Federal Budget 2016 - more undermining of the superannuation system

The 2016 Federal Budget has again made changes to superannuation law.  For example it's proposed that the concessional contributions cap be reduced to $25,000 for everyone able to contribute to superannuation.  This constant changing of limits only undermines the general publics confidence in making contributions to superannuation.  If the general public can't be confident in the superannuation laws not being adversely changed over a one year period, why would they have the confidence to invest their money in superannuation for 10, 20, 30 years or more.  In addition retrospective changes are proposed to Transition to Retirement Pensions.  Where previously the investment earnings of these pensions were tax free, it is now proposed that this investment income be taxed at 15%, even for existing Transition to Retirement Pensions from 1 July 2017.  Again, how can people have confidence in the system and make long term investment decisions when superannuation has become a political football.  It's time for the politicians to provide confidence to the general public via ruling out any further adverse changes to superannuation rules.

VOLATILITY IS INCREASING

Markets have been whipsawed around by both positive and negative news, with some significant events highlighting the need for caution and also diversification.  For example, some of the issues that have moved markets include:

·         US 30 year Treasury yields hitting a record low (US borrowing costs are at record lows);

·         European government bond yields hitting record lows, and even turning negative for some durations (savers are paying banks to hold their money);

·         Chinese GDP growth hitting a 24 year low (China is slowing down, double digit growth rates are gone);

·         European equities hitting a 7 year high (shares are rising on the back of stimulus measures);

·         The Euro currency falling to an 11 year low against the US Dollar (money printing is devaluing currencies);

·         Commodities falling sharply, with oil down more than 50% since October (good for consumers, but not for exporters);

·         A surprise move by the Bank of Canada to cut interest rates by 0.25% (falling commodity prices are taking their toll);

·         A shock move by the Swiss National Bank to unpeg its currency from the Euro (currency soars and equities tank);

·         The European Central Bank announcing a massive stimulus package to print €60 billion per month (Europe is bordering recession, can stimulus turn it around?);

·         Anti-austerity party, Syriza, winning Greece’s election (this puts debt default concerns back on the agenda);

·         Standard and Poor's downgrading Russia’s government bond rating to below investment grade (Russia’s credit now considered ‘junk’).

 Some of these events have come as a complete surprise to markets.  Of particular note was the Swiss National Bank’s decision to unpeg its currency from the Euro, only two days after confirming to the market that it would maintain the currency peg.  This decision sent the Swiss Franc soaring 30% against the Euro and sent the Swiss share market down more than 10%.  These large scale and quick moves have negatively impacted some investors, with the world’s third largest retail foreign exchange broker requiring a bailout to stay afloat.

 

Despite these issues and rising volatility, share markets have held up relatively well, with most trading positively for the month to date.  However, we would caution investors from becoming too complacent.  The market is providing some warning signals, and we recommend that investors remain focused on diversification and risk management to mitigate the possibility of a negative ‘event’ impacting portfolio returns.

NEW SELF MANAGED SUPERANNUATION FUND PENALTY REGIME

From 1 July 2014 be afraid as the ATO will penalise you heavily if you have breached any of the superannuation fund rules.  Not only are the penalties large they apply to all trustees and cannot be paid by the superannuation fund.  Below are some examples of the breaches and the penalty that applies:




Failing to prepare financial statements                                                    $1700


Failing to keep trustees minutes for at least 10 years                              $1700


Providing financial assistance to members and relatives                        $10200


Failing to keep records of change of trustees for at least 10 years          $1700


Failing to sign Trustee Declaration within 21 days of                             $1700
appointment and keeping same for at least 10 years


Failing to keep members reports for 10 years                                         $1700


Failing to notify the ATO of an event that has significant                      $10200
adverse effect on the funds financial position


Failing to notify the ATO of a change of status of the SMSF                 $3400


Failing to appoint investment managers in writing                                 $850


Failing to comply with ATO education directive                                    $850


Failing to formulate, review regularly and give effect to an                    $3400
investment strategy


Failing to have funds financial statements prepared, signed and            $1700
retained for at least 5 years


Contravene borrowing prohibition                                                          $10200

QUICK TIP TO BECOME MOTIVATED ABOUT SAVING FOR RETIREMENT

If you are lacking motivation and direction with regards to investing for the future then answer these 3 questions:


1. What will your income needs be in retirement?
2. How much are you prepared to contribute to your retirement whilst you are working?
3. How long are you going to work for?


Generally your answers will be that the time you have left working and how much you are prepared to or are capable of saving will not accumulate enough asset to generate enough income to support the life you want to live in retirement. 


Then you need to be honest with yourself and face the fact that the only way to try and solve this problem revolves around the following strategies:


1. Save more
2. Work longer or harder
3. Adjust your investment philosophy


or you will just have to be prepared to retire with less and not be able to live the life you want in retirement.


There is no magical answer no matter how many guru's tell you there is.

Cold Callers

The latest garbage that cold callers are now peddling is "tax variations".  They make it sound like there's a tax loophole that allows people to get a whole lot of additional tax refunded.  For most people there is absolutely no benefit.  For some people who typically get large refunds of their PAYG withholding when they complete their tax return, all that it means is that they get this refund slightly earlier. This is because the "tax variation" means not as much PAYG withholding is taken from their wage during the year.  For this minor cash flow benefit the cold caller will charge a fortune - I wonder whose interest the cold caller is thinking of.

This "tax variation" garbage comes on top of cold calls in relation to "fantastic property investment opportunities", which just happen to make the cold caller thousands on dollars.

Always check with a trusted adviser before proceeding with anything these cold callers have to say - better still just hang up on them.

Superannuation Myths

Superannuation is still undoubtedly the best vehicle to save for your retirement.  As I have written in previous newsletters, superannuation has both tax and Centrelink benefits which can add greatly to the wealth of clients.

When speaking with clients there are 2 main objections to using superannuation as a savings vehicle.  The first objection is that superannuation is always losing money.  What is not clear to many people is that superannuation is only a tax structure.  Superannuation does not dictate that you must have shares or property.  Therefore provided the superannuation investment strategy allows for it, 100% of your superannuation money could be invested in cash or fixed interest based investments.  Therefore it is possible that your superannuation is no more risky then money in the bank.  It is a myth that superannuation is risky as it purely comes down to the member’s investment choice.

The second main objection to superannuation is that the Government is always changing the rules and making it less attractive.  While it is true that the rules around superannuation have always and will always change, the tax effectiveness of money, once it’s inside superannuation is as great as it has ever been.  There have been measures taken to reduce the amount of money that people can contribute to superannuation, however a superannuation tax rate of 0% on pension investment earnings and 0% tax on pension payments for superannuation members over the age of 60 is still as good as you can get. In fact recent announcements by the government in relation to capital gains tax when a member passes away have increased the tax effectiveness of superannuation.

The main advice I have for clients is to be aware of the rules of superannuation and how they affect their own personal circumstances.  Do not make blanket assumptions that superannuation can’t be of benefit to you.

Wealth creation for the next generation

 

Over the last few months I have had the pleasure of a number of clients bringing in their young adult children who have recently commenced  employment for the first time.  The idea was to discuss with them how to create long term wealth.

While each client’s circumstances are slightly different there are a number of key themes that continually recur in each meeting which I have summarised below.

1)      Continue to improve your knowledge in the career you have chosen.  The main asset of a young adult is their ability to earn an income.  By increasing knowledge of your job you are increasing your ability to earn a high income from that job and you are increasing your job security as you become more integral to your employer.  Many young people see a job as the end to their education process, but it should just be a continuation of that process.

2)      Don’t try and emulate your parent’s lifestyle too early.  Many young adults are seduced into far too much debt as soon as they earn an income because they want a house and a car like their parents.  It is far better to start off with a modest house and car and pay them off quickly, then to be burden under the weight of large debt repayments.  Some parents have taken decades to accumulate their assets and their children should understand there are no short cuts in achieving wealth.

3)      Pay off your non-deductible debt first.  The allure of a hot share tip or a get rich quick scheme is often too tempting for many.  However, there is no investment that offers a better risk adjusted return then that off paying off non-deductible debt first.  Non-deducible debt maybe such things as a home loan, car loan or credit card debt.

4)      Be prepared to take some risk with superannuation.  The default superannuation fund option that many people are automatically invested into is often the wrong investment option.  People in their 20’s have a 40 year investment timeframe in front of them before they can access their superannuation and therefore this should lead them to weight their superannuation in favour of growth assets such as shares & property.

5)      Never spend more than you earn.  Credit cards are a convenient way to pay for many items, however they can be the worst financial trap for many people.  It is very easy to spend on a credit card without any thought as to how it will be repaid.  The 20% plus interest rates can then make it virtually impossible to climb out from under this debt burden.  Ultimately everyone needs to ensure that live within their means and if debt is becoming a problem there are only 2 solutions.  Increase your income (eg second job) or decrease your spending.

The above items are by no means an exhaustive list of what young people should be considering when first starting to earn an income, however they would be well on the way to financial success by taking note of these 5 principles.