Statement of Advice - Financial Planning in Australia - Case Study Example

Statement of Advice Student’s name: Institution: Instructor: Subject: Table of Contents Cover Letter 4 Executive Summary 5 Your Present Financial Statement 6 Cash flow statement for year 2012 6 Net Worth 7 Fact Sheet: Investing and Your Option 8 Financial objectives 8 Paying fees for your grandchildren 8 Strategy recommendations 9 AMP Growth Bonds 9 The 10 year tax rule: No personal tax is levied after 10 years 9 The 125% opportunity: Simplified 10 How the 125% opportunity works 10 Retirement account 11 Importance of a Retirement account 11 Contributions Accepted 11 Member contributions 11 Spouse contributions 11 Award contributions 11 Salary sacrifice Contributions 12 Government co-contributions 12 Your investment in retirement account 12 Flexibility in payment options 12 The type of account you can use YPE OF ACCOUNT SUITABLE FOR 13 The amount of income you can receive 13 Pension factors 13 Summary and Conclusion 15 Diversification of risks in investments) 15 Avoid unnecessary government tax 15 Changing your Investment Level 15 Switching 16 Consolidating your super account 16 How do you combine your super? 16 The Government Age Pension 17 (a) Age requirements 17 References 19 Cover Letter Prepared for: Tony and Annah Ross Address: ............................................ Contacts: ........................................... Date: ................................................. Prepared by: ...................................... Authorised Representative Number: 2319HT Authorised representative of: Australian Financial Planning Group ABN: VXZ984 Australian Financial Services Licensee: ...................................... License No: AD52978656 Level: 5A Dear Tony/Annah, Re: statement of advice You are entitled to receive a Statement of Advice (‘SOA’) whenever we provide you with any personal financial advice. My Personal advice takes into account your financial goals and objectives, current financial situation and needs and addresses them accordingly. This SOA is a detailed report on personalised financial advice showing your10 years of your financial projections and how you can transit easily to your retirement provided. It also includes information on a product recommendation to help you have stable and reliable income when you retire. Executive Summary I believe that implementing my recommendations will be of help to you in achieving your retirement objectives of educating your grandchildren, buying a new home at the coast, repairing Anna’s car and taking a business investment that that does not require you to take loans from financial institutions. Beginning with your retirement lump sum of $381,000, conservative investment returns have been used for the estimation of your income retirement. My estimate is that you will receive 126,126 $ a year in today’s dollars. This income is enough to enable you to live comfortably throughout your retirement years. You will also have secured investment AMP Growth bonds which will be worth $ 298 023.201 will not be having any more loans to pay and this will enable you to live a comfortable peaceful life. Bearing in mind that we are living in changing times, this statement of advice needs to be revised from time to time. Many assumptions have been made due to these uncertainties that come due to unpredicted personal changes or changes in environment (Grable, 2000). .Therefore recommendations in this Statement of Advice need to be reviewed and modified at regular basis. This is to avoid any impression of certainty in achieving this goals and objectives Your Present Financial Statement Cash flow statement for year 2012 Total salary per year in $ Tony Anna Rental income Franked Dividends Gains from retirement accounts Tony Anna Earnings from joint accounts Assessable income Deductible Interest expense Interest on property loan Share portfolio loan interest Mortgage interest Other personal deductible expenses Total expenses Taxable income Medicare (1.5%) Total Tax Received income after taxes Credit card debt payments Living and Holiday expenses Net savings capacity 105 000 54 000 23 000 13 050 23 400 4 125 15 600 238175 6 000 28 500 1 771 3 500 39 771 198404 3 126.06 70 351.81 124 926 2 520 80 000 42 406.13 $ Net Worth Assets Owner Acquisition value Market value liability Net value House at 3 manor street joint 750 000 nil 750 000 Investment property joint 400 000 600 000 nil 600 000 Portfolio share joint 400 000 290000 nil 290 000 car Tony 40 000 nil 40000 car Anna 20 000 nil 20 000 Net worth 1 700 000 Fact Sheet: Investing and Your Option Based on various levels of income over different timeframes, the table provides a guide as to how long your super could last before the Government Age Pension becomes your sole source of income. Since your annual income is $42 406 for 10 years you’d need around $260,000 in Super. This is based on your savings being used to open an Australian Super Pension as well as receiving a part Government Age Pension. Financial objectives 1. A stress-free retirement and simplified financial commitments 2. have good secondary school for your grandchildren 3. buy a dream home worth approximately 800 000 $ at the coast 4. repair Anna’s car Your financial cash flows shows that you are capable of saving 42 406.13 $ plus 26000 dollars already in their joint savings account to have a total of 68 406.13$ only for the current year. Since your daughter is weeding next year your net saving next year will reduce by $20,000 therefore have a saving of 48 406.16$ Paying fees for your grandchildren In the year 2014 your financial cash flow will be the same as for the current year and have a saving of funds. This will continue for the next three years and for the fourth (2017) year you will need to pay school fees for the first born kid of your son which is $15000 per year meaning that your savings will reduce to 40 532. This will continue for the 3 years until when your second grandchild will join secondary school year (2020) and your savings will reduce to -2594dollars.The total requirement for secondary school fees for your grandchildren is $180 000, with $ 260 000 amount in your pension account your will make to pay fees for the three kids. Projections for your savings in the next ten years will be as follows. year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Savings in $ 68 406 48406.13 42 406 42406 42406 27 406 27 406 27 406 -2594 -17 594 Total savings for the ten years= 306 060 Strategy recommendations AMP Growth Bonds Having your total net worth amounting to $ 1 700 000 and since you are not happy with the portfolio share (worth $ 290 000) you have you can opt to sell it and invest in more profitable bonds. Choose to invest in AMP Growth Bond that simplifies your tax and helps you save money. It is a “tax paid” investment that allows you to take advantage of the tax treatment in this type of product. AMP Life pays tax on investment earnings currently at a rate of 30% and the actual rate the actual rate paid may be reduced as a result of imputation credits. It includes the 10 year tax rule and the 125% opportunity (Elsayed & Martin, 1998). The 10 year tax rule: No personal tax is levied after 10 years If you hold your growth bond investment for 10 years from the original investment date without making any withdrawals, you will be exempted from paying Personal income tax on any investment earnings. That is, after 10 years there won’t be any personal income tax charges (investment earnings) made on your AMP Growth Bond in time of withdraw. The 125% opportunity: Simplified Each year you can invest up to 125% of the previous year’s contribution without restarting the 10 year tax period. For example, if you invested $10,000 during year 1, you can invest up to $12,500 ($10,000 x 125%) in year 2 and so on. By contributing up to 125% of the previous year’s contribution you can take advantage of the 10 year tax rule. You can switch investment options at any time; this will not affect the 10 year tax rule or the 125% opportunity. How the 125% opportunity works The table below shows income gained by starting with a contribution of $100 per month or an initial starting contribution of $40,000, your investment can work using the 125% contribution opportunity. Based upon an initial contribution in the first year of $1,200 then taking advantage of the 125% contribution opportunity each year, you can invest up to $8,940.70 in year 10 as shown in the graph below Year If you invest $100 per month If you invest $ 40000 at 25% Year1 1 200 40 000 Year 2 1 500 50 000.00 Year 3 1 875 62 500 Year 4 2 343.75 78 125 Year 5 2 929.69 97 656.25 Year 6 3 662.11 122, 070.31 Year 7 4 577.64 152587.88 Year 8 5 722.56 190 734.85 Year 9 7 152.56 238418.56 Year 10 8940.70 298 023.201 To invest in this type of bonds you do not need to take a loan but I do advice that out of your current savings of $ 68 406 ,you can invest $ 40 000 in a lump sum and don’t withdraw any amount until a period of ten years is over and by doing so, withdrawals from your account will be without any tax charges on your taxable income as it is according to Australian AMP Growth Bond and at the end of 10 years you will have $ 298 023.201 in your bond account at the current rate of 25%. You can also sell your current home which is worth $750 000 and buy your dream home at the coast worth $800 000 and also repair Anna’s car which will cost 50 000, therefore this will involve a withdrawal of $ 100 and still retain 297932.201 $ in your account and by doing so you will have achieved your financial retirement objectives. Retirement account Since you are planning to retire you need to open a retirement account. You can try and get AMP Flexible Super - Retirement account. Importance of a Retirement account Withdrawing money though a Retirement account can be a tax-effective method The earnings within your account and other investments are tax-free (Harlow, & Brown 1990).There are no PAYG tax deductions from your income payments once you have achieved the age of 60 and above, this is very important to you since 10 years from now you will be above sixty.There is 15% tax offset on the taxable portion of your income payments at the age of 60 and above (Grable, 2000).Since you’re between the ages of 55 and 65 and not yet retired, you make a smoother transition to retirement by opening your Retirement account so you can draw a regular income from your super account (Gaskekk & Ashton, 2008)). Contributions Accepted The following contributions are accepted into your account: Member contributions In this type of contribution you either pay from your after-tax or before-tax income Spouse contributions These are Contributions that your spouse pays into your account and they are entitled to a tax deduction for and must be living with your spouse and not live separately from you on a permanent basis). Award contributions These are Contributions your employer pays to avoid a liability for SG charge, and the contributions paid to help with an Award or Industrial Arrangement. Salary sacrifice Contributions In this contribution you will be able to arrange for your employer to be making contributions to your account. These are called salary sacrifice contributions which are treated as employer contributions. This can also involve your employer making employer contributions to your account in addition to your SG, Award contribution and salary sacrifice contributions. Government co-contributions You may also be capable of receiving a co-contribution from the government Your investment in retirement account The lump sum super you deposit into your Retirement account we say this is your “investment”. It is advisable to open a retirement account before you retire since you can only open your account to add more money to an already existing Retirement account with a single investment amount (Hershey & Wilson, 1997). Minimum income payment that you can receive per year is calculated on basis of your account balance and your age at the time of investment, then it’s recalculated every 1 July of every year and this income payment applies for the whole of financial year (Moisand, 2008). As Nicolaisen,( 2005) explains, If you invest in both a Super account and a Retirement account using a Transition to Retirement strategy .There is a set maximum amount of what you can be paid as income in a year from your Retirement account which is currently set at 10% of your account balance). This amount is then recalculated each year basing on your account balance as at 1 July. Flexibility in payment options Retirement account offers you a flexible payment option which helps you to determine the date and frequency of your income payments of which you can choose the frequency and amount at which you want to receive your income (Nobes, 1993). The type of account you can use YPE OF ACCOUNT SUITABLE FOR Super account and Retirement account under a Transition to Retirement strategy- since you are between your preservation age and 64, and you have not retired you can go for this type of account (Hershey & Wilson, 1997). The amount of income you can receive You are allowed to select the amount of income you want to receive from your Account in every financial year (from 1 July to 30 June) it should be at least the minimum annual income payment allowed by the by Government. You are at liberty to change the amount you at any time; however your minimum income may be adjusted income if your minimum income payment will not be met Pension factors Your minimum annual income payment is calculated using the following formula and table: Following formula and table: Minimum Annual Income Payment = Account Balance x Pension FactorAT ATI AT DATE Your age at time of calculation pension factor Under 65 years of age 4% 65-74 5% 75-79 6% 80-84 7% 85-89 9% 90-94 11% 95 and over 14% Where you start your Retirement account part way through the year, your minimum annual income payment is pro-rated to reflect the remaining days in that financial year. Maximum income limits for Retirement accounts under a Transition to Retirement strategy are not prorated if you start your account part way through the year. The Government has reduced these Pension Factors shown in the table above by 25% for the financial year ending 30 June 2012. Therefore since you are under 65 years your current Pension Factor is 3.99 % of which we shall assume that it will not change 10 years to come then your income will be as follows. Expected Annual Income after Retirement Rental income 23 000 1nterest Gains from retirement accounts Tony 23 400 Anna 4 125 Earnings from joint accounts 15 600 Total $66 126 Since you are expecting a retirement salary of $60 000 per year then your annual total income will be $60 000 plus this other extra income giving you total of 126,126 $ per year. How long will your money need to last? You can find the average life expectancy based on your current age in the table below and budget your income in accordance with expected living years. For Example, if you’re a 50 year old male, your life expectancy is 82 years. Your life expectancy is based on your gender and current age. Male (age) Life expectancy Female (age) Life expectancy 30-47 81 30-52 85 48-57 82 53-62 86 58-63 83 63-69 87 64-68 84 70-74 88 69-71 85 75-78 89 72-75 86 79-82 90 76-77 87 82-83 91 78-80 88 84-85 93 81-82 89 86-87 93 83-84 90 85 91 Source: Australian Bureau of Statistics Life Tables Australia, 2008 to 2010. Rounded 85 91 to the nearest whole year Summary and Conclusion Diversification of risks in investments) After ten years of investment in the growth bond, you Investing small amounts regularly in the same investment will greatly assist you in reducing the risk of investing everything in the in a lump sum and you will be able to monitor profitability changes if there are changes in the market (Elsayed & Martin, 1998). Spreading your money across different periods in time of investing and even different fund managers can reduce your risk of losing heavily on a single choice. Avoid unnecessary government tax Avoid paying unnecessary tax by using the AMP growth bonds and open retirement account to make sure you receive any government benefits you’re entitled to (Nicolaisen, 2005).You should take caution and be ready of changes since this SOA assumed that Australian economy will remain stable thought the 10 years before retirement and that interest rates will also not change in whatever case. Due to this assumptions you should be ready to make any necessary adjustments when need arises. Replacement products advice When choosing to replace recommended products you need to weigh the benefits of the new product over the old one. Changing your Investment Level There are 3 Investment Levels available within AMP Flexible Super which enables you to design the features that you want. The levels are: – Core – Select – Choice. You can change your Investment Level at any time. Note: If you have features or investment options that are only available in a specific Investment Level and those options are not available in your new Investment Level, these features will cease. Where the investment option is no longer available you will need to switch your investment options. Switching You can switch your investment options or change the investment options you have selected for future contributions or income payments (or do both) except for a Super account where you have chosen the Life Stages investment approach. While you invest in Life Stages, you may not select any other investment options. If you wish to switch from Life Stages to another investment option, you will need to switch your entire Life Stages balance. Before you decide to switch, we recommend you speak to your financial planner. You can switch your investment options, add or alter your auto-rebalancing facility. One replacement product is having a consolidated super account Consolidating your super account How do you combine your super? Many people have more than one super fund. But having more than one fund usually means you pay extra fees. The more fees you pay, the less super for you. So consider combining your super into a low cost fund like Australian Super and save. Since you have two different accounts you can consolidate these two accounts and save a lot by reduction of fees paid. Some funds charge many fees. But With the Australian Super Pension there is: • No fees to open your account • No fees on regular pension income, and • No fees to change investments. The low fees we do charge are set to cover the costs of operations only and not to make profits for shareholders. Government pension with super account Only some people have saved enough to be completely self funded in retirement. Most people use a combination of their super and the Government Age Pension. The Government Age Pension In this account you will also get government age pension. The Age Pension is a social security benefit paid by the Government. If you’re not married, the maximum pension payment is $755.50 per fortnight. For married couples, the maximum fortnightly pension payment is $569.50 per person. These rates as correct as at July 2012 and include the maximum pension supplement amounts. To qualify for the Age Pension you must first meet the (a) age and (b) residence requirements. (a) Age requirements Your Age Pension age depends on your gender and when you were born. These rules are a little complex as a result of making the ages for women and men the same, and then increasing the minimum Age Pension age to 67 years old by 1 July 2023. So people aren’t overly disadvantaged by these changes, they’re being progressively introduced. Age pension age Date of birth female male Before 1 July 1947 64 65 01 Jul 1947 to 31 Dec 1948 64½ 65 01 Jan 1949 to 30 Jun 1952 65 65 01 Jul 1952 to 31 Dec 1953 65½ 65½ 01 Jan 1954 to 30 Jun 1955 66 66 01 Jul 1955 to 31 Dec 1956 66½ 66½ 01 Jan 1957 or later 67 67 If you qualify for the Government Age Pension, you’ll receive a Pensioner Concession Card for: discounts on prescription medicines available via the Pharmaceutical Benefits Scheme (PBS) bulk billing for doctor’s appointments (not all doctors bulk bill so check first) More refunds for medical expenses through the Medicare Safety Net, and assistance with hearing services through the Office of Hearing Services b) Residence requirements To qualify for an Age Pension you need to be an Australian resident and in Australia on the day that you lodge your claim. You also need to have been an Australian resident for a continuous period of at least ten years, or for a number of periods which total more than ten years, with one of the periods being at least five years. Plus, depending on where you live you may have other benefits including: reductions on property and water rates energy bills and motor vehicle registration a telephone allowance Reduced fares on public transport, and free rail journeys. References Elsayed, H., & Martin, J. (1998). Survey of financial risk tolerance: Australian technical report. Sydney: Chandler & Macleod. Gaskekk, J. and Ashton, J. (2008). Developing a financial services planning profession in the UK: An examination of past and present developments, Journal of Financial Regulation and Compliance, Vol. 16 Iss. 2, pp. 159–191. Grable, J.E. (2000). Financial risk tolerance and additional factors that affect risk taking in everyday money matters. Journal of Business and Psychology, 14, 625-630. Harlow, W.V., & Brown, K.E. (1990). Understanding and assessing financial risk tolerance: A biological perspective. Financial Analysts Journal, Nov-Dec, 50-80. Hershey, D.A., & Wilson, J.A. (1997). Age differences in performance awareness on a complex financial decision-making task. Experimental Ageing Research, 23, 257-273. Moisand, D. (2008). Rules of the Road. Journal of Financial Planning, Vol. 21 No. 5, pp. 32–44. Nicolaisen, D.T., 2005. A securities regulator looks at convergence. Northwestern Journal of International Law & Business 25 (3),661–686 Nobes, C., 1993. The true and fair view requirement: impact on and of the Fourth Directive. Accounting and Business Research 24 (Winter), 35–48. Read More