Preference Shares and Income Securities can provide investors with relatively more stable and predictable returns in the form of fixed rate dividends or floating rate interest payments. Convertibles have an option structure which may enable the holder to participate in upside of the underlying security. They may also carry tax credits in the form of franked dividends.

As with any investments, but particularly with hybrid securities it is important to understand the key terms and conditions, to ensure the security is issued by a substantial organisation and is well rated. Higher returns usually means higher risk.

Convertible Preference Shares
Convertible preference shares exhibit benefits of both fixed interest and share investments. Income is in the form of a dividend. They are more secure than ordinary shares and allow investors to receive a fixed rate of return. In addition investors have the option of converting to ordinary shares at a future time allowing them to benefit from the growth that shares can deliver.

Dividend payments are often fully franked which enhances the net return. Therefore in comparing hybrid securities it is important to consider a pre-tax equivalent return.

Many convertible preference shares display strong correlation with the share market prices. They tend to increase in value when the company share price rises, and decrease in value when the company share price falls (but not by as great a percentage).

The table below provides a comparison of the running yield and pre-tax equivalent Yield To Maturity (YTM) of some convertible preference securities in the market. The pre-tax equivalent YTM is a composite indicator of return that factors in a number of variables including franking credits and the discount on conversion to ordinary shares.

Floating Rate Income Securities
Income securities are debt instruments or loans. Income is in the form of interest.
In terms of security they rank ahead of
preference shares. They provide a quarterly income stream and are tradable on the Australian Stock Exchange. They are issued by companies to raise funds.

Effectively, when you purchase an income security, you lend money to the company and in return you receive a variable rate interest return. Your interest rate is reset every three months at a fixed margin above the 90-day bank bill rate.

Some other characteristics are:
• Income paid quarterly
• A higher interest rate than corporate or government bonds
• Floating rate return protects against rising interest rates
• Added diversification if you have a portfolio of higher-risk investments.
• Subject to credit rating of the issuing company
• May not always make interest payments in some circumstances

The table below shows the return from income securities issued by a number of well known companies.

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Income Protection Insurance! Why Bother?

Income Protection Insurance is about risk management. Like house or car insurance it’s one of those insurances that you hope you never have to claim on. It often seems like such a waste of money when you can’t see any tangible benefit. But of course the purpose is to protect you from the unexpected.

We spend so much of our lives accumulating assets and enhancing our income earning capacity. We always insure our valuable assets such as our car or house. We often forget that our most valuable asset is ourselves. If we die or become injured we are aware of the emotional effect and trauma that can result. We often forget that the financial effect can be devastating.

When we are young, single, and strong we are even less inclined to think about such things. But life insurance is diverse in its range of offerings and is an important part of any well laid financial plan. Income protection insurance is an important part of this safety net.
Features of Income Protection/Salary Continuance
This insurance will replace income if you are sick or have an accident. It can replace your wages and help you to continue living. If you are injured at work, workers compensation will often help. But if you have a skiing or car accident or contract a long term illness, income protection insurance can replace your income for months or years.

Unlike house insurance the premiums are tax deductible which can reduce the cost by up to 48.5%.The cover is usually worldwide for 24 hours a day. You can vary the cost by tailoring the cover to suite your budget. For example you can decide to wait for some time before any payment is received.
You may have one of two month’s sick leave or a sum of money in the bank you can draw on for short term illnesses or injuries. By extending the “waiting period” to say 2 or 3 months you can substantially reduce the premium cost.

You can also set the period of cover. For example the “benefit period” can be 2 years, 6 years, or up to age 55, 60 or 65. This is how long a benefit will be paid to you provided you continue to meet the claim criteria.
Other special features
Most policies offer various additional features, some included and some at an additional cost. The following are some examples worth considering.

Costs for Rehabilitation – Additional payments to help with any rehabilitation costs such as house modifications, training courses, wheelchairs etc

Trauma Recovery Benefit – Payment of 6 months
benefit even if there is not total disablement.
Eg Cancer, Heart Attack, Stroke, Aorta Surgery

Immediate Family Member Benefit/ Special Care benefit – Additional payment for a nurse or family member carer if you are confined to a bed.

Superannuation Maintenance Benefit – Continue paying your employer superannuation contribution while you are on claim.

Business Expenses – For the self employed this
addition provides cover for the payment of business expenses such as rates, accounting fees, advertising, administration salaries, telephone, rent etc.

There are many other inclusions that can be considered. If you would like to know more we can identify the options that suite your needs and can provide a range of quotes for you to consider.

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UK Pension Fund Transfers

Recent changes to UK pension transfer rules have now made it easier to transfer superannuation benefit from the UK to Australia. Recent falling UK markets and the strong exchange rate have prompted many to revisit transferring their benefits.

As of January this year, UK pension rules have been relaxed. UK Funds are less particular about where the monies are transferred to making it a little easier to qualify. Although it may be harder to transfer to DIY pension or super funds.
To effect a transfer you need to send a written request to the UK Fund with details of the fund in Australia that you wish to transfer to.

It is important to consider the tax consequences before the decision to transfer is made. Current legislation stipulates that should the transfer not occur within 6 months of you becoming an Australian tax resident, the earnings of your
overseas super fund will be taxed at your marginal tax rate from one day prior to you becoming a tax resident in Australia. The ultimate decision to release the money is made by the transferring pension fund. The unpredictability of the length of time needed for the transfer to occur may impact on the final outcome.

Importantly, you do not have access to the monies transferred to pay for the tax liability that has been incurred. You need to find the funds to pay the tax from your own sources. Depending on the size of the earnings and your marginal tax rate, the tax bill can have a significant impact on your cashflow.

Many may not be aware of the 6 month rule, including Australians that have worked overseas in the United Kingdom, and migrants, who may not have made a decision on the transfer of these funds for many years.

Given these consequences of tax liability and budget disruptions why would you still want to transfer your UK pension?

Transfers within the 6 month time frame will incur no tax liability upon transfer. The monies transferred are treated as undeducted contributions which means they can eventually be withdrawn tax-free upon retirement.

Your Australian super fund benefits can be withdrawn as a lump sum, whereas in the UK only the pension option is available. Having the option of taking all or part of your super as a lump is desirable for those who wish to renovate their houses, go on holidays etc upon retirement.

Moreover, Australian pension streams are very favourably taxed with deductible amounts and pension rebates whereas the UK pensioners will not be eligible for the pension rebate. This means the tax consequences in retirement are less favourable for the UK pension funds.

This is also a most opportune time to transfer UK pension funds to a complying super fund in Australia considering the fall in share prices of world international markets. The fallen prices may have dampened the earnings accrued in your UK pension fund and subsequently lessen the tax liability upon the transfer. You would need to seek further advice on your individual circumstances.

A last resort for those with a large tax bill even after the fall in markets may be to wait for legislative changes. The Senate select committee has proposed changes to the current tax implications of transfers to be more favourably taxed at the maximum superannuation of 15% rather than your marginal tax rate. Other changes include extending the 6 month period. Although, there has been no indication that the Government will take up the recommendations of the committee.

Clearly the issues in transferring your benefit are complex. So if you considering a transfer you should seek professional advice on the best possible course before taking any action.

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