In the February edition of Timely Tips we spoke about the benefits of diversifying your investments by assets class. We will now address the issue of diversifying by both individual securities and by investment manager.
• Individual investment securities
This refers to individual shares, fixed interest securities and properties.
Once you have diversified across asset classes, it is time to start thinking about diversifying within asset classes. There are three major ways to do that:
• Individual companies
Certain market, economic or political conditions could spell trouble for one company and success for another. Investing in a number of companies reduces the effect if an individual stock falls.
• Industries/sectors
All companies operating in a particular industry can be affected by a change in Government policy or economic conditions. But these same changes may have no effect on another industry - they may even make things better! So diversification across industries will help balance out the effect of these industry-specific changes. The same principle applies to sectors of the property market such as office blocks, houses, warehouses and shopping centres.
• Countries
While Australia has the second biggest listed property market in the world, it is still only about a fifth the size of the US listed property market. While Australia's sharemarket is among the world's 10 biggest, it still only makes up less than 2% of the value of the world's sharemarkets. This means that if you only invest in Australia, you are missing out on the diversification benefits of investing in different economies, markets and industries.
• Investment manager
One of the easiest and most effective ways to create a diversified investment portfolio is through managed funds. Share funds, for instance, will generally invest in one or more than 30 individual companies while diversified funds will generally invest
across shares, fixed interest, property and cash.
If you choose to invest through managed funds, it can make sense to diversify across different investment managers. Firstly, if one investment manager performs poorly you only have part of your investment with that manager.
Secondly, most investment managers follow a particular investment style that may perform better under certain market conditions. The most common investment styles are growth, core and value. By combining different investment management companies with different styles, you can reduce your risk and smooth out returns.
S ource: BT Financial Group - Extract from "Ten Investing Truths" What Happens to my Super When I Die?
The answer to this question is a simple, yet complex one.. it depends!
If you are in the accumulation phase of superannuation - that is you are building your retirement savings nest egg and haven't yet started to draw an income stream in the form of a pension from your super, then what happens to your accumulated benefits, and the proceeds of any life insurance you hold through your super, will be dictated by the trustees of your superannuation fund. The sole or primary purpose of superannuation is to provide benefits for a member at their retirement, or for their dependants in the event of the death of the member before retirement. This "sole purpose test" is enshrined in legislation.
Trustees of a superannuation fund are therefore required to pay a benefit to the dependants of the deceased member, or, in the absence of any dependants, to the deceased's estate. A "dependant" includes a spouse of the deceased, children of any age, and any other person who has an inter-dependent relationship with the deceased member. This may include same-sex partners. Most superannuation funds invite their members to nominate one or more beneficiaries to receive the accumulated benefits on their death. Such nominations may be either a binding death benefit nomination, or a non-binding death benefit nomination.
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In 1999, amendments to superannuation legislation saw the introduction of binding death benefit nominations. Where a valid binding death benefit nomination is made by a fund member, the trustees of the super fund are bound to follow the nomination and do not have the capacity to over-ride it. To be valid, a binding death benefit nomination must satisfy the following criteria:
• Must be made in writing;
• Be witnessed by two witnesses over the age of 18, who are not beneficiaries;
• Where there is more than one beneficiary nominated, the proportion of benefit payable to each must be clearly stated; and
• The beneficiaries can only be a dependant of the deceased (i.e. spouse, children of any age, a person having an "inter-dependency" relationship with the deceased), or the legal personal representative of the deceased members estate.
Binding death benefit nominations generally have a life of three years. That is, they need to be renewed at least every three years. Where a binding death benefit nomination fails one or more of the criteria mentioned, it is invalid and the distribution of the member's benefit on death would be at the discretion of the trustee.
Prior to the introduction of binding death benefit nominations, even where a fund member had nominated a beneficiary, the ultimate decision as to who benefits would be paid on death rested with the trustee/s of the super fund. For example, if a member nominated their adult child to receive 100% of the benefit in the event of death, but the deceased also had a spouse, then the trustees could override the deceased nomination and pay all or a part of the benefit to the spouse. This certainly created an air of uncertainty which has been overcome with the introduction of binding death benefit nominations.
Even today, unless a valid binding death benefit nomination is in place, the trustees of the super fund are the ones who will make the ultimate decision as to whom benefits will be paid.
There is a common misconception that if no death benefits nomination is made, the benefits will automatically pass through to the deceased member's estate. Many people actually direct in their will as to how their superannuation benefits are to be
distributed. This is based on the assumption that the superannuation benefits will automatically pass through to the estate in the absence of a nomination having been made.
As already mentioned, in the absence of a valid binding death benefit nomination, the trustees have discretion in determining to whom the benefit will be paid. Except where there is a valid binding death benefit nomination that specifies that benefits are to be paid to the legal personal representative of the deceased member's estate, the trustees may well direct the payment of benefits directly to the spouse and/or other eligible dependants. This may result in less assets forming part of the estate which, in turn may lead to other beneficiaries receiving a lesser or disproportionate inheritance than the deceased intended.
Estate planning within superannuation is a critically important matter that requires very careful consideration to ensure that a deceased's wishes are carried out. Whilst, in many cases a binding death benefit nomination may not be required, there will be situations, particularly where there are second marriages, de-facto relationships, blended families and estranged relationship (with spouse and/or children) where binding death benefit nominations are appropriate. If a fund member wishes to ensure their superannuation benefits pass through to their estate, then a binding death benefit nomination, nominating the legal personal representative, is suggested.
It is also very important to ensure that any nominations are up-to-date. We recommend that all members of superannuation funds review their nominations from time-to-time to ensure their appropriateness. Your financial planner can provide invaluable assistance in working through this maze.
In summary, have a look at your super and determine:
- Who would you like a death benefit to be paid to;
- Are you happy for the super fund trustee to make the decision for you?
- If you have made a nomination, does it require updating and should it be in the form of a binding death benefit nomination?
In future issues of Timely Tips we will look at the taxation of superannuation benefits when paid out following death, the ways in which benefits may be paid, and what happens to benefits where a person who is receiving a pension from their super fund, dies.
Source: Peter Kelly - Professional Investment Services |
