David Middleton

People planning for their retirement might soon shun convention by upsizing to a more expensive home to improve their access to the Aged Pension.

Middletons Securities Adviser, Mr David Middleton, said the unexpected by-product of the taper rate increase would see savvy investors try to reduce the level of their assessable assets by moving capital to places where it isn’t assessed. An obvious choice will be to ‘hide’ the money in the value of their residence because the value of their residence isn’t counted.

The taper rate governs how much of the fortnightly pension payment is lost for each additional $1,000 of assets above the lower threshold. From the start of 2017, $3 of a fortnightly pension will be lost for each additional $1,000 of assets held above the lower threshold, and for a home-owning couple, the new upper threshold will be $823,000 as of 1 January 2017, compared to the current threshold of $1.15m.

In percentage terms the pension reduces by 7.8% per year on assessed capital above the lower threshold while you can only earn around 3% if you have funds on a term deposit. As a result you have more income if you don’t have the capital.

“Because the family home is not counted as an asset it means that this can essentially become a bricks and mortar bank account to be drawn against as needed,” Mr Middleton said.

“This might just ring the death bell on the days where an empty-nester couple chooses to downsize from the family home to something more manageable – and instead we may see them look to buy something that is actually more expensive,” he said.

“We can expect to see more and more cashed-up older buyers using their superannuation investments to outprice younger families for the conventional family home, and the other factor to consider is that a change in seller behaviour may very well stall this segment of the housing market, as older people choose sit on the family home rather than sell.”

“The Federal government has been highlighting what it considers to be good news from the budget, but changes to the taper rate will be cold-comfort for the estimated 100,000 people who now face the prospect of receiving considerably less aged pension or no aged pension at all,” Mr Middleton said.

“The bottom line, is that a home-owning couple with $800,000 in assets will soon see their Aged Pension fall by around $14,000, and that’s quite a bit,” he said.

“By increasing the value of their home by trading up or doing renovations they will get a lot of extra pension. For example, a pensionable couple with $800,000 in investment capital would currently get interest income of around $24,000, along with an Aged Pension of $14,000 – making for a total of $38,000 income.”

“Under the new rules their aged pension would all but disappear, but if they added $300,000 to the value of their home their interest income would fall to $15,000 and under the new rules they would have pension income of $23,000 – more than they’re getting now. Overall they get the same income as they are now, and have a nicer house to live in to boot.”

Mr Middleton said that tying up money in direct real estate may cause some problems if people want access to the capital, but the new breed of reverse mortgages may make this easier too.

“Instead of downsizing to increase their investment capital, investing some of their nest egg in a more expensive family home and drawing down on that equity as they need it through a reverse mortgage arrangement could well see them better off,” he said.

“This isn’t great news for the Federal Budget or for young families looking to move into the houses that the pensioner couples will now be gobbling up.”

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Middletons Securities spokesperson, Mr Matthew Stobart, said barring a disaster like a Global pandemic or an escalation of the ISIL or the Ukrainian conflicts, 2015 was expected to be a good environment for investors.

“While property and share prices aren’t too expensive at the moment, it’s difficult to find investment options that are cheap – so investors need to have realistic expectations”, he said.

The Middletons Securities Top 5 investment ideas for 2015 are:

1. Emerging Markets

There is deep value in emerging markets. Share markets in emerging economies are typically considered more volatile and tend to lag behind broader international markets. As well as taking advantage of attractive valuations, there are a number of fundamental reasons for investing in emerging markets – the populations are usually younger, the economies grow faster than developed economies and so are average wages. Government and personal debt levels are lower in developing economies, and corporate balance sheets are stronger – with lower debt and a higher return on equity. Currently share prices are cheap and ideal for investors that can tolerate and manage the volatility.

2. Inflation Indexed Income

With a higher level of inflation in Australia almost inevitable at some point in time, investors can adopt a position where they can have an each way bet by buying bonds with inflation indexation and investing in the inflation indexed income from infrastructure. Until recently, indexed bonds weren’t readily available to ordinary investors and were typically bought and traded by institutions, but are now available through the Australian Securities Exchange and intermediaries on the Corporate Bond Market.

Corporate Indexed Bonds are typically issued by infrastructure owners who have monopoly protection and guaranteed inflation adjusted income, and offer a running yield close to what you’d get from term deposits (around 3.4%). So the inflation protection is free. The other option is to invest directly in infrastructure. Internationally, the reliability of Utilities with monopolies sees them trading at lower yields than have traditionally been expected in Australia. In the long term we would expect this gap to narrow so the investment price should rise. Along the way investors can enjoy a yield of around 5%, and because these investments are geared, the yield is expected to grow at a rate above the inflation rate.

3. Australian Real Estate Investment Trusts

Listed Property Trusts, as they were previously known, suffered badly during the Global Financial Crisis. They had too much debt and were forced to raise capital at a deep discount.

Now the’re looking good. Investors can receive a yield of 5-6% as the net yield after retained income, and given the quality of the properties, those who buy these investments at current prices are getting excellent value. Property generally handles periods of inflation better than shares because rents keep better pace with inflation than profits, and the cost involved in building new properties goes up with
inflation too.

4. Construction will be a Growth Driver

Australia’s population is growing at a rate that’s well above the world average. Also, there is a bubble of population, largely the children of the baby boomers, who will move into their own homes in increasing numbers over the next ten years. The demand for new housing will rise. Meanwhile our Governments plan to spend $50 billion on new infrastructure projects. All this is positive for the construction industries.

The share price of materials suppliers like Boral and CSR have already risen to very high levels in anticipation of better times, but there is still reasonable value in the large engineering contractors, especially those involved in housing development and infrastructure projects.

5. Return of the Consumer

The consumer has gone missing in recent years and at the same time there has been a shift towards ecommerce, so it’s been a tough time for traditional retailers. Our growing population will lift all retail activity over time, but consumer confidence is also expected to return. Household debt is under control and the net wealth of households is on the rise, and sooner or later this will be for cash registers. We also get the sense that the switch to online shopping is maturing. Consumers know what they are a going to buy on line and what they’re not. Our traditional retailers have joined in and now the vast majority of online transactions is between Australians.

Australia’s large retailers deserve a place in most portfolios. Woolworths’ share price looks like a safe bet, increasing earnings per share by ten times in the past twenty years, with a growth in earnings in all but one of those years. The other main player to be considered is Wesfarmers. Woolworths is slightly cheaper with a Price to Earnings Ratio (PE) of 16 compared to Wesfarmers at 20, but the anticipated earnings growth from Wesfarmers is higher as is their dividend payout ratio and consequently the yield.

More adventurous investors might be tempted by some of the smaller retail offerings and the environment is likely to be supportive.

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David Middleton

As the Nation braces itself for an onslaught of pre-Christmas sales and traditional Boxing Day spending sprees, there is every reason for Australia’s traditional retailers to be confident, says Middletons Securities.

Middletons Securities spokesman, Mr David Middleton, said early signs suggested a turnaround in the fortunes of traditional retail sense as our fascination for online shopping starts to reach maturity.

“Since the GFC the consumer has largely gone missing, and as economies have slowed and the focus shifted from debt-fuelled consumption to battening down the hatches we have seen traditional retailing under threat from online retailers,” Mr Middleton said.

“However, as our economy becomes more accommodating, and as the level of employment improves, and net wealth begins to grow again, we can expect the Australian consumer to feel more confident,’ he said.

“In the past, traditional retailers have been challenged by the growth of online shopping, but as we lead into the busiest retail spending period of the year we can expect consumers have already made clear and decisive choices as to what they will buy online and what they won’t – especially when it comes to putting their trust in an overseas seller.”

Mr Middleton said traditional retailers have risen to the challenge. The majority of e-commerce activity in Australia now involves transactions between consumers and Australian – rather than international – businesses, reflecting a settling of buyer behaviour.

“Security remains a key area of concern for buyers, who want to know they can trust a site to receive their goods, that what they are buying will be a quality item, and their credit card details are safe, while sellers want to have trust in that they are not being defrauded and left out of pocket,” Mr Middleton said.

“On the back of those key purchase concerns, a growing number of Australian businesses have focussed on selling their products online but offering the convenience of store-pick-ups, or showcasing items and publishing stock levels online,” he said.

“This approach allows consumers to still have the convenience of shopping from work or home, but overcomes the huge postage cost that is often a major deterrent from online buying and selling activity.”

Further consolidation is expected in the online retail sector during 2015, and while Australia’s online retail spending increased to $16.19 billion for the year to October 2014, it still represents only around 6.8% of traditional retail spending. “The share of domestic spending continues to edge higher and now represents 75.2% of our total online spending, and recent online growth has been far more subdued than the 20-30% growth rates that have been recorded in earlier years,” Mr Middleton said.

“We expect Australia retailers will be switched on to this stabilised participation in online shopping amongst consumers, and aggressively promote the benefits of shopping with a trusted local businesses, go to great lengths to demonstrate the customer service and advice that is missing from online buying, and ensure the delivery of quality products to the marketplace at competitive prices.”

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Andrew Winter and David Mead

Middletons Securities has announced the addition of Andrew Winter and David Mead as Authorised Representatives to its local team to drive its expansion activity across the South Australian market.Middletons Securities spokesperson, Mr Nick Loxton, said the pair would play a pivotal role in building on the strong reputation of the professional services firm and expanding its client base across South Australia.

“Middletons Securities is entering an exciting phase of its development and the significant industry experience and credibility that both bring will perfectly complement our talented team,” Mr Loxton said.

“Both offer a strong understanding of the strategic challenges and opportunities facing our industry and will be of great benefit to Middletons Securities,” he said.

Mr Winter started his career in the financial services industry in 1984 when he joined the State Bank of South Australia (now BankSA), and spent more than a decade working in various branch and Head Office roles. He then joined Pembroke Financial Planners in 1994 as a Strategic Planner and remained with the business through its transition to Ord Minnett, before becoming a financial adviser in 1998.

Most recently the Certified Financial Planner® and Senior Associate of FINSIA was an adviser with Prescott Securities before joining the Middletons Securities team.

Mr Mead has over 25 years’ experience within the Securities and Financial Services industry from his previous employment with ASIC and its predecessors. He has held a number of senior roles and has a solid track-record in building and strengthening relationships with clients in many different and challenging circumstances.

The announcement of the appointments follows the professional services firm being accredited as Professional Practice by the Financial Planning Association, in recognition of its high professional and ethical standards.

“Middletons Securities is committed to setting the highest of standards across the industry, and attracting market-leading staff to provide clients with the best advice and develop strategies designed to secure their financial security,” Mr Loxton said.2

“Andrew and David join a team that has a strong reputation for providing clients with quality portfolio management and investment advice to ensure strong cash flows for retirees and solid asset accumulation for people who are still working.”

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