Summary of key proposals
The key proposals announced by the Government include:

• the minimum super guarantee (SG) contributions you can receive from an employer will increase gradually from 9% to 12% of salary, starting from 1 July 2013
• the age to which you could receive SG contributions from an employer will increase from 70 to 75 from 1 July 2013
• if you earn up to $37,000 pa, the Government may make a super contribution of up to $500 pa from 1 July 2012 to refund the tax payable on concessional Includes SG, salary sacrifice, personal deductible contributions and certain other amounts.
• the cap that applies to concessional super contributions from 1 July 2012 will no longer halve from $50,000 to $25,000 pa, if you’re aged 50 or over at that time and your total super balance is below $500,000
• the company tax rate will gradually reduce to 28% by 1 July 2014 (and two years earlier if you have a small business), and
• generous depreciation rules will apply to small businesses from 1 July 2012.

MLC’s summary of the Government’s response to Henry review (PDF, 175KB)

MLC Technical Expert, Gemma Dale outlines a number of key changes and what it may mean for you.

These changes include:

• an increase in the rate of pension
• incentives to remain in the workforce, and
• new arrangements for treating income.

Find out how the new pension system will work, and how you can make the most of the changes before the 20 September deadline.

View the Gemma Dale video here.

MLC technical expert Gemma Dale has examined the Budget and identified the key areas likely to affect investors.

 In the video, Gemma looks at some of the key measures announced in the Budget including:     

• changes to the private health rebate system
• the planned continuation of the first homer buyers’ grant
• amendments to the Family Tax Benefit
• the introduction of a paid parental leave scheme in 2011
• an increase in the full Age Pension for both singles and couples
• a progressive increase in the Age Pension age to 67 in 2017, and
• changes to the tax treatment of employee share schemes.

Gemma Dale leads a team of technical specialists at MLC responsible for providing information to advisers and investors on a range of superannuation, tax and social security issues.

View the  Budget video here.

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.

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 planner 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 minimum* 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 minimum.

Alternatively if you are already receiving the minimum* 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 planner is the best person to help work through your personal circumstances and determine which strategies may be right for you. If you do not have a financial planner, call MLC on 132 652 and we’d be happy to put you in touch with one.

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.

If this has happened to you, we understand you may be quite worried at the moment. So here are some things people at different life stages could consider:

People who are ten or more years away from retirement

It’s important to keep in mind that super is a very tax-effective place to invest.

This is because:

• investment earnings are taxed at a maximum rate of 15%, not your marginal rate which can be up to 46.5% (includes a Medicare levy of 1.5%), and
• you can receive a tax-free income at age 60 or over.

You also need to remember that super is a long-term investment. This is because you are investing not only for the ten or more years until you retire, but the 20 to 30 years you could spend in retirement.

So despite the recent market declines, it’s still important that your super is invested in a portfolio that matches your timeframe. And for most people in this age group, a portfolio with a moderate to high weighting to shares and property would generally be considered appropriate.

You may even want to think about investing more in super, so you can benefit from the tax concessions, as well as the lower market prices at the moment.

One approach is to make super contributions from your pre-tax salary. This is known as salary sacrifice. The beauty of this strategy is that your contributions are taxed at a maximum rate of 15%, not your marginal rate. So salary sacrifice can enable you to make a larger after-tax investment for your retirement.

Another approach is to make super contributions from your after-tax pay or savings. If you meet certain conditions, this could entitle you to receive up to $1,500 in additional super from the Government. This is known as a co-contribution and it can help you to boost your retirement savings.

People who are approaching retirement

If you are 55 years of age or over, you could consider making salary sacrifice contributions (see above) and starting what’s called a ‘transition to retirement’ pension. Because of the potential tax benefits, this strategy could enable you to build-up your super without reducing your take-home pay.

But if you had planned to retire soon, say in the next year or so, you may need to work for a little longer. This will give your existing super more time to recover. You can potentially contribute more, and each year you work is one less year you will need to support yourself without a regular wage.

Alternatively, you could consider working part-time and use a ‘transition to retirement’ pension to replace your reduced salary.

Here’s how it works:

Peter, aged 60, was approaching retirement. He needs an after-tax income of $40,000 pa to meet his living expenses.

Rather than leaving his employer completely, he decides to work part-time and will earn a salary of $25,000 pa (after-tax).

He will also invest his super in a transition to retirement pension and draw a tax-free income of $15,000 pa.

By using this strategy, he will achieve his income goal and not have to draw as much from his savings.

People who are already retired

If you are already retired, you’ve probably been impacted more than other people by the financial crisis.

But you need to keep in mind that super pensions are a very tax-effective place to invest your retirement savings. This is because no tax is payable on earnings in the fund and you can receive a tax-free income at age 60 or over.

If you are worried about your financial situation, there are a couple of options you could consider.

If your risk tolerance has changed, you could choose a more conservative investment portfolio within your pension. But remember that more conservative investments usually earn lower returns over the longer term. So if you make the switch you could increase the chance you’ll outlive your savings. Even in retirement, sticking with a suitably diversified portfolio is generally the better approach, regardless of market conditions.

Another option is to reduce the income you draw from your super pension (subject to the minimum income limits). This will enable you to retain more of your money to participate in the eventual sharemarket recovery. While reducing your income may impact your lifestyle, you may find you are now eligible for greater Centrelink benefits, because of a reduction in the value of your assets.

Finally, if you have the opportunity, you may want to return to work – either on a full or part-time basis. This could enable you to use the ‘transition to retirement’ strategies outlined above to improve your financial position.

To find out the best approach for you, you should speak to your financial adviser.

General Advice Warning:

These comments contain general information and may constitute general advice. They do not take into account any 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 judgement at the time of issue and are subject to change.

The format for the 45-minute online discussion was 15 minutes of presentations, followed by 30 minutes of live Q&A.

The presenters were:

• MLC Investment Strategist Brian Parker who provided a market update and talked through the issues of the day, and
• Paul Maddock, General Manager Investment Products & Services who detailed the options and choices people in or approaching retirement have.

A panel of experts then took live questions from viewers.

A recording of the webcast is now available. Tune in for what was a lively and insightful discussion.

You can hear what other people are asking the panel, and navigate the webcast to just listen to the bits that really interest you.

Watch MLC’s online discussion now.