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Changes to your Super

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While the government will reduce the amount of money you can put into super from 1 July 2017, the good news is that you could still take advantage of opportunities before the financial year ends. The Australian Government’s May 2016 Federal Budget proposals and several subsequent modifications to its plans around super reform passed through both houses of parliament at the end of November. With new regulations set to become part of Australian superannuation law, some of the rules around super contributions and the tax breaks available will change from 1 July 2017.

In the video above, Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital provides an overview of the key changes and what these could mean for investors.

Four things that are changing

The after-tax super contributions cap will be reduced

Initially, the government planned to introduce a $500,000 lifetime cap on after-tax (non-concessional) super contributions, which it will no longer be implementing.

Instead, an annual after-tax contributions cap of $100,000 will be put in place, replacing the current cap of $180,000. Those under age 65 will still have the ability to bring forward three years’ worth of after-tax super contributions, with a maximum of $300,000 under the bring-forward rules.

The before-tax super contributions cap will also be lowered

The before-tax (concessional) contributions cap will decrease from $30,000 (or $35,000 if you’re turning 50 years of age or older this financial year) to $25,000 per year for everyone, irrespective of age.

A pension transfer cap of $1.6m will be introduced

If you’re converting your super into a pension to derive an income in retirement you’ll be restricted to a limit of $1.6 million in your tax-free pension account, not including subsequent earnings.

If you already have a balance above that, the excess will need to be placed back into the super accumulation phase, where earnings will be taxed at the concessional rate of 15%, or taken out of super completely.

Transition to retirement pensions will lose their tax exemption

Investment earnings on super fund assets that support a pension are currently tax free. However, this will no longer apply to transition to retirement (TTR) income streams.

Earnings on fund assets supporting a TTR income stream will be subject to the same maximum 15% tax rate that applies to accumulation funds.

 

Super opportunities this financial year: two things you can do now

Contribute more in before-tax super contributions

The before-tax super contributions cap will be reduced from $30,000 per year (or $35,000 if you’re turning 50 or over before 1 July 2017) to $25,000 per year, for everyone, irrespective of age.

This means, depending on your circumstances, there is an opportunity to contribute an additional $5,000 (or $10,000 if you’re turning 50 or over) in before-tax super contributions than what will be possible before the cap is lowered at the end of the 2016 financial year.

Contribute more in after-tax super contributions

The after-tax super contributions cap will decrease from $180,000 per year to $100,000 per year. This means you could contribute $80,000 more in after-tax super contributions than what will be possible when the after-tax super contributions cap is reduced on 1 July 2017.

If you’re under age 65, you could also bring forward three years’ worth of after-tax contributions up to a maximum of $540,000, which is much higher than the $300,000 limit that will apply from the 2017 financial year.

Why super matters

Australians are living longer and with many needing to fund a longer retirement as a result, adding to your super could make a difference to the lifestyle you lead in the years after you finish working.

To put it into perspective, September 2016 figures, provided by the Association of Superannuation Funds of Australia, show individuals and couples, around age 65, who are looking to retire today, need an annual budget of $43,372 and $59,619 respectively to fund a comfortable lifestyle – that’s assuming they own their home outright and are in relatively good health.

By comparison, the maximum annual Age Pension rate for a single and couple is currently $22,804 and $34,382 respectively, keeping in mind not everyone is eligible for government assistance.

Other considerations

  • If you contribute money to super that exceeds the super cap amounts, it will be taxed at a higher rate and an interest penalty will apply. You can find out more at the ATO website.
  • The value of your investment in super can go up and down. Before making extra contributions to your super, make sure you understand and are comfortable with any risks associated with your chosen investment option. Learn more.
  • The government sets general rules about when you can access your super. Generally you can access it when you’ve retired and reached your preservation age, which will be between 55 and 60 depending on when you were born. Learn more.
  • There are other ways to help boost your super. Learn more. There may also be benefits to making spouse contributions. Learn more.

More information

To find out how reforms to the superannuation system could affect you, speak to your financial adviser.

 

WHAT HAS HISTORY SHOWN US ABOUT INVESTING?

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In view of the recent market ups and downs, if you’re an investor, you might be thinking about pulling out of higher risk investments, such as shares, and transferring them to lower risk investments, like cash or term deposits.

But if you’ve just started your investment journey, you might not be aware of how investments perform over time.

So here are some things to think about before making any changes to your investments.

Markets always recover

Share markets go up and down and this affects investor sentiment and the performance of listed companies which trade on the official stock exchange. The Global Financial Crisis (2008) had a major impact on the Australian share market but the market recovered. So it’s important to remember that markets always rebound from major events and move on to new highs, as the graph below shows.

Time is on your side

History tells us that investing in shares almost always provides a higher return than investing in low risk investments, such as cash or term deposits.

For example, if you’d had shares and switched out of them into cash during the Global Financial Crisis (GFC) in 2008, you’d still be recovering from their drop in value. But if you were an investor who ‘rode the storm’ and kept your money in shares, you’d be better off now, as you can see from the graph below.

We can’t predict the future

There’s no crystal ball to tell us when the markets are going to change and how they’re going to perform over time. That’s why, generally speaking, it’s best to have a variety of investments across different asset classes.

And remember to take a long-term view when it comes to investing.

Want to know more?

If you’d like to learn more, call us on (03) 9851 0300 so we can help you on your investing journey.

GLOBAL SHARE MARKETS FALL DESPITE SOUND FUNDAMENTALS

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All major share markets have been sold down heavily over recent days. The correction on equity markets has also been accompanied by ongoing falls in the price of commodities and emerging market currencies. Since the beginning of August, Australian shares are down 12%, with losses of 10% to 12% recorded across the United States, Europe and Japan. Chinese shares have declined 14% since the start of the month.

What has caused the market correction?

There appears to have been little change in underlying market fundamentals, with the economic backdrop remaining relatively stable and supportive of modest company earnings growth. Rather, the sell-off seems to have been largely sentiment driven. AMP Capital Chief Economist Dr. Shane Oliver highlights that markets are currently “full of emotion” and characterised by nervousness.

Underpinning the market’s nervousness seems to be increasing concern over the outlook for Chinese economic growth, ongoing weakness in commodity prices and fears that the combination of falling commodity prices and weaker Chinese growth will be particularly problematic for emerging markets. As a result, funds have flowed out of emerging markets causing sharp falls in many emerging economy currencies.

Is it a correction or something worse?

Whilst a fall of the magnitude experienced in recent days was not expected, sharp declines in share markets of up to 20% are not unusual and do not imply there will be an extended period of weakness. In fact, corrections can be a healthy characteristic of “bull” markets, allowing investors to reassess valuations before a rising trend resumes. Dr. Oliver believes that the longer term trend for shares remains upwards, stating that:

“Our view remains that the cyclical bull market in shares likely has further to go. Put simply shares are not seeing the sort of conditions that normally precede a new cyclical bear market: shares are not unambiguously overvalued; they are not over loved by investors; uneven and below trend growth is extending the economic expansion cycle; and monetary conditions are likely to remain easy for a while yet.”

Previous market falls that have preceded more extended market downturns tend to have been associated with financial system dysfunction, excessive overvaluation or imminent economic recession. None of these factors appear to be in place today. In particular, the global economy remains on a modest growth path with low inflation and accommodative policy support creating an environment conducive to company profit growth. Locally, the latest profit reporting for the period ending June 30th, confirmed a steady rise in the profitability of Australian non-mining companies of around 7% from the previous year.

Although share market fundamentals may remain sound, share market valuations can move away from fundamentals for extended periods. As such, the latest sell-off suggests that caution is required by investors, particularly around emerging markets. However, with little change in the outlook for underlying company profitability, investors should maintain longer term strategies and asset allocations. In fact, for investors with underweight positions to equities, the current sell-off may represent an opportunity to enter the market. Please do not hesitate to contact your AMPFP adviser should you wish to discuss recent market events or any aspect of your investment strategy.

If you would like more information on about this or any other financial planning matter, please call our office on (03) 9851 0300 to speak to one of our financial planners.

 

IF YOU CAN’T GET INTO PROPERTY…

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Consider these investment alternatives and you may just end up being better off.

Buying a home has been hailed for generations as an essential part of the Australian dream. But with house prices increasing faster than earnings, getting into the property market seems more like an impossible dream for first home buyers. You may even be better off renting in the meantime before attempting to get into the property market.

Australian capital city house prices soared by almost 8 per cent in 20141 while wages growth fell to 2.5%2 ―a record-low.

Consider these investment alternatives and you may just end up being better off.

…move into other areas

If property seems out of reach for you at the moment, consider investing in other assets instead of buying a home now or in the future―or to save a home loan deposit more quickly.

You can aim to build wealth with shares, managed funds or a fixed-term investment. And if you’re saving a deposit, some investments could give better returns than a basic savings account.

Some investment options

Consider these options and remember that all investments involve some risk. Explore our investor style calculator so you can understand your own attitude to risk.

1. Shares

When you buy shares―which you’d normally do through a stock broker or online stock broking service―you’re essentially buying part of a company. You can normally buy and sell shares anytime with no minimum time limit imposed on the investment term.

Building a portfolio of shares in different companies and industries can be financially rewarding. But because markets go up and down there are risks―your investment balance is likely to either increase or decrease, and so on throughout different market cycles.

Start by gaining an understanding of share market cycles and your own attitude to the risks they present.

2. Managed funds

When you invest in a managed fund, your money is pooled with other investors’ and managed by an investment manager. The manager buys and sells shares or other assets on your behalf that ideally increase in value. The fund then distributes income―often called distributions―at predetermined intervals.

Managed funds can be offered by managers specialising in a particular investment technique or industry (sector). They can provide access to assets and markets normally unavailable to individual investors. And you can often invest with a relatively small amount of money and make regular contributions to build your investment over time. See how investing bit-by-bit can make a big difference using our dollar cost averaging calculator.

Some managed funds specify a minimum investment term, although investment returns and risk levels cannot be guaranteed.

3. Fixed-term investments

Rather than investing for an undefined period, you may want more certainty.

Fixed-term investments offer opportunities for predetermined periods at declared rates of interest so you know exactly how much you’ll end up with at the end of the term. The downside is you’ll generally earn less than you would with other types of investments and if you withdraw your money before the end of the agreed term, a penalty will apply.

Fixed-term investments can include unlisted debentures, secured or unsecured notes, bonds and term deposits. Each type will offer specific terms, conditions and investment characteristics, normally outlined in a prospectus.

4. High-risk investments
High-risk investments can be complex, even for the most experienced investor. It’s important to consider the potentially high levels of risk before investing in assets like exchange traded products, futures, options, warrants, hedge funds and others.
Some high-risk investments are offered with the potential for higher returns, which can be tempting for investors aiming to make money in a short period of time. The reality is that you can lose money very quickly.
What’s right for you?

Investing to build wealth or buy a home can be rewarding. Whatever you choose to invest in, make sure you seek professional help beforehand. At Tailored Lifetime Solutions, our Financial Planners specialise in helping people match their investments to their personal risk preferences. Call us on (03) 9851 0300 to arrange an appointment.

1 ABC News, 2 Jan 2015, http://www.abc.net.au/news/2015-01-02/home-prices-rise-nearly-8pc-in-2014-boosted-by-strong-december/5996972

2 Business Insider Australia, http://www.businessinsider.com.au/wages-growth-in-australia-is-at-2-5-the-lowest-since-records-began-2015-2

Article originally published by AMP Ltd.

A WILL CAN SAVE MORE THAN YOUR MONEY

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With an up to date will you can make sure your money goes where you choose…

A recent news story reminded me of the importance of having an up to date will.

Like me, you may have read that the Sydney Swans club is arranging a memorial plaque for one of its long term supporters—a man named Royce Skinner who died in 2014.

What makes the story so interesting is that Mr Skinner had no direct family and he chose to bequeath what is believed to be a six-figure sum to the Sydney Swans Foundation.

The thing is, without a formal will in place—and no immediate next of kin, there’s every chance Mr Skinner’s wealth could have ended up in the hands of the state government. But by choosing to make his wishes known in a formal will Mr Skinner has not only provided a valuable legacy to the club he loved, he will be acknowledged for many years to come through the memorial plaque.

It could be a very different story for some 45% of Australians who don’t have a formal will.

When we die intestate (without a will) we can leave behind a mess for families, friends and even business associates to sort out. And if things turn nasty, as they can do, the people who matter most to you could face years of legal wrangling as its left to the courts to sort out who inherits your estate.

All this can be avoided by having a will drafted by your solicitor. It will set out what you want done with your property and possessions after your death as well as making provisions for all your dependents including elderly relatives. It gives you peace of mind and provides certainty for family members.

Yes, you can write a will yourself and there’s no shortage of online will kits that cost next to nothing. However it’s not something I usually recommend. For the cost of around a few hundred dollars I think it’s preferable to employ your solicitor to prepare a will. This should ensure it’s written up properly and more likely to withstand legal challenge.

If you already have a will in place, take a few minutes to think about any significant changes to your life over the last year—like the purchase of additional assets, the sale of old ones, or even a shift in your relationships, and consider if your will should be updated in light of these.

If you would like to know more about wills or discuss your estate planning needs contact us on (03) 9851 0300 to arrange a meeting with one of our financial planners.

Originally published by AMP Ltd.