US presidential election result and the possible consequences for global financial markets
As you well know, on Tuesday, 8 November (Wednesday, 9 November in Australia), Republican Party candidate Donald Trump was elected America’s 45th president.
In the lead-up to the election, the polls were predicting a Democratic Party (Clinton) victory, so the result came as a surprise to many around the world. Financial markets reacted negatively initially, and then reversed course and treated the news as a positive. There have been scores of commentaries on what this means for politics, foreign affairs, financial markets, etc but in truth no one yet knows what Trump will actually end up doing and what the outcomes will be. However, it does seem safe to say that financial markets will remain somewhat volatile. My view is not to overreact to day to day news and speculation.
To answer questions you might have on the election result and its possible consequences for financial markets, I’ve attached a special US Election edition of our Market Watch newsletter.
In uncertain times it’s important to stay focused on your long-term financial goals, so I have also attached our Market Volatility fact file to help you understand the causes of market movements.
Insurance in Superannuation – Issues to Consider
It’s very common to hold Life (Death) & Total & Permanent Disability (TPD) insurance through your Superannuation Fund. Some people also hold their Income Protection cover through their Super.
One reason that this is common is that the premiums are deducted from your Super and therefore don’t affect your cash flow – funds available for living expenses, the mortgage, etc.
There are two main types of insurance policies that you may have in your Super Fund and these have some important differences:
- Group insurance policies – typically via an industry, government or corporate super fund but also in some instances via a so-called public offer fund i.e. a Fund generally open to anyone. With these group policies the legal policy owner is the Trustee of the Super Fund rather than you or your chosen beneficiary. The insurer is able to change the policy terms at any time, as many industry funds have done in recent years, which may significantly impact your cover. Also, the policy may be cancelled at any time i.e. it is not guaranteed renewable even if your Fund wants to pay the premium. In many cases underwriting (the insurer’s process for deciding how safe a bet you are) is not done when the policy is taken out but when a claim is submitted so you can’t be certain as to whether you might be unable to claim for certain preconditions (medical issues you had when the policy was started).
- Retail or individual insurance policies – you personally are the policy owner and any claims will be paid directly to you, your estate or an eligible person you nominate, such as your partner. The policy terms, other than cost, can’t be changed unless the change is in the insured person’s favour e.g. more illnesses or diseases added to the definitions of your policy. Most retail policies allow you to maintain coverage until death for Life & TPD (though the premiums get significantly higher as you get old) and until 65 or even 70 years with income protection. Generally retail policies are underwritten at time of issue when any exclusions are identified up-front. This means that you know exactly what you are covered for and that the insurer guarantees payment to you or your beneficiary in the event of a legitimate claim.
Defined Benefit pensions and the new $1.6 million cap
Defined benefit pensions are increasingly rare in Australia as Government and corporate employers stopped offering them to new employees many years ago. Therefore most people with these pensions (or eligible to receive them in the future) are over age 50. These pensions pay a given sum each year, generally for life and are indexed for inflation. They are attractive to many retirees as they provide a greater certainty of income than an account based pension, which is impacted by the return you earn on the funds invested.
However, an important issue has arisen for some people with defined benefit pensions due to the Government’s recently announced $1.6m pension transfer balance cap. In simple terms, it is proposed that the annual pension payment for a lifetime defined benefit pension will be multiplied by a factor of 16 for the purpose of determining how much of an individual’s $1.6m cap has been used. Thus someone with a $70,000 annual payment would be assessed $1.12 million against their cap and could only hold an additional $480,000 in other pension accounts. Someone lucky enough to receive a $100,000 annual pension could not hold any additional funds in a pension account (though funds could still be held in a Superannuation accumulation account). This won’t impact too many people but is something for retirees with defined benefit pensions and significant other super balances to be mindful of.
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.