Nobody wants to see their account balance drop, so cash is where it's at for safety, writes George Cochrane.
I AM 63 and expect to work for another five years while gradually decreasing my income. I have $200,000 in an industry fund and $600,000 in a self-managed super fund (SMSF), both based on Australian shares. I have been managing the latter and it lost significantly in the global financial crisis and again recently. I would like to increase the pool of money to live on in retirement. What strategy do you recommend for someone in my position? D.P.
Put as much money into super as you can without penalty and manage it better. The past few years have not been a time to have 100 per cent of your portfolio in shares. Maintain large amounts of cash until this crisis is over.
You mentioned the upcoming change to the government guarantee being reduced to $250,000. We have an SMSF that includes some term deposits above this limit. I have written to the Australian Prudential Regulation Authority with some questions and received a pre-printed article that answered none. As I understand it, the limit applies to "per person, per financial institution". The article included definitions of "financial institutions" it did not define a person. I had asked: "Our SMSF includes a portion in my name, which is in pension mode, and my wife's portion, which is in accumulation mode. We also have money invested in our own names at the same bank. If (for example) the total value of the SMSF is $400,000, equally split between us, and if we also have $300,000 in a joint (online saver) account: a) do we need to put part of our joint account into another bank? (I know we could split it into separate individual accounts as one option) b) is the SMSF considered a "person" (it has its own tax file number) and, therefore, do we need to put some in a different bank? and c) if our individual parts (accounts) within the SMSF are considered to be separately "ours", do we need to add them to our parts of the joint account (or individual accounts), thus each of us exceeding the $250,000 limit, at that bank? I wrote back to the APRA asking about the SMSF (whether only $250,000 is guaranteed or are our individual parts, $200,000, guaranteed) and got the same pre-printed article. P.L.
Under the Financial Claims Scheme, or FCS, the $250,000 cap applies from February 1 per account holder, per "approved deposit-taking institution" or ADI. In the case of joint accounts, each account holder's share of the joint account will be added to other deposits held in their name and the FCS cap will be applied to the aggregated amount for each account holder.
In simple terms, an account held in your name alone will be one "account holder", another will be an account in your wife's name and your SMSF will be a third. Joint accounts will be split between you and your wife.
That means the three of you can place up to $750,000 in any one ADI and be covered by the government guarantee. So where you have a joint account containing $300,000 but no other account in your private names, this would fall within the $250,000 cap for each of you.
Remember, all the SMSF investments are made in the name of the trustees, regardless of which member's account. If your SMSF has a company as trustee, it would doubtless be regarded as a separate account holder. If, in fact, you are the two sole individual trustees of your SMSF, I would imagine, in the absence of legal advice, this would still be regarded as a separate account holder but if you didn't fancy an argument in the event of a claim, move your SMSF's account elsewhere.
Starting from scratch
I have an unusual problem. At 57, all I have is a chronic medical condition, my personal possessions, household goods, my car and little else. However, I am more determined than ever to start all over again and make a go of things. My question is, how? I will have to find another job when I am well and I have undertaken a couple of courses to help. But what do I do first? R.C.
You seem to be on the right track in terms of retraining yourself. In this post-GFC world, the winners will be those who realise hard work and thrift are the keys to success. Just be sure to carefully study any contract you sign.
Oops! Last week's suggestion to "research online for ex-brokers" should have read "research online forex brokers". Blame the spell checker.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: Banking Ombudsman, 1300 780 808 pensions, 13 23 00.