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)

• the recent performance of the MLC Australian Share Strategy
• the outperformance of manager Sands Capital, and
• what it means for the MLC Balanced and Growth Funds

View the February MLC Fund Performance Update video here.

Download John Owen video script.

As further evidence that the Australian sharemarket is indeed rallying to a sustained recovery, superannuation funds have risen for the sixth month in a row, offering some much needed relief to pensioners and retirees.

The latest SuperRatings research shows the median balanced superannuation fund rebounded 14.3 percent between March and August this year.

This results in a minus 7.9 percent performance for the year and a positive 5.4 percent return for the five year period.

“These figures indicate that Australian superannuation funds are well positioned to benefit from the recovery,” said Michael Clancy, Executive General Manager, MLC Investment Platforms.

“This has certainly been the case with MLC’s funds where we’ve seen some impressive gains over the last six months in our Horizon series of diversified funds and also in our Australian shares and listed property funds.

“While these improved performance results should give investors a sense of confidence, we need to keep in mind that the superannuation system is in its nature a long-term savings category and investors should view it that way.

“Typically superannuation funds have meaningful investments in the Australian and global sharemarkets, and as a result will go through good periods of performance and bad. However, history teaches us that over time sharemarkets do trend upwards, which translates into performance for our superannuation funds.”

Investor sentiment on the rise

In the last six months, improving returns for superannuation funds has coincided with a rise in positive investor sentiment.

A separate research report produced by the Investment and Financial Services Association (IFSA) and research firm Core Data, confirmed that investor confidence is returning.

With the sharemarket at 11-month highs, a strong Aussie dollar and confidence building in the property sector, wary investors are experiencing their greatest levels of optimism for two years.

“The small but positive move in the right direction demonstrates investors are slowly becoming more confident about both the economic and investment outlook in Australia” IFSA CEO, John Brogden said.

According to the report more than half of investors believe the sharemarket is improving, with a record two-thirds believing it will show positive returns in the next quarter.

IFSA’s report, which asked investors to assess their financial risk appetite, showed investors were most enthusiastic about Australian shares, managed funds and superannuation funds.

And while there’s still a long way to go before market and investor confidence returns to pre-crisis levels, these latest figures should be encouraging for all investors, not just those who have kept their money in superannuation.

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.

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.

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.

We’ve identified four advantages of a recession: and how you could be profiting from them.

1. Decreased cost of living

While an economic boom cycle is great news for investors, it has the counter-effect of driving inflation into worryingly high levels. In simple terms, inflation is a rise in the average price of goods and services, as measured by the consumer price index (CPI).

During a boom cycle, the economy is in full swing; exports are high, jobs are plentiful and the nation generally enjoys high levels of prosperity. With more people eager to spend, the price of goods and services increase as producers take advantage of the high levels of demand.

Under a slowing economy, like we have now, market opportunities reduce, businesses find it harder to obtain credit to finance new projects, and people tighten their belts over concerns about unemployment. This leads to less demand in the economy, which drives prices lower as producers vie to attract sales.

This lack of demand has already seen the price of petrol drop significantly in recent months. Lower petrol prices also has a flow-on benefit of contributing to a reduction in food prices, as the cost of trucking fruit and vegetables to supermarkets is decreased.

The other big decrease in the family budget has been the Reserve Bank’s heavy interest rate cuts. These are designed to free up cash flow, encouraging households to spend more and keep the economy moving.

So what to do with this additional cash? At the risk of upsetting Kevin Rudd and Wayne Swan, you may want to consider maintaining your current mortgage repayments, regardless of the lower minimums now required.

It may also be an opportune time to get your personal debt under control. You could use the extra cash to pay off your credit cards. And, if you have several cards, and other personal loans, you may want to consider consolidating them into one, lower-interest loan.

Additionally, you could use the funds to make an additional contribution to your superannuation. More on this later.

2. Government rebates

Another hallmark of a recession is increased Government spending and rebates. While the Reserve Bank lowers interest rates to encourage us to spend, the Federal Government has the power to hand over cash to taxpayers and those on welfare payments.

The big winners here are likely to be first home buyers and lower to middle income earners, particularly those with children.

The Federal Government first home buyers grant has been increased from $7,000 to $14,000 for established homes, and $14,000 to $21,000 for new homes. Various state and territory governments have also come to the party by contributing additional grants and lowering stamp duty. This, combined with the record low interest rates, is great news for those looking at entering the housing market for the first time.

Another avenue to stimulate spending has been the Federal Government’s ‘fiscal stimulus bonuses’. First released to lower-income families before Christmas, a second round has been proposed for March/April, with up to $900 on offer for individuals and more for students.

Again, while the intention of the bonus is to encourage Australians to spend on things like electrical goods, clothing and holidays; you may want to consider how you could use the bonus to pay off credit card debt, decrease your mortgage or top up your super.

3. Sale of the century

It’s now universally recognised the global financial crisis of 2008 has wreaked the greatest havoc on sharemarkets since the 1930s. As a result, almost every superannuation fund has reported negative returns, and many industries are suffering significant reductions in their earning expectations.

This has been particularly tough for investors, especially those who have retired or are looking to retire, and depend on investment returns to live on. However, for those investors still accumulating money for their retirement, the bear market represents what could be the greatest buying opportunity in a generation.

According to MLC Investment Specialist Brian Parker, “crises provide opportunities for long-term investors to acquire quality assets at beaten-down prices.”

That said, knowing when to buy into (and sell out of) the market can be challenging, even for professional investors.

One of the best ways of reducing your investment risk is by dollar cost averaging. This process involves drip feeding a set amount of funds into the sharemarket at regular intervals. For example with managed funds, or your superannuation fund, you could invest a fixed amount on a monthly basis. When markets go down, you will be buying more units in the fund at a lower cost. And when markets go up, while you will be buying units at a higher price, the overall average price paid will be somewhere between the high and the low, thus reducing the impact of volatile markets.

Investing in a managed fund also ensures you are investing across a diversified range of industries, countries and companies. It also allows you to draw on the expertise of world-class investment managers to select the best quality investments available at severely reduced prices.

4. Remembering what’s important

In boom times, it’s easy to get caught up in the lifestyle of spending big, taking advantage of easy credit and investing in overvalued, even risky, products.

A bear market coupled with an economic recession is an opportunity to re-evaluate what’s really important. What are your long-term goals? What’s most important about your current way of life? What are your biggest concerns when it comes to the welfare and future of your family and yourself?

‘Sensible’ is the key concept here, as people the world over remember the value of spending time on family, not possessions; and investing in quality, not quantity.

Right now, it feels as though the whole world is focused on money matters, as world leaders work together on a roadmap to repair global economies and forge a new way forward based on responsibility and sustainability.

With this in mind, there’s never been a better time to talk to your adviser about your own financial map; a compass to ensure you make the most of whatever opportunities 2009 provides.

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.

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.