The UK’s HM Revenue and Customs (HMRC) sets the rules for QROPS status. Generally speaking, an Australian super fund (including an SMSF) will be granted QROPS status if it matches preservation and benefit payment rules in the UK pension scheme.

The UK government has expressed concerns that the preservation restrictions are not appropriately applied in many countries and on 6 December 2011 released a draft of proposed changes to QROPS status. If passed, the changes will apply to any transfers received by a QROPS fund on or after 6 April 2012.

The proposed changes include:

• The QROPS provider will need to report withdrawals made within the first 10 years from the date of transfer (currently only required if the pensioner had been a UK resident within the previous five years)
• More personal data will need to be provided by the client to the UK pension scheme before a transfer can be approved, with that data then reported to HMRC
• Payments by a QROPS fund will need to be reported to HRMC within 60 days of the transfer.

These changes will affect existing and new members in Australian super funds (including SMSFs) that already have QROPS status or apply for status on or after 6 April 2012.

If you have already transferred your benefit, no action is required and the additional requirements are the responsibility of the superannuation fund to meet. However, this is an additional deterrent for establishing a self managed superannuation fund to receive UK pension benefit transfers.

Life on today’s treadmill is fed by a daily infusion of bad news media stories and society’s expectations, yet the popularity and plethora of lifestyle programs and self-help books show we’re all wanting something more. Conditioned to struggle, we aren’t taught how to find contentment or appreciate what we have.

We’re more time poor and discontented than ever, working longer hours, taking fewer holidays and being reachable 24/7. Productivity is lower and absenteeism is higher than ever, we spend more time and money on commuting than ever before and our health and relationships are suffering.

In The Great Life Redesign, Caroline Cameron not only helps you identify how 21st-century living is impacting you, but what you can do to change your life for the better. Whether you need to make some minor changes to make instant improvements or undertake a major life renovation to realise your dreams, Caroline’s wealth of experience will help you get clear about what it is you want, how to plan for it, how to afford it and how to make it happen. It really is quite simple to achieve and The Great Life Redesign will help you reshape the life you have into one you’ll love.

With practical, easy-to-apply techniques, exercises, tools and tips – including your own life redesign blueprint & a Thrival Kit – plus more than 30 inspirational case studies, you’ll soon be well on your way to a great life. Featuring expert advice from Summerhill Financial Services very own Caroline Bell, you’ll also learn how to crunch the numbers, plan and afford your redesigned life.

Don’t settle for ‘good enough’ – you only have one life, so vow to make the most out of it.

To find out more, subscribe to the blog and get your own personally signed copy, go to www.greatliferedesign.com.au.

But what if you got a phone call to say that your teenage (or any age) child had suddenly become disabled. Just leaving aside the obvious emotional pain, would your financial planning allow you to financially cope? When a child becomes disabled through accident, the trauma is not just to the physical and emotional elements — it’s financial too.

It’s not a pleasant thought by any means, but if your child’s life changed suddenly through an accident, and you wanted to be by their side, or they needed to be by your side — forever — would the insurances you’ve set up allow that? Or would you be forced to keep working, when all you can think about is being with your child? Or would you give up work, but with devastating impact on your finances, hence future plans for retirement and lifestyle?

But beyond the initial daze, when things “settle down”, there’s perhaps the even more pressing issue of ongoing support. No matter how old your offspring, there is no age barrier to a disabled child returning to their parents.

Think of a child suffering spinal cord injury: there is no cure. Their care needs continue right through your working life, right through your (planned) retirement. And most likely past your death. Until their own.

They may not be able to work, so will need you to support them. How will that affect your finances — not to mention lifestyle?

This is where having the right insurance is critical: that is, the right type of insurance for you and your family, and for the right amount. In other words, you need protection strategies that are meaningful for your family.

And that also means not choosing a policy on its premium alone. Choose the policy for what it offers you. The cheapest premiums will be money down the drain if the policy doesn’t do what you need it to when you need it to do so. (You don’t insure half your car; so insuring half your life/income, etc. is nonsensical.)

Generally, people need more than one type of insurance. Here are some basics to think about:

1)     Income protection insurance will pay a pre-selected percentage of your income before the accident — for someone on home duties, for instance, this would be irrelevant.

2)     Total and permanent disability (or TPD) covers you for when an accident leaves you unable to work.

3)     Life insurance payouts go to your family if the worst happens to you. The figure is predetermined, and ideally you will have chosen it to pay out mortgages and any other debts, so your family doesn’t struggle without you. For a stay-at-home parent, this payout figure should also cover the cost of a nanny or housekeeper. (This cover is also sometime called “death cover”.)

4)     Trauma insurance pays you a lump sum when a crisis happens — this could include a stroke, some cancers, head injuries, organ transplant, paraplegia and quadriplegia (this list is not exhaustive, and, naturally, waiting periods apply with some conditions). The idea behind this one is to give you some “financial breathing space” (say if you need several months off work to recover from major surgery).

One important point to think about with trauma insurance is covering your children in your policy. It’s not uncommon for parents to fear that their child will suffer a major illness or surgery. Covering them gives you that “financial breathing space” so you can spend time by your child’s side, as you wish, during their treatment, for instance.

Other strategies to think about are arranging medical powers of attorney, estate planning using Trusts and intergenerational planning. It’s probably also quite smart to get your newly turned 18-year-old into your financial planner for their own evaluation. This will be beneficial to them — and you.

Consider also, that your now-disabled child needs treatment outside hospital: physiotherapy, massage, dieticians, chiropractors, gym/personal training… the list goes on. What will be covered?

Don’t fall into the trap of thinking Workers’ Comp will cover you in the case of an accident (and your Workers’ Comp certainly won’t cover your children’s accidents). Workers’ Comp is strictly for accidents or illnesses that directly result from your work. For males, about 70% of long-term disabilities are caused by illnesses unrelated to work; the other 30% are accident and injury related — and most of those have nothing to do with the workplace. Thinking the government will cover you? Centrelink pays a maximum disability pension of around $570 for singles — per fortnight. That’s probably not going to cover your current lifestyle. Or your child’s. Then there’s insurance in your superannuation: yes you probably have it, but check it to see it’s right for you and your family. Again, it’s money down the drain if it does not suit your needs.

Without the proper planning, you may find yourself wanting to retire “tomorrow” –– but you can’t afford it. For your family’s financial security, make sure your insurances are exactly what you and your family need. This will give you the freedom to take time off work in the case of your child having a major or disabling accident, and will cater for their ongoing care. For life.

If you have any questions on which insurances are right for you and your family, please contact us.

It’s also important for Summerhill’s insurance clients to remember that if you have an illness or an injury that needs treatment, keeps you in bed or disables you, then contact us and we’ll check it if could be a claim. We don’t expect you to remember all your policy’s (or policies’) benefits — that’s our job. It’s also our job to deal with insurance companies on your or your family’s behalf. In both cases, having your finances taken care of, means you can concentrate on the physical and emotional healing.

Throughout the year, investors seeking clues regarding the strength of business conditions or the prospects for stock prices were confronted with ample reason to rejoice or despair. Optimists could cite the strong recovery in corporate profits and dividends, the substantial levels of cash on corporate balance sheets, low interest rates and inflation, a booming domestic energy sector, continuing strength in auto sales, and record-high share prices for leading multinationals such as Apple, IBM, and McDonald’s. Pessimists could point to persistently high unemployment, slumping home prices, tepid growth in retail sales, worrisome levels of government debt at home and abroad, and political gridlock in both Congress and various state legislatures.

Although the broad market indices showed little change for the year, there were opportunities to make a bundle—or lose one. Among the thirty constituents of the Dow Jones Industrial Average, thirteen had double-digit total returns, including McDonald’s (34.0%), Pfizer (28.6%), and IBM (27.3%). But losing money was just as easy: The three worst performers in the Dow were Hewlett-Packard (–37.8%), Alcoa (–43.0%), and Bank of America (–58.0%). If nothing else, the substantial spread between these winners and losers discredits the argument we often hear that all stocks are now marching in lockstep and that diversification is ineffective.

Achieving even modest results in the US market required more discipline than many investors could muster, since investor sentiment fluctuated dramatically throughout the year and the temptation to enhance returns through judicious market timing often proved irresistible.

For fans of the “January Indicator,” the year got off to a promising start as stock prices jumped higher on the first trading day, pushing the Dow Jones Industrial Average to a twenty-eight-month high. Bank of America shares jumped 6.4% that day, the top performer among Dow constituents. With copper prices setting new records and factory activity worldwide perking up, the biggest worry for some was the potential for rising prices and higher interest rates that might choke off the recovery. “Overheating is the biggest worry,” one chief investment strategist observed. By April 30, the S&P 500 was up 8.4%, reaching a new high for the year.

Stocks wobbled through May and June but strengthened again in July. On July 19, the Dow Jones Industrial Average had its sharpest one-day increase of the year, jumping over 200 points, paced by strong performance in technology stocks. Just a few days later, however, stocks began a precipitous decline that took the S&P 500 down nearly 17% in just eleven trading sessions. The century-old Dow Theory—a sentimental favorite among market timers—flashed a “sell” signal on August 3, and on August 5, Standard & Poor’s downgraded US government debt from AAA to AA+. As investors sought to assess the implications of sovereign debt problems in both the US and Europe, stock prices fluctuated dramatically, with the S&P 500 rising or falling over 4% on five out of six consecutive trading days in early August. Rattled by the sharp day-to-day price swings, many investors sought the relative safety of US Treasury obligations in spite of the rating downgrade, pushing the yield on ten-year Treasury notes to a record low. Stock prices hit bottom for the year on October 3 as some market participants apparently lost all confidence in equity investing. A Wall Street Journal article cited a number of individual investors as well as professional advisors who had recently sold all their stocks and did not expect to repurchase them anytime soon. “I feel like a deer in the headlights,” said one.

As it turned out, the article appeared in print on the second day of a powerful rally that sent the Dow Industrial Average surging over 1,500 points during the next 19 trading days, putting it back into positive territory for the year.

What can we learn from a difficult year like 2011? The most important thing about an investment philosophy is that you have one. Many investors (as well as some professional advisors) apparently decided to switch from a buy-and-hold philosophy to a market timing strategy in the midst of an unusually stressful period in the financial markets. We suspect few of those adopting the change would have been able to clearly articulate their investing beliefs and why they had shifted.

Legendary investor Benjamin Graham offered the following observation nearly forty years ago: “There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he himself is a part.”

Good advice then, good advice now.

Mark Gongloff, “Investors’ Forecast: Sunny With a Chance of Overheating,” Wall Street Journal, January 3, 2011.

Jonathan Cheng and Sara Murray, “Stock Surge Rings in Year,” Wall Street Journal, January 4, 2011.

Matt Phillips and E.S. Browning, “Tech Sends Stocks Soaring,” Wall Street Journal, July 20, 2011.

Steven Russsolillo, “‘Dow Theory’ Confirms It’s an Official Swoon,” Wall Street Journal, August 4, 2011.

Damian Paletta, “U.S. Loses Triple-A Credit Rating,” Wall Street Journal, August 6, 2011.

Tom Petruno, “Investors Stampede to Safety,” Los Angeles Times, August 19, 2011.

Kelly Greene and Joe Light, “Tired of Ups and Downs, Investors Say ‘Let Me Out’,” Wall Street Journal, October 5, 2011.

Benjamin Graham, The Intelligent Investor (New York: HarperCollins 1949).

The S&P data are provided by Standard & Poor’s Index Services Group.

MSCI data copyright MSCI 2011, all rights reserved.

Yahoo! Finance, www.yahoo.com, accessed January 3, 2012.

Take the late 2010 Barclays Capital Global Macro Survey of more than two thousand institutional investors. The pick for the best performing asset class in 2011 was equities (with 40% support), followed by commodities (34%) and bonds (less than 10%).¹ The consensus prediction was a 15% gain in the US S&P-500 for the year to around 1,420.

As we now know, the truth turned out to be rather different. To the beginning of December and using broad indices, diversified fixed income was the best performing asset class of the year, followed by government bonds. Returns from commodities and equities were negative. The year-to-date return for the S&P-500 was close to zero. (And remember, these are the forecasts of big institutional investors.)

Barron’s, meanwhile, was telling readers this time last year that smart stock pickers were “looking eastward” in 2011. The year was to be dominated by fast growth and rising inflation and the smart thing was to reweight toward China and other tigers.²

That didn’t really turn out to be such a good idea, as China had another bad year. The Hong Kong Hang Seng index was down nearly 17% to early December. The Shanghai Composite was down by a similar amount.

Conversely, the gloom around fixed income in late 2010 was all pervasive. Barron’s surveyed 10 strategists and investment managers and found nearly all expected stocks to outperform bonds in 2011. “You’ve got to believe in outright deflation to put new money into bonds right now,” said one investment banker.³

The logic might have been impeccable, but the strategy wasn’t so. As of early December, US debt securities, as measured by a Bank of America Merrill Lynch index, had risen by 8.7 per cent in 2011, their best performance since 2008.⁴

In other words, bond yields might have been seen as unusually low a year ago. But they have fallen even further since and those who tried to profit by market timing or making concentrated bets elsewhere have paid a heavy price for doing so.

So if the experts can’t get the broad asset class movements right, what chance on earth have they of correctly and consistently predicting individual stock or commodity performances? But year after year, that doesn’t stop them from trying.

One prominent investment bank team was quoted by The Australian Financial Review last January as saying that platinum was the metal to back in 2011. As of early December, the spot platinum price was down nearly 14% for the year. On the Australian stock exchange, platinum stocks Platinum Australia and Aquarius Platinum – both recommended by the bank – had delivered total returns to the end of November of -83% and -53% respectively. Ouch! ⁵

Stock picks often go wrong because forecasters base their calls on what turn out to be incorrect assumptions on macro-economic variables like base lending rates and inflation. Take the AFR Smart Investor magazine “expert panel”,⁶ who in late 2010 suggested to readers moving out of international fixed income and into cash given expectations of rising cash rates in Australia. As it turned out, Aussie rates did not move until November and when they did, the direction was down, not up.

Currencies are another variable that defy even the most assiduous forecasters. In its 2011 outlook, published in the London Daily Telegraph⁷ in December 2010, a major British bank forecast sterling would be the best performing currency of the year. The banks also predicted stock markets would outperform bonds, with the FTSE-100 rising about 18%. A year later, sterling ranked only a distant fourth behind the Japanese yen, Norwegian krone and Swiss franc and the FTSE was nearly 6 per cent lower.

It’s a tough business isn’t it? And remember these are major financial institutions with armies of expert analysts, mountains of data and sophisticated forecasting tools. So what is an ordinary investor supposed to do?

The first lesson might be that forecasting is hard, particularly about the future! You can do all the analysis you want, but events have a way of messing with your assumptions.

The second lesson is you don’t really need forecasts to succeed as an investor. Yes, equity markets were rocky again this past yearm, but staying diversified both across and within asset classes provides a cushion in down times and ensures you are still positioned to reap returns when riskier assets come back into demand.

The third lesson is that the past has gone. The news may be gloomy, but that information is in the price. When risk appetites are low, the price of safety is higher than at other times. But the expected reward for risk is higher. Conversely, when risk appetites are high, the expected rewards are lower.

It’s human to feel anxious about bad news because we fear loss more than we like gains. But in this case, the loss isn’t real unless you realise it, so it makes sense to stay with the asset allocation your advisor has tailored for you.

The final lesson is that nothing lasts forever. In fact, of all the forecasts ever made, the only one really worth counting on is that things change. What’s more they often change in ways we least expect.

1. ‘For 2011, It’ll Be All About Equities’, Pensions & Investments, Dec 27, 2010

2. ‘Asian Trader: Stockpickers, Look Eastward’, Barron’s, Dec 20, 2010

3. ‘Outlook 2011′, Barron’s, Dec 20, 2010

4. ‘Treasuries Rise on Concern Europe Struggling to Resolve Crisis’, Bloomberg, Dec 7, 2011

5. ‘Platinum to Become the Price of Metals in 2011′, Australian Financial Review, Jan 7, 2011

6. ‘How to Rebalance Your Portfolio in 2011′, AFR Smart Investor, Dec 17, 2010

7. ‘Sterling Best Major Currency Next Year, says Barclays’, The Daily Telegraph, Dec 10, 2010

Voluntary HELP payments can earn a discount to help reduce the debt. Parents looking for a Christmas gift for their children may wish to consider helping with the repayments.

Voluntary payments of $500 or more received by the ATO before 31 December 2011 will qualify for a 10% bonus. This reduces the debt by a further 10% of the voluntary repayment amount.

On 1 November 2011, the Reserve Bank of Australia (RBA) decided to reduce the official interest rate for the first time in 31 months. The RBA cut the official rates by 0.25% to 4.50%.

As a result, many banks have reduced interest rates on loans. If you have a mortgage with a variable interest rate this may have reduced the amount the bank requires you to repay each fortnight/month, leaving you with additional money to spend, pay off debt or save.

The effect of an interest rate reduction

A fall in interest rates of 0.25% can lead to the minimum repayment on a loan of $350,000 being decreased by $55 per month.

Depending on how much you owe on your home loan, how much your lender reduces the interest rate by and the term of your loan, your minimum repayment may fall by more or less than this amount.

This may seem like a small amount, but used wisely it can provide you with significant increases in wealth over time.

What can you do with the additional money?

If your minimum repayment does reduce, you could continue to pay the same amount off your mortgage to repay it sooner, or you could use the money to:

• pay off a credit card
• make an after-tax contribution to super and receive a Government co-contribution
• salary sacrifice into super, or
• (if eligible) make personal deductible contributions to super.

Repay the mortgage quicker

The simplest thing you could do with the interest rate reduction is to effectively do nothing and keep paying the same amount off your mortgage. If you can keep paying this amount, you will pay your off home loan sooner and save interest over the term of your loan.

Pay off a credit card debt

The reduction in minimum mortgage payments could instead be used to pay off ‘bad debt’ such as a credit card. Debts on credit cards are commonly charged interest at rates around 21%. Therefore, it makes little sense to have large credit card debt, as the interest is generally not tax deductible and is higher than other forms of debt such as home loans and even personal loans.

You should always aim to pay off amounts owing on credit cards as quickly as possible. In most cases it is better to pay off a credit card before putting additional money into a mortgage.

Make an after-tax contribution to super

If you work, are under age 71 and have income* below $61,920 you may be able to double your money by making an after-tax contribution to super and qualify for the Government co-contribution. You need to check that you meet all the eligibility rules and so should speak to us before doing anything.

*Total income is the total of your assessable income plus reportable fringe benefits paid by your employer and reportable employer superannuation contributions (includes salary sacrifice amounts).

If you are eligible, you could use some of the lower mortgage repayment savings to make an after-tax contribution into your super fund. Not only will this mean that you have your money invested in a low tax environment, where earnings are taxed at a maximum of 15%, but the government may match your eligible contributions with a co-contribution.

How much co-contribution you receive will depend on your income. If your total income is below $31,920, the Government will match your contribution $1 to $1 up to $1,000. The eligible amount reduces for income over this level until it cuts out at $61,920.

Where else can you get an immediate 100% return on your money!

Salary sacrifice into super

If you earn higher levels of income it may be worthwhile asking your employer about salary sacrifice into super. With lower monthly mortgage repayments you may be able to afford to sacrifice some salary into super or increase your current levels of sacrifice.   

The benefits of salary sacrifice are that you:

• increase your retirement savings
• reduce the tax payable on your employment income.

You should always get advice before you increase the amount you salary sacrifice to ensure you do not exceed the amount that can be contributed to super without penalty tax rates.

Make personal contributions and claim a tax deduction

If you are not an employee than salary sacrificing is not an option for you. But you may be eligible to receive the same benefits by making claiming a tax deduction for any personal contributions you make into super. Again you need advice to work out how much you should contribute and what tax deductions (if any) you can claim.

Your next steps

The reduction in interest rates gives you an opportunity to get that little bit further ahead – don’t waste it! And if you do decide to reduce your mortgage repayments use the savings wisely.

If you need the extra money to help make ends meet each month then now is also a good time to review your expenses and see where little savings can be made so you can also take advantage of the opportunities discussed above.

Each strategy is different and the best option will depend on your particular circumstances. So review your debts, look at your budgets and speak to us for further advice about how to make the most of the interest rate reduction.

Note: this is general advice only and should not be considered investment advice. You should speak to us before implementing any strategy.

The webpage includes information on the items below and can be found here:

• Income Tax
• Capital Gains Tax (CGT)
• Goods and Services Tax (GST)
• Residential rental properties
• Property used in running a business
• Property development
• Building and renovating.