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Welcome to this edition of Your Financial Future, which reviews the March 2007 quarter. In this issue, we explain what the Government's Simplified Super reforms mean for you and we highlight the risk of outliving your superannuation savings and what you can do to counter this.
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In addition, we ponder whether Super Splitting amongst spouses is still worthwhile and outline how you can grow your retirement savings just by consolidating your different superannuation accounts.
We also caution you against knee jerk reactions to volatile share markets and expose the myth that you'd be better off going directly to a fund manager on your own.
In addition to profiling Andrew Wells, one of our financial planners on hand to help you with all your financial issues, we provide updates on the latest offers from the Fair Go Member Benefits program and on how the different asset classes have performed in the past quarter.
What the Budget changes mean for you
How the Simplified Super reforms affect you
The Simplified Super reforms, initially announced in last year's Federal Budget, received Royal Assent on March 15 2007 and is now law.
The reforms make super one of the most attractive savings mechanism available. This is partly because they have removed the tax payable on end benefits taken out of your super in a lump sum or income stream after you turn 60. However, they have also increased your exposure to additional tax on contributions made to super.
Superannuation is already concessionally taxed in other ways. Both pre-tax contributions made by yourself and the Superannuation Guarantee contributions paid by your employer (up to $50,000 a year) are taxed at 15%, which may be a much lower tax rate than the rate you pay on other earnings. In addition, the earnings on your investments while invested in super are taxed at a maximum rate of 15%, whereas earnings outside of super may be, depending on your circumstances, taxed at the highest marginal tax rate.
So, as Treasurer Peter Costello has said: "You will never find a better savings vehicle."
Here's a rundown of some of the key changes that could affect you.
Deductible or pre-tax contributions (referred to as concessional contributions)
In the past, the size of concessional contributions you or your employer could make to your super at the concessional rate of 15% was limited by your age. Now there are no age based limits. In fact, you are now allowed to make concessional contributions to super until you turn 75. However, the Superannuation Guarantee only applies up until age 70.
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Remember the 30 June 2007 deadline for Co-contributions. For more details call Member Services on 1800 800 002.
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From 1 July 2007, any concessional contributions you or your employer make up to $50,000* a year will be taxed at 15%. Any amount over $50,000 will be taxed by the ATO at 30% plus the Medicare levy.
If you turn 50 between 1 July 2007 and 30 June 2012, there are transitional arrangements which allow you to make concessional contributions of up to $100,000 a year at the 15% tax rate each financial year until 2012.
* This amount is indexed to Average Weekly Ordinary Time Earnings (AWOTE) but will only increase in $5,000 increments.
For the self employed
Self employed persons will be able to claim a full deduction for all their super contribution (up to the new $50,000 limit).
From 1 July 2007, section 82AAT forms will be superceeded. Therefore any section 82AAT notices that need to be lodged MUST be lodged before 30 June 2007. The new section 290-170 notices:
- must be given to the Fund trustee within specified time;
- can be invalid or refused by the Fund trustee in certain circumstances;
- cannot be withdrawn once lodged; and
- can only be varied in specific circumstances.
Further details will be provided later in the year.
Undeducted or after tax contributions (referred to as non-concessional contributions)
From 1 July 2007, non-concessional contributions to super will be limited to $150,000** a year if you are:
- 64 years old or younger; or
- 65 years to 74 years old and satisfy the work test (that you work for 40 hours during a consecutive 30 day period each year a contribution is made).
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If you are sitting on a big amount of cash or have just sold a business or investment property, there's an exciting window of opportunity that you can take advantage of before 30 June 2007. Thanks to transition measures in place, you are permitted to make after tax contributions of up to $1 million to your super before this date. Such a move will allow you to place your money in a vehicle where the tax on your investment earnings won't be greater than 15% and the benefits you finally draw down are tax free after you turn 60 (based on current law).
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If you are younger than 65, you can also average these contributions out to a limit of $450,000 over three years. For example, a person under age 65 can make up to $450,000 of contributions in the
2007-08 financial year but would not then be able to make further non-concessional contributions until the 2010-11 financial year. Any contributions made within the limit will not attract tax when withdrawn from super. Contributions above the limit will be taxed at the top marginal tax rate plus the Medicare levy.
Self employed persons will be able to claim the Government Co-contribution for any non-concessional contributions made.
** This amount will be linked and capped at 3 times the concessional contribution limit.
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Before 30 June 2007 you can make non-concessional contributions of up to $1 million to super.
| Important notice for personal contributions made between 10 May 2006 and 7 December 2006.
If for any reason you have breached the $1 Million transitional cap for personal contributions, you have to lodge with the ATO before 30 June 2007 if you wish to avoid the tax Excess transitional personal contributions tax of 46.5% and have the contribution refunded.
A warning about Tax File Numbers (TFNs)
If you don’t provide your TFN to the Fund between now and 30 June 2008, your concessional contributions will be taxed at the top marginal tax rate, plus the Medicare levy, if they exceed $1,000. For accounts that begin after 1 July 2007, the $1,000 threshold does not apply. Furthermore, your Fund will not be able to accept any non-concessional contributions from you if they don’t have your TFN.
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Note: where you have not provided your TFN to your Fund, any non-concessional contributions you make after 1 July 2007 must be returned to you.
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For this reason, it is crucial that you provide your TFN to the Fund, either directly or through your employer, as soon as possible (if you haven’t already done so). You should also check your Member Benefit Statement to ensure that your TFN is correctly recorded.
You can now provide your TFN over the phone, provided you have read the following. Click here.
The risk of outliving your savings
A century ago, retirement strategies were not an issue for most people… they just didn't live that long. In 1901, the average life expectancy was around 57 years. Thanks to advancements in medical science, life expectancy figures have now jumped to 75.5 years for men and 81.5 years for women and are expected to keep rising.
The problem, however, with these figures is that they are just averages. This means that half of the population will outlive them and half will die earlier.
If you are lucky enough to fall in the half that outlives the average, do you know by how much you'll outlive it? Of course not! They say the only certainties in life are death and taxes, but at least we know when our taxes are due.
These days, one of the biggest risks we face when planning our retirement is that we outlive our retirement savings.
That's okay, you say, you'll just live off the Age Pension when your money runs out. Bear in mind, however, that this pension currently amounts to $13,314.60 for a single person a year and $22,240.40 a couple per year, and may not be enough to keep you in the style you might have become accustomed to.
Also take into account the possibility that if a bigger percentage of our population is living longer in retirement, future governments may not be able to sustain this level of Age Pension.
So, what can you do to reduce the risks of outliving your savings? Here are some strategies:
Start saving more now
The earlier you start saving for retirement, the better. That's because you benefit from compounding returns over the long-term. This is when you get earnings on the previous earnings you've received as well as on the actual money you've invested. Over the years this can really add up.
Put another way, it's much harder to make up for lost time by saving a bit more later on.
Make use of available incentives to grow your savings
Superannuation is one of the most attractive savings mechanisms because it is concessionally taxed. Any additional pre-tax contributions, such as salary sacrifice, (up to $50,000 a year) are taxed at 15% and this could be much lower than the tax rate you might have to pay on other income you earn. Capital gains on investments in superannuation are generally taxed at 10% and thanks to the new Simplified Super measures discussed above, any money you draw out of your super after age 60 will be tax free.
The Government also offers incentives to encourage further superannuation savings. For example, if you earn less than $58,000 per annum, you might consider making a contribution to your superannuation account to benefit from the Co-contribution Scheme. The Government will match this contribution, but by how much depends on your total income for the tax year. For more information on the Co-contribution Scheme, click here.
And if your spouse* earns under $10,800 pa, you could contributes to his or her superannuation account and get a tax rebate of 18% for the first $3,000. The maximum rebate you can claim is $540 per year.
* A spouse includes another person who, although not legally married to you, lives with you on a bona fide domestic basis as your husband or wife, but does not include a person who lives separately or apart from you on a permanent basis.
Review your financial strategy
It's important to speak with a financial planner to assess whether your investment strategy can be improved to help you better grow your assets over the long-term and whether it meets your particular needs. As a member of this Fund, you can speak to one of our financial planners at no additional direct cost to yourself and without obligation. Please phone 1800 800 002 to book an appointment with one of our qualified financial planners.
Is Super Splitting still worthwhile?
The Simplified Super reforms, first announced in last year's Federal Budget, may make splitting your super with your spouse less attractive than it was before.
Previous legislation that came into effect from January 2006 allowed you to split both your personal and Superannuation Guarantee contributions with your spouse.
This legislation benefited families which had a single breadwinner or families which had one partner who had large super savings while the other had little or none. The advantages were that it provided the family with two tax-free thresholds and two reasonable benefit limits (RBLs) on retirement.
The Simplified Super Budget measures, however, have abolished RBLs and removed any tax on lump sums or pensions paid to people who are 60 years of age or older.
There may, however, be some tax benefit to be gained from super splitting amongst spouses if one or both of you expect to start receiving super benefits before age 60. You may also prefer to continue to split your super with your spouse for personal reasons.
To find out what best suits your situation, please contact our financial planning team on 1800 800 002.
A simple step to grow your savings
Do you have money lying around in more than one super fund? One of the easiest ways to boost your retirement savings is to consolidate these into a single account.
This is because each super fund may charge you an annual administration fee to manage your savings, and some will charge much more than others.
Over the years, these costs add up and eat into your savings. You also lose out on the compounded returns that this money could have earned if it was invested over the years. And, it's much easier to keep track of your retirement savings if they are all in one place.
Member Services can assist you if you wish to consolidate your superannuation accounts. Please call 1800 800 002 for help.
Investing can be a bumpy ride
After hitting all time highs at the beginning of this year, share markets have since been rather volatile and the outlook is uncertain. So, what should you do?
The advice from some experts is not to panic! They caution that investment markets are cyclical. In other words, they go up and they go down. Fortunately, however, they have gone up more than they have fallen, especially over the longer term.
It's important to remember why you selected your investment strategy in the first place. You might have chosen it for a number of reasons, such as:
- To meet your financial goals;
- Because of the number of years you have left until retirement;
- Because of your level of risk tolerance;
- To diversify your investments and spread your risks; or
- Because it's generally the right strategy for your life stage.
If your reasons have changed, then maybe you should re-examine your portfolio mix. If your reasons haven't changed, perhaps it's best to sit tight even if the ride gets a bit bumpy.
Many advisers warn against trying to pick the market cycles because most investors rarely get the timing right. Instead, they say that while there may be short-term dips in market returns, most carefully selected and age-appropriate strategies work well for investors over the long-term.
However, if you feel uncomfortable with this strategy, or believe that this is a good time to review your investment portfolio, please call 1800 800 002 to speak to one of our financial planners at no additional cost to yourself.
The myths of financial planning
In these days of financial information overload, it's often difficult to discern fact from fiction. For this reason, we expose another financial planning myth in each issue of Your Financial Future to help guide you through the maze of information out there in the marketplace.
Myth: I'll do better if I go directly to a fund manager myself
Perhaps you’ve heard chatter around the dinner table or barbie of a great fund manager that’s earned a fortune for your mates. Not wanting to be left out, you may be thinking of investing with that manager yourself. If you are, here are some factors to consider.
Yesterday’s heroes
History has shown that last year's star performing fund managers are seldom next year's heroes. Fund managers have different investment styles and philosophies that perform better during some stages of investment cycles than others. None have been able to shine through all cycles. A manager may have had a good run, but there’s no guarantee that this good run will continue into the future.
Diversity
One of the most important rules when investing is diversification – that is, not having all your eggs in one basket.
Research shows that using several carefully selected investment managers in one portfolio will produce a better result, more consistently and with lower volatility, than a single manager over any reasonable period.
However, one needs to be careful not to create any biases when diversifying across managers. If your investment portfolio is biased towards any one style, your risks of poor returns at different parts of the investment cycle are increased.
The fund and its financial planners use a range of managers when investing. Each manager is carefully researched by our asset consultants and in-house investment team. But before each manager is hired, our experts spend much time assessing how it will blend together with our other managers to avoid any bias in our portfolio. And, once a manager is chosen, it is constantly monitored to ensure it lives up to its promises and if it doesn’t, it is replaced. Would you be able to achieve the same diversification, blending and monitoring yourself?
Price
When you go to an investment manager on your own, you approach that manager as an individual and will be charged individual rates even if you have a large amount to invest.
In contrast, if you invest through the Fund you benefit from the Fund’s huge bargaining power. This Fund is part of a superannuation grouping which has assets of over $12 billion under management. Because of our size we are able to negotiate highly competitive wholesale rates with investment managers rates which even the wealthiest of individuals would struggle to secure on their own.
In addition, because fund managers rely on financial planners to distribute their products, they generally do not give members from the public better deals than they would receive through advisory groups.
You will enjoy the same benefits of our scale if you are placed into an investment by one of our planners. Our planners are salaried and they don’t earn commissions.
So look before you leap! Speak to one of our planners before making an investment. You will not be charged any additional fees for this advice and it is provided without obligation. To consult with a planner, please call 1800 800 002.
Meet your financial planner: Andrew Wells
“For me, financial planning is all about helping people achieve their personal goals,” says Andrew Wells, a Certified Financial Planner with FuturePlus who looks after the financial needs of executive members in the Fund.
“It doesn’t matter whether these are short-term goals, like establishing an education trust, or long-term goals, aimed at retiring, paying off the house, buying a caravan and travelling around the country. I enjoy sharing in my client’s experiences and helping them move towards financial independence.”
Andrew believes financial planning is all about holding clients’ hands through a maze of often complex material and regulations. “We use our knowledge and experience to cut through these, but the client always gets to make the decisions,” he says.
“Once we understand our client’s goals, we put the financial planning process to work. It can be technical but we are also sensitive to the person’s needs and behaviours. It’s all about bringing the technical and psychological sides of money together.”
Andrew started out studying to be a vet, but moved into the financial services sector 16 years ago. "I quickly realised I preferred working with people to wearing a white lab coat and tending to cats and dogs," he says of the move.
It was during his first two finance jobs that Andrew encountered the emerging world of financial planning. The first job involved marketing group life insurance benefits to planners and the second entailed providing superannuation strategies to planners and accountants. However, instead of selling his products to planners, the financial planning world sold itself to Andrew, and in 1997 he began providing direct advice to clients.
Of his move to Chifley Financial Services in 2004, Andrew says: "I appreciate its focus on providing objective planning advice. Members of the Fund are given high quality advice at a low cost and any profit that is made goes back to providing better services to members. Clients also benefit from the scale that comes from being part of a $12 billion superannuation grouping."
He adds: “Here at Chifley, we are constantly looking at new solutions for our clients. We attend briefings and examine the latest investment thinking. And, it isn’t only about superannuation. Superannuation is important, but our aim is help clients crystallise their goals, whether these are in the short-term or after they retire.”
House With No Steps
In a recent edition, we mentioned that the packing of most of our seminar materials is now being done by House With No Steps, one of Australia's leading providers of services to people with disabilities.
One of the people who works in that Packaging department is Madeleine, who has a range of physical disabilities and who joined the House 30 years ago.
When Madeleine was born, all seemed well. As an infant, her motor skills developed the same as others, she was able to put words together, was very active, climbing everywhere and so on. When she was five years old, and had just started school, she had a slight stroke which affected her motor skills. She couldn't "keep up" at her school, and transferred to one for children with disabilities, where she stayed until she was 18. During that time her condition deteriorated. Her tongue became "spastic" and she couldn't speak; her eyesight began to fade, and her motor skills worsened.
Madeleine came to the House With No Steps when she left school, and when there were limited opportunities available to her. Although she was not able to speak with others, she was delighted to be with young people and work alongside them in packaging. Because her motor skills continued to deteriorate, her parents felt they could not leave her on her own. At first her mother accompanied Madeleine to work, sitting with her on the packaging line to help her. She ended up doing this every day for 14 years. And when Madeleine's father Bill retired almost 20 years ago, he took over this role, and since then has been bringing Madeleine to work each day, sitting with her and helping her, taking her and feeding her at morning tea and lunchtime, and then taking her home at the end of the day.
Madeleine now needs 24/7 care, which her parents continue to provide themselves. Despite what others may think, Madeleine's parents feel "very lucky". "Madeleine is a joy to be around," says her mother, Maria. "She always has a smile on her face, never complains or misbehaves, is so easy to get along with, and enjoys everything so much."
Madeleine's parents feel her packaging job at the House is tremendously important to her, and provides socialisation and stimulation. It's also been an enormous help to her parents. "The House has been a godsend. I just don't know what we would have done or how we would have managed without them," says Bill.
Chifley Financial Services Limited is proud to be able to support the House With No Steps.
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