, while you are under age 60, the taxable part of your pension payments received are taxed at your marginal rate, but you receive a 15% tax offset if your pension is paid from a taxed source*. Once you reach age 60, your pension payments are tax-free if paid from a taxed source*.

*Most people belong to a taxed superannuation fund. Some government or other defined benefit superannuation funds may be untaxed, and you will pay higher tax on these pensions.

Is a Transition to Retirement Pension Right for You?

Transition to retirement pensions can provide you with flexibility in the years leading up to your retirement and may help to boost your retirement savings in some circumstances.

You may find transition to retirement pensions attractive if you:

  • Have reduced working hours from full-time to part-time and want to replace the forgone salary with an income stream from superannuation.
  • Are able to salary sacrifice or claim deductions for contributions and the amount you draw as income is less than you contribute back into superannuation.

Contact Us Today! The transition to retirement rules and associated strategies can be very complicated. Please contact our office before deciding if this type of income stream and strategy is right for you.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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Business Succession Planning

Posted on June 26, 2024 by Arrowroad

Introduction:
Are you carrying on a business with one or more business partners? Have you considered who will assume control of that business in the event of your death? And how to protect your family to ensure they get fair value for your share of the business? It is important that every business owner has a succession plan in place to cover what would happen upon their death or another trigger event.

Importance of a Succession Plan:

Commonly, if you are in business with someone else, this will involve entering into a buy/sell agreement supported by life insurance policies on each partner’s life. The proceeds from the life insurance policy provide the funding to enable your partner(s) to buy the business. The buy/sell agreement (which should be drafted with the assistance of a solicitor) spells out when one of the owners must leave the business or can choose to leave and how they can expect the business to be valued.

Key Considerations for a Business Succession Plan:

When making a business succession plan, you should consider the following questions:

  • What is to happen to the business if you pass away or become disabled – will a family member take over your share, will your share be sold to the remaining partners, or will it be liquidated?
  • What events should trigger implementation of the agreement – for example, death and/or total and permanent disability? What about other events?
  • How will the business be valued – what method will be used, and will you consult professionals to calculate the value?
  • How will the sale of your share of the business to the remaining partners be funded?

What is a Buy/Sell Agreement?

A common way to ensure the smooth transfer of control of a business between partners is to enter into a buy/sell agreement. The agreement is usually structured so that the remaining partners will purchase the share of the business of the partner who is leaving due to the specified event, such as death or disability. This can be done either by way of options or by using a conditional contract. The agreement is usually linked to an insurance policy on the partners’ lives. The proceeds from the policy provide the funding (all or some) to enable the remaining partners to buy the deceased’s interest at the value nominated in the agreement. The transfer of ownership of the deceased’s interest in the business will result in a CGT liability. The transfer will be deemed to take place at its market value. The small business CGT concessions may be available to reduce the CGT liability.

Why Use a Buy/Sell Agreement?

A buy/sell agreement is a tool to help business partners agree on what might happen in the future and how to best protect all of their interests – both for themselves and their families. It can avoid disputes at a future point in time and provide certainty for planning. Business owners should discuss their succession plans with each other to ensure they are each comfortable with what will happen to the business and who might take over control. If a buy/sell agreement is not entered into, control of the deceased person’s interest in the business will pass to that person’s beneficiaries. This may cause problems for the surviving partners of the business as well as for the deceased person’s beneficiaries.

Traps in Relation to Buy/Sell Agreements:

If you enter into a buy/sell agreement, care needs to be taken to ensure:

  • The agreement is regularly reviewed, checking that it still meets your needs and ensuring the formula or method used to calculate the purchase price of the business correctly reflects the value of the business, and
  • The life insurance policy is also updated as the business grows so it will provide sufficient money to enable the purchaser to buy the business.

The insured benefit under the life insurance policy might be set at a level to cover the sale of the life insured’s share of the business but can also be set to provide additional funding to allow:

  • The beneficiaries to pay any CGT liability which may arise as a result of the sale, and
  • Debts owed by the business to be repaid.

Case Study:

Brett and Luke are co-owners of a sports store. If Brett was to die suddenly, and there was no business continuation plan, Brett’s widow, Evette, would inherit half the store. Evette does not know anything about running a business, and she does not like Luke. This is not likely to be a harmonious partnership. A better outcome may have been achieved if Brett and Luke had a business succession plan with a buy/sell agreement. Under the agreement, Luke would have to buy Brett’s interest in the business, with the help of funding from a life insurance policy held on Brett’s life. This would allow Luke to become the sole owner of the business and Evette to receive cash as fair value for Brett’s share of the business. Luke would have full control of the business and Evette would have cash to move on with her life.

Next Steps:

There are many options for structuring the buy/sell and the insurance policy. The best option will depend on your circumstances and needs. In developing your business succession plan, the buy/sell agreement and the funding mechanisms, we may need to work with your accountant and a lawyer to ensure the most efficient and tax-effective outcome is achieved. It is important that the terms of the buy/sell match the structure of the life insurance policies. Contact us to consult further on your needs so we can help you to develop a plan to protect your family and the hard work you have put into your business.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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Business insurance – easier than you thought

Posted on June 26, 2024 by Arrowroad

Introduction:
It is important to focus on what will happen to your personal lifestyle and family if you become ill or die and look for solutions to solve the potential problems. Insurance can provide an effective solution. But if you are a business owner, not only can your own health problems have a detrimental impact, but so can the health problems of other people who are important to your business. Luckily, this impact can also be mitigated through insurance and proper planning.

Simplifying Business Insurance:

If you thought business insurance was all too hard and struggle to get your head around dealing with business structures, legal agreements, and taxation implications, look again. You may be surprised how easy it really is with some good advice and guidance.

Step-by-Step Guide:

Step 1 – Identify the Need
The initial step is always to work out the specific goals and needs for you and your family and identify the risks that need to be managed. Identify who is a key person in your business and what is at risk if something happens to that person. The main areas of concern might include:

  • The ability to repay a loan or to release a bank guarantee
  • Access to a cash reserve to pay expenses if revenue drops
  • The ability to fund the buyout of another partner’s business share

Example:
Bill and Kate operate a courier business through their company BusyAs Pty Ltd. Kate manages the client relationships, and they are particularly concerned that if something happens to Kate, the relationships will suffer and business revenue will fall. Bill and Kate decide to take key person insurance on Kate’s life. This will provide a cash reserve to keep the business running while Kate recovers or the revenue can be stabilized.

Step 2 – Deciding on the Policy Owner
Once you decide the type of insurance (death, total and permanent disability, trauma, or business expenses) and how much, your next step is to decide who to make the policy owner. For business insurance, your options can include the life insured, the business, an insurance trust, or another person (e.g., business partner or spouse). The most efficient way to do this is to make the person or entity that ultimately needs the cash the policy owner.

Example:
To keep the business running, Bill and Kate need the money to end up in the BusyAs bank account. They decide to make BusyAs the policy owner.

Step 3 – Check the Taxation Implications
Taxation is where business insurance can get tricky, but you don’t need to work alone on the solutions. You should always work with your tax adviser or accountant for advice and support. In this step, review the taxation implications for the premium (i.e., decide whether the premiums are tax-deductible or not) and also the taxation implications for the proceeds received (i.e., whether taxable or tax-free). The taxation outcomes are impacted by the purpose of the cover and who is the policy owner. In some cases, the taxation outcomes may change the decision made in Step 2 as to whom to make the policy owner.

Step 4 – Get Legal Agreements Drawn Up
If the policy owner is not the ultimate beneficiary of the insurance proceeds or you are setting up insurance to fund a buy/sell agreement, the appropriate transfer agreements need to be drafted by a legal professional. It is important that the legal professional has a full understanding of the insurance arrangements and structure to ensure the correct drafting of the agreements to get the right amounts to the right places.

Conclusion:
Your financial planner will play a key role in designing an insurance package to meet your business needs. This requires coordination and cooperation with an accountant and possibly a legal professional. Make an appointment with us today to discuss your business needs and how to protect you, your family, and your business.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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Interest Yields Versus Dividend Yields – Vanguard Report

Posted on June 21, 2024 by Arrowroad

? From our friends over at Vanguard, they talk to higher interest rates leading to higher yields, but not for all investments. Understand the difference between interest and dividend yields to optimize your income strategy.

By Vanguard
When the Federal Reserve Bank’s chairman, Jerome Powell, signalled last week that United States’ interest rates are likely to stay higher for longer, many income investors there would have breathed a collective sigh of relief.

There was likely to have been a similar reaction from Australian investors when the Reserve Bank announced after its May board meeting it was keeping its cash rate on hold at 4.35%.

It makes sense. After all, unlike borrowers who are struggling to pay off debts at elevated interest rate levels, investors seeking to generate income (particularly retirees not wanting to take on significant investment risk) understandably like higher rates.

Higher rates equate to higher yields on certain types of investments. This has been the primary reason behind the large investor inflows into high interest cash accounts and fixed interest products such as bonds over the past two years ever since central banks around the world began ratcheting up rates to combat inflation.

Before then, central banks cut interest rates to record low levels in order to offset the severe economic and business impacts caused by COVID-19 – a tactic that eroded the income returns of investors worldwide.

A quick glance at some of the current shorter-term interest returns on offer shows investors can readily park their money in fixed interest investment products and receive yield returns in excess of 5% per annum.

Those yield returns reflect the expectation that official interest rates are unlikely to come down quickly, and when they do they will not fall back to record lows again.

Yields Versus Yields

Another major source of income for many investors are the dividends paid out by companies listed on the Australian share market and other markets.

During March, more than 80% of the largest companies listed on the Australian Securities Exchange (ASX) reporting their half- or full-year financial results to 31 December 2023 declared a dividend per share to their shareholders.

The total dividend haul amounted to around $30 billion, and the latest dividend payouts have been steadily trickling through to investors over recent weeks.

Understandably, many income investors are attracted to companies with a long track record of paying out dividends to their shareholders.

Another key attraction for investors is Australia’s dividend imputation regime. Introduced in 1987 with the objective to prevent double taxation of dividend income, franking credits apply to the tax paid on earnings generated from the domestic activities of Australian companies.

The distribution of franking credits reduces the applicable tax rate on dividend income to that of the end investor. For investors with a lower tax rate than the corporate rate, a cash refund is received.

So, in searching for higher dividend income returns, some investors may focus on a company’s dividend yield.

A scan of companies on the ASX shows some have dividend yields well in excess of 10%. They include some well-known companies paying fully franked dividends – that is, their investors get a 100% tax-paid franking credit.

A dividend yield is calculated by dividing a company’s prevailing share price by its declared annual dividend payment per share. For example, a company with a share price of $5.00 paying an annual dividend of 50 cents per share has a dividend yield of 10%.

But here’s where it’s very important to understand the difference between the yields payable on cash and fixed interest products versus dividend yields.

Investors in most cash and fixed interest products generally expect to receive a fixed interest rate return based on their current investment balance. Account rates do change, but not frequently.

Dividend yields are very different, because they change whenever a company’s share price changes. They rise whenever a company’s share price falls, or fall whenever a company’s share price rises.

Using the hypothetical company example above, if that company’s share price fell over time to $4.00, its dividend yield (based on its annual dividend of 50 cents per share) would have risen to 12.5%.

That is the case with a number of the ASX companies currently showing the highest dividend yields. Their share prices have fallen quite sharply over the last year, some by 30-50%.

And another factor to consider is that dividend payouts by companies are not necessarily set in stone. Companies – especially those that have experienced sharp share price falls – may decide to halt their dividend payouts.

There have been many instances in the not too distant past when some of the largest listed Australian companies, including the major banks and resources companies, have either cut or deferred their dividend distributions.

Franking credits can also be cut at a company’s discretion, based on its earnings results.

How to Reduce Dividend Payout Risk

The easiest way to reduce dividend income risk – the risk of being over-exposed to the payout policies of specific companies – is through diversification.

The best way to achieve that is by having broader exposures to diversified income streams via a large pool of listed companies, such as through managed funds or exchange traded funds (ETFs) that cover a wide range of companies in a single market or across multiple markets.

Think of funds as a form of fishing net that will catch the dividends of every company that falls into their investment focus.

For example, the Vanguard Australian Shares Index ETF (VAS) – which is the largest ETF listed on the ASX by market capitalisation – tracks the S&P/ASX 300 Index by investing in Australia’s top 300 companies. Many of the largest companies pay out interim and final dividends based on their earnings reporting cycle.

The key advantage for investors is that irrespective of individual company dividend yields and payouts, a fund will aggregate all dividends and distribute them to investors.

While dividend flows may decline at different times, having exposure to many companies allows investors to capture a greater amount of the total dividends spectrum.

Doing this also eliminates the need to focus on the dividends of individual companies and their dividend yields, which can be a potential trap for investors.

Important Information

An investment in the Vanguard Australian Shares Index ETF (VAS) is subject to investment and other known and unknown risks, some of which are beyond the control of Vanguard Investments Australia Ltd, including possible delays in repayment and loss of income and principal invested. Please see the risks section of the Product Disclosure Statement (“PDS”) for the VAS for further details. Neither Vanguard Investments Australia Ltd (ABN 72 072 881 086 AFSL 227263) nor its related entities, directors or officers give any guarantee as to the success of the VAS, amount or timing of distributions, capital growth or taxation consequences of investing in the VAS.

© 2024 Vanguard Investments Australia Ltd. All rights reserved.

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Know What You’re Paying in Super Fees – Vanguard Report

Posted on June 21, 2024 by Arrowroad

? From our friends over at Vanguard, explore how lowering your super fees can lead to higher retirement savings! Discover what fees you’re paying and how to compare them effectively.

Most of us are pretty savvy consumers in Australia – comparing petrol prices and energy costs is the norm, and many shop around for a good deal on mortgage rates.

But what about your ongoing superannuation fees? Do you actually know what you’re paying your super fund?

One of the fundamental principles of investing is that it pays to minimise your fees. That makes a lot of sense because what you pay in fees and costs will ultimately reduce your returns to some degree.

Vanguard’s late founder John Bogle made this point powerfully when he stated: “Investors need to understand not only the magic of compounding long-term returns, but the tyranny of compounding costs; costs that ultimately overwhelm that magic.”

Generally speaking, the higher the fees you pay on your investments the greater the effect on your net investment returns.

The Australian Securities and Investments Commission (ASIC) requires all super funds to include the following consumer advisory warning in their product disclosure statements:

“Small differences in both investment performance and fees and costs can have a substantial impact on your long-term returns. For example, total annual fees and costs of 2% of your account balance rather than 1% could reduce your final return by up to 20% over a 30-year period (for example, reduce it from $100,000 to $80,000).

“You should consider whether features such as superior investment performance or the provision of better member services justify higher fees and costs.

“You or your employer, as applicable, may be able to negotiate to pay lower fees. Ask the fund or your financial adviser.”

So, knowing how much you are paying in fees – whether they be administration fees, investment fees and costs, transaction costs, and other fees and costs– is really critical so you can make informed investment decisions.

Yet, when it comes to superannuation, one of the biggest single investments most of us have outside of our family home by the time we retire, many people are unaware of the various fees they are paying to their super fund provider.

There is a wide variation in the fees being charged by different super funds. In fact, the Federal Government’s YourSuper comparison tool shows some super funds are charging their members more than double the amount of annual fees than other providers.

What Fees Do Super Funds Charge?

As noted above, understanding what you are paying in super fees is critical, and it’s a worthwhile exercise to compare them to those being charged by other providers.

Switching to a lower-cost super fund could potentially save you thousands of dollars in fees over the long term and result in you achieving a higher retirement savings balance than if you had stayed with your current fund.

Fees broadly fall into three main categories across most super fund providers; however, you should be aware that some providers can charge additional fees. It’s therefore especially important to check your super fund’s product disclosure statement (PDS), which details all fees and costs.

The three main categories of super fees are administration fees and costs; investment fees and costs; and transaction costs.

Administration Fees and Costs

Super funds charge administration fees to cover the costs associated with administrating and operating your super account. These fees are often levied at a fixed percentage rate based on your current account balance.

All super fund trustees also have a legislative requirement to fund and maintain an Operational Risk Financial Requirement (ORFR). This fee is normally charged monthly to members and is recorded on annual statements as an ORFR Admin Fee for Vanguard Super.

Investment Fees and Costs

Investment fees typically relate to the costs involved in managing the investment options you have chosen within your super fund and may vary between different options. These can include investment management costs based on your asset allocations and costs levied by third parties. They are usually deducted from investment returns before they are applied to your account.

Some super funds also charge additional performance fees if their returns exceed a target level stipulated in their PDS. This is normally charged based on the percentage of the investment return achieved above the target level.

Transaction Costs

Transaction costs are generally incurred as part of daily investment management activities to buy and sell underlying assets held by the super fund. They will also usually be deducted from investment returns before they are applied to your account and do not appear as specific items in your record of account activity.

Other Fees and Costs

Super funds also typically charge buy/sell spread to recover the cost whenever you make a contribution, withdrawal, or switch investment options. The buy/sell spread is the difference between the buying and selling of the underlying investments. The buy/sell spread charged depends on your investment option and the number of transactions you make.

Some super funds can also charge switching fees if you decide to switch between different investment options, such as from a growth to a balanced asset allocation strategy.

Insurance fees (for default death and total permanent disability (TPD) cover) will also apply unless you decide to opt out of the cover. These fees are generally payable on a monthly basis and deducted from your account balance.

Lastly, where personal financial advice is provided by a licensed financial adviser, advice fees can be levied and, with your consent, can be paid via a deduction from your super account.

While this may all seem daunting, and not easily understood, one way you can check on the total fees that you have been charged throughout the course of the year is to review your member statement.

Compare Apples with Apples

If you compare your super fees with those of other super providers it’s important to make sure you are comparing like for like, especially as different super funds tend to have a range of investment options charging different fee levels.

A good starting point is to check investment options that are closest to the allocations you have in your current super fund. You may need to investigate what other super funds are investing in, and their percentage allocations.

For example, if you have selected a balanced option through your current fund, aim to check for the same investment product options offered by other super funds.

Conclusion

Employers are required by law to contribute a set percentage of your salary into your chosen super fund, which is then allocated to your preferred investment option.

How your investments perform are not within your control, but there is one thing in investing you can control and that’s the fees you are willing to pay.

Even small differences in fees can have a big impact on your super balance over the long term.

You can check all of Vanguard Super’s fees by clicking here.

Important Information

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (“Vanguard”) is the issuer of the Vanguard® Australian ETFs. Vanguard ETFs will only be issued to Authorised Participants. That is, persons who have entered into an Authorised Participant Agreement with Vanguard (“Eligible Investors”). Retail investors can transact in Vanguard ETFs through Vanguard Personal Investor, a stockbroker or financial adviser on the secondary market.

We have not taken your objectives, financial situation or needs into account when preparing this publication so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for Vanguard’s products before making any investment decision. Before you make any financial decision regarding Vanguard’s products you should seek professional advice from a suitably qualified adviser. The Target Market Determination (TMD) for Vanguard’s ETFs includes a description of who the ETF is appropriate for. You can access our IDPS Guide, PDSs Prospectus and TMD at vanguard.com.au or by calling 1300 655 101.

© 2024 Vanguard Investments Australia Ltd. All rights reserved.

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Warren Buffett’s $1 Million Index Fund Bet – Vanguard Report

Posted on June 21, 2024 by Arrowroad

? From our friends over at Vanguard, explore Warren Buffett’s $1 million bet on an index fund. It highlights the power of passive investing. Learn why this legendary investor supports index funds despite his active investing success.

By Vanguard

Investing should never be about making bets, even calculated bets.

But there are exceptions to the rule, especially when the person betting is one of the world’s most successful, and famous, investors.

American businessman and investor Warren Buffett, now aged 93 and with an estimated net worth of US$132 billion, is chairman of the Omaha-based multinational conglomerate Berkshire Hathaway.

His investment successes over many decades have largely been tied to identifying undervalued companies and taking large, long-term shareholding positions in them.

“I can’t remember a period since March 11, 1942 – the date of my first stock purchase – that I have not had a majority of my net worth in equities, U.S.-based equities,” the multibillionaire told Berkshire Hathaway shareholders at the company’s 2023 annual meeting.

“And so far, so good. The Dow Jones Industrial Average fell below 100 on that fateful day in 1942 when I ‘pulled the trigger’. I was down about $5 by the time school was out. Soon, things turned around and now that index hovers around 38,000. America has been a terrific country for investors. All they have needed to do is sit quietly, listening to no one.”

Betting on Index Funds

Buffett has built his career and fortune as an active investor, but over the years he has repeatedly extolled the benefits of investing in index-tracking funds with a broad spread of shareholdings.

“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals,” he told Berkshire investors in 1993.

Almost a decade later, in 2002, he reiterated to Berkshire investors: “The people who buy those index funds, on average, will get better results than the people that buy funds that have higher costs attached to them, because it is just a matter of math.”

And then, in 2007, Buffett proceeded to really prove his point by making a “simple” US$1 million wager. He challenged a United States-based hedge fund manager that he could outperform him, over a 10-year period, by investing in a Vanguard fund tracking the well-known S&P 500 index.

As a counter strategy, the hedge fund manager picked five funds-of-funds (funds that invest in portfolios of different investment funds) that he expected would outperform the U.S. share market.

Buffett shared the final results to Berkshire shareholders in 2017, describing them as “an eye-opener”.

“The five funds-of-funds got off to a fast start, each beating the index fund in 2008,” Buffett noted. “Then the roof fell in. In every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund.”

The final outcome, he said, reflected the large amount of fees payable to the investment managers of the five respective funds-of-funds and the 200-plus managers of the underlying funds they had invested in. This compared with the very low management fees that are payable on investments in index funds.

Buffett pointed out that while the U.S. share market had recorded strong growth over the 10-year stretch, earning many active investment managers large amounts of fees, their investors had “experienced a lost decade” because of these fees.

Investors are Getting the Message

Investors around the world have been gravitating towards low-cost broad-based index funds for some time, and at the end of 2023 a major milestone was passed.

According to data from Morningstar, the total assets under management in exchange traded funds (ETFs) and notes along with passively managed mutual funds reached a combined US$13.29 trillion at the end of December 2023, surpassing the US$13.23 trillion held in active funds.

In Australia, there are now more than A$700 billion of indexed assets under management, with the domestic ETF industry alone holding almost A$200 billion of investors’ assets as at 31 March 2024.

Data released in March by S&P Dow Jones Indices shows 76.5% of Australian equity actively managed funds struggled to keep up with the share market’s performance over 2023 – the second-highest underperformance rate on record.

The underperformance picture hasn’t really changed over time either, even going back to when Buffett made his comments to Berkshire shareholders back in 1993.

In Australia, just over the last 15 years, 85.3% of Australian equity general funds have underperformed the broader Australian share market.

“Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes,” Buffett told his company’s shareholders last year. “It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.”

The next Berkshire annual meeting is scheduled for 4 May in Omaha, where once again all eyes and ears will be tuned in to what Buffett – the man colloquially known in the investing world as the “Oracle of Omaha” – has to say about his investments and investing strategies in general.

Important Information

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (“Vanguard”) is the issuer of the Vanguard® Australian ETFs. Vanguard ETFs will only be issued to Authorised Participants. That is, persons who have entered into an Authorised Participant Agreement with Vanguard (“Eligible Investors”). Retail investors can transact in Vanguard ETFs through Vanguard Personal Investor, a stockbroker or financial adviser on the secondary market.

We have not taken your objectives, financial situation or needs into account when preparing this publication so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for Vanguard’s products before making any investment decision. Before you make any financial decision regarding Vanguard’s products you should seek professional advice from a suitably qualified adviser. The Target Market Determination (TMD) for Vanguard’s ETFs includes a description of who the ETF is appropriate for. You can access our IDPS Guide, PDSs Prospectus and TMD at vanguard.com.au or by calling 1300 655 101.

© 2024 Vanguard Investments Australia Ltd. All rights reserved.

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How to Decipher the Freeze on Deeming Rates – Vanguard Report

Posted on June 21, 2024 by Arrowroad

From our friends over at Vanguard, updates us on the recent federal budget announcement to freeze deeming rates until June 2025 could impact your Age Pension. Understand what this means for your financial investments and retirement planning.

By Vanguard
4–5 minutes read

Why the decision to keep deeming rates on hold may be a window for interest rates.

In delivering the second reading of the Appropriation Bill (No. 1) 2024–25 last week, otherwise known as the latest federal budget, the Treasurer announced that the current freeze on social security deeming rates will continue until 30 June 2025. It was a passing reference, but one that potentially has big income implications for an estimated 450,000 people receiving a full or part government Age Pension payment.

The announcement also signals, indirectly at least, that official interest rates may be lower by mid next year, when the latest freeze on deeming rates will end, than they are now.

What are deeming rates?

Deeming rates are used by Services Australia to determine the amount of Age Pension payable to singles and couples who generate additional income from financial investments. They’re also used to assess eligibility for the Commonwealth Seniors Health Card and to determine co-contributions for aged care services.

The deeming rates essentially “deem” that all financial investments earn the same percentage return, regardless of what they actually earn. The government’s definition of investments for the purposes of deeming is broad, from money invested in a savings account or term deposit, to managed investments, listed shares and other securities, loans, and debentures.

A deeming rate of 0.25% currently applies to the first $60,400 of financial investments held by a single age pensioner, and to $100,200 held by a couple. A higher deeming rate of 2.25% applies to any financial investments above those thresholds.

The benefits of having a deemed rate of return are that it helps keep Age Pension payments steady for those with outside financial investments, instead of having them move up and down based on the performance of their assets. Any returns above the set deeming rates are not counted as income for Age Pension calculation purposes.

By treating all financial investments in the same way, the deeming rules encourage people to choose investments on their merit rather than on the effect the investment income may have on their pension entitlement.

What the deeming rates freeze means

Deeming rates are not changed frequently, and keeping the current deeming rates on hold undoubtedly provides more income certainty to many Age Pension recipients with financial investments.

Indeed, the last time there was a change to deeming rates was back in May 2020, when they were cut from a much higher 1% (for assets below $51,800) and 3% (for assets above $86,200). Deeming rates have historically been aligned to the prevailing official cash rate, and 2020 marked the start of the rapid falls in interest rates to near zero as governments around the world moved to buttress their economies against the impacts of COVID-19.

However, with rates having now been lifted sharply to tackle surging inflation, there were some expectations that the deeming rates would now be lifted to be more closely aligned to the current 4.35% cash rate (which is at a 12-year high).

Vanguard foresees core inflation falling to 3% year-over-year by the end of 2024, still solidly above the midpoint of the Reserve Bank’s 2%–3% target range. As such, the Reserve Bank is likely to be one of the last central banks in developed markets to cut rates, doing so only in 2025.

The government will be watching these developments closely in terms of deciding its next move on deeming rates.

Important information and general advice warning

Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270) (the Trustee) is the trustee of Vanguard Super (ABN 27923449966) and the issuer of Vanguard Super products. The Trustee has contracted Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (VIA) to provide some services to members of Vanguard Super. Any general advice is provided by VIA. The Trustee and VIA are both wholly owned subsidiaries of The Vanguard Group, Inc. (collectively, “Vanguard”). The retirement savings tips provided above are general in nature and don’t take into account your personal financial objectives, situation or needs. You should consider your objectives, financial situation or needs, and the Product Disclosure Statement (PDS) and Target Market Determination (TMD) before making any decision about Vanguard Super. The PDS and TMD can also be accessed free of charge by calling 1300 655 101. Before you make any financial decision regarding Vanguard Super, you may wish to seek professional advice from a suitably qualified adviser. Any past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. The information above is current as at time of publication and was prepared in good faith and we accept no liability for any errors or omissions. ©2024 Vanguard Investments Australia Ltd. All rights reserved.

Posted in Economic Insights, Financial Planning, Investment Strartegies, May Vanguard, Retirement Planning, Vanguard Insights | Tagged , , , , , , , , , | Comments Off on How to Decipher the Freeze on Deeming Rates – Vanguard Report

What Self Managed Super Fund Trustees Think About Running Out of Money – Vanguard Report

Posted on June 21, 2024 by Arrowroad

From our friends over at Vanguard, explores that SMSF trustees are more confident about their retirement savings than APRA fund members. Discover why in the latest insights from the 2024 Vanguard/Investment Trends SMSF Report

SMSF members are less concerned than APRA fund members about outliving their savings.

Self managed super fund trustees have a high level of retirement confidence in comparison with the general population in Australia, according to the 2024 Vanguard/Investment Trends SMSF Report.

The 19th edition of the annual report, which reflects the trends and demographics of Australia’s SMSF investors, is the most comprehensive survey of this cohort of investors and was conducted between February and March 2024.

This year’s report finds that in comparison to APRA super fund members, SMSF members are far less concerned (34% are not at all concerned) about the possibility of outliving their retirement savings. Breaking this down further, the report finds that retirees are even less concerned about outliving their retirement savings in comparison to non-retirees (47% of retirees vs 24% of non-retirees not at all concerned).

Reflecting the retirement readiness of this cohort, the report also finds a much smaller retirement adequacy gap (7%) in comparison to the 27% retirement adequacy gap expressed by the general population.* Retirement adequacy refers to how much money a person wants to have in retirement versus how much they will have.

Concerns that SMSFs have about retirement primarily relate to regulatory changes in superannuation rules, falls in the financial markets and having enough for extra expenses, and – reflecting the current economic conditions – inflation/rising prices.

Additionally, 36% of SMSFs surveyed intend to retire before they reach the preservation age of 60 years old.

When it comes to thinking about a retirement income product, flexibility of access, competitive pricing, and ability to adjust the size of their income payments are top of mind for non-retirees. For retirees, the ability to access funds for the life of the product, fees, and the ability to leave an inheritance are the three most important features.

Trends

The overall number of SMSFs continues to climb as establishment rates rise and wind ups fall. There are currently about 615,000 SMSFs following the establishment of 29,007 SMSFs as at December 2023 (up from 25,813 the prior year), and only 15,154 wind ups as at December 2022 (down from 17,852 in December 2021).

SMSF trustees are establishing their funds earlier than ever, averaging 46 years at the time of establishment, with an average balance of $320,000. SMSF average balances are also at their highest this year at over $1.5 million, nearly double what the average balance was in 2009.

The desire for control over their investments – interpreted as choice over investment products, control over asset allocation and flexibility – continues to be the primary reason for establishing a SMSF, with achieving better returns, making better investments than an APRA super fund, greater transparency of investments, and tax efficiency making up the other top five reasons.

Building a sustainable income stream and maximising capital growth are priorities.

While an accountant was likely to be the initial influencer for starting an SMSF a decade ago, today’s SMSF trustees are more self-directed than ever, with nearly 40% of them establishing an SMSF after doing internet research.

Advice Needs

The number of non-advised SMSFs is at an all-time high at 475,000, with adviser use at an all-time low despite the previous upward trend over the last three years (140,000 in 2024, down from 160,000 in 2023 and 205,000 in 2019). This year’s report also found that newly established SMSFs are less likely to use advisers than established SMSFs.

This comes as the number of SMSFs without a financial adviser and with unmet advice needs is the highest it has been in the last three years. Further, only 25% of trustees without financial advisers are likely or very likely to seek financial advice in the future.

The top three reasons cited for not seeking advice are the ability to manage their own financial affairs, the perceived high cost of advisers, or not currently needing advice. Previous poor experience with advisers comes a close fourth.

Accountants remain the primary advisers for most established SMSFs, with SMSF administrators the preferred advisers for newly established SMSFs.

Notably, both advised and unadvised SMSFs indicate that guidance in the areas of tax and retirement strategies would be helpful, specifically on the topics of SMSF pension strategies, inheritance and estate planning, tax planning, as well as changes in regulations.

These findings continue to signal the opportunities that financial advisers have in delivering advice that is suited to the needs of SMSF trustees.

It’s been a longstanding view of Vanguard’s that advice can help investors achieve better outcomes in terms of pension strategies, estate planning, and keeping trustees well-informed about regulatory changes and their potential impact.

Reflecting the growing digital world, SMSFs with unmet advice needs are increasingly expressing an interest in digital advice or digital tools with the assistance of a human adviser. The top three areas of interest are SMSF contribution strategies, investing for a regular income, and exchange traded funds (ETFs).

Conversely, the advised SMSF cohort are more likely to use digital tools when it comes to buying an investment property or investing for a regular income.

* Calculated using the expected income (average $5,800) versus the preferred (average $6,200) monthly income by SMSF trustees.

Important information and general advice warning

Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270) (the Trustee) is the trustee of Vanguard Super (ABN 27923449966) and the issuer of Vanguard Super products. The Trustee has contracted Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (VIA) to provide some services to members of Vanguard Super. Any general advice is provided by VIA. The Trustee and VIA are both wholly owned subsidiaries of The Vanguard Group, Inc. (collectively, “Vanguard”). The retirement savings tips provided above are general in nature and don’t take into account your personal financial objectives, situation or needs. You should consider your objectives, financial situation or needs, and the Product Disclosure Statement (PDS) and Target Market Determination (TMD) before making any decision about Vanguard Super. The PDS and TMD can also be accessed free of charge by calling 1300 655 101. Before you make any financial decision regarding Vanguard Super, you may wish to seek professional advice from a suitably qualified adviser. Any past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. The information above is current as at time of publication and was prepared in good faith and we accept no liability for any errors or omissions. ©2024 Vanguard Investments Australia Ltd. All rights reserved.

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How more SMSFs are using ETFs and managed funds – Vanguard Report

Posted on June 21, 2024 by Arrowroad

From our friends over at Vanguard, discover why a growing number of self-managed super fund (SMSF) trustees are incorporating exchange traded funds (ETFs) and managed funds into their portfolios.

A growing number of self managed super fund (SMSF) trustees are using exchange traded funds (ETFs) and managed funds as core parts of their investment portfolio, the 2024 Vanguard/Investment Trends SMSF Report has found.

The 19th edition of the annual report, which reflects the trends and demographics of Australia’s SMSF investors based on a comprehensive survey of this cohort of investors conducted between February and March 2024, has found that around 43% of SMSFs (265,000 funds) are using ETF products.

In fact, the average portfolio allocation to ETFs by SMSFs has almost doubled over the last 12 months from 5% in 2023 to 8% this year. SMSFs now account for 13% of Australia’s total ETF investor population, which numbers around two million.

This number is likely to continue to rise, with 175,000 SMSFs (28%) expected to reinvest in ETFs over the next 12 months (up from 155,000 in 2023), and a further 65,000 (10.6%) likely to make their first ETF investment over the same period.

The growth in allocation to ETFs is the outcome of both increased adoption (57%, up from 45% in 2023) and increased average amount allocated ($250,000, up from $180,000 the year before). This increased allocation to ETFs is observed across both advised and non-advised SMSFs, with non-advised SMSFs contributing to the bulk of the increase. Interestingly, nearly 60% of newly established SMSFs intend to invest in ETFs over the next 12 months.

Meanwhile, the number of SMSFs using managed funds has risen from 255,000 in 2023 to 285,000, representing 46% of the SMSF population. On average, SMSFs have around 9% of their assets invested in managed funds. The average amount allocated to managed funds by SMSFs is around $350,000.

The general shift to ETFs and managed funds has seen SMSF trustees reducing their allocations to cash holdings over the last year (from 22% to 18%) and to direct shares (from 31% to 27%). Cash products typically receive the second largest allocation in SMSFs after Australian shares. The decline in allocation to cash in the past year may suggest SMSFs are reasonably comfortable with the yield generated from their other investments.

Why SMSFs are using ETFs and managed funds

The primary reasons SMSFs say they are using ETFs is for diversification (71%), to gain exposure to specific overseas markets (54%), liquidity (easy to buy and sell) (44%), and because ETFs save time over choosing individual stocks (43%). They also see ETFs as providing easy access to specific types of investments and asset classes (42%), as a good portfolio core (38%), as being competitively priced (31%), readily available on investing platforms (18%), and having transparency (16%).

In terms of how SMSFs are allocating their capital to ETFs, the biggest asset class exposures are international equities (76% of respondents), Australian equities (69%), followed by Australian fixed income (16%), and commodities (14%).

Australian Securities Exchange (ASX) and Vanguard data shows international equities continued to gain the biggest investor inflows in April, capturing $676 million in investments – around 74% of the total ETF inflows. This amount included $576 million in inflows into the broader global equity ETFs category as investors continued to focus on equity products covering United States markets and products with a wide spread of international shareholdings.

Similar to investing in ETFs, the main investment areas cited by SMSFs for using managed funds are international shares (around 41%), large cap Australian shares (29%), mid and small cap Australian shares (28%), and Australian listed property (13%).

The Investment Trends data shows Vanguard remained the primary product provider in Australia for both ETFs and managed funds for SMSFs at the time the survey was conducted.

“We are proud that our low cost, diversified products are resonating with some of Australia’s most sophisticated investors,” said Renae Smith, Chief of Personal Investor, Vanguard Australia.

Looking ahead, a growing proportion of SMSFs are focusing on building a sustainable income stream (31% versus 27% in 2023). The top three products they plan to invest in are blue-chip Australian shares (59%), ETFs (39%), and international shares (28%). Additionally, one in 10 SMSF trustees mention investment property as a planned investment.

Important Information

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (“Vanguard”) is the issuer of the Vanguard® Australian ETFs. Vanguard ETFs will only be issued to Authorised Participants. That is, persons who have entered into an Authorised Participant Agreement with Vanguard (“Eligible Investors”). Retail investors can transact in Vanguard ETFs through Vanguard Personal Investor, a stockbroker or financial adviser on the secondary market.

We have not taken your objectives, financial situation or needs into account when preparing this publication so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for Vanguard’s products before making any investment decision. Before you make any financial decision regarding Vanguard’s products you should seek professional advice from a suitably qualified adviser. The Target Market Determination (TMD) for Vanguard’s ETFs includes a description of who the ETF is appropriate for. You can access our IDPS Guide, PDSs, Prospectus, and TMD at vanguard.com.au or by calling 1300 655 101.

© 2024 Vanguard Investments Australia Ltd. All rights reserved.

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