It is often said that Australia’s superannuation system is the envy of the world, yet even its most ardent fans would agree it is an incredibly complicated beast.
There have been more than 10,000 changes to legislation affecting superannuation in the past 20 years, says financial planner John Hazell – and from what one hears in the media these days, it sometimes seems another 10,000 are in the pipeline.
Because it is compulsory, our super system casts retirees and those approaching retirement into a sea of constantly shifting markets and laws that is extremely difficult to navigate, even for a highly qualified expert, says Hazell. And mistakes can be terribly costly.
Mistakes can be costly
“Tripping over super legislation can incur exceptionally large penalties from a tax perspective, and there is the potential for big losses through inappropriate investments too.
“Just as you would get an architect if you were building a house, in this day and age it is absolutely essential to get professional financial advice.
“Invariably the feedback I get from clients after we’ve set up their retirement plans is that they didn’t even know about half the strategies or solutions available to them, or how to navigate through all the options.”
We all need a hand
Mark Rantall, the former CEO of the Financial Planning Association of Australia, says he has a very personal appreciation of the complex decisions retirees face.
“I’m 60, and I’m about to begin semi-retirement myself, so I understand the issues well,” he says.
Rantall stresses the value of independent, professional financial advice – even for those like himself with multiple academic qualifications and decades of experience in the industry.
“I am a Certified Public Accountant and a Certified Financial Planner – yet I use a financial planner myself,’’ he says.
“It is essential to have someone independent to act as a coach – someone to help one design a plan and keep it on track in these volatile markets.’’
Nothing worthwhile is free
No matter which financial planner you approach, from a strategy point of view they should all provide generically similar advice, says Hazell.
In terms of financial-advice legislation that came into effect in 2013, all financial planners are required to act in the best interests of their clients, consider all facets of the client’s situation and use the best strategies and solutions available.
Many financial planners utilise a carefully researched and constructed approved product list, which is kept up to date to reflect changes in products, legislation and markets.
The days of conflict in financial planning have also now long passed with the abolition of commissions and a move to the transparency of a fee-for-service environment. “These days, everyone should be paying for advice from a financial planner,” says Hazell.
“With a few exceptions for certain products such as life insurance, commissions don’t exist in this industry any more. They were outlawed a couple of years ago.”
This was designed to give clients peace of mind that advice is not biased in favour of any product or financial institution, and is aligned to the client’s goals.
Bad eggs in the industry receive a lot of media attention, but in reality, they are very few and far between.
“The vast majority of financial planners do a huge amount to improve their clients’ situation and peace of mind,’’ says Hazell.
“We provide help in navigating hugely complex topics, and another important function we serve is to educate our clients.
“As the relationship develops and we build up rapport and trust over time, I sometimes almost feel like a therapist, helping them through the tough times and keeping their focus on what is important.’’
Hazell says rules regarding transition-to-retirement pensions are a good example of a complex area of legislation in which a financial planner can really provide value to a client.
Transition-to-retirement legislation was introduced in 2005 to make it possible to keep working while drawing down some of your super benefits. The policy can also be used to save tax and boost your super before you retire.
Financial planners can help retirees use transition to retirement to achieve a better, or earlier, retirement, or use the tax concessions available to achieve a better after-tax income than they would otherwise achieve from their super scheme.
“Let’s say a client comes in five years before retirement,” says Hazell. “They have decisions to make in terms of when they retire, how much they retire on, and how this might affect their social security eligibility.
“We need to estimate, four to five years out, their future investment income streams and look at how they can use social security to reduce their living costs and increase the longevity of their investments.
“These decisions would depend on factors such as their asset position, whether they qualify for a full or part pension – or none – and a Commonwealth Seniors Health Card and Pensioner Concession Card.”
Hazell points to annuities as an example of an advanced financial product that is relatively poorly understood by some Australians but which, with the help of a financial planner, can deliver big benefits to retirees.
An annuity pays a guaranteed, secure income that can keep pace with inflation, if you choose. The income is generally tax free if you’re over 60 and investing super money.
Some annuities can interact efficiently with Age Pension benefits, social security and aged care rules.
“Annuities are very useful from an income-layering perspective,’’ says Hazell.
“These days, with people living longer, it is increasingly important to look at clients’ longer-term needs and discover the appropriate asset mix that allows them to maximise benefits from social security.’’
A portfolio that uses income layering is an important tool in meeting these needs. With a traditional balanced investment risk profile, one might for example put 40-50 per cent of assets in defensive investments such as fixed interest and cash.
A portion of this could be invested in an annuity, which, in conjunction with any applicable government age pension, provides a stable layer of guaranteed income.
The balance of the portfolio could then be placed in a market-linked pension, equities or other growth investments, which may be more volatile.
Hazell says recent legislative changes to the social security assessment of both assets and income have enhanced the appeal of annuities from a financial planning perspective.
“Changes to rules on the Age Pension assets test, effective 1 January 2017, mean that some clients will see a reduction in their Age Pension.
“There are a range of strategies that could be implemented for different clients, including in some circumstances the use of annuities, which could help provide clients with increased income, including the Age Pension.”
Keep it up
Because the world keeps changing, Hazell stresses that it’s not only the initial meeting that’s important – ongoing service from your financial planner is vital too.
“As with buying a car, you know there is a 5000km and 10,000km service and you wouldn’t skip them, you keep changing the oil, etc,” he says.
“It is just as important to keep your retirement plan in good shape.”
Each year, the Budget brings major changes for financial planners and their clients, he says.
“A Certified Financial Planner is required to spend a minimum of 120 hours every three years on training and development, but most financial planners I know do a lot more than that simply to stay on top of the industry,” says Hazell.
“Clients don’t realise how much of our time is spent researching and investigating.”
Experts agree that staying abreast of new and constantly changing developments in the financial world can seem like a complex minefield for the average person. Seeking professional advice in retirement can give retirees the peace of mind of knowing that their unique financial goals are met, like ensuring their savings are enough to last their lifetime, and are protected from market swings and inflation.
As Mark Rantall says: “The risks from not getting advice are simply too high.”