Why have share and property prices been rising strongly as interest rates have fallen?
Assets like shares and real estate have been rising strongly over recent years despite a sluggish economy; why? The most obvious and rational reason is that all over the world central banks, like the Reserve Bank of Australia, have been reducing interest rates, which are now at record lows.
As an example, long term UK bond rates are at the lowest level recorded in the 300 years since records have been kept! When savers and retirees are unable to earn much interest (none in many European countries, the USA and Japan) this effectively forces people to look at other investments which provide at least some modest return.
This on-going search for yield has driven up the price of many assets, particularly dividend paying shares like the banks and Telstra, and more broadly equity prices globally. Similarly, investors have been buying commercial and residential real estate pushing up valuations that look, by historical standards, somewhat excessive.
As we have never seen interest rates this low it is unclear what will happen to asset prices when rates rise but it does suggest a degree of caution is warranted as there certainly is a real possibility that we will see a significant correction (fall in prices) at some point. Any such correction could be quite severe if we see a recession and rising unemployment, something not seen in Australia for nearly 24 years.
Research on happiness and the mid life crisis – it’s not just you and it’s not all bad news
The US published Atlantic magazine recently had an interesting article reporting that a growing body of research shows that there is a pattern of happiness across a lifetime.
Happiness is typically high when we are young but declines from the mid 20’s, bottoming out around the mid to late 40’s. It seems that by around age 50 most people are starting to let go of their unmet aspirations and becoming happier as a consequence. The very good news is that happiness then increases progressively each decade reaching new heights each decade through to your 80’s.
Many people in their 40’s, including the very successful, look at their life and ask themselves, “Is this all?”. A decade later many are looking at their life again and thinking, “Actually, this is pretty good”.
For many of us there is a happiness or life satisfaction U-curve. This phenomenon has been observed across different countries but is more pronounced in wealthier countries where people live longer and have better health in old age. It is good to know that after 50, despite most careers having peaked and some signs of diminishing physical capabilities, greater happiness awaits most of us.
Potential policy changes in the Budget and what you might consider doing to pre-empt them
The difficulties the Federal Government is having in reducing the Budget deficit mean that there is a significant possibility of some policy changes in the next Budget, to be announced in May 2015, that may reduce tax concessions or increase effective tax rates.
Among the potential policy changes rumoured to be under consideration are:
- A reduction in the 50% capital gains discount for assets held longer than one year.
- A tightening of the rules around negative gearing or potentially even its abolition.
- A reduction in the tax saving for concessional superannuation contributions for persons on higher marginal tax rates.
- Applying some earnings tax to superannuation funds that have moved into pension phase.
- Applying some income tax to superannuation benefits received by persons aged over 60.
Any of these potential changes could be expected to receive a negative response from impacted parties but that doesn’t mean they can’t occur in the context of a broad range of measures to bring down the deficit, so it is worth considering whether any pre-emptive action should be taken to minimise any impacts before such measures are introduced. Such actions, which would be unlikely to be invalidated retrospectively, might include:
- Realising capital gains before the Budget to take advantage of current rules.
- Considering the personal impact of any change to negative gearing rules e.g. a change such that losses on investments, like negatively geared property, could no longer be offset against employment income.
- Fully utilising your concessional superannuation contribution cap (remember it includes employer SG contributions) this financial year.
- Realising large capital gains on assets held within Superannuation Pension phase (ahead of the Budget) so such gains are realised tax free for persons age 60.
- Taking additional tax-free pension benefits this financial year (ahead of the Budget) in order to reduce potentially taxable benefits to be taken next financial year.
None of these rumoured changes are certain to happen, either in the forthcoming Budget or subsequently, but it is certainly worth considering whether any such change would have a significant detrimental impact on you and whether you should be considering taking action sooner rather than later. You should consider getting financial advice before acting on such matters.
Tighter eligibility for the Government Age Pension coming?
There are differing opinions as to whether the Age Pension should be considered an entitlement for all, reflecting their taxes paid and contribution to society during their working life, or a safety net with only those in financial need receiving the benefit.
While the Age Pension benefit in Australia is not particularly generous compared with what people receive in many comparable wealthy countries (our maximum Single Age Pension is currently approximately $22,200 p.a. and $33,500 for a couple), eligibility to receive a part pension (and related benefits, including cheaper prescriptions) is quite generous under the asset test.
Eligibility to receive at least a partial Age Pension is an area under scrutiny in the effort to control Government expenditure. Currently a single person who owns their own home of any value can receive some pension and associated benefits provided their assets (excluding the home) don’t exceed $771,750 and their assessable income doesn’t exceed approximately $48,500 p.a. The respective numbers for a couple are assets of $1,145,500 and assessable income of approximately $74,300 p.a.
Recent changes to deeming of income amount to a tightening of the income test for new pension recipients but the assets test remains generous, particularly for those with homes worth substantial amounts, so it will not surprise if this is tightened in the future.
Deeming Rates to be cut from 20 March 2015
The Federal Government has confirmed that the deeming rates applied to investments (including superannuation account balances for those over age 65 and pension income streams for those who have started pensions since 1 January 2015) will be reduced effective from 20 March 2015.
The lower deeming rate applicable to financial investments up to $48,000 for single pensioners and $79,600 for pensioner couples will decrease from 2.0% to 1.75%. The upper deeming rate for balances over these amounts will decrease from 3.5% to 3.25%.
This newsletter contains general advice. 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.