Financial advisory system neutered by compliance measures

The federal government has effectively neutered the financial advisory system with a range of well-meaning but totally ineffective compliance measures. Picture: Shutterstock.
The federal government has effectively neutered the financial advisory system with a range of well-meaning but totally ineffective compliance measures. Picture: Shutterstock.

There is no question that interest rates are on the way up. But the most realistic estimates are a maximum rise of 1.5 per cent over the next two years, which does little to assist retirees who are unwilling or unable to take advantage of the returns offered by superannuation.

Even with interest rates rising, returns from cash and term deposits will probably remain well below historical levels for several years. The obvious solution for retirees is to seek expert advice to improve their situation.

However, the sad reality is that the federal government has effectively neutered the financial advisory system with a range of well-meaning but totally ineffective compliance measures.

The outcome is that advice has become out of reach for all those people who don't have enough money to justify spending at least $5000 for a consultation - or are not prepared to.

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The high initial cost covers the time spent researching the client's resources in depth, and then preparing the paperwork that is now required. The document that must be prepared is called a statement of advice, and it normally runs to over 100 pages - it is also unintelligible to most clients.

The high cost of advice has led to many retirees doing their own research on the internet. While this may be useful in certain specific cases it also leaves them open to bad decisions and - even worse - to becoming the victims of scams.

Just last week I received an email from a bloke telling me that he had sold a property and been searching the web to find ways to invest the money. He was attracted by an investment in Commonwealth bonds, maturing next year, offering 5.5 per cent, and was emailing me for my opinion.

My response was, "That sounds too good to be true, but tell me more - if that's available I wouldn't mind some for myself". He sent me the email he had received from a company he had found on the internet, which gave details of the alleged investment.

I checked with a friend, who really knows his bonds. He pointed out that the two bonds in question were old Commonwealth Bonds that were nearing the end of their life, hence maturing next year.

Their respective rates were 5.5 per cent and 4.75 per cent, reflecting the high interest states that were current when they were issued.

But even though the maturity value of a bond is fixed, the daily value varies in line with prevailing interest rates. My enquirer would need to pay $108 for a $100 bond paying 5.5 per cent and redeemable next year. The other bond had a coupon rate of 4.75 per cent and was redeemable in 2027. The current price of that was $116 for the $100 bond.

By "investing" in these bonds he would receive the full coupon amounts of $100 on maturity but would be faced with a capital loss of between 8 per cent and 16 per cent because of the premium he would have paid to buy these products. There is no such thing as a free lunch: the market had priced them to yield 1 per cent for the 2023 bond, and around 1.5 per cent for the 2027 Bond.

I pointed out to him that his "safe" investment in government bonds would give him a guaranteed capital loss, and an overall return no better than he was getting at the bank.

Given his age and investment goals, superannuation would be a much more effective investment for him, with all the decisions made by experts and not by somebody inexperienced researching the web to see what they could find.

Noel answers your money questions

Question

I am of pensionable age but don't wish to apply for the pension or receive it. My wife is also of pensionable age and does want to apply. If she qualifies for a pension does that mean I must get one too?

Answer

A departmental spokesperson tells me that there is no requirement for a person to apply for the Age Pension for their partner to receive it. In the absence of your own claim, you won't receive a pension but your details will be used to determine your wife's entitlement because social security payments are paid to an individual in a couple ,based on their combined circumstances.

The combined gross income and assets of both partners are taken into account when entitlement for a social security payment is assessed because couples are able to pool their resources for their mutual benefit and share some of their expenses, such as electricity, gas, telephone and water.

Question

I am trying to explain the Centrelink gifting rules to my 90-year-old father who is on a part pension. He is under the belief that gifting more than $10,000 is prohibited. I told him he can gift as much as he wishes. Your clarification would be most appreciated. He seems to think his pension will be reduced if he makes gifts.

Answer

This is a common misconception. There is no limit to how much a person can give away, but to prevent people giving away assets just to increase their pension, any gifts over $10,000 in a financial year, or $30,000 over five years, are treated as deprived assets and will still be asset and income tested for five years from the date of the gift.

There is no reduction in the pension because Centrelink regards their assets as being unchanged, even though they have been reduced because of the gift. Think about a couple with $800,000 in assessable assets and who are receiving a part pension.

If they gave away $200,000 to their grandchild for a home deposit, the first $10,000 gifted is within allowable limits, and the remaining $190,000 gifted will still be counted as an asset, and their pension would be largely unchanged because Centrelink would still regard them as having $790,000 of assessable assets. However, in five years those deprived assets will no longer exist for Centrelink purposes and depending on other factors at that time could result in an increase in their pension.

Question

We are a couple aged 70 and 68 with combined assets of $2.6million. Our SMSF is in Pension mode. For the last two financial years we have withdrawn 50 per cent of the 5 per cent required to take as pension as per government policy. We were able to qualify for the CSHC on the basis of 50 per cent drawdown of pension amounts. Would we qualify in the current financial year 2022-2023 for the CSHC considering we will have to take the full 5 per cent as pension for each of us.

Answer

I don't think you understand the way the income test works for the CSHC - It has nothing to do with the amount that you withdraw each year. The income test is $57,761 per annum for a single and $92,416 per annum combined for a couple.

The income test will look at both your adjusted taxable income and a deemed amount from account based income streams. Under the deeming rules $4 million of income producing super would have a deemed income of $88,220 a year.

If the bulk of your assets are in superannuation your adjustable taxable income would be minimal, and you could have $4 million in superannuation as a couple with the whole fund in pension mode and still be under the limit.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au

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This story High cost of financial advice opens doorway for scams first appeared on The Canberra Times.