Author: James Black

Super baby debt

Having a family can create a ‘super baby debt’ for mothers of up to $50,000 by the time they reach retirement age.

Taking time off work means you may not have any employer contributions being paid into your super account. And if you are taking a few years off, this can have quite an impact on your retirement nest egg. Even if you are working part-time at all during this period, then your employer will only pay money into your super account if you’re earning more than $450 a month.

To overcome this problem, women should adopt the ‘one per cent rule’ by adding an extra one per cent to their superannuation contributions for the rest of their working lives.

You should also think about what you can do to continue to build on your super savings while you are out of the workforce. One way of doing this is for your partner to make contributions on your behalf. ‘Spousal contributions’ are where your spouse makes a contribution to your super account and they receive an income tax rebate. It’s a great way to keep growing your super while you’re taking time off; be it to raise a family, or for other reasons. 

Also, don’t forget about the government’s co-contribution scheme. If you are a low or middle-income earner, you can make an after-tax contribution of $1,000 a year to your super account and the government will provide up to 50 cents for each dollar you contribute, up to a maximum of $500, provided you meet the eligibility requirements.

If you’re taking a few years off, it’s certainly something to consider. But remember, you can always put extra into your super account.

If you would like to discuss, please call us on |PHONE|.

Source:

Reproduced with the permission of the The Association of Superannuation Funds of Australia Limited. This article was originally published at www.superguru.com.au 

Important:

This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

by James Black

A vital SMSF question: A corporate trustee or individual trustees?

A self-managed super statistic that doesn’t seem to change much over the years is the strong preference of new SMSFs for individual trustees rather than a corporate trustee.

The latest-available tax office statistics on SMSF trustee arrangements show that 93 per cent of SMSFs established in 2015-16 had individual trustees – a percentage that has remained more or less static in recent years. Yet 77 per cent of all SMSFs in existence at June 2016 had individual trustees – again a percentage that has remained rather static.

Looking at this from another way, a third of all SMSFs have corporate trustees against just 7 per cent for new SMSFs.

There are perhaps some straightforward explanations for these trustee differences between fledgling and established self-managed funds.

Individual trustee arrangements – with all members individually being trustees – are typically less-costly and simpler to put in place when a fund is being setup.

Yet the statistics suggest that as time goes on, many SMSF members either recognise the potential greater flexibility of having a corporate trustee or a change in their circumstances necessitates a switch to a corporate trustee.

Depending upon their circumstances, some informed would-be SMSF members may decide to bite the cost-and-convenience bullet early and go with a corporate trustee from the beginning. It could be worthwhile gaining advice about the issue from an SMSF specialist.

Let’s run through some of the basic rules regarding trustees for self-managed, which should be understood by all intending and existing SMSF members.

Under superannuation law, all members of an SMSF must be either individual trustees or directors of a corporate trustee of the fund. An SMSF with individual trustees must have at least two individual trustees yet a corporate trustee can have only one director.

An SMSF with individual trustees are held in the names of individual members as trustees. If the membership of an SMSF with individual trustees changes – perhaps following death, marriage breakdown or the addition of a new member such as an adult child – the names on the funds’ ownership documents must also change. This can be costly and time-consuming.

By contrast with a corporate trustee, assets are held in the name of a company as trustee. If trustee directors change, the assets remain in the name of the same company.

If a fund has, say, two individual trustees and one dies, the fund must appoint another trustee in order to continue as an SMSF. (This is because of the requirement that a fund must have at least two individual trustees.) Yet if an SMSF has a corporate trustee, a deceased trustee director may not have to be replaced because a corporate trustee can have a single director.

In short, a corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a key estate-planning consideration.

The decision about whether to have a corporate trustee or individual trustees could have financial and personal implications for as long as an SMSF remains in existence, including when a member leaves the fund and/or a new member joins.

Unfortunately, some SMSF members may not understand the differences between having individual trustees or a corporate trustee until it is too late.

For more information about SMSFs please contact us on |PHONE|.

Source:

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important:

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

by James Black

Buying A Tenanted Investment Property

There are plenty of upsides to buying an investment property that already has a tenant, as well as a raft of risks. Here’s how to minimise them.

• Purchasing an investment property that already has a tenant means you collect rent from day one, with no vacant period and no lease fees to find a new tenant. The lease just carries on as it did before you purchased the property. Sound good? Of course it does. There are some possible problems to be aware of though.

• It’s very important to check whether the lease on your prospective investment is current or the tenants are on an expired lease. If the tenants are off-lease, they can give a short period of notice and vacate the property, so those upsides mentioned above could come to nought.

• A current lease, on the other hand, offers security, it also means that you are stuck with the lease, its conditions (or lack thereof), the current rental return and the tenants.

• There are steps you can take to minimise your risk:

• Make sure the bond has been lodged properly. Your agent will arrange for the bond guarantee to be transferred into your name on settlement.

• Check the property condition report, making sure that it is a complete and accurate record of the property as you inspected it.

• Ensure there are no rental arrears. If there are, or if a landlord has agreed that rental arrears can be taken out of a bond payment, stipulate that this amount is deducted from the purchase settlement amount.

• Ask the leasing agent about the tenants and their payment record. You cannot demand that you meet the tenants, but attending the open house will give you a sense of how they live in the property. If possible, sight the tenants’ original application for the property and rental ledger.

• Look at the yield for rental properties in the area and compare them to yours. You won’t be able to increase the rent until the end of the lease.

• Be aware of any concessions or conditions that are either in the lease or have been agreed with the landlord or property manager, because these will become your responsibility. For example, does rent include electricity or other utilities? Has the landlord agreed to install a new oven or paint a room?

• Of course, if you love a property but have doubts about the tenants, the lease or the managing agent, all is not lost. You can easily change the managing agent when you settle. You can also make vacant possession of the property a condition of settlement. You may need to wait until the lease expires to settle, but you aren’t taking on the previous owners’ problems and responsibilities.

If your only problem with a tenanted property is the rental yield, keep in mind that increasing rent on a good, long-term tenant may well drive them away anyway, so do your sums. Work out whether the amount you’d like to increase the rent by equates to more over the year than the lease fee plus any rent lost if your property is vacant for a few weeks.

If you would like to discuss, please call us on |PHONE| or email |STAFFEMAIL|.

Source:

Reproduced with the permission of the Mortgage and Finance Association of Australia (MFAA) 

Important:

This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

by James Black

A realty check for accessing super early

When it comes to the basics of life the issue of finding shelter – putting a roof over one’s head – ranks high on most people’s list.

So as the dream of home ownership continues to recede further into the financial distance for younger Australians in our major cities it is not surprising that the public debate about levels of housing affordability is increasing in volume.

Australians have an ingrained faith in property – both on the shelter front and as an investment.

Residential property is like other investment markets and it moves in cycles and it is strongly influenced by things like interest rate rises or jumps in unemployment but convincing younger Australians that property prices may fall in the future is one of the great communication challenges of our time.

Today we are living in a record low interest rate environment. That – as someone who had their first mortgage application rejected at a time of 16% variable rates – has not always been the case nor can it be relied on to stay that way forever.

The economics of supply and demand will play out over time particularly as house price growth outpaces household income levels and we are already hearing warnings about oversupply particularly in apartment markets in Melbourne and Sydney.

This is not to dismiss the need for a public debate on the issue of housing affordability. Clearly that is a significant social issue and a key challenge facing our state and federal political leaders.

It also impacts different parts of our community in different ways – there is the obvious challenge to the aspiring new home buyer but increasingly it can also involve parents providing loans or guarantees to enable children to enter the property market.

It is also not surprising that when housing affordability is being discussed alternative funding solutions are often raised. Recently the idea of allowing access to superannuation accounts to help finance house purchases has again surfaced.

In investing, as in life, it is all about trade-offs. The appeal of allowing part of your super balance to be used to buy a home is understandable. For a start as a younger person your super is locked away for what seems a long, long time. So being able to access it to do something useful and personally beneficial right now is instantly appealing.

The immediate risk is that markets will adjust accordingly and all you will achieve is artificially inflating house prices to allow for the additional loan from the super account. Beneficiaries are more likely to be the sales agents courtesy of the commission structures in the industry rather than new home buyers.

But the longer term risk is that by taking a lump sum out of the super account investors will lose the impact of compound earnings over several decades. You do not have to be much of a mathematician to work out that your retirement account balance will be significantly lower than it otherwise would be.

Independent consulting firm Rice Warner modelled the impact on a fund member aged 35 who is earning average wages and takes $100,000 out of their super account to use as a housing deposit.

The loss of compounding investment earnings over many years would dramatically affect the young member’s retirement balance. Rice Warner calculates that allowing someone to withdraw $100,000 from their super account would mean the federal government would have to pay them an additional $92,000 in age pension.

What is often not well understood is that the investment earnings usually represents a larger component of the retirement benefit than your contributions.

So a short-term solution on housing could mean long term pain on retirement savings.

If you would like to discuss anything in this article, please call us on |PHONE|.

Source: 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important:

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

by James Black

Defying mortgage stress

Technically speaking, if more than 30 percent of your pre-tax income goes towards paying your mortgage, you meet the common definition for being ‘mortgage-stressed’ – and it’s more common than you think!

When thirty-something professionals Harry and Sally were house hunting for their first home they were on high incomes and had saved a healthy deposit. Even so, they cautiously did their homework, entering their information into several bank online calculators to determine their borrowing capacity.

They entered:

How much?

The highest amount suggested by one of these calculators was around $976,000 with monthly repayments of $4,650 over 30 years. Based on their current combined income this would take up 29.3% of their pre-tax income.

It’s natural to want the best home affordable. “We’re on good money. We figured we could afford it,” Harry said during our first meeting.

“But it’s a lot of money to owe,” Sally added as she started to understand what other costs might be involved. “A larger house costs more to maintain and furnish; plus higher council rates.”

When inflation is low and wage growth is next-to-nothing, households with large mortgages could be in real strife when costs of living go up or interest rates rise – regardless of the Reserve Bank of Australia’s (RBA’s) management of the cash rate. Already banks are increasing the rates on home loans off their own bats.

Online calculators generally use limited information to give applicants an idea of what might be available to them. Supporting a mortgage up to thirty years requires more detailed consideration than credit card limits and pre-tax earnings.

The banks’ calculations would take Harry and Sally perilously close to the 30 percent threshold. Increased living expenses, or small interest rate rises would tip them into the danger zone.

Together we looked at an independent mortgage calculator on the ASIC MoneySmart website. By working on the couple’s AFTER tax income of $140,536[1] and applying 25% of this to calculate monthly repayments of $3,000, MoneySmart’s calculator returned a more realistic estimate of $629,000[2].

Though disappointed, they pragmatically decided to continue growing their deposit and even looked at ways of increasing their saving potential.

Options for increasing a loan deposit

Harry’s friend is saving for a home deposit by being a ‘house-sitter’. Initially popular for grey nomads, house-sitting has become a growing trend for potential home-buyers to live rent-free in exchange for caring for pets and plants. While this sounds idyllic, the nomadic lifestyle doesn’t suit everyone, and Harry’s friend occasionally ends up on his mum’s couch between sitting engagements. With a small child, this was not an option for this couple.

Alternatively, they could rent their spare room to Sally’s niece studying at a nearby university. That appeared more workable, not to mention a free baby-sitter!

And managing risk

Finally, we talked about insurance. It’s imperative that the couple’s income – their most valuable asset – be protected. Additionally, life cover, to provide for their daughter should anything happen to either of them was vital.

Unfortunately, too many people are in over their heads. If you’re experiencing mortgage-stress or you’re losing sleep worrying about an interest rate rise, speak with your licensed adviser about a strategy to relieve the pressure.

Contact us on |PHONE| to discuss how you can save for your first home and manage your debt.

by James Black

Almost the world's best for retirees

What are the best countries for a comfortable retirement? What countries have the best retirement-income systems? It seems the answers to these questions are rather positive for Australian retirees.

The recently-published 2017 Best Countries survey from US News & World Report, BAV Consulting and the Wharton School at the University of Pennsylvania ranks Australia as the world’s second-best country for a comfortable retirement – behind New Zealand and ahead of Switzerland, Canada and Portugal in the top five.

Survey respondents aged 45 years and up ranked the best countries for retirement on seven attributes: affordability, favourable tax environment, friendliness, “a place I would live”, pleasant climate, respect for property rights and a well-developed public health system.

The questions were asked in the context of where a person would consider moving to upon retirement if cost were no object. It is worth noting that the Best Countries survey did not seek views about the adequacy of a country’s retirement-income systems.

Up to approximately 21,000 survey participants from around the world were asked to grade countries under such headings as best countries overall (Australia came eighth with Switzerland taking first place), best countries for women (Australia sixth), quality of life (Australia fourth), best countries to invest in (Australia 22^nd) and best countries for a comfortable retirement.

The latest Melbourne Mercer Global Pension Index, as discussed by Smart Investing late last year, once again ranked Australia’s retirement-income system third out of 27 countries assessed (accounting for 60 per cent of the world’s population) in terms adequacy, sustainability and integrity. While Australia was given a B-plus, the front-runners – Denmark followed by the Netherlands – received A grades.

Australia’s high rating in the pension survey was largely due to our “robust” superannuation system and Government-funded age pension, but “there was work to be done” to achieve an A grade.

Irrespective of each country’s social, political, historical and economic influences, the pension report stresses that many of their challenges in dealing with an ageing population are similar. These include encouraging people to work longer, the level of retirement funding and reducing the” leakage” of retirement savings before retirement.

Although the suggestions of the Global Pension Index are directed mainly at government and the pension/retirement sectors, individuals may pick up useful personal pointers from most of its suggestions to, perhaps, discuss with a financial planner. In other words, consider taking a personal perspective on this global retirement-incomes challenge.

These personal pointers may include:

• Think about whether to work until an older age than initially intended. The longer a person remains in the workforce, the greater the opportunity to save for what will be a shorter and therefore less-costly retirement. (An individual’s ability to work longer will much depend, of course, on personal circumstances including health and employment opportunities.)

• Try to save more in super within the annual contribution caps. And if self-employed, consider making voluntary super contributions. Unlike employees, the self-employed in Australia are not required to save in super.

• Think carefully before accumulating pre-retirement debt with the purpose of repaying it with super savings – it could reduce your standard of living in retirement. This is part of the pre-retirement “leakage” referred to by the Global Pension Index.

• Take your superannuation pension rather than a lump sum upon retirement if possible. This will keep your savings in the concessionally-tax or tax-free super system for longer and, most importantly, make your retirement lifestyle as comfortable as possible for as long as possible. The report for the Global Pension Index suggests that one possible way to improve Australia’s retirement-income system might be to compel super members to take part of their super as a pension.

It’s comforting that thousands of people around the world regard Australia as one of the very best places for a comfortable retirement if they could afford to shift to another country after leaving the workforce and cost was not a barrier. And it must provide a degree of comfort that Australia’s retirement-income system is “relatively well placed” in the worlds of the Global Pension Index.

Unfortunately, other research has long shown that a large proportion of Australians have inadequate – often grossly inadequate – retirement savings.

As global retirement-income systems grapple with the demographic shift of an ageing population with declining birth rates and seemingly ever-greater longevity, individuals should be doing as much as they can to maximise their own retirement savings.

If you would like to discuss anything in this article, please call us on |PHONE| or email |STAFFEMAIL|.

Source: 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important:

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

by James Black

Six Ways To Fund A Renovation

Any renovation project, large or small, can be all-consuming in terms of your energy and money. Here are six loan types that can help you with the latter.

Considering transforming your home from ‘blah’ to ‘brilliant’, but lacking the funds to support your major makeover? Never fear, we’ve rounded up a few different home renovation loans to help you turn your dream into a reality.

Whether you want to make a few finishing touches to your home with the help of a paint job or completely turn your home into something magical, there’s an option to suit your needs.

1 Home equity loan

This is probably the most common way people borrow money when they want to renovate. It involves borrowing against the current value of your home, before any value-adding renovations. You won’t be able to borrow the full value of your home but, without mortgage insurance, you can usually borrow up to 80 per cent of its value if you own it outright. One potential problem is that the cost of your renovations may actually be higher than the equity you have available.

2 Construction loan

This is similar to a home equity loan, except the lender will take into account the final value of your home after the renovation. You won’t be given the full loan amount upfront, but in staggered amounts over a period of time.

3 Line of credit

This may be ideal for ongoing or long-term renovations. When you apply, you can establish a revolving credit line that you can access whenever you want up to your approved limit. You only pay interest on the funds you use and, as you pay off your balance, you can re-borrow the unused funds without reapplying. However, care must be taken not to get in over your head in terms of serviceability – make sure you can make repayments on the line of credit that will reduce the principle. Read more about Line of credit here.

4 Homeowner mortgage

If you’re planning to completely transform your home and undergo a major makeover, this may be a good option as you can spread the cost over a long period of time. You could even possibly borrow up to 90 per cent of the value of your home and take advantage of mortgage rates, which are often lower than credit card and personal loan rates.

5 Personal loan

If you’re only making minor renovations – personal loans are usually capped at around $30,000 – this might be suitable, but interest rates on personal loans are higher than on home equity loans.

6 Credit cards

This option is only if you want to undertake really small renovation projects. The interest rates are usually much higher than on mortgages, but for a very small project that extra interest might actually total less than loan establishment fees.

One thing you must do

There are very few exceptions to the rule that your renovations should add more value to your home than they will cost to carry out. Think about how the money you spend on a renovation will increase the value of your property. For example, consider making changes that would appeal to the majority of potential buyers to help you sell your house faster and at a higher price.

If you would like to discuss, please call us on |PHONE| or email |STAFFEMAIL|. 

Source:

Reproduced with the permission of the Mortgage and Finance Association of Australia (MFAA) 

Important: 

This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

by James Black

May 2017 Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

There has been a broad-based pick-up in the global economy since last year. Labour markets have tightened further in many countries and forecasts for global growth have been revised up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. The improvement in the global economy has contributed to higher commodity prices, which are providing a significant boost to Australia’s national income. Australia’s terms of trade have increased, although some reversal of this is occurring.

Headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices. Core inflation remains low. Long-term bond yields are higher than last year, although in a historical context they remain low. Interest rates have increased in the United States and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively.

The Bank’s forecasts for the Australian economy are little changed. Growth is expected to increase gradually over the next couple of years to a little above 3 per cent. The economy is continuing its transition following the end of the mining investment boom, with the drag from the decline in mining investment coming to an end and exports of resources picking up. Growth in consumption is expected to remain moderate and broadly in line with incomes. Non-mining investment remains low as a share of GDP and a stronger pick-up would be welcome.

Indicators of the labour market remain mixed. The unemployment rate has moved a little higher over recent months, but employment growth has been a little stronger. The various forward-looking indicators still point to continued growth in employment over the period ahead. The unemployment rate is expected to decline gradually over time. Wage growth remains slow and this is likely to remain the case for a while yet.

The outlook continues to be supported by the low level of interest rates. Lenders have announced increases in mortgage rates, particularly those paid by investors and on interest-only loans. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Inflation picked up to above 2 per cent in the March quarter in line with the Bank’s expectations. In underlying terms, inflation is running at around 1¾ per cent, a little higher than last year. A gradual further increase in underlying inflation is expected as the economy strengthens.

Conditions in the housing market continue to vary considerably around the country. Prices have been rising briskly in some markets and declining in others. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases are the slowest for two decades. Growth in housing debt has outpaced the slow growth in household incomes. The recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness.

Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033
Email: rbainfo@rba.gov.au

by James Black

Save early, save often

One of the underlying attributes of Australia’s superannuation system is that it starts young adults saving for retirement as soon as they join the workforce.

Without compulsory super contributions, many millennials – aged in their twenties to thirties and also known as members of Generation Y – may have second thoughts about saving for retirement early in their working lives.

Any reluctance to begin saving for retirement at a relatively early age is understandable given that their post-working days might be 40 years away or so.

A challenge, of course, is to convince millennials that saving for the really long-term is worthwhile. And part of that challenge is to persuade millennials about the value of adding to their superannuation guarantee (SG) contributions in such ways as making salary-sacrificed contributions.

A recent New York Times personal finance feature – For millennials, it’s never too early to save for retirement – comments that it is “perennially true” that most young adults don’t make retirement savings a priority.

However, its author tellingly adds, “millennials are in an ideal position to get started” because their perhaps seemingly modest regular savings have the opportunity to grow substantially over time.

The article is largely based on interviews with five people aged 28 to 32 about their attitudes towards savings and investing. The interviews produced some surprising and not-so-surprising responses.

For instance, a 28-year-old accountant interviewed has been saving for retirement since she was 17 and arranges with her husband for one of their salaries be saved each pay day. However, several of those interviewed recognise the need to properly save for retirement yet have never quite got around to it.

High in the reasons why young adults should begin saving and investing as early as possible is to reap the rewards of what is sometimes called “the magic of compounding”.

Compounding occurs when investors earn investment returns on past investment returns as well as on their original capital. And the compounding returns can really mount (or compound) over the long term – particularly the extremely long term.

Ways to get the most out of compounding include:

• Start to save and invest as early as possible in your working life with as much as possible. Compounding needs plenty of time to produce its best results.

• Invest regularly to keep building your investment capital and to accelerate the benefits of compounding.

• Adhere to an appropriate long-term asset allocation for your portfolio – with enough exposure to growth assets.

A perhaps overlooked attribute of compounding is that disciplined investors who reinvest their earnings are less likely to be distracted from their long-term course by the latest market noise such as a bout of higher market volatility. Meanwhile, there returns keep compounding.

Current retirees who had recognised the value of compounding at the beginning of their working lives should now be enjoying its rewards.

If you would like to discuss, please call us on |PHONE| or email |STAFFEMAIL|.

Source:

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2017 Vanguard Investments Australia Ltd. All rights reserved. 

Important:

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

by James Black

Explaining the upcoming $1.6m transfer balance cap

Of all the major changes to superannuation coming this year, probably the most confusing is the new “transfer balance cap”. In this article we’ve answered the most common questions to help you understand how it will work and to plan ahead.

What is the transfer balance cap?

The transfer balance cap is a new limit on the total amount of superannuation savings that can be transferred from an accumulation account to a tax-free retirement account. It’s a lifetime cap that applies on a per person basis, regardless of the number of superannuation accounts you have. It comes into force on 1 July 2016.

How much is the cap?

Initially it will be $1.6 million. It will increase in line with the Consumer Price Index in $100,000 steps. At the current rate of inflation the cap is expected to rise to $1.7 million around 2020-2021.

I already have more than $1.6 million in a tax-free pension. Am I affected?

Yes. You will need to remove the amount in excess of $1.6 million from your retirement account prior to 1 July 2017. You can either transfer it back into a super accumulation account, where earnings are taxed at the concessional rate of 15%, or remove it from superannuation entirely.

What happens if I don’t withdraw the excess or transfer more than the cap into a retirement account?

You will need to withdraw the excess, and until you do you will be liable to pay tax on the notional earnings on the excess amount. The tax rate is 15% for the first breach, and 30% on subsequent breaches.

There is one concession. If your retirement account value is less than $1.7 million on 1 July 2017 you will have six months from that date to withdraw the excess without penalty.

If my retirement account balance increases due to investment performance, will I have to withdraw amounts in excess of the cap?

No. The cap only applies to the amount transferred into the retirement phase account. It does not apply to subsequent earnings.

Can I make more than one transfer into the retirement account?

Yes, provided the available cap has not been exceeded. For example, if you transfer $800,000 in July 2017 you will use 50% of your cap. In a few years’ time, with indexation, when the cap rises to, say, $1.7 million, you will still be able to access 50% of this new cap, which means you can add up to $850,000 to your retirement account.

If you establish your retirement account with the maximum permissible amount (i.e. $1.6 million) you will use 100% of your cap and will not be allowed to contribute additional amounts.

Do transition to retirement income streams count towards the cap?

No, because from 1 July 2017 these income streams will lose their tax exemption. However, once a condition of release has been met, the transfer balance caps will apply to the TTR pension as it will become a standard account based or allocated pension.

How are defined benefit pensions and other non-account based pensions treated?

The treatment of defined benefit pensions and other non-account based products is complex. It depends on the type of pension or annuity, the tax status of its components, and the annual income it pays. If your pension is valued at more than $1.6 million, you won’t need to withdraw the excess, but you may be subject to tax on annual payments of more than $100,000. You will need to contact your pension or annuity provider to find out how you will be affected.

What do I need to do right now? What do I do with the excess? Do I use up my entire cap now or keep some for later?

The answers to these questions all depend on your personal circumstances and long-term goals. Good advice is essential, so the sooner you speak to your licensed financial adviser, the better. 

If you would like to discuss, please call us on |PHONE| or email |STAFFEMAIL|. 

Sources:

Introducing a $1.6 million transfer balance cap available at http://www.treasury.gov.au/superreforms#transfer

by James Black