Worried about running out of money in old age? We talk to retirement expert and women’s advocate Nicolette Rubinsztein about what women can do now to help their long term financial security.

Inform: Is financial literacy a women’s issue?

Nicolette Rubinsztein: When looking at financial literacy, women often rank lower than men. We are often just as informed and capable, but are frequently less inclined to take the next step to apply that knowledge. And I think that comes back to confidence.

Studies have shown that women are often less confident than men. This is partly due to conditioning, in how we raise our daughters. We tend to encourage girls to be perfectionists – not to be brave. There are also some physical factors that can come into play, how our brains work and the influence of hormones on behaviour.

Together, these can undermine women’s willingness to take action, and that includes when it comes to making financial decisions and taking control of their financial future.

 Q: What are the key financial risks for women?

NR: I think that one of the biggest risks is running out of money in retirement. We need to think about our longevity risk – as we’re probably going to live much longer than we think. As women, there is also a very good chance many of us will outlive our partners, which could mean we spend our final years on our own.

There are some great tools online that can help you estimate your life expectancy. When I did it, I had a number in my head – around 87, the age my grandmothers died. But the calculators estimated around 95 to 100 – much higher than I had thought.

When my husband did it, his estimate was 90 – which raised the real possibility of living 10 years by myself in retirement.

My numbers are probably pretty typical for many women. That means that we need to consider how much money we need to provide for those extra years – and also be across all the financial arrangements.

Q: How can women overcome the risk of running out of money in retirement?

NR: The most important thing they can do is calculate how much they’ll need.

The Association of Super Funds Australia (ASFA) retirement standard is just under $60,000 per year for a comfortable retirement. For a single, it’s $43,665. Another way to do it is to use a replacement rate: such as 70% of the income you were earning before you retired.

Once you have a figure in mind, you need to work out whether you’re on track to achieve it. To do this, you can project your current savings to calculate what level of income this will give you. Online tools can help with this, but the best way to be sure is to see a financial adviser.

If you’re not on track there are two main options: you can contribute more or work longer. Alternatively, you can reduce your expectations.

Q: When should women start planning for retirement?

NR: The biggest barrier to having enough money in retirement is simply not thinking about it early enough. People typically start thinking about retirement at around 50 or 55, or after certain life events – like paying off the mortgage or the kids’ finishing school.

But ideally, you should start planning in your 40s, if not earlier. Many people may be relying on working longer to save more, and then find that they can’t reach their retirement target because something happens.

About 20% of people have to stop work in their 60s due to ill health, while about half retire for reasons not of their own making, like sickness or redundancy. Some things will be out of your control, so that’s another reason for planning and being more conservative early on.

 Q: What advice would you give your three daughters to become financially secure?

NR: One of the key things is ensuring they have a career that can support them financially.

As a career mum, I used to think I should try to influence them to choose jobs that can be done flexibly – like, running their own business. But I’ve decided they should just do what they’re passionate about – there is no perfect solution for balancing work and family.

I try to raise them to be financially aware – one fun thing that they love doing is running a lemonade stand. We make them pay for the ingredients, so they learn about revenue and profit. Then they learn about marketing and promotion by selling the lemonade to passers-by.

But to ensure lifelong financial security, my advice for them is the same as for anyone else: get financial advice, start planning early – and don’t leave it to your partner.

Get the right advice

Everyone’s financial circumstances and retirement goals are unique, so it’s best to speak with your financial adviser. They can talk you through your options and help you choose the right super strategy for your needs.

 About Nicolette Rubinsztein

Nicolette Rubinsztein is a non-executive director at UniSuper, OnePath Insurance. Class Limited, SuperEd and the Actuaries Institute. She is also the author of Not Guilty, a practical guide for women juggling a family and corporate career on how to find a genuine work/life balance. Nicolette and her husband Jonathan Rubinsztein have three children.

This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a Financial Adviser before making a financial decision. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom Advisers are authorised representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, as at 26 June 2017, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. Financial Wisdom is registered with the Tax Practitioners Board as a Registered Tax (Financial) Adviser. However your authorised representative may not be a Registered Tax Agent, consequently tax considerations are general in nature and do not include an assessment of your overall tax position. You should seek tax advice from a Registered Tax Agent.

What is super?
Superannuation is a specialised type of investment designed to help you accumulate a significant level of savings for your retirement.

To encourage you to save for retirement, the rules provide various tax concessions for super investments. For most people, these tax concessions make saving through super more tax-effective than saving outside it, which means their savings may grow faster.

In return for the tax concessions, the rules restrict when and how you can access your super – generally you need to wait until you retire after reaching what is known as your ‘preservation age’.

Why is super important?
Australians now have a higher life expectancy than ever before. Current figures show that on reaching the age of 60, the average man will live for another 23 years and the average woman another 26 years.¹

It is unlikely that the government Age Pension alone will give you the financial freedom you want for the 20 or more years you are likely to spend in retirement. The Age Pension is designed to provide a basic income, but many people want a lot more from their retirement years including overseas travel, dining out, spending more time with their families and enjoying a more relaxed lifestyle.

What types of super funds are there?
There are four main types of super funds:

Corporate funds          
These are funds that are set up by an employer with a financial institution for their employees and often provide group discounts and special member benefits.

Industry funds
Some of these are open to everyone but if you work in a particular industry or under an industrial award your employer may contribute your Super Guarantee (SG) and other super into an industry fund. These funds can have a limited number of investment options in some cases and are usually run by employer associations and unions.

 Personal or retail funds
Retail funds are available to all individuals. They often have a large number of investment options which can be tailored to individual needs. These funds are run by financial institutions.

Self-managed super funds (SMSFs)   
These are often referred to as ‘do it yourself’ funds. The trustees/members manage their own super investments. They are responsible for the investment strategy, operation, administration and compliance of the fund.

Your financial adviser can outline the advantages of each and help you decide which type of fund is best for you.

What can super funds invest in?
Superannuation funds hold your money and invest it in different asset classes depending on the type of option you selected when you opened your super account. For example, if you selected a high growth option, your money will primarily be invested in Australian and global shares, with a smaller allocation in low-risk investments such as cash. The mix of investments that is appropriate to your needs will depend on your investment goals, your investment time frame and your attitude towards risk. If you have not selected which investment option you would prefer often a ‘default’ investment is allocated by the super fund.

Growing your super
There are several different types of super contributions; however these can be divided into two main categories:

• concessional (pre-tax) contributions.
• non-concessional (after-tax) contributions.

Concessional contributions

Concessional contributions are those that are generally taxed concessionally at just 15% (rather than your marginal tax rate) and include:

• Compulsory employer contributions, for example Super Guarantee contributions which generally involves your employer contributing 9.5% of your salary to super for you².
• Voluntary employer contributions, for example salary sacrifice contributions where you agree with your employer to give up some of your future pre-tax salary in return for extra employer contributions.
• Personal contributions for which you claim an income tax-deduction³.

Non-concessional contributions

Non-concessional contributions are those made from money that has already been taxed at your marginal tax rate and include:

• Personal contributions for which you do not claim a tax deduction
• Eligible contributions made by your spouse into your super account.

Are there limits to how much I can contribute?
When considering any super strategy, it’s important to assess how much you are contributing to super in any one year. The Government has set annual limits – known as contributions caps, and additional tax may apply where you exceed the caps⁴.

The contributions caps for the 2017-18 financial year are⁵:

• A concessional contributions cap of $25,000 per financial year.
• A non-concessional contributions cap of $100,000 per financial year, or $300,000 over a three-year period (known as the bring forward rule) if you are under age 65 any time during a financial year.  In addition:
  • Your non-concessional cap reduces to Nil once your total super balance (just before the start of the year) is $1.6 million or more.
  • The cap you have available under the bring forward rule will reduce once your total super balance⁶ (just before the start of the year) is $1.4 million or more.
  • If you triggered a bring forward rule in 2015-16 or 2016-17 (the bring forward cap was $540,000 at that time) but did not use all of your cap by 30 June 2017, transitional rules will reduce the remaining cap you have available.

Am I eligible to make super contributions?

If you are under age 65, there is no restriction on your ability to contribute to superannuation. However, those aged 65 to 74⁷ will need to satisfy the ‘work test’ (i.e. be gainfully employed for at least 40 hours during a consecutive 30 day period in the financial year to which the contribution relates). Once aged 75, voluntary super contributions can generally no longer be made, even if you continue to work.

Compulsory contributions (e.g. Super Guarantee) can be made at any time regardless of your age.

Is there a limit to the amount of super you can save?
While contributions caps limit the level of contributions you can make to super each year before additional tax applies, there is no limit to the amount of superannuation you can accumulate through your working life.

However, there is a ‘transfer balance cap’ of $1.6 million on how much of your superannuation you can use in retirement to commence retirement phase income streams (earnings on assets supporting these income streams are tax free).  Any superannuation above your transfer balance cap can remain in the accumulation phase of super, or be withdrawn from the super system.

How is super taxed?⁸
Compared to other types of investments, super may be a tax-effective investment over the long term.  Depending on your situation, tax may apply when you contribute, on investment earnings in your fund, and when you withdraw benefits from super.

Contributions

If you make pre-tax (concessional) contributions to super, they will generally attract a contributions tax of just 15%⁹. A government low income super tax offset of up to $500 extra into your super each year applies if you earn up to $37,000 pa and have made concessional contributions in the year. Best of all, the payment will happen automatically as the Australian Taxation Office (ATO) will work out your eligibility from the tax file number lodged with your super fund.

Non-concessional contributions are not taxed when received by your fund as they have already been subject to income tax in your hands.

Contributions that exceed your caps may be subject to additional tax⁴.

Investment earnings

While in accumulation phase, or a transition to retirement income stream (where a full condition of release has not been met), earnings on the investments in your super fund are taxed at a maximum rate of 15%, which could be lower than your marginal tax rate.

If you commence a retirement phase income stream from your super in the future, earnings on the investments in your income stream are tax-free.¹⁰

Withdrawals

The amount of tax you pay on your super when you withdraw will depend on your age and whether you take the money as a lump sum or as an income stream, such as an account based pension or annuity.

Generally, all super can be withdrawn tax-free if you are aged 60 or over, whether you take it as a lump sum or as an income stream. If you begin withdrawing your super before you turn 60, you may have to pay tax on the amount you withdraw, although part of your super may be tax-free.

When can you access your super?
The Government places restrictions on when you can withdraw your super – known as ‘preservation rules’. These rules ensure your super balance is locked away and continues to grow until you meet an eligible condition of release. Conditions of release include:

• Permanently retiring after reaching your preservation age
• Ceasing a gainful employment arrangement after age 60
• Reaching age 65
• Death
• Becoming permanently incapacitated or terminally ill
• Commencing a transition to retirement income stream upon reaching your preservation age.

Your preservation age will be between 55 and 60, depending on your date of birth. You can find out what your preservation age is by visiting ato.gov.au or speaking to your financial adviser.

Super housing measures

First home super saver scheme

From 1 July 2017, you can make additional pre-tax or after tax voluntary contributions to super to save for your first home. As super is concessionally taxed, saving through super may allow you to save for your first home more quickly.

You can contribute up to $15,000 pa ($30,000 in total, across all years) in voluntary contributions¹¹ under the scheme. From 1 July 2018, you can then withdraw the contributed amounts plus a deemed earnings amount to help fund the purchase of your first home (this amount includes 100% of eligible non-concessional contributions, 85% of eligible concessional contributions, and associated earnings calculated on these contributions). Amounts withdrawn (excluding after tax contributions) form part of your assessable income but provide you with a 30% non-refundable tax offset.

For further information about the First Home Super Saver Scheme, please refer to www.ato.gov.au.

Downsizer contributions

From 1 July 2018, if you are aged 65 or over and sell your principal home¹², you can make a downsizer contribution of up to $300,000 of the sale proceeds into your superannuation account. Downsizer contributions are not subject to normal contribution eligibility criteria such as having to meet a work test and don’t count towards other contributions caps. However, it will count towards your total super balance and transfer balance cap, currently set at $1.6 million. This cap applies when you move your super savings into retirement phase.

If you are thinking of downsizing your home, this new measure allows you to contribute up to $300,000 ($600,000 combined for a couple) of the proceeds into the concessionally taxed superannuation environment. The contribution will be tax free when received by your fund, although it will be assessable under the social security assets test and generally deemed under the social security income test

To be eligible to make a downsizer contribution, your principal home must have been owned by you and / or your spouse for at least 10 years, and you must have not made a downsizer contribution from the sale of another home in the past.

Please note, there are a number of additional eligibility requirements that will also need to be met.

For further information about downsizer contributions, please refer to www.ato.gov.au.

Things to consider:

• Super is one of the largest investments you will ever make in your lifetime
• The tax concessions can make it a great way to save for your retirement.
• Super regulations are changing constantly so it is important to get professional financial advice to plan for a better and more secure lifestyle in retirement.

1              Source: Australian Government Actuary. Australian Life Tables 2010-12.

2              The SG rate is 9.5% until end of financial year 2020/21. After that it will increase gradually each financial year by 0.5% until it reaches 12% on 1 July 2025.

3              Prior to 1 July 2017, in order to make a personal tax-deducible contribution, you must have not been an employee during the year or have less than 10% of your total income attributable to employment.  This eligibility test has now been removed so that all eligible contributors can make personal tax-deductible contributions to super.

4              Contributions made in excess of your concessional contributions cap are effectively taxed at your marginal tax rate, plus an interest charge. You are also able to withdraw up to 85% of any excess concessional contributions. Contributions made in excess of your non-concessional contributions cap are taxed at 47%, however, you will generally instead have the option of withdrawing non-concessional contributions above your cap tax free, plus an associated earnings amount which is taxed at your marginal tax rate less a 15% tax offset. Interest charges may also apply to the amount of tax payable to cater for timing differences on when the tax is payable.

5              Contributions caps were significantly reduced from 1 July 2017.  Higher concessional and non-concessional contributions caps applied for the 2016-17 financial year.

6              Total super balance is broadly the total of all your superannuation accounts, whether in the accumulation or pension phase.

7              However, spouse contributions can no longer be made once the receiving spouse has reached age 70.

8              The tax rules discussed in this fact file apply to taxed funds only and do not apply to untaxed funds (untaxed funds include certain government superannuation schemes).

9              If your total income (including your concessional contributions) exceeds $250,000, you will need to pay an additional 15% tax on part or all of your concessional contributions.

10            Retirement phase income streams include account based pensions and most superannuation income streams, but exclude transition to retirement income streams where a full condition of release has not been met

11            The amount of voluntary pre-tax contribution amounts able to be withdrawn is reduced by 15% to allow for contributions tax.

12            Applies where the exchange of contracts occurs on or after 1 July 2018.

Snapshot                                                                                           

• Did you know that 95% of Australian families do not have adequate insurance cover?¹
• Insuring yourself and your family can be the most important thing you do to protect your family.
• Talking to your financial adviser can help simplify the process so you are only covered for what you need.

What is personal risk insurance?

Personal risk insurance is an important way of assisting you and your dependants to be financially supported in the event of serious illness, disability or death. If your ability to earn an income is affected, a personal risk insurance policy may enable you to maintain your current lifestyle and continue supporting those who depend on you.

Why do I need it?

While we recognise the emotional impact of events such as serious illness or death, the financial consequences can be equally devastating. If the unexpected did occur, having personal risk insurance can go a long way to helping you and your family meet your basic living expenses such as your mortgage, groceries, petrol or school fees. Depending on the event, you may also need to cover significant medical expenses, rehabilitation, modifications to your home or services to help maintain your lifestyle.

 Types of personal risk insurance

Life insurance

Life insurance can help provide financial assistance for a family if they lose the homemaker or breadwinner.Life insurance

In a business situation, life insurance can help protect against the loss of a key employee or business partner.

Total and permanent disability (TPD) insurance

TPD is designed to help meet one-off and ongoing living expenses, as well as cover special expenses such as medical and rehabilitation costs. To receive a TPD insurance benefit, you must satisfy specific criteria to establish the genuine nature and extent of the disability (this can vary between insurers). These criteria usually include a range of permanently disabling conditions specified in the policy, such as paraplegia, as well as more general criteria relating to your total and permanent inability to work.

 Income protection insurance

Income protection insurance, also known as salary continuance insurance, pays a monthly benefit of up to 75% of your pre-tax salary if you are disabled due to an illness or injury for longer than the nominated waiting period. Income protection benefits begin after a predetermined waiting period (e.g. 30 days, 90 days, or two years) that you nominate when you take out the cover. Generally, a longer waiting period means a lower premium however it also means you’ll have to wait longer to receive your first benefit payment. The policy will continue to pay the benefit for as long as you remain unable to work up to a maximum predetermined period. This can be a set timeframe such as two years or age based (e.g. up to age 65).

Trauma insurance

Trauma insurance provides a lump sum payment if you suffer a serious, debilitating medical condition (as specified in the policy you choose) such as heart attack, cancer or stroke. Trauma insurance is designed to help people cope with the financial impact of a traumatic event as they recuperate. Generally, you will receive the trauma benefit provided you survive for a set period after incurring the condition.

It is important to note that different policies may have different features and you can access certain types of insurance through your super. Talk to your financial adviser for the most appropriate insurance to suit your individual and family needs

What kind of insurance do you need and when?

As your lifestyle and financial position change over time, so do your risk insurance needs. For example, during the years when you are supporting a young family or paying off a large mortgage, you will likely want more protection than later years when you may have downsized homes and your children are in the workforce. The diagram shows what type of insurance may be required most during each phase of life.

 Can you afford personal risk insurance?

When you consider your existing financial commitments and level of savings, how long could you be without an income before you would need to sell the house or change schools? The cost of premiums for any personal risk insurance policy reflects both the risk (probability) of an insured event occurring and specific features of the policy. Some typical risk factors are your age, the state of your health, your occupation and the type of recreational activities you participate in.

Some of the policy features may include:

• the amount of benefit payable upon claiming
• the waiting period before benefits are paid
• how long benefits will be paid out for.

Before taking out personal insurance, consider the policy features carefully and seek professional advice.

Insuring through superannuation

Acquiring life insurance through your superannuation fund can provide some tax concessions which are not generally available for life insurance policies held ‘outside super’. For example, your superannuation fund may be able to claim a tax deduction for the life insurance premiums for life, TPD and income protection which can be paid for via salary sacrifice contributions (pre tax monies) and the contribution is only subject to 15% contributions tax. This could make it significantly cheaper (on an after-tax basis) for you to insure through superannuation.

Not all types of personal risk insurance is available through your superannuation fund. New rules came into effect on 1 July 2014 that restrict the types of new TPD and income protection policies that can be purchased through superannuation, while new trauma policies are generally prohibited.

 Tax considerations

Salary sacrifice contributions and personal tax-deductible contributions you make to super to fund insurance premiums (along with your other concessional contributions) are subject to the concessional contributions cap ($25,000 for the 2017-18 financial year). If you exceed this cap, the excess is effectively taxed at your marginal tax rate, plus an interest charge². When insuring through superannuation, if life insurance benefits become payable they attract a tax liability of up to 32% if paid as a lump sum to a non-dependant. However where life insurance benefits are paid from super as a lump sum to a dependant, they are tax-free. TPD insurance may also be subject to tax if paid from superannuation as a lump sum.

Depending on your situation, you or your eligible beneficiaries may be able to receive life or TPD insurance proceeds as a superannuation income stream, in which case different tax rules will apply.

Benefits for income protection acquired through superannuation are taxed at normal marginal tax rates.

The importance of policy ownership

Whether you are taking out risk insurance yourself, with your spouse or with a business partner, ownership of the insurance policy is an important consideration. There are different policy ownership options available. Each one can give a different outcome in certain circumstances. We recommend you seek professional advice on the structure that suits your goals and objectives.

 Ways your adviser can help

• Your financial adviser can help decode the various insurance policies and find the right mix of cover to suit your needs.
• They can outline the pros and cons of waiting periods, different insurance providers and premiums.
• Based on your current investment portfolio and earnings they can ensure your level of income is protected should the unexpected happen – so your family have financial security and you can recover in comfort.

[1] Lifewise/NATSEM Underinsurance Report – February 2010.

2 You are also able to withdraw up to 85% of any excess concessional contributions. Amounts withdrawn do not count to your non-concessional contribution cap.

IMPORTANT INFORMATION

This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom advisers are authorised representatives of Financial Wisdom. Information in this document is based on regulatory requirements and laws, as at 1 July 2017, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. Financial Wisdom is registered with the Tax Practitioners Board as a Registered Tax (Financial) Adviser. However your authorised representative may not be a Registered Tax Agent. Consequently, tax considerations are general in nature and do not include an assessment of your overall tax position. You should seek tax advice from a Registered Tax Agent. Should you wish to opt out of receiving direct marketing material from your adviser, please notify your adviser by email, phone or in writing.

 One of the problems when discussing wealth creation and retirement planning is that it usually involves words rather than numbers. People say they want to ‘build a retirement nest egg’ or ‘make sure I have enough to live comfortably’ or ‘pay for my kids to go through private school’, but rarely are accurate numbers attached to those wishes.

“Until you come up with real numbers it’s impossible to come up with goals or a solid financial plan,” says Deborah Wixted, Head of Advice at CBA Investment and Advisory Services.

“In order to measure how you are tracking against your goals, what you can afford and what you need to do to make your objectives a reality, you must be able to say, ‘In exactly five years from now I want to have enough money to pay $20,000 annually for my child’s private school education,’ or, ‘From age 65 to 85 I will require today’s equivalent of $55,000 annually.’”

The starting point, experts say, is the development of a thorough understanding of your own cash flow and its likely future movements. This is even more important for women, whose careers and income earning capabilities traditionally experience more interruptions.

In order to figure this out, check how much your savings account is growing by each month – if it’s not growing then that’s the first serious problem identified. Or for a deeper understanding, record all of your spending per month over several months to find out exactly how much is going where.

Use this information to figure out what spending is essential and what is non-essential, and where you can cut back in order to give yourself a greater chance of achieving goals.

Next, write down short-term, medium-term and long-term goals, each with financial figures against them. Then prioritise each of your objectives. Using your knowledge of your current financial position, your current available cash flow and your goals, the picture of how you make those goals reality becomes a lot clearer.

The second part of the equation is developing an understanding of the financial and investment markets. Speak with a financial adviser, read financial sections of media and do whatever else you can to improve your financial literacy. A goal that seems unattainable can suddenly become far more realistic if you’re aware of various tools that are in place to help you get there.

“If you know a little about the investment environment, which is constantly changing, and you have a finger on the pulse of your own profit and loss, developing a plan and realistic goals becomes a lot easier,” Wixted says.

A good financial strategy will also include ways to protect the plan against unforeseen interruptions. This is what personal insurance is all about.

Finally, Wixted recommends the plan is re-visited at least once a year and also every time there is a major change in circumstance, whether it’s a wedding, having a baby, a pay rise etc.

“A good plan is never set and forget,” Wixted says. “You should always know whether you’re on track or not and always keep an eye on what the investment markets are doing. Do this, and monitor your own behaviours such as paying off mortgages, credit card debts and putting money into savings etc, and the result should be peace of mind and financial comfort.”

This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a Financial Adviser before making a financial decision. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom Advisers are authorised representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, as at 6 April 2017, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. Financial Wisdom is registered with the Tax Practitioners Board as a Registered Tax (Financial) Adviser. However your authorised representative may not be a Registered Tax Agent, consequently tax considerations are general in nature and do not include an assessment of your overall tax position. You should seek tax advice from a Registered Tax Agent.

There are many types of investment vehicles to choose from, with managed funds one of the most popular choices in Australia. Here are some of the reasons for investing in managed funds, direct shares, bonds and exchange traded funds to help you work out which combination is right for you.

Types of investment vehicles:

■ Managed funds
■ Direct shares (listed equities)
■ Exchange traded funds
■ Investment bonds

What is a managed fund?
Managed funds pool the money of many individual investors. This money is then invested by a professional fund manager in different asset classes (eg shares, property and bonds) in line with the fund’s stated investment objectives. When you invest in a managed fund, you are allocated a number of ‘units’, rather than shares. Each unit represents an equal portion of the market value of the portfolio of investments. Each unit has a dollar value, known as the ‘unit price’. The unit price will vary according to changes in the market value of the investment portfolio or the total number of units issued for the fund.

What types of managed funds are available?

What are the advantages of managed funds?

For some investors, managed funds provide the right amount of control without the time-consuming hands-on management required by direct investing.
The advantages of investing in managed funds include:

■ Access to sophisticated investments: investing in a managed fund gives you access to a range of investments that may not ordinarily be available or affordable to you as a single investor.
■ Diversification: through managed funds, you can access different fund managers, asset classes, companies, industries, sectors and countries. To achieve this level of diversification when investing directly, you would need large sums of money to invest.
■ Your money is managed by experts: the qualified investment professionals managing your money have access to information, research and investment processes not readily available to individuals.
■ Regular investment plans: many managed funds offer the convenience of a regular investment plan – deducted straight from your bank account – so you can add to your investments on a regular basis.
■ Select your investment style: you can choose whether to invest in a managed fund designed to deliver income, or one focused on capital growth.
■ Distribution reinvestment: managed funds make it easy to reinvest your earnings. This allows you to purchase more units with no additional cash outlay and take advantage of compounding over time.

Investing in shares
A shareholding is part ownership of a listed company. The shareholder receives dividends or income from their share investment and the company is able to raise valuable equity capital to fund its growth and operations. The shares can then be sold on the stock exchange and a potential capital gain realised if the share price rises – creating an opportunity for both income and capital growth.

What are the advantages of shares?
■ Flexibility and liquidity: shares offer real-time pricing, this means you can buy or sell your shares easily and quickly at any time whenever the market is open. This allows greater transparency plus the flexibility to invest over the long or short term and pick your stocks.
■ Low cost: shares are typically a cheaper investment option to manage due to lower operating costs and management fees.
■ Capital growth and dividends: shares offer capital growth and maximum control over capital gains realised, as you can make the decision when to sell. Shares held by individuals or trusts for more than 12 months qualify for a 50% discount on any capital gains tax (CGT) payable, in addition complying super funds can qualify for a 33.33% discount. Shares also offer income paid as dividends.
■ Franking credits: Australian shares often include franking or imputation credits, which means where the company has already paid the tax on their profits, you can use these franking credits to offset tax payable on your other income.

Investing in exchange traded funds
An Exchange Traded Fund (ETF) is an investment fund traded on stock exchanges, much like shares. An ETF can hold assets such as shares, commodities or bonds. ETFs usually track the performance of an index, giving investors access to an instantly diversified portfolio. ETFs are open-ended funds, meaning investors have the flexibility to buy or sell shares at any time. The premise of an ETF is that you are buying into a selection of companies in one hit, rather than individually picking each company to invest in. The value of your investment is driven by the underlying asset value and general market sentiment.

What are the advantages of ETFs?
ETFs can be managed as a passive investment, which is cost effective and your returns will more than likely match the market. Alternatively using ETFs as part of an actively managed portfolio can assist with reducing costs and enhancing portfolio diversification. Finally ETFs are a good way to gain exposure to international shares and foreign currencies. For an investor looking to avoid volatility, the risk from currency movements needs to be understood before proceeding with an ETF. You should speak to a financial adviser to ensure your investment portfolio suits your requirements.

Investment bonds
Investment bonds can provide you with a simple, tax-effective, long term investment. They are also known as insurance bonds, and are ‘tax-paid’ life policy investments. This means the life company pays the tax on the investment earnings, making them potentially a tax-effective way to invest.

What are the advantages of bonds?
Tax effective investing
One of the most significant benefits of investing in bonds is the tax advantages, particularly for investors on a marginal tax rate greater than 30% as this is the maximum rate the life company pays on its investment earnings. Another benefit is provided you hold your investment bond for 10 years, there is no tax on investment withdrawals (as long as contributions each year do not total more than 125% of the previous year’s contributions). You can switch between investment options without tax consequences.
Investing for children
Bonds can be used as an investment vehicle for children without incurring a penalty tax rate. A bond can be set up in a child’s name (ages 10–16) or you can invest on a child’s behalf (under 10 years of age) and transfer the ownership when the child reaches a certain age.
Estate planning benefits
Bonds are an attractive investment for estate planning as proceeds can be paid to any beneficiary (not just dependants) tax-free. Bonds are flexible as you can nominate more than one beneficiary and stipulate the percentage paid to each upon your death.
Increased Age Pension
The amount of your Age Pension depends on your family circumstances, income and assets. A bond, held through a family trust, may provide significant advantages by maximising Age Pension payments if they’re calculated under the Centrelink Income Test. They may also reduce aged care facility costs.
Ways your adviser can help
As with any investment, periods when markets are down or volatile are generally not a good time to make hasty decisions. If the value of your investment has fallen due to current market conditions, remember that you are only making a loss on paper. Selling your investment would make those losses real and irreversible.
If you are ever concerned about your investments, the best thing to do is talk to your financial adviser. They can provide clear, objective advice on how market movements may affect your investments and help to rebalance your portfolio and minimise your tax liability.