5 new year resolutions

Christine St Anne  |  23/01/2014Text size  Decrease  Increase  |  

Christine St Anne: Happy New Year, everyone. Today Westpac's David Simon joins again to talk to us about five key new year resolutions for investors.

David Simon: Tweaking your portfolio is an absolute classic. I mean, markets will move around regardless of economic conditions and as markets move around, it's really, really important to have a long-term strategic asset allocation strategy. So that means rebalancing on a regular basis and certainly not being a spectator.

The major asset classes of Australian shares and international shares and property indeed as well as other alternative asset classes like fixed income and currency are very, very fluid assets. They always move and having a very strong discipline strategic asset allocation is very, very important when you show the long-term plan stays the course.

Tax efficiency is certainly that people need to be aware of all the time, and there are certain things that people should be very cognizant of throughout the period. The first one is really knowing your marginal tax rate. Believe it or not, a lot of people actually don't know their own marginal tax rate.

Notably, there has been quite a few changes out of recent years on the tax rates, but people need to understand what the marginal tax rate is.

Other aspects around taxes is ensuring that people understand the right tax structures or the tax structures that are available. People can invest in a myriad of different options, such as a trust which gives control and discretion on how income and potentially capital was displaced. You can also look at other entities, such as superannuation, which is really, really, really efficient. Income tax is taxed at a maximum rate of only $0.15 in a A$1 and capital gains tax can be managed at a maximum rate of only 10 per cent. And indeed if you are in pension phase which for some people that's only from the age of 55 at the moment, you can actually be in a tax-free environment much like a non-for-profit where there is no income tax or capital gains tax whatsoever.

Other aspects around tax is understanding and managing gains and losses. People can be carrying losses forwards, so they can offset gains in the future indefinitely if they are carrying capital losses. And other aspects around capital gains is if an individual owns an asset for greater than 12 months, they get a discount of 50 per cent on their capital gains tax. So, it's really important that that people are aware of these tax situations.

The other aspect is all assets that generate income is largely taxable, but for some assets there are concessions such as Australian shares, franking credits can make the assessable income concessionally assessed, and indeed with property, the depreciation on property can also ensure that the tax assessment is more concessional than other traditional income such as interest from a term deposit.

According to ASIC, over half of the people that pass away, pass away without a will. So, that means that the law determines where assets are placed, and that could actually include relatives where you know the deceased effectively resents, so really important that people have an appropriate will.

But it doesn’t just stop at the will when you're referring to things like estate planning. It can be a lot more complex and a lot more structured incorporating different techniques such as having a Testamentary Trust, Power of Guardianship, and also a Power of Attorney shows that not just the estate is managed appropriately, not just when one passes away, but also somebody is incapable or unable to make a decision while still being alive is important part of the overall estate planning.

Insurance is only necessary for people that don’t have the provision in place or have accumulated assets sufficiently to ensure a replacement income or replacement of capital in the event they're not around. So, for those people – and that are traditionally more in the accumulation phase, for those people then insurances can be a very important part of their contingency planning. And there are many different ranges of insurance that people can look into. Certainly there is the staple, such as the lump sum insurance in the event of death, and that’s particularly important for people that have large debt or maybe single income households where if the income earner is no longer around, they're not able to repay the mortgage, let alone the (lots of) expenses of the family. So, that’s particularly important.

Other aspects such as disability and critical illness or trauma insurance is also important because that will pay a lump sum in the event of a critical injury or illness allowing the insured person to recuperate, but ensure there is no financial implication whilst they are out of action.    

Other aspects such income protection is also critical for people that are completely relying on their own ability to exert labor in order to generate income. So, it’s a tax effective product as it is largely 100 per cent tax deductible, but effectively replaces one's income in the event they are unable to work due to illness or injury.

There is no such things as a plan set in stone. I mean, as we all know our lives change. So, personal circumstances change in a very, very regular basis. On top of that, you've got financial markets that are always moving around. The legislation continues to change as well as the economic conditions, both domestically and globally. We will always evolve and will always move around.

So, it's absolutely critical that people are making sure that their strategies continue to be looked at, whether it’s a business plan or personal plan or financial plan, they are continually reviewed to ensure they stay on track. That’s where it's good to have quality advice, whether it’s a legal advisor, whether that’s financial planner, whether it's an accountant, really good quality professional advice will ensure that there is that underline discipline, ensuring that people stay on track regardless of how things move around.

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