SMART TALK: AUGUST EDITION
Dear Reader,
Sufficient time has now passed since the Budget once again moved many goal posts and disrupted many people’s life, largely as a result of changes deemed necessary by the Government as it tried to make sense of the Global Financial Crises in the context of prevailing political and perceived economic realities. For Clients and Financial Advisers like Dollar Growth Financial Planning and its allied businesses, which make up Dollar Growth Group, the past year has been distressing and challenging.
We feel confident that while we are not yet out of the woods, there is some cause for cautious optimism that life with many new options is beginning to unfold. Like with the freedoms that we cherish the price of success and financial stability is eternal vigilance. In plain talk, we all have to keep looking for what solutions and options are the best to pursue in the time and space ahead.
More than ever the ramifications of any decision taken on one aspect of financial planning will ricochet through the other effected aspects of our life and more or less reduce the validity of all previous decisions taken. It is essential that we all take the time and effort to check the estate plan we wrote some years ago; see if our bank is really ‘as friendly as we thought is was’; see if our Accountant has gone to sleep or check to see if our investments are still ‘prime’.
RETIREMENT ISSUES AND STRATEGIES
A specific conundrum continues to be that of retirement and how to fund it.
Endless tinkering with superannuation rules has sent people scurrying back to the drawing board to review their retirement plans following last month's budget changes. The key changes are a lift in the age for eligibility for the age pension and caps on concessional (tax deductible) contributions. As a result, retirement plans are being unsettled, particularly for those aged in their early 50s and younger who will be most affected by the changes.
Those who want to retire earlier are going to have to set aside a retirement lump sum outside of super, which can be accessed at any time. Concessional contribution caps are also to be halved. From July 1 the $100,000 cap for over-50s will be halved to $50,000 and for those under 50, the cap will be halved from $50,000 to $25,000. In three years' time, the $50,000 cap for over-50s will be reduced to $25,000 to match under-50s.
The halving of concessional limits the maximum amount that can be salary sacrificed into super in any one financial year will hit higher-income earners. The $25,000 is actually less than it seems because it includes the 9 per cent superannuation guarantee charge.
A reassessment of retirement plans is not just for the wealthy. The age at which the age pension and pensioner concessions can be accessed will be increased from 65 to 67. That is important, because about two-thirds of retirees get at least a part-age pension.
The Government has also floated the idea of raising the access age to retirement savings, perhaps to 67 to align it with the pension age. The access age (or preservation age, as it is also called) is being raised to 60 anyway. Under current arrangements, those born before July 1, 1960, can access their super at age 55 while those born after June 30, 1964, have to wait until 60.
Concerned at a barrage of stories in the media of blue-collar workers in physically demanding jobs who are unlikely to be able to work to 67, Prime Minister Kevin Rudd has ruled out (it seems at this point in time), the possibility of raising the access age. The Government will wait for the final report at year-end of the Henry tax review, which is looking at income adequacy in retirement, before making any decisions.
Currently, those over age 60 can draw a lump sum or pension payments tax free. However, there are fears the Government will increase the access age for lump sum draw-downs or will limit the amount that can be taken as a lump sum, to encourage people to take a private (their own) income stream instead.
The qualifying age for the age pension will be increased by six months every two years, commencing from July 1, 2017, and reaching 67 on July 1, 2023. That means anyone aged 57 or younger will have their pension age increased from 2017. Those born after January 1, 1957, will not be able to claim the age pension until they turn 67. Any increase in the super access age would have to protect those older people for whom it is too late to change the rules. Those that will be affected by the new rules are those aged in their early 50s and younger.
Although accumulating an alternative lump sum outside of super is sound financial planning, few are expecting an exodus from super, as it is the most tax-effective vehicle for retirement savings outside the home. However, some steps can be taken to perhaps better manage the risk that emanates from potential government changes to regulations, that can cause massive stress and dislocation to people.
All this makes me wonder what impact these matters could have on the tax implications of estate planning for those unfortunate people who currently have wills that in reality, may be ineffective as their solicitor may not have given any or adequate thought to addressing such time-bombs.
TAX EFFECTIVE
"Particularly for those over 50, super is still the best investment that you could be putting your money into," says the technical counsel for the National Institute of Accountants. With super, there is a 15 per cent tax on concessional contributions, such as employer and salary sacrifice contributions, and investment earnings are taxed at 15 per cent. Withdrawals, including lump sums and pension payments, are tax-free after age 60.
During the biggest global financial crisis in 75 years, super funds (from a long term perspective) have held up relatively well. Super funds are down about 20 per cent from their highs of late 2007. Fund members will be unhappy with that but they are unlikely to lose their shirts. Most super funds invest their assets across different asset classes are run conservatively and the negative returns reflect the broader market.
This contrasts sharply with the 200,000 or so investors, mostly retirees, who have lost much more, sometimes all of their savings and their homes, investing in property-backed debentures and mortgage funds. Or took the advice of financial advisers or accountants to gear into the share-market, borrow money to put into super when the $1M cap existed, or into property development projects and tax-effective agribusiness investments.
While there are tax-effective investments that are reasonably secure for those who want to build up some savings outside of super, tax effectiveness should never be the sole reason for choosing an investment.
GEARING
It is only worthwhile gearing into assets that are expected to yield reasonable capital gains over the long term, such as shares and property. It requires a long-term commitment to ride out the inevitable falls of investment markets and the investor has to be comfortable with those risks and time frames.
Just as gearing magnifies the gains of the underlying investment, it also magnifies the losses. There is a lot at stake, so anyone gearing to invest would want to be in secure employment to meet ongoing repayments.
Depending on such factors as risk averseness and the time-frame for retirement, we at Dollar Growth Financial Planning would offer the view that shares are probably a better prospect for investment at this point of the business cycle than direct self sourced property. Despite all that has happened in recent times it seems likely that people with a well diversified portfolio will do well out of the stock-market in coming years.
INVESTMENT BONDS
While super is still king and that any increase in the access age to super would occur gradually some people may well want to invest outside of super in case they need to draw on the money before they retire, or simply to add to their retirement savings pot.
Investment bonds (and friendly Society Bonds) are one of the best tax-effective investments going. These are like managed funds in that the investor gets to select whether to invest in a balanced fund, which spreads the money between asset classes, or shares. They are a tax-paid investment with tax paid at 30 per cent, or a bit less because of the franking credits on the shares.
If the investor is on a marginal income tax rate of less than 30 per cent, he or she does not get a refund for the difference between the marginal tax rate and 30 per cent. If the bond is held for 10 years, the proceeds can be cashed in whole or part with no more tax to pay. Another advantage of investment bonds, or insurance bonds as they are still called, is that nothing has to be included in the investor's tax return as no income is received from the investment bond. With shares and managed funds, tax is paid each year on the income from the investments and then there is capital gains tax when the investments are cashed in after 10 years.
RENTAL PROPERTY
Property is always an investment for the long-term so investors should be cautious about taking on excess debt, especially now that unemployment is rising. It is not only the risk to the investor's job that is of concern but also the employment of the tenant, because the rental property may be unoccupied if the tenant loses his or her job.
With the prospects of direct property capital gains in the short and medium term not that great, due to the lower inflation environment, property investors need to focus on the yield they will be getting and look closely at the numbers. Vacancy rates in Sydney and Melbourne are tight but that could change if the unemployment rate goes to 9 per cent.
BEAUTY OF HOME OWNERSHIP
One of the best ways to help secure a comfortable retirement is to have the house paid off as it is capital gains tax exempt. An increase in mortgage repayments by just a small amount can reduce the outstanding loan term by a significant amount and reduce the interest costs substantially.
It depends on clients' individual circumstances but generally we recommend that they get rid of or restructure non-tax-deductible debt, which includes their mortgage, as quickly as possible because the return, on top of the capital growth of the house, can be phenomenal. If there is an outstanding loan on a property it is just as well to be putting money into that rather than ploughing every cent into super. The return on this strategy is likely to be far higher.
(Based on an article by John Collett: SMH June 10, 2009)
We are living in very difficult and uncertain times. But as always, we at Dollar Growth Group are here to provide top quality advice and continuing service. Keeping you informed is one of our key goals. If you need any assistance of any nature, please come and see us or ring us to arrange a visit to your home-or any place of your choosing.
Philip Enger,
Managing Director, Dollar Growth Group.
DISCLAIMER: The author of this newsletter is Dollar Growth Financial Planning Pty Ltd a Corporate Authorised Representative (No:321108) of Financial Planning Services Australia Pty Ltd AFSL: 225982 ABN:55010521810. Any advice contained herein is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. The material contained herein is believed to be accurate. To the extent it is permissible by law, however, no liability is accepted for errors or omissions or for loss or damage suffered by any person as a result of inaccuracies in the publication.
