Take advantage of your fund's tax benefits before it's too late, writes George Cochrane.
MY WIFE and I will turn 60 in October. We have been retired for 18 months. I have drawn down (almost to the non-taxable limit) on one of our two major superannuation funds. We have $360,000 in six-month term deposits that mature in May 2012 and will earn 3.1 per cent. There is $72,000 in the super fund we raided and $740,000 in the other. Both of these funds are in a balanced/growth area. There is about $50,000 in another three funds that do not mature until 2016. We have also been advised by an accountant that a self-managed super fund would be our best option. We intended to reinvest the $360,000 in six- to 12-month term deposits, drawing living expenses as required. What guidance can you give? R.M.
If you've never run your own portfolio before, think twice before setting up an SMSF they are not necessarily easy and foolproof. I suggest you spend the time between now and age 65 putting as much of your non-super money as possible into super but be wary of the investment caps. Plan to end up at age 65 (when no further contributions can be made) with close to 100 per cent of your income from super pensions so that it will be untaxed and require no tax return.
I like to keep up to 65 per cent in equities, depending on the state of the sharemarket. If you want a term deposit-style investment for the rest of your super savings, consider the Melbourne-based Defence Force Credit Union, which offers a fixed 6 per cent for 12 months in its Retirement Savings Account term-deposit option, available as either accumulation or pension funds. See defcredit.com.au. Also, the Melbourne-based Police Credit Union is similarly offering 6.1 per cent for 12 months or 6.25 per cent for 24 months. See policecredit.com.au.
Lessons to be learnt
I'M TRYING to create a future wealth account for my 14-year-old son. I put his pocket money of $25 a fortnight into an E*Trade account, which I hold in trust in his name. He has his own tax file number. His current portfolio has 1260 Argo Investments shares (ARG), with slightly more than $500 in cash. He wanted some QR National shares but the prospectus was out of his cash range. He is still keen to get some. He could also afford Telstra. Should
I just continue adding to the ARG shares, or look at something such as QRN or TLS? G.R.
It sounds as if your son is getting an excellent lesson. One thing that becomes apparent is that we learn from our mistakes. With a total portfolio value of about $7000, your son is limited in his choices but if you let him invest, say, $2000 at a time, in a share of his choice, while giving him all the positives and negatives, he will learn from his decisions.
For example, Telstra is paying a whopping 9.4 per cent fully franked yield but can it keep paying a 28? dividend in the future, given all that is happening in the telecom sector? As for QRN, what is it that the overseas investors knew that local investors did not know or were not told, or both, for it to have risen more than 30 per cent, as it has, and can it go higher? I suspect it can and its first dividend of 3.7? is expected to be paid this September.
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.
Frequently Asked Questions about this Article…
When should I move non-super savings into super to maximise superannuation tax benefits before age 65?
The article advises using the years up to age 65 to transfer as much non-super money into super as you can while watching contribution caps. The goal it suggests is to be receiving close to 100% of your income from super pensions by age 65 so the pension income is untaxed and you may not need to lodge a tax return. Remember the piece also says no further contributions can generally be made from age 65.
Is setting up a self-managed super fund (SMSF) a good idea for retirees?
The article warns that SMSFs are not necessarily easy or foolproof. If you’ve never run your own portfolio before, it suggests thinking twice about an SMSF and weighing the time and skills required against other options.
How much should I hold in equities inside my superannuation portfolio?
The author says he likes to keep up to 65% of super in equities, but notes this depends on the state of the sharemarket. In short: consider an equities allocation up to about 65% if it matches your risk tolerance and market conditions.
Are term-deposit style investments recommended for my super savings?
If you prefer a term-deposit-style approach for part of your super, the article suggests considering retirement savings term-deposit options. It highlights offers from credit unions — for example, a 12‑month fixed 6% option from the Defence Force Credit Union and 6.1% (12 months) or 6.25% (24 months) from the Police Credit Union — as examples of available fixed-rate options.
What happens to pension tax and tax returns once I reach 65?
The article recommends structuring your finances so that by age 65 most of your income comes from super pensions; in that situation the pension income can be untaxed and may not require a tax return. This is the stated tax-planning rationale for moving savings into super before age 65.
How can I teach my teenager about investing using a small brokerage account?
The article gives a practical example: holding a youngster’s E*Trade account in trust with their own tax file number, adding pocket money to grow the account, and letting them make real investment choices. It suggests letting them invest modest amounts (for example, about $2,000 at a time) so they learn from both successes and mistakes while you talk through the positives and negatives of each decision.
Should I buy high‑yield dividend stocks like Telstra for a young investor?
The article notes Telstra was paying a high fully franked yield (quoted as 9.4%) but cautions that a high current yield doesn’t guarantee future dividends — especially in a changing telecoms sector. It implies you should weigh income now against the company’s ability to sustain dividends before buying for a young investor.
Is it sensible to buy recently strong performers such as QR National (QRN)?
The article points out QRN had risen more than 30% and that overseas investors may have acted on information local investors hadn’t, suggesting momentum can continue. A first dividend was expected in September, but the takeaway is caution: consider why the stock has risen, whether the dividend outlook is solid, and whether the price already reflects future good news before buying.
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