Scenario: Kelly and Kyle Kentia – interview 20 October 2020
Kelly & Kyle have come to your financial planning practice for some advice about their respective superannuation funds. The couple are both aged 48. Their address is 41 Kallandra Drive, Kallista. They have 2 children, Ned aged 15 and Nellie aged 13. The couple provide the following information
Kelly is a primary school teacher and works for a private school in Melbourne. She has returned to work on a part time basis working 3 days per week. Her gross salary is $58,000 per annum and her employer pays the standard superannuation guarantee contributions. She considers herself to be a middle of the road investor with a balanced risk profile. Kelly has an accumulation style superannuation account with Australian Super. Her latest superannuation statement shows that she is invested in the Stable option plan and has an account balance of $160,000. Kelly wonders whether she is in the right investment selection. However, she does not particularly want to change from Australian Super.
Kelly hasn’t been involved with any salary sacrifice arrangement but is contributing $3,000 p.a. in nonconcessional contributions to her super fund. She is keen to continue making these contributions in the future and to increase the contribution each year to compensate for inflation. Kelly is in good health and a non-smoker. She has private health insurance with Medicare. Kelly has a current Will in place with Kyle being her Enduring Power of Attorney. There is no testamentary trust provisions in place.
Kyle runs a coffee shop as a sole trader. His average net profit before tax and superannuation contributions is $105,000 p.a. Kyle has been making an annual personal concessional contribution of $6,000 p.a. into his superannuation fund for the past 5 years but nothing else. After mentioning the effects of inflation to Kyle, he also sees the sense of his super contributions keeping pace with inflation. He is not like Kelly and considers himself to be an aggressive investor. Kyle has an accumulation style superannuation account also with Australian Super. His latest super statement shows that he is invested in the index diversified investment option with an account balance of $210,000. Kyle is also happy to stay with the super fund. Kyle is in good health and a non-smoker. He also has private health insurance with Medicare. Whilst Kyle has a Will in place, it was drawn up 20 years ago when he was single. There is no Enduring Power of Attorney or testamentary trust provisions
The couple are not particularly good with managing money and they struggle to increase their savings and investments. They enjoy entertaining and try to take the whole family each year on a good holiday within Australia which although being quite expensive, is their treat. Kelly & Kyle realise that they will need to start to better plan for their future if they are to achieve a reasonable standard of living in their retirement and accumulate an appropriate level of superannuation. The two of them think that in retirement they should be able to live reasonably comfortably on around $65,000 p.a. in real terms. Retirement seems such a long way off however both have decided that it is better to have a plan and to revise that plan when necessary rather than having no plan at all. The couple are planning to both retire in 14 years time at age 62 if at all possible
The couple provide the following financial information:
• Kelly’s grandmother died a couple of months ago and Kelly has been advised that she is likely to receive an inheritance of $100,000. She is looking at the option of paying part of this into her super fund but is not sure how this might be best done from a tax point of view.
• The clients goals are as follows:
a.To continue to be able to travel each year which is expected to cost $15,000 p.a.
b.For the couple to be able to retire at age 62
c.To ensure the couple’s super portfolio is appropriately invested
d.To have $30,000 put aside for home renovations which is likely to be required in 3 years time
e.To minimise tax payable
• The name of your practice is “Make your dreams come true Financial Planners”
• The name of your licensee is “Your dreams Pty. Ltd.
• The couple would like to retain a minimum cash surplus of $5,000 at all times and a minimum cash balance of $5,000
• Rate of inflation is 1.6%.
• Nominal increase in salary / net profit and expenses expected to increase by rate of inflation. Share portfolio expected to increase by 2% p.a.
• Interview with Kelly & Kyle has been conducted towards the end of October 2020 so that all modelling should be done for the 2020/21 financial years.
• Quoted nominal superannuation returns by Australian Super are after fees but before taxes. You are to use the average 5 year return data in your projections
• Assume a rate of return of 5% after fees from superannuation funds held in retirement phase.
• All superannuation contributions are made in June of each year and therefore do not attract earnings in the financial year in which they are made. (This a simplifying assumption for modelling purposes. In reality contributions would be made progressively throughout the year.)
• Kelly & Kyle request that you limit the scope of your advice to superannuation related strategies only
• You are to use current tax rates – effective 1 July 2020
You are employed as a paraplanner at the practice and the financial planner has asked you to provide preliminary work that will form part of a Statement of Advice (SOA) that they will prepare at a later stage. You are required to complete the attached “Best Interest Duty Report Template” for the financial planner which is to include providing superannuation projections and recommendations for Kelly and Kyle relating to their respective superannuation positions. You are not required to provide recommendations or strategies on issues other than related to their superannuation position.
You are required to complete the following
Draft a covering letter to the client for when the Statement of Advice and recommendations are provided to the client (including name of practice & licensee)
Complete the attached Best Interest Duty Report including financial statements and modelling as detailed below.
As part of the Best Interest Duty Report, the financial planner has asked you to prepare financial statements as well as superannuation projections that models and displays the couple’s superannuation position. You are specifically required to provide the following
A. Prepare a Statement of Net Worth and detailed Cash flow statement, including full tax calculations for the couple based on their current situation. B. Based on current settings, provide detailed spreadsheet modelling showing how much Kelly & Kyle can expect to accumulate in superannuation by the time they reach their retirement at age 62 based on their current situation.
C. Determine the retirement income stream, expressed as a percentage of Kelly’s & Kyle’s pre-retirement income, that they can expect to receive in retirement based on the accumulated amount you determined in part B above. This should be based on Kyle’s life expectancy at age 62 - Life expectancy tables. Please note that this can be calculated using the Payment (PMT) function in Excel – we are not asking you what type of income stream they should choose.
D. Based on your superannuation recommended strategies, prepare amended cash flow statement and superannuation projections to demonstrate how the couple’s situation in retirement will improve and whether they are likely to generate an income stream to meet their required retirement needs.