Brisbane-based Pentalpha Investment Management Limited has studied the number and severity of drawdowns of the S&P/ASX 200 Accumulation Index over the last three decades.

There were 10 occasions when stocks fell more than 10 per cent in market value, the worst being the Global Financial Crisis -50.58 per cent. The peak to trough duration of that drawdown was more than 16 months (339 trading days). However, more alarmingly for retirees, it took 1482 trading days (or nearly 6 years) for the market to recover to its prior peak. There have been three other such episodes where recovery has taken multiple years, investment horizons that retirees cannot generally afford.

Denis Donohue

Outsourcing your retirement income needs to an annuity provider was supposed to reduce your anxiety levels. Recent developments at the likes of Challenger are causing annuity owners some disquiet.

As yields have continued to decline in the fixed interest and property sectors, Challenger amongst others has raised a few eyebrows by moving up the risk curve in its investment selection and into more exotic investments.

Challengers recent share price has been under downward pressure which may be viewed as a barometer of corporate health. While share price movements of annuity providers doesn’t directly impact their annuity products, the corporate parent is the ultimate guarantee of the investor’s annuity capital base.

A combination of changing underlying investments choices and weaker corporate head offices is causing annuitants to revisit their annuity strategies. This in part has led to declining inflows into the traditional annuity products.

Investors are more actively diversifying amongst annuity providers to spread the corporate risk more evenly and adopting more “annuity-like” solutions. These often provide even greater diversification and sometimes greater transparency and control.

Diversification can be effective in reducing risk. Anxiety about developments within the traditional annuity providers is leading to greater care being taken in sourcing annuities. In the long term, this can only benefit investors as they prepare to better fund their income needs in retirement.

Denis Donohue

The end of this Financial Year presents savvy Australian share fund investors with the opportunity to top up their franking credits pool and reduce their tax bill.

Franking credits collected by many Australian share funds are frequently not recognised in the Fund’s unit price, in which case Credits are often only distributed at Financial Year End.

A canny Fund investor can effectively buy extra franking credits for a “free kick”, by purchasing additional units in these Funds in the lead up to Financial Year End … simply top up the holdings in the Fund.

If the taxpayer is already invested in this Fund, it’s a simple matter of topping up their holdings ahead of Financial Year End to reap the benefits. While the S&P/ASX200 Accumulation Index Franking Credit return for last 12 months to 30th April was sizeable at approximately 1.5%, it is important to check that the Franking Credits gained through this strategy exceed any entry fees charged on the additional investment.

“One would hope, in the interest of fairness, that eventually all Australian share funds will be like our Pentalpha Income for Life Fund and include franking credits in the daily unit price.

“Unfortunately, many share fund investors are at risk of having their accumulated franking entitlements being raided by opportunistic investors just ahead of franking credit distribution time,” said Denis Donohue, Head of Investments at Pentalpha.

What are franking credits?

Franking credits represent the Australian tax already paid by a Fund’s underlying investments, like the “pay as you go” tax instalments deducted from wages. Franking credits then become available at financial year end to offset the investor’s other tax liabilities.

Franking credits perform the important function of ensuring that taxable earnings are only taxed once – either at the company level or in the hands of its owners when received as dividends from these already taxed earnings.