An increasingly common question we receive as financial advisers relates to the valuation of portfolios and how long they are likely to last. As the majority of the people we work with invest through superannuation, due to its tax effectiveness, it’s important to understand the underlying purpose of this investment vehicle.

Superannuation was originally created as a means to fund one’s own retirement, rather than an entity structure through which capital could be passed through various generations. The result of this purpose was the imposition of minimum pension payments that must be made in order to retain the tax exempt status of your super fund. These minimum pension payments increase aggressively as you age, with the intention of ensuring all of your retirement capital is paid out of the tax effective environment and either consumed, or invested in your own name at which point it becomes taxable.

The first chart shows the minimum pension drawdowns applied by the Australian Government, and as you can see, from as young as 80 at least 7% of your fund must be paid out each year as a pension. This naturally has the result of forcing the balance of superannuation accounts to fall each year as funds are withdrawn.

The upcoming election and in particular the proposed banning of franking credit refunds offers a strategic opportunity for investors with pension balances exceeding $1.6m; particularly those who do not require the increasing income that must be drawn from their super fund.

If the Labor Party is successful in passing this proposal, there will be little benefit in retaining funds within the pension phase if these payments are not being spent. In many cases, you may actually be better off reducing your pension balance below the $1.6m cap and thereby reducing the amount of capital that must be withdrawn from the fund each year. This will have limited tax impact, if any, as the franking credits being received are likely to be sufficient to offset any tax bill that may be payable.

Given the early nature of this proposal, we do not recommend any action be taken, but for clients of Wattle Partners, we will be in contact with tailored advice during May

Looking globally…………….

In an example of why we continue to seek more investment opportunities offshore, Avengers: Endgame was released last week and fast became the biggest worldwide movie opening in history, bringing in USD$1.223bn in its first week. The Avenger’s franchise, owned by Marvel (who now sponsor the AFL’s home ground in the Docklands) which has spanned some 21 movies, is owned by Walt Disney Corporation. This is the same Walt Disney that also owns the rights to the Star Wars franchise and recently purchased Rupert Murdoch’s 21st Century Fox businesses. The chart below shows the movement in Disney’s share price in recent months courtesy of Bloomberg: