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Which way to go Allocated Pension or Term Deposit

Discussion in 'The Economy' started by marion, 25th Oct, 2008.

  1. marion

    marion Member

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    I will shortly be receiving proceeds from the sale of a house and need to park this money for six months in a 'safe' environment. Financial Planner suggests an Allocated Pension Account with CFS but unfortunately superannuation money is not under the govt's guarantee umbrella nor is CFState. The tax advantages are obvious but what about the risk. The other way to go is a term deposit with the bank with no tax advantages.

    Any suggestions :rolleyes:

    Maz
     
  2. AsxBroker

    AsxBroker Well-Known Member

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    Hi Maz,

    What are your plans after 6 months? Are you going to spend the funds?

    I cannot comment about CFS products but I know that Asgard's Cash and Money Market Account are guaranteed by the government as they are St George Bank Accounts (or Bank SA for you in NT and SA). Also in Asgard there are St George Bank 6 month and 12 month term deposits with Term Deposits which are very popular for clients over 55.

    Focus on your goals first, the strategy and investments will follow.

    Cheers,

    Dan

    PS This is general information, speak to your FPA registered Financial Planner before making an investment decision.

    PSS ING (read ANZ) and MLC (read NAB) also have access to term deposits in Allocated Pensions.
     
  3. marion

    marion Member

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    The proceeds are only being parked for six months or more and need to be available for a re-purchase of a house. A FP is advising Allocation Pension thru CFS for tax advantages. Problem is CFS is not govt guaranteed nor are super funds. Term deposit at lease will have guarantee as it will be with a bank even though we will be taxed heavily.

    Maz
     
  4. AsxBroker

    AsxBroker Well-Known Member

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    Hi Maz,

    It's always exciting buying property.

    You might want to suggest to your FP that they recommend a previously named Allocated Pension that DOES have cash or term deposits which are government guaranteed. Otherwise you can take your business elsewhere.

    You have got to compare the tax savings vs cost of setting up an allocated pension.

    To put money into super you must be under 65 (or working and under age 75) you can use the bring forward rule of $450,000 (3 years rolled into 1 year) if under age 65.

    $450,000 x 6% x (6/12) = $13,500 interest payable

    If you are able to take fall unds out you would not be working, so no income from working.

    You will have to add the interest from a term deposit to your assessable income...(from other investments)

    $13,500 which would have about $500 in tax if only income, $2,025 at 15%, $4,252 (31.5% tax), $5,602 (41.5% tax) and $6,277 (46.5% tax).

    How much is your FP going to charge you? If it's less than your tax saving it makes sense. If your worried about the government guarantee, you've got to figure out how much tax is worth paying for it.

    You can also ask your accountant about a SMSF which could invest in cash or term deposits in a cheaper manner...

    Cheers,

    Dan

    PS I am not a tax adviser! This is general information. Speak to your registered tax adviser or accountant or financial planner before making a decision.
     
  5. marion

    marion Member

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    Thanks for your reply ASX. The FP says CFState are currently in the process of apply for Govt guarantee. Could take a while. He also states superannuation is not going to be guaranteed which I assume the Allocation Pensions is classed as??? There is a fee of course which is 5% entry plus a management fee but this money is of course 'at risk' of being frozen or worse.
    A term deposit will of course have no entry fee, management fee but will be taxed. My husband is over 60 years and we both have CSS pensions.

    The answer maybe to split the proceeds and halve the risk

    Cheers Maz
     
  6. ashwright

    ashwright Well-Known Member

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    Hi,

    If you need the money in 6 month, wouldn't you leave it in cash?
    If you are going to pay a 5% entry, plus management fee, you are going to have less in 6 months then you put in. ie over the 6 months you will probably lose money. (unless of cause the CFS fund is earning 10%+ pa )
    If you leave it in cash, or a 6 month term despoist, sure you are going to pay tax, but at least that means you are making money.
    Ash.
     
  7. AsxBroker

    AsxBroker Well-Known Member

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    Hi Marion,

    Cash and term deposits are automatically covered by the government, there is no applications to go through, it either is covered by the government (being in cash and term deposits) or not. It sounds like the FP is making excuses to relieve your anxiety.

    Your Marginal Tax Rate, Superannuation and Allocated Pensions are tax structures and not investments. Think of three buckets and you can put anything you want in those buckets. If you had a term deposit in your own name you could be taxed at up to 46.5%, in superannuation the term deposit would be taxed at 15% and in an allocated pension 0%.

    Eg, Term Deposit pays 6%, in your marginal tax rate this could be taxed at up to 2.79% leaving you with 3.21%, in super this could be taxed at 0.9% leaving you with 5.1% and in allocated pension leaves you with your full 6%.

    5% Entry fees sounds a little over the top for the FP doing nothing amazing. Ask the FP what their Basis of Advice is and to show you in dollar terms how much you are going to be better off. I would be surprised if they do as I don't think they are going to be able to save you 5% in tax to justify what they are suggesting.

    I do agree with Ashwright, if you want 6 months, it's such a short period of time, it'll go in a blink.

    You may be better off with your original idea of opening a term deposit and putting the term deposit in both your names to split the tax to pay (if any).

    Cheers,

    Dan

    PS Go see your accountant or tax adviser as they can take your actual situation and give specific advice based on your circumstances.
     
  8. marion

    marion Member

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    Allocated Pension or Term Deposit

    The 5% entry is a bit steep, but that's what CFState charge. It is a one off fee only and there are more funds to follow from several industry superfunds once my husband retires and this money has to be put in an allocated fund at this point. So whether we pay it when we park the house proceeds or later its got to be paid.

    The real question is the risk of losing money that has been set aside for the purchase of another house for us by putting it in an AP with CFS for six or maybe more months depending on whether we find another property in that time. The AP does provide a good weekly income to cover the rental property. Its really a question of risk.

    Thank you all for your comments.
    Maz
     
  9. AsxBroker

    AsxBroker Well-Known Member

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    Hi Marion,

    It's what CFState charge and gets paid to the FP, it's 4% contribution fee as per the PDS (probably 4.4% with GST). You can read the PDS http://www.colonialfirststate.com.au/prospects/FS593.pdf?1 on page 7...

    "The contribution fee you pay is negotiated with your
    adviser, up to the maximum shown in this table"

    You can tick the box on page 42 to say how much is charged (called the Application Fee). So it is negotiable.

    You can ask the FP why they don't suggest CFS wholesale as you only need $100,000 and no entry fees. I strongly suggest that you get a second opinion, though you seem very keen on this financial planner, if you are happy to pay the fee go for it. I am surprised that they are not going to negotiate fees with you.

    You can find a planner here Find a Planner

    I am interested to hear what their reasonable basis for advice to roll your husbands industry fund into a retail pension fund would be as most industry funds do have their own allocated pensions.

    The AP is designed to pay you a salary for the rest of your life.

    Good luck,

    Dan

    PS This is general information, speak to your FPA registered Financial Planner before making an investment decision.
     
    Last edited by a moderator: 26th Oct, 2008
  10. marion

    marion Member

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    Allocated Pension vs Term Deposit for 6-12months only

    Hi and thanks for your reply Dan
    The amount of FP's in Darwin are limited and this particular one is familiar with the CSS Scheme which we are both members of. We have to leave the industry fund (CSS) at retirement. The pension is paid from the fund but the lump sum has to be rolled over.
    The proceeds of the house could be put into CFS wholesale which may have a no entry fee but a steep exit fee. I'm thinking to just put these monies into a Term Deposit for 90 days at a time and pay the tax as the entry fee or exit fee whichever they get you on will erode any gain we make.
    Just need to work out the most tax effect split between ourselves.
    Thanks again and keep the comment coming. I'm ready for the FP when he returns from leave. He is attached to the CBA.


    Maz:rolleyes:
     
  11. AsxBroker

    AsxBroker Well-Known Member

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    Hi Marion,

    Sounds like I should move to Darwin ;) Love those Darwin stubbies :)
    Most banks will have a financial planner attached (Eg, in this case CBA).

    You can read the CFS wholesale PDS here http://www.colonialfirststate.com.au/prospects/FS1494.pdf?1 as per page 7, there are no exit fees, so I don't know why you think the exit fees are steep...

    You can get a second opinion while you wait.

    I'm not surprised he is attached to CBA as they own CFS, NAB own MLC, ANZ own ING, Westpac own BT (platform), St George/Bank SA own Asgard, Bendigo own Sandhurst Trustees.

    Cheers,

    Dan

    PS This is general information, speak to your FPA registered Financial Planner before making an investment decision.
     
  12. marion

    marion Member

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    Unfortunately you can't invest with ASGARD unless you use a financial planner and again this is money off the top.
     
  13. Young Gun

    Young Gun Guest

    for a 6 month investment time frame, I'd just stick it in a term deposit. Alot cleaner and easier than holding it in an allocated pension for 6 months.

    Yes you would save tax but an entry fee of 4% - 5% is outragous.

    As ASX stated, ask your FP to show you that you will be better off over 6 months period and by how much $$$. I'd be suggesting that he will struggle to justify his fees.

    alternatively give ASXBroker an email as I'd imagine that he could the same job for less. You'd just have to do it over the phone. (plus I'm sure he could look after the rest of your super for much less too!)
     
  14. bennymarsh

    bennymarsh Well-Known Member

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    Just a quick point on the government guarantee, while it is true that superannuation funds aren't included in the government guarantee, generally a superannuation fund will invest it's "cash" fund with a number of banks, and at the moment will most likely only be investing these with approved deposit institutes. ADI's are able to apply for the governments wholesale guarantee which is essentially what the super funds will be investing in, wholesale funding. Therefore, while the super fund is not directly guaranteed, if you invest in their cash funds (and ask them if this is the case with their fund), you should find your money is safe.

    For example i have noticed this week that Vanguard put out a statement saying all of their funds were covered this week, although they did have the caveat that the guarantee has not yet been finalised yet, so it isn't 100% clear what things will look like when it gets through parliament.

    Super funds also don't hold your funds, so even if the superannuation fund went under, their custodian holds your assets, so you still get your money back.

    Having said all that, cash in Australia is safe in any case. APRA is an incredibly good regulator, and i think we will see Rudd be able to get up in front of the G20 on the 20th November and say "This is the model everyone should be using".

    Then again cash rate - inflation = not much at the moment, especially if the RBA drops interest rates further.

    But as ASX Broker says, if you can access your super in 6 months you obviously don't have income. LITO means you pay no tax if you have under $14K income, so for 6 months you may not pay any tax!

    Benny

    P.S. Seek tax advise from a professional, or see a financial planner.
     
  15. Iaminsydney

    Iaminsydney Member

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    Use the Cash Facility and ask for NO FEES

    Being an adviser i would simply ask him to put the investment in the cash option of the allocated pension - that way you can receive the same rates as an IBD then have the ability to withdraw all or part of your funds whenever you wish. As Colonial First State is owned by the Commonwealth Bank - i know that guarantees are not required for their cash or fixed interest fund.

    As far as the entry fee is concerned i would ask the advise to do it on a Nil Entry and Nil Exit fee basis - with a .45% trail only.

    I would and have done for my clients.

    Good luck and let me know if you need any other advice.
     
  16. JudgeDreadz

    JudgeDreadz Well-Known Member

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    i am reading a lot about money markets in investopedia. a quick google suggests only st.george offers them in australia. are they known as something else here?