Ask Noel

Each week, financial adviser and international best-selling author Noel Whittaker answers your questions.

Financial advisers suggest the importance of a broad-based approach to maximise the chances of financial security. I note from one superannuation website that diversified bonds have offered the best return over five years (8.37 per cent a year with an anticipated negative year every 20 years) compared with the balanced option (2.67 per cent a year with an anticipated two to three negative returns every 20 years). It makes me wonder about the wisdom of a broad-based portfolio (for example balanced) compared with a targeted approach (for example diversified bonds). Do you think that a period of five years is too short to tell longer-term trends?

Ashley Owen of Philo Capital points out that diversified bonds have done better than treasuries over the past year because of the higher spreads on corporate/high-yield bonds, and because credit spreads have tightened.

But in a crisis (such as in 2008, 1974, etc), treasuries do better because credit spreads blow out but Treasury yields collapse. In the early stages of booms, while inflation is still low and credit spreads tighten, both corporate bonds and treasuries do well. This happened last year.

Bonds have done very well over the past five years, but over the very long term a balanced fund should always beat a bond fund (diversified or concentrated) because bonds have no inflation hedge, no prospects of real growth and no tax advantages.

I am about to start a pension from my self-managed super fund (SMSF). I am required to withdraw a minimum of 4 per cent of the fund value, but it's not clear to me exactly when the value is determined. Is it tax-year-end valuation, with the 4 per cent applicable for the next tax year?

For pensions already in operation it's the pension account balance at July 1 each year; a pro-rated pension payment must be calculated and paid for pensions started part-way through a financial year. This is done via a day's calculation method, for example if there are 180 days left in the financial year the equation would be:

Pension Purchase Price x (180/365 x 4%).

Note there is a 25 per cent reduction in the required minimum payment this financial year. So for people under age 65, their minimum is 3 per cent for the current year.

We received a notice that we had gone over the concessional contributions cap. I was aware of the cap but had forgotten my husband's life insurance premiums come out of the super fund and are included as concessional contributions.

He is 54 and the premium is skyrocketing. Between the compulsory super guarantee contribution and the insurance premium, we will be almost at the $25,000 cap this year. We will reduce the insurance cover, as we don't need as much any more and may even drop it entirely over the next a few years. We would like to make the maximum concessional contributions without the premium taking up so much of the cap. Are there any alternative strategies?

The premiums would count towards his concessional contribution cap if funded with pre-tax contributions. One strategy is to fund the premium from his existing super balances or after-tax contributions.

The simplest way out is probably to use the entire $25,000 allowed as a concessional contribution to make a salary-sacrificed contribution to super and then simply pay the insurance from the fund. As you point out, you may be in a position where you could reduce the insurance or eliminate it.



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The explainer

I'm a 23-year-old student going back to university for three years (where my doctorate does not qualify for Centrelink support). I have set aside $4000 for living costs in 2013 (I am lucky to live at home and hope to have a small income from a part-time job). I have $25,000 in a savings account earning 3.25 per cent a year. I have investigated a term-deposit option earning 4.6 per cent for a year. Do you have any other suggestions for investing the money for a year, such as in a cash-management trust? (I am investing it for only one year because I might need to access the money for university or living costs in 2014.)

Congratulations on being such a good money manager. With interest rates trending downwards, it's hard to go past 4.6 per cent for 12 months. Just make sure the institution is a secure one.