Australian investors must recognise that political risk is currently a significant consideration in wealth creation and management, Matt Walsh, head of Lifeplan, has warned.
“Managing political risk clearly involves the diversification of assets and asset classes but what is not so widely understood is that it should involve the diversification of how investments are held.
“Indeed, while Australian investors may be aware of the term “political risk” they would usually relate it to foreign countries with unstable governments.
“Recent global events should remind us that every country has a degree of political risk, and Australian investors should now appreciate the impact on markets our own uncertain political outlook can have.
“Couple this with ongoing leadership concerns in the UK, the unknown impact of Brexit, and the Trump factor in the US, and political risk is currently a major influence for Australian investors.”
Mr Walsh said that professional money managers, with a well-diversified quality portfolio, would have already taken political risk into account through diversification of assets.
“However, the political risk in the choice of investment vehicles also needs to be considered.
“This is especially true of superannuation – which is where most Australians have a large portion of their wealth.
“We are reminded time and again that politicians cannot stop themselves from tinkering with super – especially the tax aspects that are what make superannuation so attractive as an investment vehicle.
“Investors need to consider other ways of holding assets, not necessarily instead of super, but to complement it and diversify.”
Mr Walsh said that other than investing in one’s own name, or that of a partner, there are four main vehicles that investors can use when holding assets:
· Via family trusts (taxed at marginal rate) or family companies
· Superannuation (taxed at 15 percent; or 0 percent in pension phase)
· Investment bonds (taxed at 30 percent or less with imputation system)
· Companies (at 30 percent tax rate)
“To reduce the impact of political risk on long term savings, investors should ideally spread their wealth across these three types of vehicle.
“Investment bonds are a particularly good vehicle to complement super and diversify as a way to minimise the impact of political risk.
“In recent months, during all the comment on tax and superannuation, any possible changes to investment bonds were not raised. Indeed, there have been only a few material changes to investment bonds in the past 20 years.
“There are also a number of other features to investment bonds which make them an ideal companion to super, including estate planning, intergeneration wealth transfer.”
