Sam Rubin
Advisermag Technical Strategy

2011: Client strategy opportunities

By Sam Rubin

With the 2010 year closing upon us, we will soon be enjoying the festive season. At the same time, we should take this time to plan and review our service offering and client strategies for 2011.

Next year will be a year of major proposed industry reform and we should have a better idea of how our industry will shape up over the longer term. Whilst we can’t control external factors (such as legislative change, industry developments and investment markets), we can think about how we can support our clients in 2011 and make sure they continue on the right path to their financial freedom.

We have outlined six financial strategies that your clients could benefit from in 2011 and these could form part of your new year’s client resolution.

1) Maximise super contribution caps – 30 June 2012 deadline is not that far off

The $50,000 transitional concessional contribution cap is scheduled to be reduced to the standard $25,000 cap from the 2012/13 financial year. As you might be aware, the Federal Government announced in last year’s Federal Budget that they would look to extend the $50,000 transitional concessional superannuation caps post 1 July 2012 but only for individuals with superannuation savings of less than $500,000.

You may even consider advising your clients to salary sacrifice their income down to the Medicare levy threshold (eg single to $18,488 for the 2010/11 financial year threshold) to utilise the maximum $50,000 concessional cap. This will provide the client with the same effective tax rate if they were to receive this salary as individual taxable income to $37,000 (marginal tax rate at 15 per cent).

For clients aged over 50 with superannuation balances close to or above the proposed limit of $500,000, this means they only have the remainder of the current and next financial years to utilise the higher $50,000 cap. Even though this might be a short-term planning opportunity, it could mean putting the client in a negative monthly/annual cash flow position.

Financial modelling would be required to determine the appropriate recommendation even if it means utilising savings, home equity or other investments to cover the cash flow requirement. Other factors such as years to planned retirement and future assessable income should be considered.

Other important points to note:

  • You should be allowing for clients to accumulate wealth outside superannuation in a tax efficient manner. Consideration could be given to gearing to fund a shortfall in retirement funds.
  • It is also important to start considering what you recommend to your client should their superannuation account balance exceed the $500,000 limit. Should the client consider alternative strategies?

2) Superannuation spouse splitting – a blast from the past

As outlined above, the Government has announced the extension of the $50,000 transitional concessional superannuation caps post 1 July 2012 but will limit this to individuals with super account balances below $500,000. Based on legislative risk, this presents an opportunity for couples to keep their super accounts under $500,000 by employing superannuation spouse splitting.

Superannuation spouse splitting has been available since 2004 but hasn’t really been utilised since the Government abolished Reasonable Benefits Limits effective from 1 July 2007 under the simple super reforms. Now this can come back as a standard strategy for couples to remain under the $500,000 individual superannuation savings.

To implement this strategy, an election is required to be sent to the trustee after the end of the financial year to nominate the level of concessional contributions the member wishes to split to their spouse. The maximum available is 85 per cent (given the 15 per cent tax rate) of the member’s concessional contribution (ie 85 per cent of the $25,000 cap for a client under age 50).

Having both clients within the same superannuation fund makes sense for this planning strategy and the IOOF Pursuit superannuation products can support it in the following way:

  • Fee aggregation allows up to four family members to link up their accounts to gain a reduction in the total administration fee that applies to each account. IOOF Pursuit also has a maximum fee cap of $3,150 pa which applies on account balances above $500,000.

The IOOF super splitting forms can be accessed via our adviser website Portfolio Online.

Action required: Advisers should be considering this as part of the strategy recommendation for new clients and as part of the ongoing review process for existing clients. A relatively insignificant action could prevent longer term planning issues.

3) Savings capacity above super caps – what’s the best place

Income earners who may already be utilising their super contribution cap but still have surplus annual savings capacity could benefit from diversifying their assets across super and non-super investments.

Contributing surplus cash flow into super (via non-concessional contributions) or non-super assets will depend on the clients’ personal taxation position and whether they are comfortable in utilising strategies like neutral gearing which can provide at least a 15 per cent tax savings on annual earnings.

If these strategies are not appropriate for a client, then their surplus cash flow could be gifted into a discretionary family trust utilising a wide range of beneficiary’s tax rates. This could be beneficial if you have a client that is a single income family, has minor children (be aware of minor tax rates under Division 6AA ITAA97) and/or adult children that are not working.

The IOOF Pursuit administration fee cap will support this strategy.

Action required: Advisers should start thinking about which strategy they consider to be superior. Refocusing your strategy direction and improving your knowledge in other areas will ensure you will have different options to offer your clients.

4) Review TPD insurance

The Government has legislated changes to the tax deductibility of TPD insurance via superannuation. Currently, superannuation funds can claim a tax deduction for all TPD premiums paid by the trustee. These changes will be effective from 1 July 2011 and will mean that only the ‘any occupation’ definition under TPD, which states that the insurer pays an agreed benefit when, because of a physical or mental ill health, the individual is unlikely to engage in gainful employment for which they are reasonably qualified by education, training or experience, is deductible.

Previously, many advisers based their recommendations of TPD within superannuation under the ‘own occupation’ TPD which pays a benefit if the insured cannot perform the occupation they had just prior to permanent disablement.

All super funds with TPD insurance need to make sure that they check the terms of these policies to ensure that they will still have access to the tax deduction. The IOOF superannuation TPD insurance products are in-line with the ‘any occupation’ definition thus retaining the deductibility for member’s accounts.

Action required: Advisers should review their clients’ TPD cover and determine whether it is still available within super or whether it needs to be restructured or even changed.

5) Review estate planning and wealth protection of beneficiaries – a new opportunity to learn more about your clients

Estate planning is an important component of any good ‘Statement of Advice’. Generally, clients’ estate planning objectives need appropriate recommendations. It’s not normally sufficient to just provide standard information about having an updated Will and to establish an Enduring Power of Attorney.

How many of you have reviewed your clients’ Wills? How many of you understand your clients’ estate planning objectives? Do you understand your clients’ family structure? Do you need to protect any beneficiaries?

Action required: An opportunity in 2011 could be to provide a more comprehensive estate plan via utilising an estate planning fact find. Taking this path will allow you to provide strategic planning advice on testamentary trust for beneficiaries, the benefits of superannuation binding nominations and overall wealth protection from estate challenges and asset protection issues (ie bankruptcy or divorce).

This financial planning opportunity will enable you to learn more about your clients and it will bring you closer to their beneficiaries which could lead to stronger client relationships, retention and potentially growth in your business revenue.

IOOF has an estate planning legal service that can work directly with you and your clients via our Australian Executor Trustees business. For more information, please speak to your IOOF Business Development Manager.

6) Super doesn’t have to be the only solution – think outside the super box

Generally, the financial planning industry has focussed on superannuation advice as its main revenue source especially for pre-retiree and retiree clients. With the reduction in the superannuation caps and the future conditional concessional cap for those over age 50 post 1 July 2012 as discussed earlier, spreading our clients’ investments across super and non-super assets may provide a more flexible wealth accumulation and retirement structure. Clients can now have retirement capital of around $652,0001 without having to pay any tax. At retirement age, this can increase to $894,500 per person1.

With the baby boomer generation expected to transfer the largest wealth ever to their children (Generations X and Y), the use of a family trust (or a testamentary trust as part of the estate) could provide greater protection for the beneficiaries.

This may be something to think about for your clients that are already contributing up to their super caps and for those that are now receiving their own inheritance post retirement age.

Action required: Review your pre-retirement and retirement clients to determine if having a portion of their investment portfolio outside of superannuation may be more beneficial for estate planning tax minimisation and other tax efficiency.

Conclusion

With all the potential industry changes to be introduced to parliament next year incorporating the Future of Financial Advice reform, the Government’s response to the Cooper and Henry Tax reviews, we should be focussing on why we entered this great industry - and that is to help our clients reach and understand their financial objectives.

1Assuming a 3.56 per cent income return with 50 per cent franking. This includes the low income tax (LITO) and the senior Australian tax offset (SATO).