|Case study: Reforms drive a strategic rethink for Anthea and Peter Scallion
Attempts to reduce the tax impost following recent super reforms, while making the right provisions for the future, led longstanding clients, Adelaide couple Peter and Anthea Scallion, to look to 360 Private Wealth by Design for badly needed advice.
Peter was an intensive care specialist at a leading hospital in the state capital and an army reservist with numerous tours to the Middle East under his belt, who retired with an indexed lifetime pension – courtesy of his constitutionally protected fund with Super SA – of about $228,000 annually. While that was a great outcome, Peter’s defined benefit exceeded the transfer balance cap introduced this year.
In addition to taking a guaranteed defined benefit pension to cover their retirement, the Scallions also wanted to pay off their outstanding mortgage of about $274,000 and a $35,000 line of credit. They also wanted to fund planned expenses, plus an anticipated S293 tax assessment in 2018 of about $53,000.
With these considerations in mind, Rory Mooney recommended the Scallions elect to receive 70 per cent of Peter’s defined benefit entitlement as a lifetime indexed pension, which provided an annual net (after-tax) pension of about $147,765 annually.
“This got us pretty close to the $150,000 annually that Peter and Anthea said they wanted to fund their retirement lifestyle,” Mooney says. “We subsequently had to amend their Statement of Advice (SoA) to adequately provide for their legacy requirements and all the permutations resulting from those considerations.”
Tax mitigation and re-contribution strategy
Mindful that the Scallions’ adult children are not financially dependent, Mooney proceeded to prepare another SoA with the specific intent of mitigating potential estate tax. Given that they’d also been using contribution splitting rules for many years, the Scallions had sizable taxable components in each of their accounts that Mooney also needed to address.
While Anthea retired back in 2014, Peter, who’d turned 65 a number of years earlier, elected to continue working. As a result, both had satisfied a condition of release that allowed Mooney to withdraw and re-contribute funds non-concessionally.
“By using the re-contribution strategy, we were able to reduce the potential tax on estate as bequests moved to their children – from $198,125 to $63,126 – hence delivering a savings of $134,999,” Mooney says.
Given that the defined benefit scheme will cease pension entitlements altogether upon the death of the (member and their spouse), Mooney says it’s also important to note that the partial commutation of Peter’s defined benefit pension will pass benefits down to the couple’s children as part of their estate.
Mooney adds that this is a much better outcome than seeing any residual benefit, from 100 percent of the defined benefit fund, forfeited upon the death of the survivor.
“While Peter and Anthea had been clients for 30 years, recent super reforms prompted a rethink around investing outside of super that didn’t previously exist” Mooney says. “It’s also gratifying for us to be able to handle all facets of Peter and Anthea’s requirements – encompassing advice, taxation and estate planning – under one roof, which is something we could not have done under our former structure.”
Stronger under one big roof: A planner’s story
Having read the market tea leaves and recognised the need to offer more holistic advice back in 2010, Rory Mooney and partner Tim Rogers of Adelaide-based Wealth By Design knew it was time to restructure the business around a more comprehensive offering.
With long-suffering advice clients migrating away from institution-controlled dealer groups in droves – in the wake of CBA, Storm Financial and other scandals – they recognised that their firm would need to follow suit. In July 2014, Wealth By Design relinquished the licence it had held with National Australia Bank-owned Apogee Financial Planning since 1993.
Efforts to incorporate tax, audit and financial advice experts led to the firm’s advice team of nine merging with 38 specialists at chartered accounting firm 360 Private, which also had its own investing arm. The subsequent inclusion of estate planning and business succession planning meant the firm’s 54-strong team collectively covered the gamut of professional services under one umbrella, rebadged as 360 Private Wealth by Design.
From ‘grey nomads’ to ‘digital nomads’
In a business sense, advice needs have changed little from when Professional Planner first covered a case study on Wealth by Design back in 2011. However, Mooney says the big difference is the way that advice is now provided. While much of the firm’s business is still from Baby Boomers, – he’s witnessed a focal shift from products and money to quality-of-life issues.
“The reduction of the asset test threshold, effective 1 January this year, has directly affected the Centrelink entitlements of many clients,” Mooney says. “There’s a growing realisation that for most future retirees, any Centrelink entitlement will be little more than a bonus, and younger Australians are quick to pick up on this.”
To de-risk the firm’s current pre-occupation with Baby Boomer clients, Mooney expects younger clients to be a key focus over the coming five years. “Given that the cost of advice – $2500 for a Statement of Advice – is currently seen as prohibitive for many next-Gens, we recognise the need to develop more creative options to bring in these future clients,” says Mooney, whose firm has been charging flat fees since 2003.
“With record numbers of young Australians turning to international and domestic shares to build wealth, the challenge will be to draw on artificial intelligence (AI) and emotional intelligence (EI) to ensure advice is affordable, relevant and easy to acquire.”
Unsurprisingly, Mooney expects future investment in the right online tools to pay dividends down the line. The increase in investor mistrust of institutionally owned platforms will cause clients to gravitate to simpler, more cost-effective online solutions whose fees are commensurate with individual advice requirements, such as independently owned Netwealth or Hub24.
“Rather than rushing to develop our own online capabilities, we’d rather cherry-pick those already in the market,” he says.
Investing outside of super
Another opportunity for the business, Mooney says, was brought about through the super reforms effective on July 1, 2017, including a transfer balance cap of $1.6 million and a reduced ceiling on contributions. These changes will create unprecedented interest in investment options outside of super.
“While options to invest outside super have always been there, recent reforms have placed greater emphasis on other tax-effective solutions,” Mooney says. “As a result, insurance bonds, previously regarded as a poor cousin of annuities, will come more into view, especially within the current low-interest-rate environment.”