Switch To Cash For Safety, Then Be Ready To Ride The Next Wave

Sun Herald

Sunday October 13, 2002

GEORGE COCHRANE

I AM 63. Two years ago I rolled my $120,000 PSS super payout into the NAB Universal Super Scheme National Flexible Pension Plan. Over the past year Ihave drawn $7,700 (the minimum gross income payment) but soon will need the maximum $15,040pa payment. I own my home and have no debts. Although the fund balance dropped by more than I've drawn, the bank says stay put, ``things will improve". Should I withdraw from this scheme (wearing the penalty) and roll the money into a capital-secure super investment such as offered by Norwich or Citicorp?

JM, Rozelle

Your mention of the word penalty makes me think you opted for the nil entry fee option. I don't like these options. They look good on the surface but their exit fees, usually over four to five years, and higher annual fees, sometimes over the life of the investment, often mean you pay more in the long run.

If the markets are going to bounce back strongly, then obviously you should leave your money where it is, presumably in the NAFM Balanced Fund (NAFM has recently been merged into the MLC).

I think markets will bounce back, from late October, but I can't guarantee that. The main factor promoting my uncertainty is that sharemarkets remain overpriced. Despite the recent falls, the Australian market is still priced on a price-earnings ratio (P/E) of 17 while in the US, Standard & Poors 500 now shows a P/E of 32. Remember that a low P/E is less than 10.

If you want to adopt a low-risk profile for the next five to 10 years or more, then, yes, you can consider rolling over into a capital-guaranteed fund such as the fixed-rate, fixed-term allocated pension offered by Citicorp, or the Capital Guaranteed option offered by Norwich.

But I think you could get a similar net return by switching within your existing fund into the cash option. You can switch back into the balanced fund if your confidence returns. The problem with this strategy is that your confidence is not likely to return until the market has risen 20-30 per cent.

Show of strength

I HAVE a monthly interest ``over 65" at-call account and several term deposits with the Newcastle Permanent Building Society, which advertises that it is the financially strongest in Australia. Can I feel confident about this?

SC, Cessnock

It was the KPMG financial institutions survey that ranked Newcastle Permanent as the No1 building society in Australia.

A quick check of the Newcastle Permanent website shows that in 2001 the society had an annual profit of $20.8million and is claiming a capital adequacy ratio of 24.5pc (more than three times the statutory requirement) and has reserves of $291million.

I think all lending institutions are forecasting tough times ahead, given the recent boom in consumer loans. When interest rates rise there is going to be some pain felt by first borrowers unable to repay and then by lenders in danger of losing money.

I note that many banks are already demanding repayment from clients they think are over-borrowed. Also, the Australian Prudential Authority has warned lenders to maintain high prudential standards in lending during the current property boom.

In the end it will come down to how carefully Newcastle Permanent has been lending that aspect wasn't mentioned in the annual report, or else I couldn't find it and you have to assume that the society is keeping an eye on future problems.

The future is split super

I AM 56 and in the State Super Scheme (SSS); my wife is 50, has a small income and has $30,000 in the Commonwealth Personal Super Fund. Does super splitting apply to us? How do I apply to get the Government co-contribution for low-income people (maximum $1,000) for personal super? We have $75,000 to invest and wonder how mortgage funds such as Donovan Oates, Provident Capital, Grenfell, City Pacific or Bridge Corp rate. Are they in the same class as CBFC and Esanda?

MB, Oberon

Although the legislation has not been presented to Parliament, the Government has promised that, from July 1, 2003, members of accumulation super funds (ie, not defined benefit funds) can split their future personal and employer contributions into separate accounts with their spouse.

The SSS is a defined benefit fund and is nominally exempt from the legislation. No details have been announced yet by Pilar, the administrator of the fund, and none is likely before 2003.

Assuming you do get the opportunity, then, yes, splitting retirement income would be tax effective in your case, assuming no other large, work-based or investment income.

The mortgage funds you mentioned are either mortgage brokers' or originally solicitors' mortgage schemes. Remember that the Australian Securities and Investments Commission now requires most such mortgage schemes to offer prospectuses. These are designed to disclose all information reasonably required to make an informed decision and so you can read about the fund managers in their prospectus.

I haven't compared the balance sheets of all the names you mentioned, but I would presume that they are smaller in terms of capital assets than CBFC and Esanda, which are the finance company arms of the CBA and ANZ banks respectively.

Protecting the pension

MY brother is single, 73, and has been in a nursing home for three years. He owns a $400,000 home (rented out) and $88,000 in shares and cash. With his pension, his income is about $28,000pa. Being classed as highly dependent, his taxable rental income is not taken into account for his pension. But after five years in the nursing home, his house is treated as an asset. Then he'll lose his pension and the nursing home charges will go up. He wants to keep his pension and give whatever funds he can to his nephews and nieces. How can he do this?

DN, Galston

I don't see why your brother should be giving money away at all, never mind to his nephews and nieces, some or all of whom I presume are your children.

Surely your brother has a duty to look after himself to the best of his financial ability rather than deliberately giving money away and asking taxpayers to support him.

Australia has one of the more generous unfunded welfare schemes in the world and it gets more generous every time Prime Minister John Howard goes to the polls. But if everyone plans to give their money away at retirement and fall back on our social security system, it will become too expensive to maintain.

Tell your brother to keep his money and spend it on himself. He can gift up to $10,000 a year to a maximum of $30,000 over any five-year period and that should be enough of a gift to his nephews and nieces.

A single non-home owner can claim a part pension when his assets fall below a whopping $395,000, so if he sells the house, it won't take him long to begin claiming an age pension again and it will increase as his assets fall.

Nominations that bind

I WAS intrigued to read in your column recently that many public offer funds have chosen to change their deeds to allow binding nominations. I am a lawyer specialising in wills and estates and so far I have encountered only one fund allowing them: AM Lifetrack. I usually ask my will clients whether their fund allows binding nominations. Can you list the funds you know have adopted a binding nomination regime?

RL, Wyoming

To explain to other readers, a binding nomination requires the trustee of a super fund to follow your instructions exactly as to where the money goes should you die with benefits still in the fund.

Binding nominations need to be prepared carefully, with two witnesses, and need to be refreshed every three years.

Basically you have a choice of leaving your super benefits to dependants (a spouse, or child younger than 18 or someone largely or totally financially dependent on you) or to your estate.

Without a binding nomination, the trustee is free to act in what he or she believes to be in the best interests of your dependants, if any. But I believe at least one public offer fund automatically transfers any death benefits direct to the estate, a process designed to minimise arguments.

To the best of my knowledge, most public offer super funds have chosen to change their deeds to allow binding nominations. Examples from a limited survey are, apart from AM Corp, Advance, AXA, Colonial First State, Macquarie, Merrill Lynch, Norwich and Perpetual.

Some that have not chosen to allow binding nominations include AMP, Citicorp, ING and MLC.