Superannuation Changes Coming Soon?
Last week I attended the SMSF Association National Conference in Adelaide where Treasurer Scott Morrison expressed his views on Superannuation, negative gearing and tax, though without detailing exactly what the Government proposes. That should come soon; definitely no later than the May Budget.
Key points made by the Treasurer included:
- The Government does not propose to tax people in the pension (retirement) phase. The tax on pensions and lump sums for those over 60 was abolished in 2006.
- He said “we should not penalise people who have put money into super using the current rules”. This contrasts with the Labor party proposal to tax Superannuation income streams (pensions).
- Welfare payments and tax incentives are fundamentally different. The welfare payment comes from someone else.
- Super is not an estate planning vehicle. Morrison said we all want to leave assets for our children and that while the taxpayer should help independence in retirement it should not be by increasing inheritances.
- The Government is also looking at how changes can be made for people who have interrupted work careers. For example, it could increase the caps on contributions after a person is out of the workforce (say on maternity leave) to allow a catch up in super balances. This could include carers who have to leave the system to look after family members.
- The Government is also considering lifetime Superannuation contribution caps. (Subsequent comments by Government ministers suggest the possibility of changes to existing contribution caps so anyone looking to make a significant contribution to Superannuation should consider whether to implement that ahead of the Budget).
- Negative gearing has some excesses that should be curbed; eligibility needs to be fair. 70% of people have a loss on their investment property of less than $10,000 a year and a similar percentage only one property.However, the Government does not agree with Labor’s proposal that from July 1, 2017 negative gearing will only apply to new properties, the argument being that 93 per cent of negative gearing goes to existing properties. The Treasurer has hinted that he will propose is a cap put on the number of properties that are allowed to be negatively geared as well as a limit to annual tax deductions that can be claimed.
Current Volatility in the Share Market
On average, as an investor in the ASX200 share index over the last 22 years you would lose 14.5% at some point during the year. However, in 16 of those 22 years you would end up with a positive return if you remained invested for the entire year. This highlights that share market volatility is normal so what we have experienced so far this year is not that unusual and does not necessarily imply that this will be a bad year for investors. However, I will concede that the global growth slowdown worldwide is concerning and presents a challenging backdrop for investors.
Change to ASX Share Settlements
From 7 March 2016, the Australian Securities Exchange (ASX) is moving to a T+2 settlement cycle, meaning the settlement period for trades on the Australian share market will be shortened by one day i.e. from 3 days to 2 days.
Settlement of all trades will be required within two business days after the day a trade takes place, known as T+2 (trade date plus two business days).
This change affects shares traded through the ASX only.
Lessons from Super Fund Investment Strategy Rules
Trustees of super funds large or small, including Self-Managed Super Funds (SMSFs), are required by regulation to put in place an investment strategy that meets certain guidelines.
Interestingly, these regulations contain powerful and sensible messages for all investors.
Risk & Return
Trustees are required to consider what an acceptable level of risk is and the expected level of return when investing, taking into account the member’s risk profile, proximity to retirement and any other relevant circumstances. This should be reviewed on a regular basis as the members’ needs change.
Having your own risk profile, which may change throughout your different life stages, is vital for you and your financial adviser to understand when making investment decisions in line with your financial goals. Allocating a greater portion of your assets to riskier investments offers the chance of higher returns but has to be compared against the increase in volatility and variation of potential returns.
Even if you’re not an SMSF member it’s still important to consider your risk profile when you are saving for your retirement, how far you are from retirement and what your retirement goals are. This will help you to plan the targeted return and the risks you are willing to take from the investments you’re making to fund your retirement – whether via your super fund or outside super (e.g. an investment property).
Speaking of risk, there is an inherent risk in a lack of diversification. Trustees of super funds are required to regularly consider whether the fund’s investments are adequately diversified.
Diversification is a strategy of spreading your money across different asset classes, industries, market sectors, or potentially geographic locations.
Diversification of asset classes helps to manage risk if one specific asset class performs poorly, for instance, when the share market drops, your return in term deposits may increase due to a higher interest rate.
Diversification of industries and market sectors within a specific asset class is also an effective way of managing market risk. For instance, when the mining industry suffers from lower overseas demand, the tourism industry may be booming due to increased international tourists. Or sometimes when one country’s economy drops, another country’s rises, so diversification by geographic locations can help take advantage of such movements.
Liquidity: How easy it is to get to your money?
SMSFs in particular must have the correct levels of liquidity to be able to fund their ongoing operating costs. If all your investment monies are wrapped up in a property and its maintenance costs, you may find yourself struggling with other SMSF costs such as accounting, administration, reporting, financial advice, and lodgement etc.
Liquidity is just as important if you don’t have an SMSF but are saving for retirement. How much can you afford to keep in superannuation (where it’s generally locked up until after you retire) and how much should be invested outside of superannuation? You also need to consider how much you should keep in cash and how much in other, less liquid, asset classes.
The final investment strategy requirement is for the SMSF trustee to have at least considered whether they have adequate levels of life and disability insurance for their members. If the person that is considered the main ‘bread winner’ or who cares for their dependents suffers a serious illness or dies, any sound financial plan can easily come undone without insurance.
Continue to speak with me about whether your personal insurance matches your current needs.
What does it all mean to me?
Having a carefully considered, purposeful investment strategy is a powerful idea. You and your financial adviser have probably already done this in some way but the process of considering and transcribing thoughts around insurance, risk and asset allocation will likely be of great personal use. It will help reflect and record your changing investment attitudes during various life stages.
Such a strategy should increase your own awareness about your investment reasons and goals and should help me, as your financial adviser, make tailored recommendations.
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.