In an effort to regain lost revenues caused by the global downturn, the Government has decided to pull back some of the superannuation tax concessions.

In particular, there are two key changes to the treatment of super that are scheduled to take effect on 1 July 2009.

And while not yet legislated, there may be benefits for you if you act before 30 June.

The concessional contribution cap will halve

Salary sacrifice, along with making personal deductible super contributions, has long been regarded as a great way to boost your retirement savings by paying less tax.

Both of these fall under the banner of ‘concessional contributions’.

Under the new rules proposed in the Budget, the cap on concessional contributions will be scaled back.

From 1 July 2009 the caps will reduce from:

• $50,000 to $25,000 pa (for people under age 50), and
• $100,000 to $50,000 pa (for people aged 50 or over until 30 June 2012) and $25,000 thereafter.

The caps limit the concessional contributions that can be made (or received) each year.

To make the most of the higher caps that currently apply, you may want to:

• salary sacrifice any bonus you receive, or
• make personal deductible contributions before 30 June this year.

The maximum co-contribution will reduce

Government co-contributions were introduced in 2003 as a way to encourage low to middle income earners to save for their retirement.

Under the current rules, if you earn a lower income and make personal after-tax super contributions, you may be eligible to receive a Government co-contribution into your super account of up to $1,500.

To qualify for the full co-contribution, you need to contribute at least $1,000 and earn $30,342 pa or less. A reduced amount will be paid if you contribute less than $1,000 and/or earn between $30,342 and $60,342 pa.

However, from 1 July 2009, the maximum co-contribution will be cut to $1,000 (for the next three financial years) and $1,250 (for a further two years) before returning to $1,500 from 1 July 2014.

To benefit from the higher co-contribution amount this financial year, you will need to make a personal after-tax super contribution before 30 June.

What’s the benefit?

So while there is a limited window of opportunity, it’s well worth considering how acting now may benefit your personal situation.

That’s because both of these opportunities could enable you to:

• get more money into super, where earnings are generally taxed at a maximum rate of 15% (not your marginal rate of up to 46.5%), and
• receive more tax-free income at age 60 or over.

Please Note: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please contact your financial adviser prior to acting on this information to ascertain the maximum amount of contribution you can make this financial year.

Many may now be wondering if they should move their account-based pension into a more conservative investment portfolio, which contains less growth assets such as shares and property.

So we went back through history to see the impact that switching to a more conservative portfolio would have had, if done after a major market fall.

We also outline some strategies you could discuss with your financial adviser to help you weather the storm.

What is an account-based pension?

Before we reveal the lessons we can learn from history, we thought it was worthwhile going back to basics to explain how account-based pensions work.

An account-based pension enables you to invest your superannuation savings and receive a tax-effective income to help meet your living expenses.

By law, you must draw a minimum¹ income from the pension. This is calculated as a percentage of your account balance based on your age at 1 July each year.

Most people elect to receive the minimum payment, but it is possible to draw a larger income depending on your needs.

What impact would switching investments have had after a market fall?

To answer this question, we calculated the minimum income payments a 60 year old would have received in two different scenarios.

Firstly, we looked at what happened if:

• they invested $300,000 in an account-based pension at the start of some of the worst one-year periods since 1900, and
• selected a portfolio made up of 70% in growth assets.

Then, we calculated the minimum income payments they would have received if they switched their account-based pension at the end of the first year into a more conservative portfolio, made up of 30% in growth assets.

The graph below shows the difference that switching into the more conservative portfolio would have made to the minimum income payments.

In other words, it demonstrates the increase (or decrease) in pension payments that would have resulted from changing the investment strategy.

As you can see, in some instances, switching to the more conservative strategy resulted in a modest increase in income payments over the short term. This was particularly the case for the pensions commenced in 1930 and 1970.

However, over the longer term, switching generally resulted in lower pension incomes. This was because, in addition to locking in the investment losses, the more conservative portfolio didn’t benefit as much when sharemarkets recovered.

While history provides no guarantee for the future, this research suggests that staying the course is likely to be a better option for people who have a suitable time horizon and risk tolerance.

What other options do retirees have?

It’s understandable if you are concerned about the impact the global financial crisis is having on your retirement savings.

There are, however, some other strategies you could consider discussing with your financial planner that could help improve your long-term prospects.

For example, you may now be eligible for greater Centrelink benefits because of the reduction in the value of your assets.

As a result, you could consider reducing the income payments you receive from your account-based pension if you are currently drawing more than the minimum¹.

Alternatively if you are already receiving the minimum¹ income, you could spend less and save the difference, in a unit trust for example.

Both these strategies can leave more of your money in the sharemarket to participate in the eventual recovery.

Another option is to return to either full or part-time work. This could enable you to use the strategies outlined above.

You may also be able to contribute more into super and build up your retirement savings.

Your financial adviser is the best person to help work through your personal circumstances and determine which strategies may be right for you.

1 On 18 February 2009, the Government announced it will reduce the minimum pension payment requirement by 50 per cent for the 2008/09 financial year. If you’ve already received half of your current minimum payment amount, you can choose to stop receiving or reduce your pension payments for the rest of the 2008/09 financial year. For more information, please speak to your financial planner.

Important information: We have assumed the current account-based pension rules applied throughout all periods. All incomes are in today’s dollars. The asset class returns used in this analysis have been calculated by MLC and incorporate data presented in DMS Data Module offered through the Ibbotson Associates’ software program EnCorr. Based on copyrighted books by Dimson, Marsh, and Staunton, Triumph of the Optimists, Princeton University Press, (c) 2002, and Global Investment Returns Yearbook 2004, ABN AMRO/London Business School (c) 2004. All rights reserved. Used with permission.

There are, however, great benefits to getting in early with your financial year-end planning.

We’ve identified four strategies to consider as the tax year draws to a close. Three of them may boost your retirement savings while paying less tax, and the fourth is a tax-effective way to purchase insurance.

And this is just the tip of the iceberg! Your financial adviser has many other strategies which may be suitable for you, all designed to improve your financial position.

So why not make this year-end a clever one?

1. Boost savings and minimise tax via salary sacrifice

If you’re likely to receive a bonus before 30 June 2009, you should consider asking your employer to salary sacrifice your payment into superannuation. By using this strategy, you may pay less income tax this financial year and make a larger after-tax investment.

When you sacrifice a bonus into superannuation, the contribution is taxed at a maximum rate of 15%.

If taken as cash, your bonus will be taxed at your marginal rate (which could be as high as 46.5%¹). Depending on your circumstances, a salary sacrifice strategy could reduce the tax rate payable on your bonus by up to 31.5%.

2. Top up your super with help from the Government

If you earn less than $60,342² pa, you may want to make personal after-tax super contributions before 30 June 2009.

This could enable you to receive a Government co-contribution of up to $1,500 to help increase your retirement savings.

To qualify for the full co-contribution, you need to contribute at least $1,000 and earn $30,342² pa or less. A reduced amount may be paid if you contribute less than $1,000 “A reduced amount will be paid if you contribute less than $1,000 and/or earn between $30,342² and $60,342² pa.

3. Contribute for your spouse and save tax

If your spouse has a lower income, you might want to make super contributions on their behalf from your after-tax pay or savings.

And, if you use this strategy before 30 June 2009, you may receive a tax offset of up to $540 this financial year, while increasing your spouse’s retirement savings at the same time.

To qualify for the full tax offset of $540, you need to make a minimum after-tax contribution of $3,000 into super on behalf of your spouse. Your spouse must also earn $10,800² or less in the financial year in which the contribution is made.

If your spouse earns more than $10,800², a reduced offset may be payable. The offset cuts out if your spouse earns $13,800² or more per annum.

To use this strategy, your partner must be classified as a spouse under the relevant legislation. This includes a married or de facto spouse but does not include a partner (married or de facto) who lives permanently in a different home³.

4. Protect yourself and be tax-effective

The reason so many Australians don’t have adequate insurance protection is because of concerns about its affordability. However, insurance doesn’t have to be costly.

Life cover is critical for securing the financial future of those you would leave behind if you died. It works by insuring yourself for a particular amount, and in the unfortunate event that you die, the insurer pays that amount to your beneficiaries.

Total and Permanent Disability insurance offers financial security by providing you with a lump sum if you suffer a disability and couldn’t work again. A lump sum payment is ideal if you need to pay off debts or your medical costs, or make alterations to your home that may have become necessary due to your disability.

You may save on your premiums if you take out life and Total and Permanent Disability (TPD) insurance through a super fund, rather than via a separate policy outside super.

The same tax concessions that apply when investing in super also apply to insurance purchased through a super fund.

These tax concessions can make it significantly cheaper to insure through a super fund⁴ than outside super.

For more information on these and other clever strategies designed to boost your super while saving you tax, speak to your financial adviser.

Note: Caps apply when making contributions to your superannuation. Please speak to your financial adviser for more information.

1 Includes a Medicare levy of 1.5%.
2 Includes assessable income plus reportable fringe benefits. Other eligible conditions apply. Please see your financial planner or the Australian Taxation Office website for more information.
3 This measure will apply to same-sex couples from the 2009/10 financial year.
4 Lump sum tax may be payable when a superannuation death benefit is paid to a non-dependant, or a TPD benefit is received by a disabled fund member. However, to compensate for the potential tax liability, you could consider taking out a higher level of insurance. While this will generally increase the premiums, the after-tax cost may be lower than insuring outside super, when you take into account the up-front tax concessions available.

Here’s the transcript from her video:

Golden rule number one is never lose sight of the fact that risk and return are related. This is easy to do when we’re in a bull market and double-digit returns are taken as the norm. However if you are looking for higher returns, you have to be willing to take on more risk. This means the value of your investment could change dramatically over a short period of time. The higher this volatility, the riskier these types of assets are.

Over the long term, growth assets like shares and property are expected to earn higher returns. But these investments will be more volatile so you will need a long time horizon and a strong stomach to ride the ups and downs you’ll experience. If you’re not prepared for this, then you might want to consider a more conservative strategy or assets that are expected to earn lower returns but are usually more stable performers, like cash and debt securities.

Golden rule number two is diversify, diversify, diversify! This means having a broad range of investments in your portfolio. It’s a great way of reducing the volatility of your investment. Diversifying across asset classes like shares, property, cash and debt securities can substantially reduce volatility but we don’t stop there. At MLC we diversify across asset classes, within asset classes and across investment managers.

Diversifying your investment in this way helps reduce the ups and downs of investing. That’s because the strong performance of one asset class or investment manager can compensate for the weak performance of another. Of course, no one can get every call right every time, and no one type of investment performs well in every market. So diversification helps us manage risk and achieve smoother long-term returns for our investors.

Golden rule number 3 is use skilled investment managers. Inevitably when markets tumble, quality investments are thrown out with the bad as some investors are forced to sell assets to meet borrowing and other financial commitments. These are ideal conditions for skilled investment managers to purchase quality assets at “fire sale” prices. Good investment managers use volatile and uncertain market conditions to lay the foundations for future strong long-term returns. At MLC, we take a multi-manager approach to investing. That means we bring together some of the best managers in the world who can select the best investments for our funds.

Golden rule number 4 is set an investment strategy and stick with it, as long as your objectives don’t change. In reality, all growth-focussed investors will experience negative returns at some stage. But if we look back through history, we can clearly see economies and markets have recovered from every catastrophe and carried on growing. So by sticking to your strategy you are much more likely to do better over time than by chopping and changing.

This is, of course, easier said than done. A Boston-based financial research organisation called DALBAR studied US investor behaviour over a twenty-year period. They found the average US investor in US equity funds earned only 4% per annum over the period 1986 – 2006, while the broader US sharemarket, as measured by the S&P500 Index, earned 12% per annum. Why did investors do so much worse than the market? Because they didn’t stick to their plan. They sold when the market fell and bought back in after markets had improved. In doing so they committed the ultimate mistake when investing: they sold when prices were low and bought when they were high. So it’s worth remembering that while we can’t control the market, we can control our own behaviour.

Golden rule number 5 is that time in the market and not timing the market is what matters. Many people make the mistake of trying to time the market – hoping to sell before a market fall comes, or waiting to buy at the lowest price. But this is a high risk strategy and very easy to get wrong because markets are unpredictable on a day-to-day basis. Over the long-term though, sharemarkets are more predictable and from a historical perspective have steadily trended upwards.

Therefore by staying invested and not trying to predict the peaks and troughs, you can usually grow your investments over the long term more successfully. If you sell your investments to try and miss the worst of the downturn, you will not only turn paper losses into actual losses, but you may also miss the market recovery when it happens.

My final golden investment rule is to get good financial advice. Making the right decisions in times like these is challenging. But a good financial adviser can provide guidance so you don’t make decisions that could harm your financial wellbeing. They will help you work out your long-term financial goals and assess your appetite for risk, so together you can set a financial plan that will see you through all markets. If over time your circumstances change, or you feel increasingly uncomfortable with your risk profile, a financial planner can alter your strategy with you.

To sum up, our golden rules for investing in turbulent times are:

• Remember risk and return are related
• Diversify, diversify, diversify!
• Use skilled investment managers
• Set an investment strategy and stick with it
• It’s time in the market and not timing the market that matters
• Get good financial advice.

Thanks for your time.

General Advice Warning:

These comments contain general information and may constitute general advice. They do not take into account and person’s particular investment objectives, financial situation or individual needs. They should not be relied upon as a substitute for financial or other specialist advice.

Before making any decisions on the basis of these comments, you should firstly, consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs and secondly consider the relevant Product Disclosure Document.

Opinions expressed constitute our judgment at the time of issue and are subject to change.

Late last year it was hard to avoid the media frenzy around the Federal Government’s guarantee on cash products and I observed the commentary with disbelief. The public debate was fixated on which companies would offer government-guaranteed products, which ones would pass on the cost of the guarantee to customers and whether or not customers could get access to the guarantee for free if they split their money among several different accounts.

However, no-one seemed to ask the most important question, which is: beyond bringing Australia into line with actions taken by governments around the world, what value was there for a customer with more than $1 million who would pay an additional 70 basis points for the guarantee on a low-risk, low-return cash product? The Government did not introduce the guarantee because it was worried about the stability or security of Australia’s banking system, which is strong and performing well. Cash products have operated effectively in Australia for decades and there is no reason why this would not continue. Unfortunately, these vital facts were missing from much of the public discussion around this issue, which seemed to be stuck at a product level rather than being focused on whether or not chasing the guarantee made sense.

The issue when it comes to cash investing is not whether the product is covered by the government guarantee, but rather whether bailing out of a long-term investment strategy and moving into cash makes sense. Government guarantee or no government guarantee, cash never, repeat, never, builds long-term wealth.

We now know that if you were going to switch to cash, the time to do it was around 14 months ago – wisdom that comes only with a crystal ball or the power of hindsight. Switching to cash today will result in two outcomes:

1. Crystallisation of losses in the equity portfolio as investors convert paper losses into real losses; and
2. Investors may miss out on the rebound in equity markets when it occurs.

On this second point, let’s be clear about this: businesses build long-term wealth and so even if investors managed to time their exit from the sharemarket correctly, they are still going to have to get back in at some point. Getting these timing calls consistently correct is extremely difficult for even the world’s best investors.

In times like these, the value of advice is proven day in, day out. Advisers who have helped their clients stay true to their long-term investment strategies, ignore the hysteria and prevent them from crystallising losses by switching to cash have served their clients extremely well. In the past few months this advice could be judged to have cost investors in the short term. However, in the long term, I believe it will be proven to be the right advice because the markets will recover and when the pick-up comes, it will come quickly and those invested in cash will miss out.

At the end of the day, investors need to look at the stability and security of the company that is managing their investments, whether they be invested in cash, equities, property or any other asset class, and not just at whether or not they are invested in a product covered by the government guarantee.

The market has fallen 50 per cent in the past 12 months – investors have every right to be worried and nervous, but for investors with a long-term investment horizon, history has repeatedly shown that staying invested in equities will deliver a better long-term return than investing in cash.

As an industry, our job is to not only make sure our clients’ portfolios are set and well diversified across asset classes, but also to help our clients not jump out of the market at the wrong time. I hope the silver lining of this financial crisis will be that after it’s all over, there will be thousands of fantastic examples of how financial advice has helped clients stay calm and protect their wealth through these difficult times.

A similar article written by MLC CEO Steve Tucker appeared in IFA magazine, Issue 439, December 15-21 2008, p24.

How do you find a trustworthy adviser? I know people who have lost everything by trusting people.

Developing a plan for your finances is one of the most important things you can do in your life, so it pays to find an adviser you can trust to understand your needs and act in your best interests.

Most financial institutions are able to refer you to a qualified financial adviser, so you can ask for recommendations from an institution you trust. You can also search on the Financial Planning Association website.

At your first meeting, a professional financial adviser will give you a Financial Services Guide that details their qualifications and authority to give advice, the type of advice they provide, how and how much you will pay and the procedures they have in place if you ever have a complaint. You should review this document carefully to see your adviser’s credentials and backing.

A professional financial adviser will take the time to get to know you, your circumstances and the role you want your money to play in your life. Once they understand what your needs are, they will develop a tailored Financial Plan with their recommendations for your financial affairs.
Your adviser should always make sure you understand the type of investments they recommend to you.

By understanding your adviser’s accreditations and recommendations, how they are paid and their focus on your needs and what you are trying to achieve, your trust in them can be based on principles that are important to your financial plans.

Why should I go to a planner recommended by MLC compared to other planners?

Financial advisers recommended by MLC have been hand-picked and must meet strict criteria, including experience, educational standards (that exceed professional requirements) and an additional quality advice accreditation.

The plans they develop are focused on your financial needs, and the advisers are reviewed regularly to ensure they maintain the standards supporting MLC’s recommendation.

Read more:

• It pays to get expert advice
• How financial advice can benefit you
• Find an adviser