Investments, Retirement

Franking credits an income buffer but not solution

franking credits; income streams;

Refundable franking credits have boosted retiree income streams, but new solutions are required to offset the low interest rate environment.

The threat to ban refundable franking credits and their continued existence have provided retirees with solid income streams during a time of low interest rates, according to a boutique equities manager, which claims they need to consider new strategies in this environment.

Plato Investment Management managing director Dr Don Hamson said the second interest rate cut this year would impact on floating rate income investment assets even while retirees were accessing high levels of franking credits.

“Given the somewhat surprising election result, retirees can continue to bank on receiving franking credits from Australian share investments,” Hamson said, adding that as interest rates continued to fall in Australia, dividend payments had never been stronger.

“Ironically, the ALP threat to franking has actually caused some companies to flush out excess franking credits prior to the end of last financial year, providing Australian income investors – including retirees – with a record level of dividends.”

He pointed out these were not evenly spread across the stock market, but were concentrated in some sectors, and traditional income stocks, such as the major banks, had maintained or cut dividends.

As such, retirees needed to review their income-generating strategies following the second interest rate cut by the Reserve Bank of Australia (RBA) in as many months, and the expectation more cuts may be on the way.

Hamson said along with the decrease in income from floating rate assets, overnight cash rates and 10-year government bond yields were also trading at historical lows before the rate cuts, with the latter falling below 1.4 per cent recently.

“Returns on cash, term deposits and products linked to bank bill rates will likely continue to fall under that scenario. Many income-related products, like income securities or bank hybrids, are priced at a margin to bank bill rates, and we have already seen 90-day bank bill rates fall almost 1 per cent this year, which is already crimping their income,” he said.

“Retirees living off cash-linked income will struggle to make ends meet. So, it is very timely for retirees to reconsider their income-generating asset mix,” he added, noting more than 5 million baby boomers will move into retirement so the need had never been greater for new retirement income solutions.

“Active dividend income strategies should be a key part of the discussion about retirement income, given that dividend income can be four times that of term deposits.”

The RBA cut rates by 25 basis points to 1.00 per cent on Tuesday following a similar cut to 1.25 per cent at the start of June.

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