Are most Investment Assets like Shares & Property overvalued?
After substantial rises over recent years it is easy to form the view that most investment assets, like shares and property, are overvalued and some significant falls are quite possible sometime soon. Is that view valid? Only time will tell, of course, but Ray Dalio, who is the Chief Investment Officer of the largest and one of the most successful hedge funds in the world, Bridgewater Associates, says that:
“Assets are pricing in about average risk premiums (Returns above Cash), though they will provide low total returns. Liquidity is abundant. Real and nominal interest rates are low—as they should be given where we are in the long-term debt cycle. At the same time, risk premiums of assets (i.e. their expected returns above cash) are normal, and there are no debt crises on the horizon.
Since all investments compete with each other, all investment assets’ projected real and nominal returns are low, though not unusually low in relation to cash rates. Relative to cash, the ‘risk premiums’ of assets are about normal compared to the long-term average. So, both the short-term/business cycle and the pricing of assets look about right to us”.
Andrew’s view: It seems unlikely to me that there will be large interest rate increases anywhere in the developed world (the USA, Europe, Japan, Australia, etc) in the foreseeable future because of the very high debt levels of both governments and consumers. If you accept that, asset prices are generally reasonable as they provide a fairly normal margin above cash. There will always be exceptions and I think Sydney residential property and US equities are “richly” priced so returns over the next few years will probably be weak, but there’s a strong case that returns from most assets are reasonable given low interest rates across the world.
Where to the Property market?
We would all like a crystal ball to know where the property (or share market) is going over the next year or two but unfortunately the opinions of most “experts” are of questionable value. Obviously things look very different depending on whether you are in Sydney or Perth! However, I’ll stick my neck out and say that I think that in the boom markets of Sydney and Melbourne (up 19% and 16% respectively over the year to March according to CoreLogic) price growth will be modest over the next year or two as interest rate hikes combined with bank credit growth restraints, low wage growth and new restrictions and taxes on foreign buyers will cool the market.
Whatever your views on the outlook for residential property you should do your own homework before making a residential property investment. Consider whether you are mainly looking for capital growth or primarily for income (rent) and how long do you plan to hold the investment. Things to look at include the health of the local economy, population growth trends, council planning policies, transport and other infrastructure, proximity to good employment opportunities, social amenities like schools, parks and cafes, etc and the current level of buyer demand. Auction clearance rates are a guide to this.
It’s also worth considering how much land you are acquiring as much of the increase in value over time relates to the land rather than the building on it.
Another key factor is bank lending policies as many investors borrow to make their purchases. In recent months the banks have all tightened their lending criteria for investment property loans as well as increasing the interest rate so check your financing before making a purchase decision.
Changes to Personal Tax Deductible Super Contributions from 1 July 2017.
From July 2017 anyone who is eligible to make voluntary super contributions (everyone under age 65 and those between age 65 and 75 that meet a work test) will be eligible to make personal concessional (tax-deductible) contributions. Under current rules, the ability to make personal concessional contributions is limited to people who:
- have not ‘done anything’ to be considered an employee, or
- satisfy a 10% test which requires that less than 10% of their income is attributable to employment.
This change is welcome news for employees, most of whom fail the current 10% test, as they will have the flexibility to make concessional contributions either via salary sacrifice (if allowed by their employer) or personal tax-deductible contributions.
This new flexibility could assist with things such as:
- end of year superannuation top ups by making personal concessional contributions to use up any remaining concessional contribution cap
- being able to contribute bonuses, annual leave and long service leave.
What you can do after 1 July 2017
If you want to claim a tax deduction for personal super contributions, there are conditions to be met which include but are not limited to the following:
- You must have made the contributions to a complying super fund or a retirement savings account (excluding certain public sector funds).
- You must meet the age restrictions (including satisfying the work test for those aged 65 to 74)
- You must notify your fund in writing of the amount you intend to claim as a tax deduction within the required timeframe and using the ATO approved form
- Your fund must acknowledge your notice of intent to claim a deduction in writing
- Your total concessional contributions, including employer contributions, must not exceed the new $25,000 concessional contribution cap applicable to everyone from 1 July 2017.
Understanding Your Super and Pension Statements
We’re not all financial experts, but sometimes it feels like we’re expected to be – especially when each super or pension statement arrives. So if you’d like to understand yours better, here’s how to make sense of all the finance-speak.
Your super statement
Here’s a breakdown of what your statement may look like if you’re in a typical accumulation-style super fund. But if your super is set up differently – for example, if your money is in a defined-benefits scheme or a wrap account – your statement may show different types of information.
Balance and transaction summary
The first thing most people look for when they get their statement is their super balance. This shows how much money you have in your account and whether it’s grown since yourlast statement. You’ll also see a breakdown of all the amounts that have been added to your account (credits) and taken out (debits) during the statement period.
Your credits include Super Guarantee payments from your employer plus any amounts you’ve salary sacrificed or rolled over from another fund. Credits also include any after-tax contributions you’ve made, along with things like government payments or contributions from your spouse, as well as the earnings on your investments.
Your debits consist of any lump sum withdrawals you’ve made, plus any amounts taken out by your super fund for account fees and insurance premiums, or negative returns on your investments. They also include any tax your fund has paid on your behalf (usually 15% of your concessional contributions).
How and where your money is invested
Your statement indicates how much of your money is invested in different asset classes such as cash, fixed interest, property and shares. This is shown as either a percentage of your total balance or as a dollar value. Your individual rate of return says how much your investments have earned overall in the past year or since your last statement.
Your statement may also summarise the expected annual return rates on these investments over a longer period – for instance 3, 5 or 10 years. Remember that these aren’t your actual returns; they’re provided so you can formulate a long‑term investment strategy.
We can help you understand the growth potential of different assets and tailor the right investment mix so you can meet your financial goals.
Insurance, premiums and beneficiaries
Many super funds offer their members personal insurance, which typically covers the insured member against death or total and permanent disablement. If you have this cover, you’ll see the amount you’re insured for and the amount that’s been taken out of your super account to pay for the insurance premiums.
If you haven’t told your super fund that you’d like a specific level of cover, you’re probably getting their default cover. But be aware that this might not be enough for your needs so check with us if you are unsure.
The beneficiaries listed on your statement are the people who you’ve chosen to receive your super and insurance benefits if you pass away. If you haven’t nominated any beneficiaries (or if
you have but your nomination isn’t a ‘binding’ or ‘non-lapsing’nomination), your super might not be distributed according to your wishes when you die. In this case, it’s a good idea to speak to us so we can guide you through the nomination process.
Your pension statement
If you have an account-based pension, the following information will likely be shown on your pension statement. Bear in mind that statements for other types of income streams might provide different information – so if you’re unsure about anything on your statement, have a chat with us.
Balance and transaction summary
Your account balance shows how much you have left in your pension account. Near this, you should see the value of each pension payment and the date the next one is due – or else, how often they’re paid (for example, weekly or monthly). Your statement may also explain how you can change your pension payments if needed.
The transaction summary is a list of all the money going in (credits) and coming out (debits) of your pension account. So, your credits would include any money you’ve rolled into your pension account, plus the earnings on your investments. Your debits would include fees and taxes, your regular pension payments, any lump sums you’ve taken out and any negative returns on your investments.
How and where your money is invested
Investment structures can be complicated, so different funds may choose to simplify this information in different ways. You should be able to easily see how and where your money is invested – for example, how much you have in defensive assets and growth assets.
If your statement provides more detail, it will probably indicate how much you have invested in each of the main asset classes: cash, fixed interest, property and shares. This may be expressed either as a percentage or a dollar amount.
Superannuation Splitting between Partners
While the coming limit on superannuation amounts that can be transferred to tax exempt retirement phase pensions ($1.6 million) does not impact many people now, it has prompted a number of calls about spouse contribution splitting.
In addition to evening up the respective super balances of members of a couple, splitting contributions to a spouse can be useful for the following:
− Sheltering assets in superannuation in the name of a spouse below age pension age to gain relief from Centrelink means tests.
− To fund insurance premiums for a low income or non-earning spouse.
− To provide earlier access to tax-free benefits for an older spouse e.g. over age 60 or reached preservation age, and accessing benefits under the $195,000 low rate cap for superannuation lump sum withdrawals (provided the receiving spouse has not met a retirement condition of release at the time the split takes place – see below).
Whose contribution cap does the concessional contribution count towards? The contribution only counts towards the concessional contributions (CCs) cap of the original contributor. The spouse who receives the split contribution is receiving a rollover benefit which does not count towards their cap.
The CCs split can be to an account of the spouse in the same or a different super fund. CCs can be split to both married and de facto spouses including same-sex couples.
What types of contributions can be split? Only CCs can be split. The amount that can be split is the lesser of the contributor’s CCs cap or 85% of the CCs actually made. This allows for the 15% contributions tax. Any amount of excess CCs cannot be split. Eligible CCs include Superannuation Guarantee contributions, salary sacrifice contributions, and personal member contributions where the member has claimed a tax deduction through the Notice of intention (NOI) process.
If splitting personal member contributions, the NOI must be given to and acknowledged by the fund trustees before the splitting application can occur.
CCs made in a year can be split to the account of a spouse in the following year. Generally a super fund trustee will only action one contribution splitting request per year. Super funds do not have to offer the facility of splitting contributions. Where this facility is offered, fund trustees must action the request within 30 days.
Where the contributor’s account is being closed in a year (e.g. by withdrawal, rollover, or pension commencement) then application can be made to the fund trustee to split current year contributions prior to the account closure. This could allow contributions to be split twice in the year. Rolled over amounts cannot be split to a spouse.
In order to split contributions, a number of conditions apply: The receiving spouse must be either be: − under preservation age (currently 57), or − between preservation age and 65 and not retired from the workforce. This means they must be currently employed for at least 10 hours per week, or they intend to resume gainful employment of at least 10 hours per week. The splitting application form contains a declaration from the receiving spouse that they are ‘not retired’.
This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.