New financial year - important new rules for super
- Halving of the concessional contribution cap
- Reduction of the government co-contribution
- Extension of the minimum drawdown relief for account based pensions
Halving of the concessional contribution cap
The concessional (or tax deductible) contribution cap is the maximum before tax amount that individuals can contribute to their superannuation. Most people receive their employer's superannuation guarantee contribution as part of their concessional cap but they may also choose to "salary sacrifice" additional amounts up to the cap. Up until 30 June 2009 the cap was $100,000 for over 50 year olds and $50,000 for under 50 year olds however this is reducing to $50,000 and $25,000 respectively (and back to $25,000 for over 50s after 2012).
For many people salary sacrifice is a great way to both save tax within the financial year and also increase their retirement savings. For example, over the past financial year a 58 year old earning $100,000 could choose to salary sacrifice $75,000 of their income into superannuation which would be taxed at 15% within the fund. This contribution alone would result in a tax saving of nearly $12,000. Assuming they were planning to retire at 60, they could then access the money tax free in just 2 years. Combining salary sacrifice with a transition retirement pension has enabled many investors to seriously ramp up their super savings in the final years towards their retirement.
The halving of the concessional contributions means that the same person above would only be able to make total before tax contributions into superannuation of $50,000, assuming $10,000 is already going into superannuation as a superannuation guarantee contribution they would only be able to salary sacrifice $40,000 into their super which would result in an overall tax saving of approximately $8,000.
Despite this reduction the savings are still significant and it will still be a very worthwhile strategy for many people onoing. It's very important to make sure that if you do have salary sacrifice arrangements in place that you are not going to be exceeding the cap in the coming financial year otherwise harsh tax penalties may apply.
Reduction of the government co-contribution
For the next three financial years individuals earning less than $60,342 (indexed) may be eligible for a reduced government co-contribution payment of $1 per $1 of personal (undeducted) contribution up to a maximum of $1,000 (the maximum if payable if total income is less than $30,342 with the actual payment reducing by 5 cents for every $1 of income above this amount). In 2012/13 and 2013/14 this will increase to $1.25 before returning to $1.50 per $1 of personal contribution thereafter.
Although this is a small setback for people that were taking advantage of this concession previously it still represents a great way to increase your retirement savings - 100% return, government guaranteed (plus or minus what the market can contribute!).
Extension of minimum drawdown relief
The minimum drawdown relief for account based pensions introduced part way through this financial year has been extended for the whole of 2009/10. This measure was introduced as investors with account based pensions that were exposed to market-linked investments were effectively being forced to realise losses at a point where asset values may prove to have been at seriously depressed levels. The relief means that individuals are able to drawdown half of the otherwise prescribed minimum levels. For example, a 76 year old is normally required to drawdown a minimum of 6% of the value of their pension (if their pension is worth $200,000 they must drawdown at least $12,000 within the financial year). They would now permitted to draw a minimum of 3% (or $6,000) in the coming financial year. This potentially reduces the negative impact of having to sell assets in a depressed markets in order to make the pension payments.
This concession should help pension holders to lessen the impact of the current market conditions on the medium to long term value of their holdings. As always there is no maximum drawdown amount on an allocated pension other than transition to retirement pensions for which the maximum drawdown amount is 10% of the value of the account.
For more information on superannuation or for superannution advice, visit www.superworks.com.au
The Truth About Superannuation
Fact One: You Are In Control
Superannuation has become something which many people see as being completely outside of their control. The fact is that superannuation is just a system or a vehicle designed to encourage you to save for your retirement mostly by offering significant tax concessions. Within that system you can choose how much, who with and ultimately, what you are going to be invested in. Most employers and most funds have default options which you'll end up in if you don't take control, just like jumping into a taxi without telling the driver where you're headed, this may or may not get you where you want to go.
Over the past 12 to 18 months a lot of people have been asking why their super funds have lost so much money, "why didn't they move me into cash?". The answers is usually that they can't. The reason is that their funds are invested in-line with a mandate which might require their Balanced fund (a common default option) to be invested into between 25% and 35% Australian shares for example. As crazy as it may sound, regardless of their outlook for Australian shares 18 months ago, this fund would have had to hold at least 25% of it's assets within Australian shares. The only way to avoid the recent drop was for an astute investor (or one under the guidance of an astute adviser) to take control and shift into the more conservative option.
Fact Two: High Fees Can Hurt Your Super
The fees charged by different super funds can vary by as much as 4% upfront and 2% per annum. A difference of 2% sustained over time could make a difference to your final super balance of over $150,000.^ The phrase "you get what you pay for" does not tend to ring true for super funds. In fact 4 out of 5 of our top 5 growth funds for March were all low-fee funds. There may be some features not available in some low-fee funds that may be of particular importance to you, but in our experience they are often not worth the additional expense.
Fact Three: Financial Advisers Rarely Recommend Low-Fee Funds
Despite the obvious advantages to be gained from reducing your ongoing fees, most advisers will not recommend low-fee funds. The reason is that they do not pay commissions or asset based fees to advisers which can be as high as 4% upfront and 1% per year ongoing. Funds will often pay lower commissions for some more conservative (and lower fee) investment options which means that the adviser may also have an incentive for recommending more aggressive investments. Some advisers claim not to take commissions but are still affiliated or even owned by the funds that they recommend meaning that there is a conflict between their interests and yours. They may provide some very valuable advice in other areas, but the right adviser should be able provide valuable advice and recommend the best investments for your needs (not theirs).
Fact Four: Performance Matters
The disclaimer "past performance is no indication of future results" is an important one. It is designed to highlight the fact that last years best performing investment or fund manager may not go so well in the coming year (it may even be one of the worst). Unfortunately it can also be used as an excuse for not paying adequate attention to the chosen fund and underlying investments. It is true that it is difficult to predict which investments are going to outperform in the future but it is very important to ensure that the mix of investments is appropriate to your needs and also that the investment manager has a history of delivering strong performance in comparison to their peers. Not doing this would be like hiring someone without even reading their resume.
Fact Five: Small Changes Can Make A Big Difference
There are many small changes that you can make today which will have a massive impact on your super over time. Just a few examples: Low income earners can receive up to $1,500 dollars into their super for a $1,000 after-tax contribution as part of the government co-contribution scheme; Middle to high income earners can save tax and increase their balance by salary sacrificing into their fund; Pre-retirees can save additional tax and further ramp up their savings by initiating a transition to retirement pension and directing spare cash flow into their fund, and finally retirees can watch their investments grow tax free while also receiving a tax effective income through an allocated pension.
Put together, all of these factors can add potentially hundreds of thousands of dollars to your super balance and your quality of life in retirement. What's more is that they can be easily put in place today.
For more information on superannuation or for superannution advice, visit www.superworks.com.au
* - Past performance is no indication of future returns. ^ - Based on 30 years to retirement and a current super balance of $30,000. Also assuming gross salary of $60,000 per annum with 1% above inflation annual salary increases, 9% super guarantee contributions and 4% real (above inflation) investment returns. Refer to the Superworks Tools at www.superworks.com.au to see the difference it could make to you.
Compare Your Super Fund - March 09
- The worst performing fund for the financial year up until 31 March 2009 was a property securities fund which has lost 93%* over the past 9 months alone.
- The best performing fund was a global private equity fund which has gained a staggering 45% over the same period.
- Across 258 diversified growth funds assessed the average fall in value over 9 months was 21.4%.
- Our top ranked growth fund for the March quarter hasn't quite managed 45% returns but it has beaten the average growth fund by 7.5% over the past nine months and by approximately 4% per year over the past 5 (financial) years - and it's still one of the biggest and lowest fee funds in the market.
Investment markets have been brutal over the past 18 months but there are still things you can do to protect and even grow your super. Make sure you are in an asset mix that is appropriate to your needs and objectives, that your fund is consistently among the best performing funds of it's class, that you are fully utilising all the benefits of the super system to minimise tax and maximise your savings and (now more than ever) that you minimise unneccessary fees and commissions. Remember that a difference of just 2% per year sustained over time could make a difference to your final super balance of over $150,000.^
For more information on superannuation or for superannution advice, visit www.superworks.com.au
* - Past performance is no indication of future returns.
^ - Based on 30 years to retirement and a current super balance of $30,000. Also assuming gross salary of $60,000 per annum with 1% above inflation annual salary increases, 9% super guarantee contributions and 4% real (above inflation) investment returns. Refer to the Superworks Tools at www.superworks.com.au to see the difference it could make to you.
Minimum withdrawals cut for allocated pensions
In the best case scenario it may be possible to suspend all drawdowns until as late as June 2010 thereby giving investments more of an opportunity to hopefully recover some of their recent fall in value.
For more information on superannuation or for superannuation advice, visit www.superworks.com.au
To a prosperous new year
Lose 5kgs
Learn to play the guitar
Restore work life balance
Travel to a far away place
Take a good look at your super and secure your financial future!
On a serious note we don’t advocate that super should be your New Year's resolution but it is too important not to do something about in 2009. And in the current global financial climate the sooner the better. When looking at your super fund and your asset allocation it's important to look at
The performance of the fund against other funds
The fees you are paying
Which assets your super is being invested in and
Your insurance level and its cost
It's been a rocky road for super during 2008. Many funds have experienced significant decreases especially those with high exposures to equities and property. For those who are already Superworks members you can focus on learning that guitar. For those who are confused and don’t know where to start, call us on 1300 859 882 for a free Super Health Check and cross super off your list in Jan 2009.
Wishing you all a super New Year.
Geoff County
Managing Director
Superworks Financial
For more information on superannuation or for superannuation advice, visit www.superworks.com.au
Think hard before making significant changes to your super
1. Don’t panic!
If you still have substantial exposure to growth assets (shares, property), a long term outlook and are still managing to sleep at night, then now is probably not the best time to shift out of those investments. Some people are moving into cash with the intention of waiting for the market to recover before jumping back in. The issue is that the signal to get back in could well be a 20% plus jump which they could miss out on while sitting in cash.
2. Don’t make a change for it’s own sake.
It’s easy to get disappointed on seeing negative returns but you shouldn’t necessarily jump to shift out of your fund. Almost every fund with significant exposure to shares and/or property has declined in value over the past 12 to 18 months. A 10% fall in the value of your fund may actually represent an out-performance of the market depending on the underlying asset mix.
3. It’s not super’s fault
Superannuation is receiving criticism because of the recent falls but it’s important to remember that super is just the vehicle and the actual investments can be just about anything. Some individuals are choosing to withdraw their super in the hope of halting further losses but in doing so they are foregoing the tax advantages available to them through the super system. If you need to move in to something less volatile (refer point 1) then consider moving it into a conservative or cash option of your existing or an alternative fund rather than moving out of super all together.
4. Stay diligent
Whether the market is going up or down it is important to make sure you’re still looking after the fundamentals. This means making sure that your fund continues to provide returns among the best in the market, that you’re in a mix of assets appropriate to your situation, that you’re not paying too much in fees (either to your fund or to a financial adviser) and that you’re continuing to maximise your super in other ways such as taking advantage of the government co-contribution and salary sacrificing as appropriate.
Super will survive the current turmoil and if you look after it, it will look after you in the years to come.
For more information on superannuation or for superannuation advice, visit www.superworks.com.au
Why didn't you move me into cash?
The vast majority of funds invest your money in line with a mandate, which requires them to invest in a range of asset classes and with a benchmark percentage (and/or range) invested into each asset class. For example, a balanced fund may have a benchmark allocation to Australian shares of 35% (and range of between 30% and 40%) and a benchmark allocation to cash of 5% (and range of between 0% and 10%). This fund effectively cannot decide one day to turn around and invest everything into cash or into any other single asset class.
Some funds and of course individual investors can make significant shifts in their asset allocation or investment strategy depending on their view of the market or their specific objectives. When this is done effectively it can result in an out-performance of the relevant index however it can also result in large losses or periods of underperformance if the strategy goes against the fund.
For a diversified fund it may be easy in hindsight to say that the fund should have moved into (or out of) cash at a particular point in time but actually timing the market in this way can be very difficult. It may be little consolation if you were relying on continued positive returns over the past 12 months but the reality is that over the long term better returns can often be achieved by remaining exposed to a mix of quality assets appropriate to your objectives and risk profile.
For more information on superannuation or for superannuation advice, visit www.superworks.com.au
When is cash really cash?
- Fixed income
- Corporate debt instruments
- Property
- Shares (yes, shares)
Obviously these Cash Enhanced funds are less conservative than plain old cash and therefore carry greater risk. Many have actually gone backward over the past 12 months. In fact, out of 51 diversified Cash Enhanced funds detailed by Morningstar, only 8(!) have recorded a positive return for the 12 months up until 31 October 2008. The best and worst performing of these funds are shown below.
The average return of all 51 funds was -2.4%, the best was 5.05% and the worst return was -10.7%! Now this doesn’t mean that the “Enhanced Cash” option isn’t for you, it may well be, it just means that you need to check closely where your money is being invested, not just the option heading.
For more information on superannuation or for superannuation advice, visit www.superworks.com.au
Superannuation returns - it all comes back to fees
If you review any statistics on how fund managers perform in relation to their relevant index (ASX 200 for example) you generally won't be impressed. It is rare for a fund to outperform the index in one year, repeated outperformance is even more unlikely. Fund managers cop a lot of grief over this with investors often questioning what they're paying them for, but maybe we should consider what it truly means to outperform?
Funds are measured against an index which is the combined performance of all investments included in that index, the ASX 200 for example is determined by the combined value of top 200 shares in the Australian share market by capitalisation. If the ASX 200 goes up by 20% in one year, and a managed fund measured against the ASX 200 goes up by 21%, then that fund has outperformed the index.
Fund managers will often be working with tens of millions and sometimes billions of dollars of investors money. The money that goes into Australian shares will generally be spread out across a large number of stocks for reasons of diversification (not all eggs in one basket stuff). Within that the managers will try their best to outperform. They will occasionally deliver a performance surpassing the index but will generally fall below it. There a few reasons for this;
- Outperforming the market (consistently) is really, really hard. Almost everybody that is invested in the stockmarket is trying to outperform it. Everybody's got a different opinion and every opinion is jumped on by thousands of managed funds, corporate, professional and individual investors. Machinations of the market, efficient market theory, portfolio theory all suggest that it is very hard for any one fund or investor to consistently outperform the market.
- Too much money. If you've got $1 billion in Australian shares, you can't just invest in 10 different stocks. Funds will often be invested in 50 or more stocks out of 200 stocks making it mathematically very difficult to outperform the index.
- Because they want to. Much more important than to outperform the market is to not underperform it, at least not by too much anyway. Funds know that they're compared to other funds more than just the index. They also know that a 2% outperformance is likely to have less of an impact on their fund base (and on your super balance for that matter) than a 10% underperformance.
- An advantage today is gone tomorrow. If a fund can momentarily find a way to outperform the market it is not likely to hold onto it for long. The sands of the market will eventually shift, what works one day won't work so well in different market conditions. Other funds will catch on, they'll figure out what the other fund is doing through careful analysis or better yet by poaching their staff. Once the secret is out, so generally is the advantage.
- They charge fees. Even if a fund can navigate all of the above and deliver a 1% outperformance on paper their hardwork can be undone when they deduct their 2% in fees.
Considering all of this, if your fund is regularly getting at least very close to the index, if not outperforming it, it's probably doing okay.
So managed funds might not all be evil, but they're not all equal either. Some funds consistently outperform or underperform other funds. Although some funds are simply above or below par from a pure funds management perspective, there's one factor that comes into play more than any other - fees.
If you consider that almost all funds have to contend with points 1 to 4 above that leaves fees as the final and consistent differentiator. Low fee funds come in many forms; industry, corporate, index and wholesale funds. These funds commonly charge between .5% and 2% less per year than retail funds. And any considered analysis of the long term performance statistics taking all different fund types into account will generally show; industry, corporate, index and wholesale funds at the top of the performance charts.
For more information on superannuation or for superannuation advice, visit www.superworks.com.au
General Advice Warning
This blog may contain general financial product advice. Such advice has been prepared without taking into account any person's individual investment objectives, financial situation or particular needs. You should not act on this information without first talking to a financial adviser and ensuring it is appropriate for you. Where we mention a particular financial product you should obtain and consider the Product Disclosure Statement (PDS) for the product before deciding to buy the product.
