Sometimes the non-financial benefits contribute as much to a client’s overall wellbeing as the hard numbers. Mark Story reports.
Running out of money was the last thing on the minds of renowned, 70-something veterinarian Ruben Partridge and wife Laura three years ago, as they sipped champagne from their private balcony aboard the Queen Mary. But when Ruben became unexpectedly ill, the cost of maintaining their lifestyle, while funding myriad healthcare and associated accommodation costs, quickly soared to more than $140,000 a year.
Having spent a lifetime on the highest tax rate, Ruben and Laura (not their real names) had no qualms about putting their hands out for government entitlements to ease the financial burden. But unbeknown to them, their entitlement to the Commonwealth Seniors Health Card (CSHC) was about to be denied. A decision by fund managers to cash out abnormally high capital gains – courtesy of the last mining boom – before the financial year’s end, boosted the Partridges’ combined taxable income (CTI) to well above the $80,000 threshold. As a result, the couple lost their access to the pharmaceutical benefits scheme (PBS), and this pushed their annual medicine costs to about $25,000 to $30,000. As a seasoned investor who had self-funded the couple’s retirement, Ruben knew they couldn’t go on incurring these high costs without seriously eroding their capital base.
Faced with the bleak reality that their cash reserves would be depleted by 2012, and with Ruben now needing aged-care accommodation (since December 2007), they knew something needed to be done – and quickly. Having dismissed their longstanding financial adviser at a well-knownbank, due to a seeming indifference to their financial dilemma, the Partridges wasted no time hiring financial adviser Josef Stadler, on the recommendation of their daughter. Stadler spent the first two visits making the Partridges feel confident that, despite being nearly 50 years younger, he could identify a plan to significantly improve their financial wellbeing. It was equally important, adds Stadler, to minimise the stress related to managing their financial affairs, especially now that much of this had fallen on Laura, who was the least financially savvy of the two.
The strategy document presented to the Partridges on visit three outlined what Stadler regarded as their immediate priorities – including reducing ongoing medical outgoings by regaining entitlement to the CSHC, and reducing tax. “They have had to transition from being self-funded retirees to needing as much help and government assistance as available,” Stadler says. To ensure they regained the CSHC and reduced tax, Stadler restructured their assets to achieve a more favourable result under the income test (below the $80,000 income test threshold).
And after some careful planning and discussion about superannuation as an investment vehicle, Laura – still under age 75 at the time – started working in a local real estate office for the 40 hours (in 30 days) required under the superannuation work test. This meant she was now eligible to make a contribution to super. Despite triggering a capital gains tax (CGT) liability, the funds in Laura’s ordinary investments were moved into super. The plan was then for her to make both a concessional and non-concessional contribution, up to the maximum limit of $250,000 allowed for her age.
Stadler also discovered that the Partridges’ $1.3 million investment portfolio (predominantly in older legacy-based allocated pensions) – 65 per cent of which was invested in growth assets – was inappropriately balanced, especially given their need for additional income. For ease of management, fee savings and greater investment flexibility, Ruben’s two existing allocated pensions (with Asgard) were consolidated into a Summit master trust. And in addition to offering family fee aggregation, the Summit master trust (equally divided between shares and cash) also provided for seven years of income. “From an estate planning perspective, we set up these new allocated pensions as reversionary to each other and also recommended a restructure of ownership of other assets into a joint tenancy arrangement,” Stadler says.
In addition to money in the investment funds and allocated pensions, the Partridges also had $150,000 split between two private companies, paying $2500 a month in unfranked dividends. This investment structure brought with it taxes, which together with other liabilities boosted their total tax commitments to around $25,000 annually. As a result, Stadler recommended that the dividend income be paid to Laura to create additional income in order to offset her concessional contribution to super. “As a result of these new consolidations, we were then able to rebalance both of their portfolios to reflect their more conservative risk profile,” Stadler says.
As a result of the global financial crisis – together with their continued need for living expenses of $140,000 annually – a Centrelink and aged care review in May 2009 found the Partridges’ asset base (at $850,000) was now within the assets test limits. This meant they were finally eligible for a part Centrelink pension entitlement under the “couple separated by illness” category. And with income now less than $80,000, due to the benefits of super and the deductible amount, the CSHC was reinstated immediately under the future income clause, without the need to wait 12 months. To meet their living expenses at this point, Ruben and Laura were drawing $6000 a month from their allocated pensions, and $6000 a month from their ordinary joint investments.
Meanwhile, Ruben’s age care accommodation was costing them $118 a day ($43,000 a year), excluding extra services. Back in 2007, when Ruben was forced to enter aged care accommodation, there were two nursing home options. The first one involved a large accommodation bond (of around $400,000), so they decided to go for the alternative, with a daily accommodation charge – because this one gave them higher Centrelink benefits. “The daily charge would suit them best financially, both in the immediate and longer term,” says Stadler.
In an effort to lower the overall cost of living while preserving capital, Stadler recommended the gifting of $30,000, which made the Partridges eligible for a combined Centrelink age pension of $8000 annually. And by reducing their income drawdown to less than the $699.08 a week (about $36,250 annually) allowed under the “age care assessable income test”, they were also able to benefit from other discounts on aged care. Stadler was also able to reduce the “daily income tested fee” from $58.62 to nil and the “basic daily care fee” from $41.61 to $33.41 (as they were now considered part-pensioners), producing a total annual saving of about $24,500. Reducing their annual allocated pension income by $36,000 also created the double-whammy effect of increasing a range of government benefits while reducing the erosion of the Partridges’ own capital. But most importantly, adds Stadler, it ensured his clients could still meet their required net living costs. “By reducing their overall cost of living by some $35,000 annually and increasing government benefits, their capital will now last twice as long as it would have otherwise,” says Stadler.
Quality of life
In hindsight, says Laura Partridge – who’d been left in charge of the couple’s financial matters following Ruben’s paralysis – the “non-financial” benefits resulting from Stadler’s advice were equally beneficial to their overall wellbeing. She says unravelling the complexity of their former asset structure into new investment products also helped her assume control of their finances a lot more quickly. “Our wealth and health would have suffered a lot more over the last 18 months of volatile stockmarkets due to our exposures to growth assets,” says Laura. “And by rebalancing we were able to soften the effects of the global markets on our portfolio.” Equally important, says Laura, was Stadler’s help in dealing with Centrelink and the Department of Aged Care as they made the transition from being self-funded to relying on government entitlements.
Also high on the list of non-financial benefits, adds Laura, was Stadler’s contribution to making the rest of Ruben’s life as comfortable as possible. Given that Ruben had previously conducted all his financial affairs independently, his incapacity was distressing to both of them, she says. And while Stadler initially struck the Partridges as being alarmingly young, she says the time he put into implementing strategies, representing them to government agencies, and helping them reconcile the financial adjustments they needed to make provided a much-needed boost to their self-esteem. “By conveying the victories that he’d managed to obtain for us through his financial know-how, Joe gave Ruben a sense of worth and dignity that money alone could never have achieved.”