One Day, Boy, All This Fund Will Be Yours
Sun Herald
Sunday July 28, 2002
WITH $20,000 to invest for my grandson's future tertiary education, I'm considering a 10-year insurance bond. The bond pays tax at 30 per cent, the same rate as I incur and I am trying to keep my taxable income within that tax range. Can you advise me of the suitability of this type of investment? Or could you suggest an alternative?
GW, Eastwood
When deciding on an investment, your first priority should be for security, then return and lastly tax. Assuming you stick to secure fund managers, insurance bonds are useful in that you can invest with your grandchild as the life assured but with you as the owner of the policy. (Over 11 years old, he can also own the policy.)
If you want to play it safe and go for a capital guaranteed product, AMP offers a child's endowment policy that vests in the child at age 21. (Endowment policies, for those who have forgotten about them, guarantee a fixed sum at a certain age and also accrue bonuses during the years when a bonus is declared, as usually occurs.)
On average, insurance bonds have not performed as well as trusts, even on an after-tax comparison, although that would not be correct if you compared the best of one against the worst of the other.
If you are going to invest for the long term, then I would prefer either a managed fund which allows you to reinvest, or shares in well-managed companies that are not overpriced, pay franked dividends and which offer a dividend reinvestment plan.
If you are earning close to $50,000pa, this may push you from the 30pc tax bracket into the 42pc bracket, but I think you should get a better return at the end of the day. You can enhance your gift to your grandson by paying any tax for him, although this should be small after franking credits.
Bleeding till it hurts
BT Split Growth Fund has not paid a dividend for more than 12 months and the exit price gives me a paper loss of $8,000. Should I realise this loss (and offset my minimal CGT) or is there an option? Such a loss is devastating for a self-funded retiree.
AM, Castle Hill
Actually, the entry fee version of the BT Split Growth Fund returned a 4.28 per unit distribution for June, amounting to about 2pc. The fund showed a fall of some 21pc over the past 12 months, according to Morningstar Research.
The problem with volatile funds like this is that while they sometimes fall 20-25pc, they have rebounded to new highs in the past two decades. Therefore, the worst time to cash it in could be when it is down.
But that assumes history will repeat itself and a rebound will occur. It's not guaranteed but I think it will happen.
The problem with BT is that it is hemorrhaging money as people withdraw. A figure was published recently that showed some $2 billion had been withdrawn in the March quarter. It is difficult to maintain competitive returns when a fund is losing money.
Do what makes you happy
I HAVE been a member of the local government superannuation retirement scheme since October 1975 and my retirement benefit at the end of June 2001 was $264,900. I am 60 this year and would like to retire. My wife does not work. We own our house and are debt free. I would like to draw $24,000 a year until pension age. What would be a safe amount to retire with at, say, 60.5 years of age?
A W, Forster
If you want to withdraw $24,000pa flat from $264,000, the money will last a little over 16 years, assuming the fund earns 6pc net. If, instead, you index your withdrawals to inflation at 3pc pa, the money will last a little over 12 years and you will draw $33,222 in your 12th year.
By the time you reach age 65, you will have roughly $200,000 left in super. If you have few other assets, you will be eligible for an age pension at 65 of $16,000-17,000, assuming current rates of pension and current deeming rates, but this can be increased to the maximum married age pension of $18,460 by using a complying annuity.
My own feeling towards retirement is that a person must do what makes him or her happy. If you want to retire early, you must make do with what is available. In this case, if you have measured your needs at $24,000pa, you should be able to meet those needs comfortably for the rest of your life and that of your wife.
Driving yourself wild
IN my new job I will have a salary of $50,000pa plus a $14,000 car allowance. I don't own a car but will need one. Should I buy or lease?
N D, Preston
You really need to talk to your accountant about your individual circumstance. I prefer to own a car but if your car allowance is paid only to meet expenditures claimed, then leasing may be the better option.
There's always a risk
I RETIRED in January last year with superannuation of $501,000. I put my money with Future Plus, an industry fund which charges 1.5pc management fees. I took an allocated pension of 6.17pc of my capital, which equates to approximately $2,500 per month. My statement to March this year indicates I am down $41,000 with my monthly payments included.
P C, Blacktown
This is a complaint that will become more common in current market conditions. A lot of people are learning that if you want capital growth, you have to expose yourself to capital loss and the highest risk of capital loss is from buying an overpriced asset.
I've been saying for some years that our sharemarket (and now our property market) is overpriced. Even after these recent falls, it remains overpriced, although I do expect it to bounce back after these sharp drops.
I suspect Future Plus is quite aggressively invested in the sharemarket. If the market for these investments goes backwards, it is not the fund manager's fault. Where the fund manager's skill comes in is to be in the right assets at the right time.
© 2002 Sun Herald