“Is superannuation the best place to save my money?”

Tuesday nights Federal budget tells us that superannuation is indeed such an attractive place in which to accumulate wealth, that the government has to greatly restrict how much Australian’s can get into this very tax friendly environment.

Contribution caps were introduced back in the Howard/Costello era following the decision to make superannuation completely tax free once the individual was over 60 and drawing down an income from their savings.  Since it’s introduction, Treasury have modelled the impact of the tax free post 60 status and realised that with an ageing population, this policy decision is really, really, expensive.  How can we have a situation where someone could retire at 60, potentially with millions in their super fund, and not pay another cent of income tax for the rest of their lives?

And as every demographer will tell you, the proportion of the population in the over 60’s bracket is only going to rise.

Since the introduction of the caps, there has always been a higher level of contributions allowed for those over age 50.  This recognised that in the first 30 odd years of most peoples working life the focus was on paying off the home loan and putting the kids through school.  As those pressures ease, and retirement looms closer, most of us get a bit more serious about saving for retirement.

The government’s decision to not have this larger cap for over 50’s is an acknowledgement that superannuation is just too generous. From next financial year, everyone will be able to contribute a maximum of $25,000 per year where a tax deduction is claimed – eg. compulsory employer contributions, salary sacrifice, or self employed contributions.  They know full well that most people in their 20’s, 30’s and 40’s wont contribute anything like $25,000, whilst those close to retirement would have liked to put in a whole lot more.

So here’s the key points:

1. The government recognises that Australia’s superannuation system is now so attractive, that they have to greatly constrict how much you can get in.
2. Don’t delay in adding to your super – a life time of gradual contributions is what is called for.
3. When you do retire, for heavens sake don’t withdraw your super as a lump sum.  At retirement is the time of maximum benefit in our system.

Finally don’t forget their are plenty of options within our superannuation system, from the budget Industry Funds, too all the bells and whistles of a Wrap facility, and the always popular Self Managed Super funds, where property, share, and term deposit investments all hold appeal to certain investors.  Get some advice and determine the strategy that is right for you.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

With the carbon tax beginning on 1 July 2012, we’re all wondering what the impact will be on our hip pockets.

There are to be direct payments made to Pensioners via a Clean Energy Supplement. For those still in the workforce however, compensation for lower income earners will occur via changes in the tax rates.  Most significantly, the tax free thresholds will be changed as follows:

The tax-free threshold will be permanently increased:

• from $6,000 to $18,200 effective 1 July 2012, and
• from $18,200 to $19,400 effective 1 July 2015.

At the same time, the Low Income Tax offset is being scaled back, so that the true impact of these changes are that:

• From 2013/13 the effective tax free rate will rise from $16,000 to $20,542.
• From 2015/16, this will rise further to $20,979.

The official government web site – Clean Energy Future, can be found here.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

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Whilst not yet legislated, the Federal Government have announced changes to the popular co-contribution scheme.  The changes will impact personal contributions made after 1 July 2012.

Learn more about Australia’s largest superannuation sector – Self Managed Superannuation – with our easy to read, free e-book.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

The US Labour Department reported that applications for unemployment aid fell to a level last seen 4 years ago.

The US unemployment rate has been steadily declining over the past 6 months, so this news further validates the story of a recovering US economy.

Whilst Australian/US trade is not enormous, the economic and sharemarket performance of the United States has a very strong impact on investor sentiment in Australia.  It also helps boost sentiment and trade with Asia, Australia’s largest export customers.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

Are you running your business and tired of chasing up your landlord to fix this or repair that? Well perhaps you could become your own landlord, with the help of your super fund. Via a Self Managed Super Fund (SMSF), you can use your superannuation savings to purchase a commercial premises, and then rent those premises, at an appropriate commercial rate, to your business. With SMSF’s able to borrow, this is an option open to more and more people operating their own business.

Now, when the air conditioner is playing up there’ll be no more delay, you can get the repairman straight out. Entrance in need of a fresh coat of paint – go for it.

Another example of an SMSF giving you control.

To explore whether an SMSF might be right for you, contact our office and arrange an appointment, or click here to learn more about SMSF.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

It is hard to find a greater mis-match than the Anglo-Zanzibar war, in which the British defeated the Zanzibarians in 38 minutes, with only 1 casualty, as against 500 casualties for the locals. This war is recorded as the shortest war in history.

A modern day equivalent to the Zanzibarians is private investors trying to short term trade. Let’s remember that every time we buy a stock, someone else is selling. And we’re saying to the other party, "you’re wrong and we’re right". But who is on the other side of the trade?  Sure, sometimes it might be a punter on a computer screen in his bedroom wearing pyjamas and drinking Red Bull, but chances are the other side of the trade is an institution, and more and more often now, a computer programmed by the institution to perform ultra fast short term trades. Is it really feasible that over 100′s of trades, an individual private investor is going to out-perform sophisticated and well informed institutions with the ability to trade in fractions of a second?

But all hope is not lost. At Guidance we’ve long held the view that short term trading is for mugs. Where private investors do hold the advantage is that we we can be patient. We don’t have monthly, quarterly, and yearly performance figures that we have to hit. Institutions do. In fact a few bad performance numbers and they stop getting money to manage, and their business after all is not earning the maximum return, it is obtaining money to manage.

So as private investors we must play to our strengths. Leave the short term gambling to the computers, and instead seek out good businesses and be in there as a true shareholder for the long term.

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Important changes to superannuation co-contributions

In November the Federal Government released the Mid-year Economic and Fiscal Outlook. Various savings measures were included in this with the aim of ensuring the budget returns to surplus in 2012-13.

Amongst the savings measures was a reduction in the generosity of the government’s co-contribution. Co-contribution is the process whereby the government contributes to your superannuation account, when you have made an after tax superannuation contribution. In recent years, the government has matched whatever you put in dollar for dollar, up to a maximum of $1,000. The benefit phases out as your income rises, as it is intended as a measure to help lower income earners amass more retirement savings.

From 1 July this year (ie. next financial year), the government will only contribute 50 cents for every $1 that you contribute. And the maximum they will contribute has halved to $500.

So for now at least, government co-contribution lives on, it’s just a little less generous than it used to be.

Opportunity

Get your maximum superannuation co-contribution this financial year – your last chance for a $1,000 payment.

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Behavioural Finance aims to understand how and why people make certain financial decisions.  Much of economic theory assumes people will act “rationally”, yet reality frequently upsets these elegant theories.  By gaining an understanding of how we interpret financial information and react to it, we can perhaps reduce the harmful effects of some of our instinctive “humanness”.

Regret Aversion

One Behavioural Finance concept worth grasping is Regret Aversion.  We instinctively try to avoid a situation of regret or disappointment.  It’s not hard to see how we have become hard wired for this trait.  If we burn our hand on the side of the toaster, we don’t put our hand their again.  However it’s a small step from this useful application of regret aversion to “well once at school when I spoke to the class, someone laughed, so I never talk in front of groups now”.

Often, regret aversion is at the heart of procrastination.  We can see that undertaking a certain action makes sense, but there is a chance this bad thing might happen, so lets just be safe and do nothing.  This thought process is why most people don’t become self employed.

We all know that share markets have had a volatile and difficult time over recent years.  It is tempting to conclude, “investing is for mugs, I’ll just put my money under the bed, it can’t go down that way”.

In 1990 the Australian share market declined 17.52%.  This was only 3 years after the 1987 stock market crash where markets declined over 30% in a matter of days.  Then, like now, there would have been some, applying the regret aversion thought process.  “I can’t stand any more of this volatility, I’ll just put my money in the bank where it is safe”.

Over the next 10 years, the Australian Share market gained an average of 14.8% per year, whilst cash earned between 5% and 6% for most of that period.

There is an interesting experiment reported by the Journal of Economic Psychology looking at peoples preparedness to exchange one lottery ticket with another.  Even though they could could achieve a bonus for exchanging, may none-the-less chose not to exchange, fearful it seems, of the regret they would feel should the ticket they gave away prove to be the winner.

Regret aversion is an understandable, instinctive, human trait.  However if we understand this natural tendency within ourselves, we can perhaps question our decisions.  Is this decision I’m making rationale given the current facts, or am I letting some past event, which has little if any relevance to the current circumstance, lead me in a direction that is not in my bests interests?

In order for your superannuation contribution to be tax deductable, you need to be self employed. The thinking here is that in this circumstance, there is no employer making superannuation contributions for you – you are your own employer. So therefore you can make contributions as though you were an employer. Employers claim superannuation contributions as a tax deductable expense, as they do any other expenses incurred in running their business.

Where it can get a bit tricky is where someone does some paid employment, and is also self-employed. The test employed in this instance is known as the 10% test. The income you derive from work as an employee, must not exceed 10% of the total income you earn for the year. So put another way, for you to be considered self-employed, you must generate at least 90% of your income from self-employment.

Want to to learn more about Self Managed Super? Download our free e-book SMSF – Australia’s most popular way to save for retirement.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

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To learn more about Key Person Insurance, download our free ebook – Key Person Insurance – a succinct guide for business owners.

"In a business with two male owners over 40 years of age, the probability of a key person insurance claim event occuring prior to them reaching age 65 is greater than 50%."

Source: OnePath

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