Investment markets update and accessing super fund support for temporary disability

Are Australian shares over-valued?

Following the strong recent performance of the Australian share market, investors are asking whether the market is now overvalued. Their dilemma is that this appears to be the case on some measures, while others suggest fair-value. How can this be? Read on or click on my video at right to listen instead.

BetaShares (Market Insights Feb. 2015) point out that the current forward PE (share price/earnings) ratio has lifted to 15.8, compared with a long-run average of 13.5. On this outright basis, the market appears overvalued.

By contrast, the market’s current dividend yield remains around 4.2% p.a., which is around the same as the long-run average of 4.3% p.a.  This reflects the fact that companies are paying out a larger proportion of earnings (65%) as dividends than usual (57%).  This trend may not be sustainable, though it clearly reflects investor demand for a higher income yield in a low interest rate environment.

Summary: Based on the dividend yield alone, the market could be described as still fair-value. However, we prefer to assess a market based upon its long term earnings potential and risks which will ultimately drive share prices. Consequently, some caution should be exercised when allocating money to share and property investments.

Please contact me if you wish to discuss your investments and options for 2015.

Super funds and Temporary Disability

Most of us are aware that superannuation benefits can be paid out on retirement (i.e. after attaining your preservation age), as well as on suffering permanent incapacity and on death.

Many are not aware that our super savings can also provide some welcome relief to a member during a period of temporary incapacity.

However strict rules apply that need to be carefully understood.

Moreover, not all super funds or SMSF trust deeds provide this support. Thus, it is worthwhile checking whether you are covered, just in case it is ever needed.

A member that suffers a disability that renders them unable to work (‘temporary incapacity’) can be paid a regular income stream (NCIS) which cannot exceed the member’s salary or income from any business earned by them prior to becoming temporarily incapacitated.

Thus, where the member is self-employed or does not have any other entitlement or insurance to cover their temporary incapacity, an NCIS can provide welcome relief. Or, if a member does have income protection insurance that provides up to 75 per cent income replacement, then the NCIS payments could provide the remaining 25 per cent of income.

However, the NCIS can typically only be paid from a SMSF to a member from specific sources as follows:

• Employer contributions in excess of the superannuation guarantee (SG) level such as salary sacrifice contributions (member and SG contributions plus earnings cannot be used towards funding an NCIS)

• Insurance proceeds received by the fund in respect of the member such as income protection insurance proceeds

• Reserves maintained by the fund such as investment or general reserves.

Summary: A super fund can provide welcome relief when temporarily unable to work. However planning is required in advance to ensure funding is available for the income stream.

If you would like a check of your super fund entitlements and/or protection in the case of temporary disability then please contact me on 0411 402 283.

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