HECS – HELP Fees & Repayments: Up-Front Payment & Repayment Changes

Depending on the course they undertake, most Australian tertiary students must pay annual fees that in 2014 will vary between $6,044 and $10,085 for a full time course load. Many students pay via the Higher Education Loan Programme (HELP), which was known as HECS until 2005.

The outstanding balance of interest free HELP debt is indexed to the CPI on 1 June each year. Repayments can be either voluntary or are required through the taxation system (between 4% and 8% of the loan balance each year) when the individual’s HELP repayment income exceeds a minimum – $51,309 in 2013-14.

Legislation has been introduced to Parliament to remove the current discount for up-front payment of higher education fees and to remove the discount for voluntary repayments of HELP debt. If the legislation passes the changes will apply from 1 January 2014.

Increasing the Age at which you can access your Superannuation or receive an Age Pension

For those who meet the income and asset tests, the Age Pension access age is currently scheduled to increase by six months, from 65 to 65½, in 2017. After that it will climb by a further six months every two years until it reaches 67 in 2023. A recently announced proposal from the Grattan Institute argues for lifting the access age further, by six months every year until it hits 70 in 2025.

The Grattan Institute also proposes lifting the age at which people can access their superannuation. The super access age, currently a minimum of 55, is scheduled to climb from 55 to 60 by 2024. Grattan’s proposal would increase it by six months every year from 2015 until it eventually reached 70 in 2035.

Are these proposals likely to be adopted by Government? While longevity and rising Government expenditure on health, aged care and the Age Pension are reasons for such change, I doubt it, particularly in the near term.

An increase in the age at which you can access your superannuation beyond 60 would create many issues. There are many people with significant superannuation savings who cease work well before age 70, often due to declining health or reduced physical capabilities. Also, many retire well before age 70 because they are unable to find suitable employment after leaving a previous role due to redundancy or for other reasons. It is widely acknowledged that most employers are reluctant to hire older workers.  Surely it wouldn’t make sense to force such people onto Newstart or the Disability Support Pension simply because they weren’t allowed to access their own superannuation savings. With an ageing population, it would be politically “courageous” to implement such a proposal.

Sequencing Risk and what it means for Pre-Retirees & Retirees

‘Sequencing risk’ is the risk of experiencing poor investment performance at the wrong time, typically  in the period close to retirement –  the 5 to 10 years leading up to retirement and the first 5 or so years after retirement. This is a very important time as typically the investment balance that will provide an income during retirement is at its maximum during this period.  The timing of good or bad investment returns can be critical and as important as the size of the returns. As some unlucky people who retired just before the GFC discovered, if your investment balance declines significantly close to retirement you may not have the opportunity to see your investment balance recover because you are drawing on your capital, unlike someone who doesn’t need to access their capital until after markets have recovered.

While there is no way to predict and therefore avoid sequencing risk, there are some strategies to help minimize the risks. These include:

  • Reducing the level of investment risk as retirement approaches. The aim of reducing investment risk is to lower the chances of significant loss of retirement savings if a market downturn occurs. This is a balancing act as if an investor takes too little risk they may end up with insufficient retirement income. With too much risk, loss of capital close to retirement can erode savings and jeopardise the sustainability of retirement income.
  • Increase the level of diversification in the investment portfolio.  Diversification will normally reduce risk, though poor investment performance can still occur as many experienced during the GFC.
  • Buy annuities and/or deferred annuities which offer guaranteed returns irrespective of market fluctuations. This can address post-retirement sequencing risk but low interest rates means that annuities currently deliver only modest levels of income. Also, annuities don’t address pre-retirement sequencing risk.
  • Increasing retirement savings, such as Super contributions, more evenly over a working life. Many people concentrate the accumulation of retirement savings in the last decade of their working life. This increases sequencing risk. Of course, with large mortgages and the cost of raising children, many people don’t have the opportunity to save much other than compulsory super until their 50’s and beyond.

Tax on Superannuation Fund Investment Earnings over $100,000 per annum not proceeding

The New Federal Government has announced that it will not proceed with a proposal announced by the previous Labor Government to tax superannuation investment earnings in excess of $100,000 p.a.

Superannuation Contributions & Tax

The Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Bill 2013, which received Royal Assent on 29 June 2013, essentially repealed the 31.5 per cent tax rate on excess concessional contributions (ECC) and replaced it with a requirement for excess concessional contributions made on or after 1 July 2013 to be included in the member’s assessable income and taxed at the member’s marginal tax rate.

The Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Bill 2013, which received Royal Assent on 28 June 2013, effectively imposes a new tax on individuals with income above $300,000. This new tax reduces the tax concessions that individuals with income, including concessional super contributions, above $300,000 receive on their concessional superannuation contributions (CC, also referred to as ‘low tax contributions’). Tax on CC for these high income earners has increased from 15 per cent to 30 per cent with the higher rate applying to any amount of CC that, combined with other income, exceeds $300,000. The tax applies to concessional contributions made on or after 1 July 2012.

Some Words of Wisdom from Great Investors

Kerr Neilson, CEO Platinum Asset Management: The two worst things we can engage in when investing is recency bias (over-emphasising near-term events), and extrapolation, assuming the recent trends will continue.

This newsletter is not advice and provides information only. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. 

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