Can You Retire Comfortably?

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“1 in 6 working-age Australians said they will never be in a position to retire fully”

Latest ATO statistics for SMSFs show 17.5% of members are under 45 years old and 24% are 45 to 54. Mostly in the asset accumulation phase, many of their super contributions come from Superannuation Guarantee (SG) payments and salary sacrifice. The maximum concessional contribution per member, for 59 and under, is $25,000 per year.

Using instalment warrants in a Self Managed Superannuation Fund (SMSF)

Looking at a strategy worth considering for younger (accumulation phase) SMSF clients. For example: a portfolio of five blue chip stocks investing $10,000 in each (warrants are based on: NAB, ANZ, WES, TLS and SUN).
Using the newly launched Commonwealth Bank instalment warrant series IYB. There is also an IYA series which is 50% geared. The key features of these warrants are:

  • Approx. 70% geared
  • Effective interest rate in 7% – 8% range
  • Interest deductible – capped but in this case 98% deductible
  • Expiry July 2015 when second payment is due
  • Non-recourse so on expiry can choose not to make second payment but if you do then you forfeit the initial capital invested
  • A new series may be offered on expiry to roll into if you wish to defer making cash payment
  • Meanwhile you receive all dividends and franking credits
  • No stop loss, no margin calls
  • Traded on ASX

Over the life of the instalment warrants this is an after tax positive strategy thanks to the franking credits. Below is a summary of this strategy vs investing directly in the shares:

These figures above were based on their dividend and franking forecasts.
So what are the downside risks?

  • The initial capital outlay could all be lost if share prices decline steeply and remember leverage increases downside risk, so for a 70% geared product the initial value declines pretty quickly. However, the benefit of using a portfolio of shares is that you can isolate individual share price declines so they don’t spread to other holdings.
  • If a company either doesn’t pay a dividend or pays a lower dividend.
  • Changes to superannuation or tax laws or rapidly increasing interest rates, which affect the assumptions this strategy is based on.
  • Risk also resides with the issuer.

How do I go about investing in instalment warrants?
Firstly you need specialist advice to ensure you select the most appropriate warrant investment according to your risk tolerance and investment objectives.
Advisors in Morgans Ballina are fully accredited to provide advice in relation to derivatives (options & warrants).

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