Who inherits your super?
By visual /May 13,2020/
There are only certain people who can inherit your super when you die. There are also two different types of nominations you can make. Here’s what you need to know before making your super beneficiary nomination.
Super is different from other assets, such as your house, because the trustee of your super fund ultimately decides who gets your super and any associated life insurance, if it’s held within the super fund, when you die.
Super doesn’t automatically go to your estate, so it’s not automatically included in your Will. That’s why you need to tell your super fund who you nominate. And, depending on the type of nomination, they’ll either consider your nomination or be bound to pay it as you’ve nominated.
Who can you nominate?
Super fund trustees can only pay your super to ‘eligible dependants’ or to the ‘legal personal representative’(LPR) of your estate.
Eligible dependants are restricted to these people:
A spouse includes a legally married spouse or a de facto spouse, both same-sex and opposite-sex.
A spouse can be a person you’re legally married to but are now estranged or separated from. So, if you haven’t formally ended a marriage, your husband or wife is still considered your dependant under super law. And, while you can’t be legally married to two people, it’s still possible to have two spouses – a legally married spouse and a de facto spouse.
A child includes an adopted child or a stepchild. Even though a stepchild is included in the definition of a child, if you end the relationship with the natural parent or the natural parent dies, the child is no longer considered your stepchild. However, they may still be considered a financial dependant or in an interdependency relationship with you and could therefore continue to be a beneficiary of your super.
Generally, a person who is fully or partially financially dependant on you can be nominated as your super beneficiary. This is as long as the level of support you provide them is ‘necessary and relied upon’, so that if they didn’t receive it, they would be severely disadvantaged rather than merely being unable to afford a higher standard of living.
Two people have an interdependency relationship if they live together and have a close personal relationship. One, or each of them, must also provide a level of financial support to the other and at least one or each of them needs to provide domestic and personal care to the other.
Two people may still have an interdependency relationship if they do not live together but have a close personal relationship. For example, if they’re separated due to disability or illness or due to a temporary absence, such as overseas employment.
Who is not a dependant?
A person is not a dependant if they are your parents, siblings or other friends and relatives who don’t live with you and who are not financially dependent on you or in an interdependency relationship with you. If you do not have a dependant you should elect for your super to be paid to your legal personal representative and prepare a Will which outlines your wishes.
Legal personal representative
A legal personal representative (LPR) is the person responsible for ensuring that various tasks are carried out on your behalf when you die. You can nominate an LPR by naming the person as the executor of your Will. Your Will should outline the proportions and the people you wish your estate, including your super, to go to.
Types of nominations
There are two types of nominations you can make once you decide which super dependants, or LPR, you wish to nominate:
- Non-binding death benefit nomination
A non-binding death nomination is an expression of your wishes and the trustee will consider who you’ve nominated but they’ll ultimately make the final decision about who receives your super and any associated life insurance.
- Binding death benefit nomination
A binding nomination means the trustee is bound by your nomination. They must pay your super benefits to your nominated dependants in the proportions you set out or pay it to your estate if you nominated an LPR. Binding nominations need to be signed and witnessed by two witnesses who are not named as beneficiaries. Also, they expire after three years unless you re-affirm your nomination.
If you’re not sure of the best way to nominate your super beneficiaries, or to discuss your situation in further detail, please contact us.
Unintended consequences of Government COVID-19 Policies
By visual /May 13,2020/
For every action there is a reaction. And while we’re not criticising the government’s policy response to COVID-19, we recognise that such intervention often has unintended consequences.
Take lower interest rates for instance. Central banks intended to make the cost of investment cheaper and be stimulatory. Instead, Australian households borrowed more money to buy bigger and better houses and US corporates levered up to buy back shares. Both actions have contributed to the economy’s current precarious situation.
One needs to think laterally when considering unintended consequences, something we apply our collective minds to. Why? Unintended consequences can impact the long-term prospects of companies and industries, both positively and negatively.
A costly decision
Providing a payment holiday seems like the right thing for banks to do given the unique circumstances. However, is it simply delaying the inevitable?
While a payment holiday means you don’t have to pay principal or interest over a six-month period, interest still accrues. In other words, after the payment holiday you have more debt. Imagine if the asset against that debt, maybe your family home or investment property, is worth less in six-12 months’ time. That leaves you with a higher liability and lower asset value.
If the servicer of the loan cannot find a job and is forced to sell in a depressed market, this becomes permanent financial damage. The unintended consequence of a payment holiday for SMEs and households could be a bigger problem down the track.
Banks are experiencing significant demand for credit from existing customers. SMEs and households are getting payment holidays and larger corporates are drawing down any credit line they can. This is extremely capital consumptive for banks.
While the RBA is providing adequate liquidity and the government is providing motivation to extend credit to SMEs, there’s little motivation for banks to take on new customers, either consumers or SMEs. We believe credit rationing for new customers is likely, with non-bank lenders pulling back at the same time. This will provide a headwind for the economy, with a reduced number of business start-ups in the short to medium term.
SMEs are most likely to use retail and office properties. To keep SMEs afloat, the government is addressing the two biggest costs, one of which is rent. The government has set up rules for a Mandatory Code of Conduct which helps tenants with turnover up to $50m. Essentially, the commercial landlord must take the same revenue hit as the tenant. At least half of this rent is waived completely, and the rest is deferred.
This is a smart move politically because there’s a perception that commercial landlords are rich, so there’s little sympathy from the public. However, unintended consequences are likely.
Commercial property is an attractive investment for two reasons; the stability of cashflows and the ability to borrow large sums of money against the asset. Landlords generally don’t get to participate in the upside when a tenant’s sales are going through the roof, but on the flip side, when the going’s not so good, they still get paid or can replace the tenant.
Banks traditionally liked lending to commercial property owners because of stable cashflows, the security of a hard asset and there wasn’t that operating leverage as is the case in most businesses. A precedent has now been now been set.
Commercial landlords now must cop the downside being felt by their tenants. There is even a six-month moratorium on evictions; so this asset, which was generating cash and servicing a debt, is generating no cash and there is nothing the landlord can do about it.
When the dust settles, banks are going to want more collateral and will likely lower loan to value ratios at a time when values could be under pressure. Given the importance of debt finance for most commercial property investors, this is likely to negatively impact valuations in the medium term.
The unintended consequences could include landlords hiking rents to take this new risk into consideration. If unable to increase rents, the result could be an accelerated downcycle in commercial property valuations, which would provide a further headwind for credit providers, which in turn could lead to further credit rationing.
Policies being implemented today have numerous unintended consequences that may impact the long-term prospects of many industries. This includes changes to supply chains from global just-in-time inventory systems to relying more on domestic supply chains. Immigration may slow to a trickle which, in turn, will impact economic growth.
Planning, not panic: managing retirement portfolios through the pandemic
By visual /May 13,2020/
Despite the recent wild ride for markets coping with the uncertainty of the coronavirus pandemic, many investors are well-versed in the need to “sit tight”.
They understand that moving out of positions in falling markets risks crystallising losses at the bottom and missing out on the recovery.
For retirees it’s not so simple, where portfolios are particularly vulnerable to sequencing and behavioural risks that are not so apparent for those in the accumulation phase. If investors continue to contribute to their super fund in the current environment, they are potentially buying into the market at bargain prices every time they receive their salary.
Gains might take some time to materialise and losses some time to overcome, but with a long-time horizon there is more opportunity for an investor’s portfolio to recover.
If, on the other hand, investors draw down on their portfolio they may experience the sharp end of sequencing risk. Losses affect the entire nest egg, a proportion of which will be invested in assets acquired at higher points in the market cycle. In our view, most retirees have less of an opportunity to buy back in and take advantage of the future upside to current low prices. Crucially, most also have no choice but to draw-down to fund their costs of living – meaning they have to liquidate positions in a falling market.
Watching the dollar value of their life savings fluctuating over the course of a single day can be gut-wrenching for retirees, and these emotions are compounded by the ongoing health and societal crises raging around us. The fight or flight instinct is very strong in times like these. In our view, it creates a very strong behavioural risk for retirees who may act against their own best interests by switching out of growth assets at the worst possible time to “protect” what remains of their nest egg.
Shoring up your position without selling the silverware
These two risks create a conundrum for the retiree. On one hand, there is an imperative to reduce their exposure to market falls in order to minimise sequencing risk, and on the other hand there also exists a significant behavioural risk in shifting to lower risk asset classes at this point in time. It’s a tough time to make a decision but investors should be aware of the options available to them.
Diversify into other value assets
We believe one way to manage risk and lower an investor’s exposure to falling equity markets is to diversify. The key at the moment is to look to other asset classes where discounted pricing might be available, diversifying into areas such as infrastructure, property, credit and other alternatives.
There are a number of funds and products offering forms of protection for capital or income. Investors retain some level of exposure to market gains, but could also be insulated from more significant losses to their portfolio.
Research shows that one of the most powerful tools retirees have to secure the stability and sustainability of retirement income is to know how much they can safely spend. This depends on many variables such as age, health, social security, wealth – to which a financial advisor can guide retirees. It also might surprise retirees that even a large fall in markets may only require a small adjustment in weekly expenditure to ensure their retirement income lasts.
Reconsider what is ‘defensive’
The traditional approach to retirement investing is to move further into traditional ‘defensive’ assets such as cash and bonds. We would like to emphasise that while these assets in the short term have the least likelihood of a negative return and therefore could be considered ‘safe’, the future returns of cash and bonds are relatively low. A large allocation to this group may reduce long term returns and jeopardise the sustainability of a retirement income strategy.
Investors stand to lose when they move a large proportion of their assets to defensive positions such as cash and bonds in the current environment, locking in lower returns for their portfolio. It may feel comfortable in the short term, but over the long run it could seriously jeopardise the longevity of their retirement income.
We believe an investor could improve their retirement strategy over time by considering the steps above and always on the basis of sound financial advice.
Geopolitical risks for the economy and investments
By visual /May 13,2020/
The world has always been challenged by the dynamics of geopolitics. The nature and magnitude of associated conflicts may transition and manifest across varying contexts but, broadly speaking, geopolitical risk is ever present.
The fierce competition between the powerhouses of the East and West has been watched closely by many. The trade war between the US and China, characterised by tit-for-tat tariffs, continues to disrupt major global supply chains with greater levels of exposure to the two while threatening to hinder global economic growth, albeit the extent to which is difficult to determine.
Numerous attempts to assess the impact and cost of the trade war between the US and China have been undertaken and recent research by the International Monetary Fund estimated the combined effect of the tariffs announced in 2018 and the recently announced tariffs this year could lower global GDP by 0.5% in 2020.
However, not all market participants are worse off as a result of the disputes between the US and China. While the impact of the trade war has affected the financial markets, primarily through its effect on investor sentiment, more broadly there could be opportunities for some nations to benefit from a potential diversion of trade, particularly for economies who have the competitive capacity to replace US and Chinese firms .
The open rivalry and strategic competition comes as China makes progress towards achieving its major long- term goal in becoming a “moderately prosperous country” by 2020. As part of this strategy, China aims to become a “global innovation power in science and technology” along with several other goals relating to sustainability of its growth.
Some of the actions China is alleged to have taken to achieve this, including allegations of inappropriate transfer of IP and technology, have raised concerns over national security for the US. This issue has been a driving force behind the protracted trade negotiations between the two countries with negotiations stalling on matters related to restrictions placed on some of China’s largest players in the tech industry. The tensions between the two nations are likely to remain while the possibility of a trade deal is still unknown.
Recently the People’s Bank of China (PBoC) let the yuan depreciate in its daily rate fixing, to be above the key USD/CNY 7 mark. Key reasons for the RMB depreciation is suggested to be in support of growth in light of the impact of US tariffs on China. Recent measures by China to combat US tariffs through a devalued yuan has soured the outlook for a trade deal.
While China is caught in a challenging set of negotiations with the US, it is facing unrest within its own country. In 1997, when the UK handed Hong Kong over to China, a One Country, Two Systems Framework was established which set out civic freedoms and a high level of autonomy, including judicial independence.
Recently proposed amendments to Hong Kong’s Fugitives Bill to allow extradition of fugitives not only to China, but to any jurisdiction in the world with which the territory has no existing formal agreement, has led to protests in the streets of Hong Kong over concerns and fears that the law could be abused by China for political or commercial reasons.
What began as a peaceful protest against an amendment to Hong Kong’s Fugitive Bill has now turned into the revival of a deeper-rooted issue reminiscent of the 2014 Umbrella Movement. While it is an example of China’s assertion of power within its own borders, it too is a demonstration of a clash of political ideology and symbolic of the gradual reclaim of power that has long been vested in the West.
Changing geopolitical relationships is also clear in the pending UK exit from the European Union (EU). The outcome remains more uncertain yet following the resignation of May only months before the Brexit deadline. Oxford Economics’ modelling of the economic implications assumes the base case as the UK continuing its EU membership.
In this model, all scenarios show a degree of trade destruction in which UK trade volumes decline as a share of GDP, reflecting the increased cost of trade between the regions, encouraging consumption of domestically produced goods instead. In the worst case scenario, compared to the base case, exports fall by as much as 8.8% and imports by up to 9.4%. The loss contributes to a 3.9% loss of GDP when factoring in events, such as a drop in labour productivity and foreign direct investment.
The rise of widespread geopolitical issues comes at a time when the world economy is slowing. The uncertain impact of potential US tariffs and the course of the UK’s pending divorce from the EU continues to introduce greater levels of volatility into the markets.