global equity shifts gear
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the new elements fuelling the boom
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2/2007 Macquarie Adviser Services Magazine
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One simple rule of investing is that starting without Elsewhere in this edition of Forward Thinking we
a plan can be like driving without a map – take a closer look at the role of the emerging global
a hazardous pastime, particularly for the adventurous. powerhouse economies in China and Germany;
Financial planners have built a strong case for we assess the technical impact of Australia’s new
professional success based on the fundamental superannuation laws and we introduce a new section
premise that failing to plan is planning to fail. called ‘Investment Fundamentals’ – debunking a few
myths while explaining how common investment
But the questions Forward Thinking has posed in laws or language came to be.
this edition go to the heart of the planning profession
itself: what is the future destination for financial I trust you enjoy this edition of Forward Thinking.
planning and what are the key shifts today shaping
the advice industry of tomorrow?
The news is good. Our report finds a unique set
of forces – some say the perfect mix – that in 2007
deliver a healthy prognosis for financial advice in Neil Roderick
this country. Our Cover Story is a starting point for Executive Director
discussion, and we welcome your feedback as always. Head of Macquarie Adviser Services
Regular features Cover story
28 Smart investing 02 Perfect mix
More than one engine driving Bruce Madden uncovers the seven
global growth trends that are shaping the future
of the financial advice industry: aging
30 Investment fundamentals
population, bulging super accounts,
Beyond the efficient frontier – how
increasing sophistication, the regulators,
the risk/return world was discovered
technology, and product evolution.
33 The collection
The evolution of the
Macquarie Professional Series Main feature
34 Wrap up 4 Tech talk
What’s administration Super becomes a dead certainty
got to do with it? Transitions, transitions...
TTR pensions more attractive
36 The hub
in the new world?
Go with the flow
38 Technical essentials
40 Concord stock story Macquarie Adviser Services
Game on Magazine
Read this story to receive CPD points.
2 Simply log on to http://www.macquarie.com.au/ftmagazine
mi Financial advice is booming.
New superannuation rules,
an aging population and
strong investment markets
are fuelling high-spirited growth
and unbounded optimism.
Bruce Madden* uncovers
a combination of elements
– some say the perfect mix –
that is stimulating growth
and delivering a bright future
to financial advice in Australia.
Pundits say the financial advice industry may never have it so good.
A robust economy, a tranche of new superannuation and retirement
income rules to work through and a large proportion of the adult
population – the so-called Boomer generation – reaching retirement
age, meaning a potential endless stream of new clients.
Such is the optimism for the future growth of the advice industry in
Australia, the views of the naysayers have struggled to make a dent
on the forward progress of an industry intent on cementing its future.
Forward Thinking has taken a look at the trends, identifying seven
clear shifts to shape the future of financial advice in Australia.
Through conversations with industry insiders, the Forward Thinking
list should provide food for thought for an industry currently too busy
to think about tomorrow.
Our interview with Macquarie’s technical guru David Shirlow on
page 12 underpins the changing nature of superannuation and how
«The opportunity is for the industry to understand these
demographic shifts and work to create a new and compelling
push to attract and retain fresh talent.»
product manufacturers are expected to shift their focus to harness
the shifting demographic and retirement income patterns.
One brake on future growth may be the supply of fresh blood. Like the
rest of the population, the financial advice industry is aging. Some go
so far as to say the industry is stagnating, with no net new inflow of
fresh talent to replace the retiring generals of yesteryear. A near term
challenge confronting the industry is: where will the new planners
come from? The opportunity is for the industry to understand these
demographic shifts and work to create a new and compelling push
to attract and retain fresh talent.
If the industry can get that right, then its future – based on the sheer
weight of demographic numbers – looks assured.
Despite the massive pool of accumulated savings
and the probable extension of working life beyond
6 for many Australians, the Intergenerational Report
predicts the economy will inevitably slow over the next
40 years. The study says the average rate of growth
in GDP per person will slow from 2. per cent in the
last 40 years to .6 per cent in the next 40 years.
As well, the country will face fiscal challenges that
could threaten some of the basic assumptions
Australians have about what their government should
provide for them: the Age Pension, healthcare,
education and other support services will increasingly
come under pressure as governments inexorably
head into deficit.
The Intergenerational Report notes that the
responsibility for retirement planning will fall more
“As people live longer, the way they plan work and
retirement, may change. Policy frameworks need to
Aging population – provide opportunities for people to plan for their own
shift the great demographic driver
future,” the report says.
But as the advisory profession is part of the same
aging trend the question is will there be enough
financial planners around to help the rest of the
This is old news: Australia is aging. population make the right decisions?
Demographers have been forecasting an increasingly The issue of an aging adviser workforce has already
aged population for some time but the transition to begun to shape the thinking of large dealer groups
a nation of pensioners has been barely noticeable. and small practices alike. The expression ‘succession
planning’ has taken on a whole new meaning for
That is about to change. financial advice businesses both large and small,
with the emphasis on recruiting new talent beyond
According to the second government Intergenerational
the traditional sources – like life insurance sales for
Report released this April, the proportion of Australians
example – that have served the industry to date.
aged 6 and over is expected to double in the next 40
years to nearly a quarter of the total population. At the Should we solve the ‘war for talent’ conundrum,
same time the number of those aged 8 and up will tomorrow’s financial advisers will find themselves
triple to .6 per cent of the total population. playing a central role in the lives of clients who are
living better for longer, and will thus require smart
From a taxpayer’s perspective the numbers are
advice and product solutions to help overcome
even more sobering: today there are five people
the very real prospect that clients may one day
of working age for each one aged 6 and over but
outlive their retirement savings.
by 2047 that proportion will have slumped to 2.4
of working age for everyone 6 and above. There are further lifestyle needs which pose
significant challenges by the aging Boomers, who
And if 40 years seems far enough away to be
think differently about the traditional meaning of
irrelevant the Intergenerational Report will cure
‘retirement’. For example, the shift towards planned
anyone of that illusion.
retirement communities offering five star facilities
“The pace of aging of the population is projected to and on-call personal services is a sign of things to
quicken after 200, as the baby boomer generation come. And the rise of the part-time employee among
starts to reach the age of 6,” the Report says. older Australians is another visible trend, as people
scale back or return to the workforce to remain
Of course, this is exactly the demographic hole active and help fill the growing shortage gap of
the designers of Australia’s retirement savings skilled labour.
system hoped to fill with the establishment of the
Superannuation Guarantee (SG) scheme in 992.
But the SG alone won’t prevent what is likely to be
a painful societal adjustment to old age.
In a report, NATSEM researcher, Simon Kelly,
found that most baby boomers hoping for a large
inheritance will be disappointed as “the richest
one-fifth of those aged 6 and over in 2002 owned
63 per cent of all the wealth held by this age cohort”.
In other words, only those who don’t need a large
inheritance (i.e. the already wealthy) are likely to
Kelly also listed several social trends that could limit
the intergenerational wealth transfer:
medical advances mean the elderly are living longer
and thus consuming more of any inheritance;
many parents are choosing to spend their assets
rather than live frugally so their children can
inherit – the so-called ‘ski’ trend (spend your
baby boomers’ parents may choose to hand
whatever inheritance there is to their grand-children
Bulging super accounts and rather than their own children who will themselves
shift intergenerational wealth transfer be close to retirement.
So if the $600 billion doesn’t end up in the
Boomers’ pockets they will be rich on their super
anyway, right? Well, not according to an analysis
Australia is putting on weight at an alarming of super balances published by the Association of
rate. But don’t worry, the trend is healthy. In fact, Superannuation Funds Australia (ASFA) this June.
the weight of money flowing into the Australian ASFA found that the average super payout this
superannuation system has not only built up year is likely to be around $30,000 for men and
impressively in the years since compulsion came $4,000 for women. Over the next -2 years
into force, but latest figures from the Australian the average super payout will only increase to an
Prudential and Regulatory Authority (APRA) show average $83,000 for men and $93,000 for women,
that in the year to June 30, 2006, superannuation according to ASFA.
assets grew by almost 20 per cent to $92 billion.
At best, ASFA says, over the next two decades
This massive pool of money has swollen by an super will be a “useful but modest supplement to
even greater amount this year as the twin faucets the Age Pension”.
of buoyant markets and the one-off tax-free
contribution window pour in their contents. It has As well ASFA also found that the latest government-
been predicted that the government’s decision encouraged splurge into super will only marginally
to allow individuals to contribute up to $ million increase the number of people with over $ million
tax-free to their super before July this year (part of balances in superannuation funds or retirement
Peter Costello’s ‘Simpler Super’ reforms) will result in income products from the current estimate of 7,000.
$00 billion extra flows into superannuation funds.
However the clear opportunity for financial advisers
If you add the estimated $600 billion intergenerational is to harness the greater need to grow or manage
wealth transfer that is expected to pass into the wealth. The demand for appropriate financial
hands of baby boomers over the next 20 years it planning services will not diminish, whichever way
seems as though the market for financial advice can the pie is split.
only get better.
But there are some very important caveats to add
to these heady numbers.
Firstly, recent research by the National Centre for
Social and Economic Modelling (NATSEM) has
cast doubt on the extent and distribution of any
intergenerational wealth transfer.
for these generations, whether it be shopping mall
kiosks or web-based services.
One thing is for certain, the Xs and Ys will have
lived, and retired, with the benefit of compulsory
superannuation all of their working lives, which is more
than you can say for the older population segment.
A recent ASFA study highlighted the fact that for
most Australians, at least in the medium-term,
superannuation will not completely cure their long-
term retirement woes.
However, as super balances continue to grow,
the subject of investment and finance is increasingly
entering the vernacular of everyday Australians.
For most of them superannuation is now their
biggest asset outside the family home. Anecdotal
evidence suggests that when super balances hit
$0,000 many people start taking a serious interest
in how their money is invested.
ASFA estimates the average super balance today
More sophisticated investors – for all those aged between 2 and 64 is $48,000.
shift the age of financial literacy And today Australians have been handed the power
to make many important decisions about their super.
Almost half of all super funds offer investment choice
to members, according to the June 2006 report from
APRA, up from only 38 per cent the year before.
In terms of sophistication, they don’t come much
More tellingly only 48.8 per cent of super money now
savvier than our nation’s youth. And while whole
sits in default strategies compared to 60.4 per cent
forests of newsprint have been sacrificed to report
at June 200.
the rise of generations X and Y, many in the financial
advice industry have so far failed to grasp the impact Clearly, Australians are enjoying the ability to make
that these two demographic groups will have. sophisticated investment decisions and with choice
of super fund now a reality they have been given even
Experts tell us we are broadly dealing with an more flexibility.
ambitious, impatient and tech-savvy cohort more
interested in immediate gratification than the long- The fact self-managed super funds have grown at
term planning and prudent financial management such an extraordinary rate (almost 23 per cent in
undertaken by their parents and grandparents. the year to June 2006) shows many individuals are
There is also a strong do it yourself streak. Take the confident of taking responsibility for their own savings.
global success of the YouTube web portal as proxy Coupled with this, super-driven individual investment
for the Y generation; we can see the emergence education is an intensive effort at the macro-level
of the cult of DIY instant celebrity. This can be by government and the industry to lift the financial
witnessed through politicians such as John Howard knowledge of all Australians.
and Kevin Rudd getting on YouTube.
Last year the assistant Treasurer, Peter Dutton,
We also know that shifting consumer patterns of said the government “is committed to working in
younger Australians means they will demand a different partnership with industry to improve the ability of all
way of conducting their personal affairs. The internet Australians, from school children to retirees, to make
will figure largely in their interactions with professional better decisions in managing their money”.
service firms, and their loyalty to a particular service
proposition or brand will prove perhaps fickle at best. The Financial Literacy Foundation launched in 200 is
the most high-profile of the government’s initiatives in
As employees, these younger Australians are this area and it can already claim some success. As a
expected to move around a lot, choosing to stay result of its lobbying, financial literacy will be embedded
in any one job for shorter periods, but of course in the schools curriculum across Australia in 2008.
demanding higher remuneration and benefits.
Expect increased pressure from these generations Financial advisers are likely to find tomorrow’s clients
to also ‘fast track’ their exposure to more complex a more questioning and knowledgeable bunch than
work – the ambitious “I want it now” mentality means ever, and the challenge is that education standards
they have precious little time to ‘do their time”. for advisers must keep pace with the sophisticated
needs of the emerging savvy investor. Watch for a rise
Indeed, whether or not this cohort will even want in minimum entry standards, and increased pressure
advice remains to be seen. The challenge for the to promote degree level standards as the benchmark
industry is to create appealing points of access price of admission to the industry’s ranks.
planners saying ‘Open the books – we want to check
what you’re doing.’”
Choice’s latest demands for change in the advice
industry include that:
the price for advice be agreed before any
ASIC should ban some conflicts of interest;
investors who buy funds direct should not have
to pay administrative expenses that include an
hidden trail commissions must be disclosed
separately with consumers able to turn off trails
if they are not receiving ongoing advice and get
rebates for trails paid when there was no advice.
FSRA might have switched on a torch for consumers
and government to peer into the far corners of the
financial planning industry but in 2007 advisers are
operating in the full floodlit glare of public scrutiny.
shift the rise of the regulators
Those lights will not be dimmed. What does this
mean? With an increased compliance burden, the
industry will find new and innovative ways to meet
their regulatory obligations to allow time to pursue
the core function of their role: delivering advice.
Even as recently as five years ago the financial Just as the Statement of Advice requirements have
advisory business in Australia (with the exception forced a re-think on front end software to help
of a few high-profile scandals) had escaped streamline what can be a cumbersome and time
much serious attention from regulators and consuming chore, future regulatory standards will see
mainstream press. the evolution of new front end software solutions.
The Financial Services Reform Act (FSRA) The most successful advice businesses will be those
of 2002 marked the end of that era. who can multi-task most efficiently, using clever
As formerly free-wheeling financial planners software and time management tools to juggle the
struggled with the unaccustomed burdens of combined demands of compliance, administration
disclosure and compliance the Australian Securities and client service. It would follow that consumer
and Investments Commission (ASIC) moved in for confidence in the industry would rise in line with the
a closer look. higher compliance standards. This is further good
news for the future of advice in Australia.
A few secret-shopping expeditions later and ASIC
was ready to expose the conflicts of interest in
an industry the consumer lobby (Choice) had
notoriously labelled “structurally corrupt”.
And the mainstream press happily followed the
regulator’s lead – a process that was accelerated
even further by the Westpoint collapse.
Today the inner workings of the financial planning
industry have been laid bare by a deeply suspicious
media. Well-known economics journalist Alan Kohler,
for example, has turned his railings against the evils
of commissions and platforms into a new business
(see The Eureka Report).
Consumer bodies, too, have become more
sophisticated in their accusations against financial
advisers. Post the 2003 shadow shopper exercise
an outraged Australian Consumers’ Association
(now called Choice) could only ask for ASIC to
show up “on the doorsteps of many more financial
In ‘The next generation of Australian wraps’,
Forrester says: “The next few years will be marked
by consolidation and platform development.
The bank-owned platforms are already building
the next-generation platforms, which will secure
their domination over the next five years and have
“Development will focus on opportunities arising
from industry inefficiencies. As a result, insurers,
financial planning software vendors, practice
management consultants, and non-bank platform
providers will all be forced to change their
In the past, technology providers might have over-
promised and under-delivered (or not delivered at all)
to advisers but this time the revolution could go further
than many might like.
The opportunity is to create even greater efficiency
in the way advice is done. As firms become ever
technology augmenting more streamlined, the business of delivering financial
shift many adviser functions
advice will surely benefit.
It is difficult to contemplate how any business
today could function without computer technology
but it is impossible to imagine an IT-less financial
The growth of the investment platform and advisory
software systems in Australia over the last decade
is testament to the seemingly endless appetite of
advisers for ‘IT solutions’. From simple fund reporting
tools a decade ago, platforms have evolved into
complex beasts capable of multi-tasking at the push
of a button. Front-end software, meanwhile, has
extended its ambit beyond basic portfolio modelling
into CRM and is now pushing ever deeper into adviser
After a relatively slow start financial planners are now
realising the benefits of an online world, according to
a 2006 report from researcher Investment Trends.
“As an industry, planners now estimate conducting
34 per cent of their activities via the internet, up
from 30 per cent in 200 and they are on track to
reach 42 per cent within three years,” the Investment
Trends report says. “There was a 0 per cent shift
in most activities over the last year...”
However, despite all the great leaps forward, financial
advisers, when surveyed, have always wanted more
from their technology providers.
Last December, Forrester Research published a report
that suggested advisers will soon get just what they
Even if you remain skeptical about the claims of
peak-oil research and global warming believers their
impact on the political, and therefore investment,
agenda is undeniable.
An article published this February in USA Today quoted
Citigroup strategist, Edward Kerschner, as saying
from an investor’s point of view it doesn’t matter if
greenhouse gases are causing global warming or not.
“What does matter is if consumers, regulators,
governments and corporations react to the
perceived threat,” Kerschner said in the article.
Analysts are already trying to pick the winners and
losers from the global warming trend and have
earmarked companies to look out for in industries
such as agriculture, alternative energy, financial
services, automotive and technology.
As long as capitalism greets each challenge as if it
is an opportunity the range of ‘alternative’ investment
products will be inexhaustible.
shift Anybody up for a North Korea fund?
In 2004, the BBC found one English ‘entrepreneur’
ready to talk up the investment benefits of the
Stalinist throwback state.
Hedge funds; contracts for difference; private equity; “It’s like China in the eighties... The market reforms
infrastructure; commodity derivatives; China funds; are very evident,” Barrett said.
“It’s an exciting time to join the market.” It always is.
Five years ago any of the above products would
have been treated with bewilderment or downright In an increasingly complex investment environment,
hostility by most investors and advisers; now they the need for clear and dispassionate counsel will
are almost commonplace. remain a constant.
It is a long time since a diversified portfolio consisted
of /3 cash, /3 bonds, /3 equities and financial
engineers have responded to the desire for new
product with ingenuity.
While the trend is global, from an Australian
point of view the push into ‘alternative’ products
has also taken on an international edge as our
superannuation assets outgrow local markets.
Will we, like the good people of Holland, become
net exporters of capital? That trend is already
emerging as the weight of domestic capital requires
new markets and new market sub-sets to, in effect,
absorb the excess flood of money.
This has already seen the rise of new and interesting
product lines like capital protected structured
investments; hybrids; new investments based on
renewable energy, environmental concerns and
clean energy technology.
Structurally, the new product sets also feature
innovations like performance-based fees.
But as investment markets hit such creative highs
the world around them often seems close to a
nervous breakdown. War and catastrophe, as
always, hog the evening news but the ogre of climate
change is giving them a run for their money.
the new advice paradigm
As Australians get richer and older (and perhaps wiser)
the demand for financial advice is reaching a new
peak. In the long term, increased financial literacy and
technological advances could reduce the need for
advice but not in time for the current generations.
In the meantime the supply of advisers is not rising in
step with demand.
Using the membership figures of the Financial Planning
Association (FPA) as a proxy for the industry it is clear
adviser numbers are static.
According to the 2006 FPA annual report, “the number
of practitioner members of the FPA remained almost
unchanged at 7,320 on 30 June 2006, compared with
7,289 a year earlier”.
So who’s going to provide the advice?
One obvious answer is the industry funds that
are rapidly developing advice models. REST, for
example, has recently instigated a telephone advice
system for its members and other funds have
adopted similar strategies.
As industry funds and other technology-based
providers step in to the breach for ‘lower value’ clients,
traditional financial planning businesses are staking
out their claims in the mass-affluent and high net
Financial planning is becoming an increasingly
stratified business, evolving rapidly along the strong
currents of mandated growth and the emerging wealth
accumulators in the pre-retiree market.
The current political debate about whether to separate
out advice from ‘sales recommendations’ is just
another reminder that the days of an undifferentiated
financial planning industry are numbered.
What do you think?
These are just some
of the big picture trends
to shape the future face
of financial advice.
Share your views with
other Forward Thinking
readers by emailing us at
Macquarie technical guru
David Shirlow explains
why superannuation –
no matter how simple
– will always attract new
debate and require further
tinkering at the margins.
tothefinancialservicesindustryandgovernment,includingthefederalTreasury’sFinancial Federal treasurer Peter Costello might have pitched
LiteracyFoundation. his ‘Simpler Super’ regime as the last word on
Appendix 1Source:APRAAnnualSuperannuationBulletin2005 superannuation, but for the investment and financial
Investmentchoiceandassetallocationofentitieswithmorethanfourmembers,38.2per advice sector the conversations continue unabated.
investmentchoicestomembers,withanaverageof71optionsperentity.Industryfundshad According to Macquarie Adviser Services’ technical
anaverageofnineinvestmentoptionsperfund,publicsectorfundshadanaverageofseven chief, David Shirlow, there is a sense of inevitability
investmentchoicesandcorporatefundshadanaverageoffivechoicesperfund.Ofthetotal that Australia’s superannuation rules will require
assetsheldbytheentitieswithmorethanfourmembers,60.4percentofassets($329.5billion) further ‘tinkering’ along the way.
assetswereheldinequities:32.0percentinAustraliansharesand22.9percentininternational “For example, the super guarantee system is still
shares.Afurther14.1percentwereheldinAustralianfixedinterest,10.3percentinotherassets, maturing. The way that dovetails into the aged
7.7percentinproperty,7.2percentincashand5.7percentininternationalfixedinterest. pension will require some ongoing maintenance.
2006investmentchoiceandassetallocationofentitieswithmorethanfourmembers,49.1per We’re getting an increasing portion of people who
centofferedinvestmentchoicetotheirmembers.Retailfundsofferedthegreatestnumberof are up for aged care and how that sits in relation to
retirement incomes policy will require some thought,”
averageofsevenandsixinvestmentchoicesperfundrespectively.Ofthetotalassetsheldbythe Shirlow says.
But while those are medium to long-term issues he
inequities:31.7percentinAustraliansharesand24.2percentininternationalshares.Afurther says even Costello’s recent ‘simplification’ will require
11.3percentwereheldinAustralianfixedinterest,11.0percentinotherassets,8.7percentin some more immediate adjustments, particularly
property,7.9percentincashand5.3percentininternationalfixedinterest. around death and disability pensions.
a never-ending story
“Just to take one example, the idea that if you die “Now that could be because their portfolio is insured
and your benefit goes to your adult kids, you’ll pay in some way, or protected from an investment risk.
tax. But if you manage to pay it out of the fund Or it could be some kind of mortality risk,” he says.
(and you’re already 60) to those kids, the day before “That’s not an ‘across the industry’ thing, that’s more
you die, you’re okay,” Shirlow says. each competitor coming up with its own kind of
product features to address the specific issue.”
“In other words slow death versus fast death
produces a different result! We’ll get plenty of But while the focus of the latest super shake-up has
tinkering just because we’ve had such a big change, quite naturally been on how it affects current and
and things like that will need to be worked through.” imminent retirees, Shirlow says younger savers were
also handed incentives in Costello’s package.
For product providers too, ‘Simpler Super’ throws
up a few conundrums. But were those incentives enough to encourage
younger workers to stash more away in super?
Shirlow says as a result of the latest changes it
is likely people will have more money in super for “Arguably not,” Shirlow says. “We might see more
a longer period, including during the retirement incentives in that area in terms of co-contribution
income phase. incentives or something along those lines. We might
see more compulsion ultimately... depending on
“It becomes more important that retirees invest which government we have in future years.”
for the long-term which means that typically
they’ll be better placed in long-term assets and “In fact there have been ideas like a voluntary opt-out
not just wanting to limit themselves to fixed-return type system where employers will also contribute an
arrangements,” he says. extra 3 per cent of your salary unless you choose
not to have that included. So the default is your own
“Having said that, over time I’m sure we’ll see a money goes in.”
return to higher interest rates. So there will be an
appetite no doubt for various ways of guaranteeing Whatever happens, one of the few future guarantees
a certain level of income. I think we’ll see some Australians have about their superannuation
creativity around providing a floor, if you like, system is that it will be talked about, if not tinkered
for people limiting the downside on peoples’ with, forever.
Capital protection expected
According to Shirlow, many product providers are
already grappling with how to provide retirees with
some form of income or capital protection.
a dead certainty
Head of MAstech tech talk
The time has come to revisit
insurance and estate planning
in relation to superannuation.
David Shirlow explores features
of the new super regime which
give it certain estate planning
appeal as well as identifying a
number of key tax aspects which
Read this story to receive CPD points.
Simply log on to http://www.macquarie.com.au/ftmagazine
Recent developments have made the case for standard death insurance
and disability cover via superannuation compelling from a tax perspective
in most typical cases. For wealthier clients, or those requiring high levels
of insurance, the removal of reasonable benefit limits will have an obvious
impact in this regard.
Quite aside from insurance, many clients have been re-weighting their
wealth from non-superannuation entities to superannuation – for this
reason alone it will generally be necessary to review the manner in which
their wealth is dealt with on death or disability.
And there are numerous recent rule changes which can have a direct
influence on the treatment of a client’s death or disability benefits.
insurance via super generally
As a general proposition, the appeal of insuring via In this article we will examine each of the changes
superannuation for various types of cover has been identified for life cover but not the incapacity
reinforced in a number of respects. The table below changes. The key point to note is that the combined
outlines some key changes, most of which are effect of all these changes is likely to be significant
positive for superannuation. enough for many clients who currently hold these
insurances outside of superannuation to rethink
Cover type Change
Life removal of RBLs
benefits tax reduction, especially from age 60
restrictions on to whom (and for how long)
pensions may be paid
permanent incapacity removal of RBLs
benefits tax reduction, especially for non-
employed clients and from age 60
broader definition of permanent incapacity,
to cater for non-employees
temporary incapacity – full deductibility of premiums, including cover
income protection beyond first two years
how they’re taxed now
Lump sum benefits
The tax treatment of lump sum death benefits paid
from taxed superannuation funds is as follows:
Recipient’s status (under tax law) Tax component Rate of tax (plus Medicare)
Dependant tax free and 0%
Non-dependant tax free
– element taxed 16.5%
– element untaxed 31.5%
There are no limits to this concessional treatment: arrangements funded by tax deductible
if, for example, a lump sum death benefit is paid superannuation contributions will typically
to a dependant for tax purposes then it will be tax be significantly more tax efficient than non-
free regardless of its size. And, as we will show, superannuation arrangements, whether they
so far as insured benefits are concerned, are payable to dependants or non-dependants.
To illustrate, Frank is age 4 and on the top marginal and the net insurance required is only $.m. In this
tax rate. He has an accumulated superannuation case the pre-tax cost is 87% better than insuring
benefit of $00k in Fund A. It has been funded outside of superannuation.
entirely from salary sacrifice contributions and the
Column C shows that if the death benefit is
service period is 20 years. He has a normal retirement
to be paid to a tax non-dependant then, if the
age of 6. The table below compares insuring for
superannuation option is chosen, the amount of
a net $.m via salary sacrifice contributions to his
insurance will need to be grossed up to cover
existing Fund A with insuring for that amount outside
the tax payable on the insured amount and the
of superannuation (based on Macquarie Futurewise
additional tax payable on the accumulation amount.
premium rates for a male non-smoking professional).
(The latter arises because we are introducing some
Column A shows that if the death benefit is to be ‘element untaxed’ into the tax benefit calculations
paid to a tax dependant then there will be no tax – see breakout box on following page).
A. super B. Non-super C. super to
to dependant insurance non-dependant
Accumulated super $00k $00k $00k
Life insurance $.m $.m $2.023m
Effective tax on Nil Nil $23k
Net insurance benefit $.m $.m $.m
premium rate per $1k $.3 $.3 $.3
pre-tax cost $689.60 $38.3 $2278.72
Clients with non-dependent
and dependent beneficiaries
The fund arrangement issues, discussed on the splits between the sub-components of the taxable
following page, are worth contemplating in the component (i.e. ‘elements taxed’ and ‘untaxed’).
context of nominating which beneficiaries are to
receive particular benefits. Unlike non-dependants, Revisiting Frank’s case, if a tax non-dependant is to
dependent beneficiaries are unaffected by the ratio of be paid a benefit of a particular amount, it may make
‘element taxed’ to ‘element untaxed’, since they won’t sense for Frank to nominate a benefit which does
pay tax on any of the taxable component of a lump not attract any ‘element untaxed’ (i.e. a non-insured
sum benefit. So, if different benefits have different benefit) to be paid to the non-dependant if possible.
levels of ‘elements taxed’ and ‘elements untaxed’, And if Frank had built up his accumulated benefit
different results can arise via different nominations. with some non-concessional contributions the
location of the resulting tax-free component would
Further, since dependent beneficiaries don’t pay tax ideally be such that it could be directed first and
on any of a lump sum benefit, they are also unaffected foremost to the tax non-dependant.
by the level of tax-free component they receive. Non-
dependants are generally in a very different position. So, if significant benefits are to be paid to non-
dependants on death, then it is worth examining
Benefits paid on the death of an accumulation- a client’s fund and insurance arrangements.
phase member to different beneficiaries from the
one fund will typically all carry the same percentage Thought also needs to be given to the after-tax value
break-up as between the overall taxable and tax-free of superannuation benefits to be allocated to various
component where death occurs in the accumulation dependants and non-dependants, and (as discussed
phase. However, such benefits paid from different later) how that sits alongside the allocation of non-
funds (and, in some cases, from different accounts superannuation assets amongst these beneficiaries.
within a large fund) may each have different tax Naturally, the client needs to be comfortable that the
component percentage break-ups as well as different allocations are appropriate overall.
Non-dependent beneficiaries –
impact of deceased’s service period
For non-dependent recipients of lump sum death actual fund service period). Clearly the client’s age
benefits, the ‘element untaxed’ is more highly taxed also affects this equation.
on the basis that it represents the insured part of the
benefit. That is, it represents that part of the benefit Let’s return to Frank’s case to explore the way his
upon which no contributions tax was paid in effect, superannuation arrangements can have an effect
because a deduction has been claimed in relation to on the amount of tax paid by non-dependent
the insured benefit. beneficiaries in the event of his death. We will now
assume that the benefits are definitely going to be
As with pre-reform law, current law continues to paid to a non-dependant and that Frank has decided
identify the ‘element untaxed’ by working out the to have exactly $2m of cover inside superannuation.
‘future service’ component of the benefit in the
manner outlined below, rather than simply identifying Frank’s actual service period for his existing
the insurance proceeds. ‘Future service’ is generally superannuation in Fund A is 20 years. This is the
the period from death through until the time the client same as his future service period, so if he insures via
would have turned 6. Fund A then the taxable component of a death benefit
paid from that fund currently would be split 0:0
This means there is often a mismatch between the between ‘element taxed’ and ‘element untaxed’.
amount taxed at a higher rate and the amount of The first row in the table below summarises the tax
insurance proceeds. This can work for or against a position if he takes this approach.
client’s beneficiaries in the event of death, depending
on the amount of insurance, accumulated benefits, If instead Frank was to arrange for the $2m cover to
age and fund service period. be effected via a second fund (Fund B), in which he
had no accumulated benefit and no service period
Typically, the greater the actual service period then to speak of, then the tax result on death would be
(assuming other factors are constant) the greater the $72.k. The reason for the deterioration in the result is
‘element taxed’ portion of the taxable component, so
that the insured benefit is bigger than the accumulated
that less tax is payable. This is because the taxable
benefit, and the insured benefit is virtually all taxed
component is split into elements taxed and untaxed in
at 3.% due to the lack of past service. (If, on the
proportion to the client’s actual and future service.
other hand, the accumulated benefit had been bigger,
The ‘element taxed’ is in effect the part of the this fund arrangement would have produced a better
taxable component on which contributions tax is result. This is because no ‘element untaxed’ exists for
deemed to have been paid (i.e. the part of the benefit the benefit accumulated in Fund A since none of it is
accumulated from taxable contributions during the funded from deductible insurance.)
Accumulated insured Actual tax payable
benefit benefit service period (rounded: nearest $100)
scenario 1 $00k $2m 20 years $600k
Fund A: insurance
Fund A: accumulation only $00k $nil 20 years $82.k
Fund B: insurance only $nil $2m Virtually nil $630k
Now let’s assume that, due to a change of his insurance arrangements in Fund A intact.
employment, Frank had insured in Fund A This scenario produces the best result for his
(as per scenario ) but just prior to death had non-dependent beneficiaries, as follows:
rolled his accumulated benefit to Fund B but left
Accumulated insured Actual tax payable
benefit benefit service period (rounded: nearest $100)
scenario 3 $480k
Fund A: insurance only $nil $2m 20 years $82.k
Fund B: accumulation only $00k $nil 20 years
Older clients –
As with scenario 2, this provides the advantage For clients aged or more with adult children,
that the accumulated benefit contains no one topical issue is the extent to which their
‘element untaxed’ since none of it is funded superannuation may be passed to their children
from deductible insurance. However, there is a on a tax-efficient basis.
dramatic improvement in the result over scenario
There are a number of ways in which an adult child
2 because the ‘element untaxed’ of the insured
may receive a lump sum benefit without tax being
benefit is reduced as there is a significant actual
payable, including where:
the child receives a death benefit and is a tax
Two principles emerge from this in relation to life
cover effected via superannuation. Essentially,
there may be an advantage in: before death a client aged 60 or more withdraws
a benefit and then gives (or bequeaths) the
providing the accumulated benefit and the
amount to the child; or
insured benefit from different funds; but
the child receives a death benefit entirely
having as long a service period as possible
comprised of tax-free component.
applying to the fund which provides the
insured benefit. So far as the first point is concerned, there are various
inter-generational trends emerging, such as children
(Parallel principles do not appear to apply where
living at home for longer, or baby boomer retirees
the accumulated and insured benefits come from
being more financially equipped than the following
different accounts or interests within the same
generations, which may lead to an increased advisory
fund, because the concept of ‘service period’
focus on whether a client’s adult children qualify as
applies to the whole fund.)
tax dependants on the basis of the ordinary meaning
While these principles are worth being aware of dependency or of inter-dependency.
of, their strategic value may be limited from a
As for clients withdrawing benefits before death and
practical perspective. It may also be limited by
giving them to their adult children, this may also be
the fact that, in the case of clients insuring for
increasingly typical amongst wealthier families.
permanent incapacity as well as death, the best
fund arrangement for each type of benefit can The gift may even be used as a superannuation
often be different. contribution by the children. This might have
particular appeal if the gifting occurs when your
A key principle for permanent incapacity cover is
clients are at a senior age, as their children may well
to have as little actual service period applying to
have attained their preservation age or be close to it,
a benefit, because that will typically optimise the
in which case access to superannuation may not be
tax-free component. For example, if Frank were
such an issue for them.
also to have $2m permanent incapacity cover
under the same arrangement as his death cover Finally, the impact of recontributions on the ultimate
then if, instead of dying, he became permanently level of a client’s tax-free component warrants
incapacitated, scenario 2 would produce the best consideration. This is particularly the case given the
result of the three scenarios put forward. prospect of clients being able to contribute at the
same time as they receive a pension in the years
The tax paid on the permanent incapacity benefit
from age until 6 (or, if they continue to meet the
would be $268.8k, $3.8k, $268.8k under
work test, until 7). In this regard it is worth noting
scenarios , 2 and 3 respectively. So it can be
that there has been no formal change to the ATO’s
as well to be aware of the outcomes in the event
position with regard to re-contribution strategies
of permanent incapacity. We will explore permanent
and the non-application of Part IVA ITAA36 in
incapacity benefits via superannuation in a
However, where clients do engage in recontribution,
it is worth bearing in mind the discussion below
about the counter-balancing impact this can have on
the extent to which ‘anti-detriment’ benefits can be
paid in addition to standard lump sum tax benefits.
The tax treatment of death benefit income streams account will not be taxed, in many cases it will continue
paid from taxed superannuation funds is as below. to be tax efficient to arrange for a death benefit to be
Given that the fund earnings on the relevant pension paid (at least to some extent) as a pension.
Age at client’s death Tax component Rate of tax
Either deceased or the tax free and taxable 0%
recipient age 60 or older component
Both deceased and tax free component tax free
the recipient below age 60
element taxed Marginal tax rate less
15% tax offset
element untaxed Marginal tax rate
how they will be paid now
A key development with regard to pension death Children who do qualify to receive a pension
benefits is the constraint imposed from July 2007
The appeal of child account-based pensions (ABPs)
on to whom they can be paid.
as part of an estate plan will be as strong, and
Essentially, pension benefits will only be able probably stronger, than it has been in the past.
to be paid to:
Generally, the taxable component of child pension
a dependant who is not a child of the deceased payments will be assessable at adult marginal tax
(i.e. a spouse, an ‘ordinary meaning’ dependant rates less a % rebate (although if the deceased
or inter-dependant who is not a child of the parent was age 60 or more the payments will be tax
deceased); or free). This means that in 2007/8 even a child pension
comprising 00% taxable component will not
a child who is:
attract any tax unless pension payments exceeded
– less than age 8; or $38,684, assuming the pension is the sole source of
– aged 8 to 24 inclusive and is financially the child’s income.
dependent on the deceased; or And while the pension will need to be discontinued by
– aged 8 or more and has a qualifying disability age 2 (unless the child is disabled as defined), the
(broadly, this is a disability that is permanent or commuted lump sum will be entirely tax free.
likely to be permanent and results in the need
So, unlike pre-reform law, there is no obvious
for ongoing support and a substantially reduced
downside to choosing a pension over a lump sum
capacity for communication, learning or mobility).
death benefit if after a year or so the beneficiary or
their guardian subsequently thinks better of it and
Children who don’t qualify to receive a pension decides to commute.
While more adult children may qualify as tax Under the minimum (and no maximum) payment
dependants as a result of various inter-generational rules for ABPs, the draw-downs can vary to suit
trends, adult children over age 2 will generally be needs, including at a level which exhausts the capital
prevented from receiving death benefits as pensions by a certain age at a consistent rate.
whether or not they are tax dependants. So estate
plans which have involved payments of pensions to And if the fund rules enable restrictions to be placed
adult non-dependent children need to be reviewed on capital withdrawals and income levels (as is the
bearing in mind the issues discussed earlier in case with Macquarie Super Pension Manager and
relation to lump sums. SMSFs with suitably drafted deeds), the estate plan
can include appropriate protections and controls for
child pension beneficiaries.
A common alternative way of providing protections more children of the deceased. In these cases the
and controls would be to pay a lump sum to the appeal of having the particular desired trust rules
estate, and arrange for a testamentary trust to be may be offset to some degree by the appealing
established pursuant to the terms of the client’s tax outcome typically produced if each child has
will. This may be useful in circumstances where the a separate superannuation pension. Assessable
client wants trust rules which don’t sit comfortably income paid to a minor child from a testamentary
within superannuation. trust (or, for that matter, derived from any investment
of property paid to a minor child out of a deceased
For example, perhaps your client would like the estate) will attract adult marginal tax rates but (unlike
trustee to have discretion as to the way in which the typical child pension) will not attract the %
income and capital can be shared between two or rebate. So there may be a trade-off.
Pension death benefits –
the final analysis
Super reform will clearly have different appeals for children, the primary focus will be on transferring
families at different stages. For clients with younger superannuation benefits in lump sum form in a tax
children the new rules on child pensions should efficient manner, perhaps prior to death.
generate particular interest. For clients with older
Integrating super and
non-super wealth on death
The abolition of RBLs not only removes the constraints On the other hand, in many cases the abolition of
on the amount of tax-efficient insurance which can be RBLs means that existing will provisions (particularly
effected via superannuation, it also potentially means those which refer expressly to RBLs) may need to be
that a greater portion of wealth will come from super revisited to produce an effective outcome.
rather than non-super sources on death.
The terms of the will become especially important
The importance of integrating the terms of the will with not only in how they allocate superannuation benefits
death benefit nominations for benefits in all types of which fall into the estate, if any, but also in how they
funds will not diminish. Amongst clients with SMSFs, ensure that, overall, the after tax allocation of the
there will be an increasing demand to co-ordinate deceased’s wealth is allocated in the proportions
the drafting of the death benefit provisions of the intended. (Equalisation or adjustment clauses in wills
SMSF deed with the drafting of the will. The demand can have a valuable role to play in evening up the
for sophisticated death benefit nominations is likely amounts paid to different beneficiaries in some cases).
to escalate (for example, dealing with allocation of
Finally, the art of co-ordinating the superannuation
specific assets or providing contingency plans if certain
position with the will may involve taking account of
beneficiaries don’t survive, etc).
the possibility that in some cases (particularly later in
Naturally enough, the appeal in directing life, and in circumstances of ill-health) superannuation
superannuation benefits first and foremost towards benefits may be withdrawn prior to death and will
dependants for tax purposes (and to counter-balance potentially fall directly into a client’s estate upon death.
this by directing non-superannuation assets to
As a related matter, putting in place an enduring
non-dependants) may still be a key component of
power of attorney for appropriate family members may
integrating the allocation of superannuation death
be particularly important to facilitate late withdrawals
benefits with the operation of the will. On the one hand,
prior to death, to cover the situation where the client
integration has in some respects been simplified since
loses legal capacity.
less attention needs to be given to particular amounts
and forms of benefit payable to particular beneficiaries
in line with RBL thresholds changes from year to year.
Certain death benefit
uncertainties live on
Anti-detriment benefits and recontributions age 62 and in good health, and they have two adult
children who are in their 30s and wholly financially
The basic concept of additional, ‘anti-detriment’
benefits to compensate for the effect of contributions
tax on lump sum benefits paid to a deceased’s Jack has $400,000 in super which is presently all
spouse or child (whether the child is dependent for tax taxable component, with an eligible service date of
purposes or not) has survived superannuation reform. January 989. He intends to commence an ABP
(These benefits were formerly provided under section with these funds upon retirement.
279D ITAA36 and are now provided under new section
Let’s compare the outcome if, as soon as he retires,
29-48 ITAA97.) We await ATO guidance as to how
Jack simply commences an ABP with 00% taxable
to calculate the size of these benefits, given that the
component with what happens if he cashes the
formulae previously used have become redundant due
$400k as a lump sum, immediately recontributes that
to the introduction of new tax components.
and then commences an ABP with 00% tax free
It is worth noting that, since recontribution strategies component. The following table provides the results if
generally increase the amount of tax-free component Jack were to die soon after the ABP commences and
of a death benefit, they also generally decrease the a $400k benefit were to be paid in three typical ways.
amount of additional anti-detriment benefit that a
An important assumption in this analysis is that Jack’s
beneficiary might otherwise qualify for. This needs to
fund will be able to pay an anti-detriment benefit,
be weighed up where recontribution is pursued with
so bear in mind that it may not be relevant to some
estate planning in mind.
clients’ superannuation arrangements. The anti-
To illustrate, take the case of Jack, who will retire from detriment benefit numbers have been estimated using
full time employment just prior to his 6th birthday an adaption of a formula the ATO previously accepted
in mid August 2007. He is married to Jane who is for calculating these.
A. Jane takes B. Jane takes benefit C. Children take benefit
benefit as ABp as lump sum as lump sum
scenario 1: ABp Anti-detriment benefit? Nil $70,88 $70,88
with 100% taxable
component Tax and Medicare Nil Nil $77,647
@ 6.% if applicable
Total value of benefit after tax $400,000 $470,88 $392,94
scenario 2: Anti-detriment benefit? Nil Nil Nil
ABp with 100% tax free Tax and Medicare Nil Nil Nil
component @ 6.% if applicable
Total value of benefit after tax $400,000 $400,000 $400,000
You can see that if the death benefit is paid to if the spouse receives it as a pension, who is likely
the adult children as a lump sum then scenario 2 to receive the benefit in the event of the spouse’s
produces a $7,09 better outcome because, while death? If so, the column C outcomes may be more
an anti-detriment benefit is only available under relevant to the analysis than column A.
scenario , it does not completely offset the tax
payable. However, the net advantage of recontribution In some cases the prospect of withdrawing the benefit
may be significantly less than first imagined. just prior to death and gifting the proceeds may also
be worthy of consideration.
You will also notice that, by contrast, if the death
benefit is paid to Jane as a lump sum then scenario CGt liability of fund disposing of assets after
produces a $70,88 better outcome. death and other issues
So there are a range of factors to consider in assessing Under pre-reform law it was not clear in what
different options for clients’ estate plans, including: circumstances, if any, a fund trustee would become
liable to pay CGT on disposal, after the death of
who is likely to receive the benefit (having regard to a pensioner, of assets which were backing the
life expectancies, whether your client has the power pension. The position under reform law is also
to decide who will receive the benefit, etc); unclear. This and a range of other interpretational
and practical issues relating to death benefits will
if the benefit is likely to be paid to the spouse,
need to be resolved during the coming months or,
whether it is likely to be received as a lump sum
then re-contributed (having regard to the spouse’s
age, work status, contribution limits, etc);
Division Director, MAstech tech talk
TTR pensions more attractive
in the new world?
As advisers working in the superannuation field, we’ve all just been
through the biggest transition since the Superannuation Industry
(Supervision) Act 993 and Superannuation Industry (Supervision)
Regulations 994 (collectively referred to here as ‘SIS’) were
introduced back in 994. This transition has many implications
for Transition To Retirement (TTR) pensions.
Read this story to receive CPD points.
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