January is normally a quiet month on the economic scene, but not this year. Inflation and speculation about rising interest rates dominated the month, sending global shares tumbling. US stocks fell 6% in January while Australian shares fell 7%. After US inflation hit a 40-year high of 7%, the US Federal Reserve is tipped to start lifting rates as early as March.

In Australia, inflation is sitting at 3.5%, while underlying inflation (which excludes volatile items) is at a 7-year high of 2.6%, within the Reserve Bank’s target range of 2-3%. The Reserve has said it won’t lift rates until 2024, or unemployment is near 4% (it fell to a 13-year low of 4.2% in December) and annual wages growth is close to 3% (currently 2.2%). While wages are going backwards in real terms, one third of a panel of 23 economists interviewed by The Conversation expect the Reserve to start lifting rates this year.

One of the big influences on inflation is oil prices, with crude oil near 7-year highs. Brent Crude jumped 15% in January and 65% over the year to US$90.94 a barrel. Aussie motorists paid record prices for unleaded petrol in January, with a national average price of 170.4c a litre.

The ANZ-Roy Morgan consumer confidence index fell 8 points to 100.1 points in January, while the NAB business confidence survey fell to a 19-month low of -12.4 points in December on the back of COVID-induces supply chain issues and labour shortages.

The Aussie dollar fell US2.5c in January to close at US70c as the greenback strengthened on rate rise speculation.

Market movements & review video – February 2022

Stay up to date with what’s happened in Australian markets over the past month.

January is normally a quiet month on the economic scene, but not this year. Inflation and speculation about rising interest rates dominated the month, sending global shares tumbling.

Please get in touch if you’d like assistance with your personal financial situation.

Easing into retirement

As the nation drifts back to work after the summer break, it’s often a time to start putting your New Year’s resolutions into practice. For some, an extended holiday may have convinced you that you are ready for more of the good life and that it’s time to retire.

In the past, that would have meant leaving work for good. These days, retirement is far more fluid.

You might simply want to wind back your working hours. Or you may want to leave your full-time job but keep your career ticking over with part-time or consulting work. Others may dream of leaving the nine to five to run a B&B or buy a hobby farm.

Changing retirement patterns

There are already signs that people’s retirement plans are changing.

In 2019, the average retirement age for current retirees was 55 (59 for men and 52 for womenⁱ), but the age that people currently aged 45 intend to retire has increased to 64 for women and 65 for men.ⁱⁱ

There are many reasons for this gap between intentions and reality. Only 46 per cent of recent retirees said they left their last job because they reached retirement age or were eligible to access their super. Many retired due to illness, injury or disability, while others were retrenched or unable to find work.ⁱⁱⁱ

Retired women were also more likely than men to retire to care for others. But for people who can choose the timing of their retirement, there can be good reasons for delay.

Reasons for delaying retirement

As the Age Pension age increases gradually from 65 to 67, anyone who expects to rely on a full or part pension needs to work a little longer than previous generations.

We’re also living longer. A man aged 65 today can expect to live another 20 years on average while a woman can expect to live another 22 years.^iv So, the longer we can keep working the further our retirement savings will stretch.

And then there’s COVID. If you lost your job or your hours were reduced during the pandemic, you may need to work a little longer to rebuild your savings. Even if you kept your job, you couldn’t go anywhere so you may have postponed your retirement plans. But now the COVID fog is lifting, retirement may be back on the agenda.

Whatever shape your dream retirement takes, you will need to work out how much it will cost and if you have sufficient savings.

Sourcing your retirement income

If you plan to retire this year, you will need to be 66 and six months and pass assets and income tests to apply for the Age Pension. But you don’t have to wait that long to access your super.

Generally, you can tap into your super once you reach your preservation age (between age 55 and 60 depending on the year you were born) and meet a condition of release such as retirement. From age 65 you can withdraw your super even if you continue working full time.

But super can also help you transition into retirement, without giving up work entirely.

Transition to retirement

If you’re unsure whether you will enjoy retirement or find enough to do to fill your days, it can make sense to ease into it by cutting back your working hours. One way of making this work financially is to start a transition to retirement (TTR) pension with some of your super.

Most super funds offer TTR pensions, or you can start one from your self-managed super fund (SMSF). But there are some rules:

• You must have reached your preservation age
• Money can only be withdrawn as an income stream, not a lump sum
• There is a minimum annual withdrawal
• The maximum annual withdrawal is 10 per cent of your TTR account balance
• Income is tax-free if you are aged 60 or older; if you’re 55-59 you may pay tax on the TTR income, but you receive a tax offset of 15 per cent.

One of the benefits of this strategy is that while you continue working you will receive Super Guarantee payments from your employer. A downside is that you will potentially have less super in total when you finally retire.

Retirement is no longer a fixed date in time, with far more flexibility to mix work and play as you make the transition. If you would like to discuss your retirement options and how to finance them, give us a call.

i, iii https://www.abs.gov.au/statistics/labour/employment-and-unemployment/retirement-and-retirement-intentions-australia/latest-release

ii https://newsroom.kpmg.com.au/will-retire-data-tells-story/

iv https://www.aihw.gov.au/reports/life-expectancy-death/deaths-in-australia/contents/life-expectancy

Tree change or sea change on the horizon?

Australians are leaving capital cities in droves in a phenomenon being referred to as ‘The Great Relocation’. However, there’s a lot to consider beyond the obvious appeal of waking up to the laughter of kookaburras or enjoying a long walk on the beach.

The terms ‘sea change’ or ‘tree change’ have been around for a while to describe those who decide to make a move from the city or suburbs to a more rural lifestyle.

The pandemic has been responsible for heightening this trend due to frustration with lockdowns and people spending more time at home and in their local area than usual, leading them to reassess their lifestyles and where they would prefer to live. Of course, greater work flexibility as measures were put in place to manage the pandemic, have also been a driving force in the exodus to the regions.

Moving to the regions

There is a long-held belief that the sea change/tree change phenomenon is largely confined to baby boomers or those at or nearing retirement, which is incorrect – as early as the mid-2000s, nearly 80% of people changing from city to regional areas have been under the age of 50.ⁱ

Geographically Sydney and Melbourne recorded large net losses of people through 2020 and early 2021, regions within an hour of those major centres recorded the strongest growth.ⁱⁱ However, statistics show that the population grew in all major regional cities, reversing a 20-year decline in regional Australia’s share of national population growth.ⁱⁱⁱ

The attraction of lifestyle

The reasons for many Australians turning their backs on the big smoke are predominately lifestyle. Those making the break are attracted by the lure of a slower, less hectic life, proximity to the great outdoors, a sense of community made possible by life in a smaller town and last but by no means least, cheaper property prices than those in the big cities.

Things to consider

If the idea of a move to the sea or a rural town is increasingly attractive, it’s important to also consider the potential challenges you may face. For those leaving friends and family behind, there is often a sense of isolation in being far from those you care about, and it can take some time to make new friends and adjust to life in a new community.

It’s also important to consider how the infrastructure in rural areas differs from where you are moving from. If you have children, will you have access to good schools close by? If you are looking to retire, will you have access to the necessary medical facilities as you age? It may also be a good idea to consider local economic forces and job opportunities.

Don’t be hasty!

A knee-jerk decision brought on by a holiday stay in the area under idyllic summer conditions, can be fraught with danger. It’s a good idea to rent in the area or visit regularly over a longer period of time to gauge whether it will be the right fit. If you get it wrong, it can be a stressful and expensive exercise.

According to analyst Mark McCrindle, a sea change or tree change doesn’t work out for one in five people who attempt it, which reinforces the need to do your homework.^iv “People make a decision because they think it’s going to work for them financially or it’s going to be less pressure, less commute time and a nicer lifestyle,” McCrindle says. “But sometimes they find some of these regional areas are too small or too quiet.”

The main thing is to not be swept away by emotion, think about what you value and what you are looking for, and weigh up the pros and cons so that if you make the move it will result in the positive change you are seeking.

i, ii, iv https://www.corelogic.com.au/resources/tree-change-sea-change-what-you-need-know-generate-leads

iii https://www.abc.net.au/news/2021-11-18/migration-to-regional-australia-at-record-levels/100628278

The post PWS News: February 2022 appeared first on Professional Wealth Services.

August provided mixed economic news, with central banks, business and consumers remaining cautious. In a widely-reported speech, US Federal Reserve chair, Jerome Powell said there remained “much ground to cover” before he would consider lifting interest rates, sending stocks higher and bond yields lower.

In Australia, shares and shareholders were boosted by a positive company reporting season. According to CommSec, of the ASX200 companies that have reported so far, 84% reported a profit in the year to June, 73% lifted profits and dividends were up 70% to $34 billion. One of the COVID “winners” is the construction sector. While the value of construction rose 0.4% overall in the year to June, the value of residential building was up 8.9% and renovations rose 24.5%, the strongest in 21 years. One of the COVID “losers”, retail trade was down 3.1% in the year to June.

While unemployment fell from 4.9% to 4.6% in July, full-time jobs and hours worked were lower due to the impact of lockdowns. The Westpac-Melbourne Institute index of consumer sentiment fell 4.4% in August while the NAB business confidence index fell 18.5 points in July, the second biggest monthly decline since the GFC. Wages grew 1.7% in the year to June, well below the 3% the Reserve Bank wants before it considers lifting interest rates.

Iron ore prices fell 18% in August, while the Aussie dollar finished the month weaker at US73.2c.

Aged care payment options

When it comes time to investigate residential aged care for yourself, your partner, parent or relative, the search for a facility and how to pay for it can seem daunting. The system is complex, and decisions are often made in the midst of a health crisis.

Factors such as location to family and friends, reputation for care or general appeal are just as important as the sometimes-high price of a room and other fees in residential aged care.

Even so, costs can’t be ignored.ⁱ

Accommodation charges

The first thing to be aware of when researching your residential aged care options is that there are separate costs for the accommodation and the care provided by the facility.

The accommodation payment essentially covers your right to occupy a room. You can pay this accommodation fee as a lump sum called the Refundable Accommodation Deposit (RAD), or a daily rate similar to rent, or combination of both.

The daily rate is known as the Daily Accommodation Payment or DAP and is effectively a daily interest rate set by the government. The current daily rate is 4.04 per cent. If the RAD is $550,000 then the equivalent DAP is $60.87 a day ($550,000 x 4.04%, divided by 365 days).

A resident can pay as much or as little towards the RAD as they choose, but any outstanding amount is charged as a DAP.

The RAD is fully refundable to the estate, unless it is used to pay any of the aged care costs such as the DAP.

Daily fees

As well as an accommodation cost there are daily resident fees that cover living and care costs. There is a basic daily fee which everyone pays and is set at 85 per cent of the basic single Age Pension. The current rate is $52.71 a day and covers the essentials such as food, laundry, utilities and basic care.

Then there is a means tested care fee which is determined by Services Australia or Veteran’s Affairs. This figure can range from $0 to about $256 a day depending on a person’s income and assets. The figure has an indexed annual and a lifetime cap – currently set at $28,339 a year or $68,013 over a lifetime.

Some facilities offer extra services, where a compulsory extra services fee is paid. It has nothing to do with care but may include extras like special outings, a choice of meals, wine with meals and daily newspaper delivery. It can range from $20-$100 a day.

A means assessment determines if you need to pay the means-tested care fee and if the government will contribute to your accommodation costs. Everyone who moves into an aged care home is quoted a room price before moving in. The means assessment then determines if you will have to pay the agreed room price, or RAD, or contribute towards it.

How means testing works

A means-tested amount above a certain threshold is used to determine whether you pay the quoted RAD and how much the government will contribute towards the means-tested care fee.

A person on the full Age Pension and with property and assets below about $37,155 would have all their costs met by the government, except the $52.71 a day basic daily fee.

A person on the full Age Pension with a home and a protected person, such as their spouse, living in it and assets between $37,155 and $173,075 may be asked to contribute towards their accommodation and care.

To be classified a low means resident there would be assessable assets below $173,075.20 (indexed). It is also subject to an income test.

A low means resident may pay a Daily Accommodation Contribution (DAC) instead of a DAP which can then be converted to a Refundable Accommodation Contribution (RAC). They may also pay a small means-tested care fee.

Payment strategies

The fees you may pay for residential care and how you pay them requires careful consideration. For example, selling assets such as the former home to pay for your residential care can affect your aged care fees and Age Pension entitlements.

If you would like to discuss aged care payment options and how to ensure you find the right residential care at a cost you or your loved one can afford, give us a call.

i All costs quoted in this article are available on https://www.myagedcare.gov.au/aged-care-home-costs-and-fees

Don’t take super cover for granted

Buying insurance through super has many advantages, but you need to make sure you are getting the right cover for your individual needs. In some cases, you may be paying for nothing.

Most super funds offer life and total and permanent disability (TPD) insurance to fund members and, in some cases, income protection cover.

But since the introduction of the Protecting your Super reforms in 2019, this cover is no longer automatic.

If you have less than $6000 in your account or it has been inactive, then the insurance component will have been cancelled unless you advised the fund otherwise. An account may be deemed inactive if, for example, it has not received a contribution for more than 16 months.

In addition, insurance cover is no longer offered to new fund members aged under 25.

Is it right for you?

If you do have insurance in your super account, then it’s a good idea to check the cover is right for you. This is particularly the case now that the stapling measure has been introduced as part of the recent Your Future, Your Super legislation.

From November 1, unless you choose a new fund when you change jobs, the first fund you joined will be ‘stapled’ to you throughout your working life. This is where problems can arise; while the fund stays the same, so will the insurance cover.

Say you move from a low-risk job where the insurance offered in your super was more than adequate to a high-risk job such as in construction or mining. Would your insurance now cover you if you were no longer able to work? And if it did, would the cover be sufficient? It may well be that your new occupation is not even covered.

Most TPD policies within super are for “any” occupation rather than “own” occupation. This three-letter definition can make a world of difference. If you still have the capacity to work in some other occupation, then it is likely your insurance will not pay out.ⁱ

Many benefits

Despite this, there are still many benefits from structuring insurance cover in your super as your premium payments are effectively lower as they come out of your pre-tax rather than your post-tax income.

What’s more, you are not having to put your hand in your pocket to pay the premiums as the money automatically comes out of your super. Of course, the flipside is you will have less money working to build your retirement savings.

So, when it comes to taking out insurance, structuring cover through your super has it’s place but default cover that is offered may be lower than you need or may be sub-optimal.

Market movements & review video – September 2021

Stay up to date with what’s happened in Australian markets over the past month.

Our September update video takes you through key economic indicators, as August provided mixed economic news, with central banks, business and consumers remaining cautious.

Please get in touch if you’d like assistance with your personal financial situation.

The post PWS News: September 2021 appeared first on Professional Wealth Services.

As the financial year ended, there was plenty to celebrate on the economic front despite the continuing impact of COVID-19. Australia rebounded out of recession, with economic growth up 1.8% in March, the third consecutive quarterly rise. Interest rates remain at an historic low of 0.1% and inflation sits at just 1.1%, well below the Reserve Bank’s 2-3% target. Despite fears that global economic recovery will lead to higher inflation and interest rates, the Reserve has indicated rates will not rise until 2024 or annual wage growth reaches 3% (currently 1.5%).

In other positive news, unemployment continues to fall – from 5.5% to 5.1% in May. Retail trade rose 0.1% in May, up 7.4% up on the year, as consumer confidence grows. The ANZ-Roy Morgan consumer confidence index lifted by almost a point in June to 112.2 points.

Australia’s trade surplus increased from $5.8 billion in March to $8 billion in April, the 40th consecutive monthly rise, on the back of strong Chinese demand for our iron ore and other commodities. Iron ore prices rose 6.7% in June and almost 36% in 2021 to date. Oil prices have also surged, with Bent Crude up 8.4% in June and 45% this year. That’s good for producers and energy stocks, but not so good for businesses reliant on fuel and consumers at the petrol bowser. The Aussie dollar finished the year around US75c, up from US69c a year ago but down on its 3-year high of just under US80c in February due to US dollar strength.

What’s up with inflation?

Fears of a resurgence in inflation has been the big topic of conversation among bond and sharemarket commentators lately, which may come as a surprise to many given that our rate of inflation is just 1.1 per cent. Yet despite market rumblings, the Reserve Bank of Australia (RBA) appears quite comfortable about the outlook.

Inflation is a symptom of rising consumer prices, measured in Australia by the Consumer Price Index (CPI). The RBA has an inflation target of 2-3 per cent a year, which it regards as a level to achieve its goals of price stability, full employment and prosperity for Australia.

Currently the RBA expects inflation to be 1.5 per cent this year in Australia, rising to 2 per cent by mid-2023.ⁱ Until the inflation rate returns to the 2-3 per cent mark, the RBA has said it will not lift the cash rate.

US inflation rising

The situation is a little different overseas where inflation has spiked higher. For instance, US inflation shot up to an annual rate of 5 per cent in May, the fastest pace since 2008, up from 4.2 per cent in April.ⁱⁱ As experienced investors would be aware, markets hate surprises. So with inflation rising faster than anticipated, share and bond markets are on edge.

But just like the RBA, the Federal Reserve views this spike as temporary, pointing to it being a natural reaction after the fall in prices last year during the worst days of the COVID crisis. In addition, companies underestimated demand for their goods during the pandemic and as a result there are now bottlenecks in supply that are putting upward pressure on prices.

The central banks believe that once economies get over the kickstart from all the government stimulation, inflation will fall back into line. After all, most world economies went backwards last year, so any growth should be viewed as a good thing and more than likely a temporary event.

But markets are not convinced.

Inflation and wages

Market pundits argue that if businesses must pay more for materials and running costs such as electricity then these increases will most likely be passed on to the consumer.

That’s all very well if your wages also rise, but if your income remains static then your standard of living will go backwards as you will have to spend more money to buy the same goods.

This then becomes a vicious circle. If the cost of living rises, then you will seek higher wages; this will the put further pressure on the costs for businesses. They will then have to increase their prices further to cover the higher wages bill. Some companies may react by reducing staff levels which will lead to higher unemployment.

Impact on investment

Inflation can also have a negative impact on investors because it reduces their real rate of return. That is, the gross return on an investment minus the rate of inflation.

Rising prices and interest rates also impact company profits. With companies facing higher costs, the outlook for corporate earnings growth comes under pressure.

But not all stocks are affected the same. Companies that produce food and other essentials are not as sensitive to inflation because we all need to eat. Mining companies also benefit from rising prices for the commodities they produce. Whereas high growth stocks like technology companies traditionally suffer from rising interest rates.

Markets current fear is that central banks will tighten monetary policy faster than expected. Interest rates will rise, money will tighten, and this will fuel higher inflation.

Bond market fallout

Expectations of higher inflation has already seen the bond market react, with the 10-year bond yield in both Australia and the US on the rise since October last year.

If yields rise, then the value of bonds actually fall. This is particularly concerning for fixed income investors. Not only are you faced with the prospect of capital losses because the price of your existing bond holdings generally falls when rates rise, but the purchasing power of your income will also be reduced as inflation takes its toll. Investments in inflation-linked bonds should fare better in an inflationary environment.

Inflation is part of the economic cycle. Keeping it under control is the key to a well-run economy and that is where central banks play their role.

Call us if you would like to discuss how an uptick in inflation may be impacting your overall investment strategy.

i https://www.rba.gov.au/media-releases/2021/mr-21-09.html

ii https://tradingeconomics.com/united-states/inflation-cpi

New Financial Year rings in some super changes

As the new financial year gets underway, there are some big changes to superannuation that could add up to a welcome lift in your retirement savings.

Some, like the rise in the Superannuation Guarantee (SG), will happen automatically so you won’t need to lift a finger. Others, like higher contribution caps, may require some planning to get the full benefit.

Here’s a summary of the changes starting from 1 July 2021.

Increase in the Super Guarantee

If you are an employee, the amount your employer contributes to your super fund has just increased to 10 per cent of your pre-tax ordinary time earnings, up from 9.5 per cent. For higher income earners, employers are not required to pay the SG on amounts you earn above $58,920 per quarter (up from $57,090 in 2020-21).

Say you earn $100,000 a year before tax. In the 2021-22 financial year your employer is required to contribute $10,000 into your super account, up from $9,500 last financial year. For younger members especially, that could add up to a substantial increase in your retirement savings once time and compound earnings weave their magic.

The SG rate is scheduled to rise again to 10.5 per cent on 1 July 2022 and gradually increase until it reaches 12% on 1 July 2025.

Higher contributions caps

The annual limits on the amount you can contribute to super have also been lifted, for the first time in four years.

The concessional (before tax) contributions cap has increased from $25,000 a year to $27,500. These contributions include SG payments from your employer as well as any salary sacrifice arrangements you have in place and personal contributions you claim a tax deduction for.

At the same time, the cap on non-concessional (after tax) contributions has gone up from $100,000 to $110,000. This means the amount you can contribute under a bring-forward arrangement has also increased, provided you are eligible.

Under the bring-forward rule, you can put up to three years’ non-concessional contributions into your super in a single financial year. So this year, if eligible, you could potentially contribute up to $330,000 this way (3 x $110,000), up from $300,000 previously. This is a useful strategy if you receive a windfall and want to use some of it to boost your retirement savings.

More generous Total Super Balance and Transfer Balance Cap

Super remains the most tax-efficient savings vehicle in the land, but there are limits to how much you can squirrel away in super for your retirement. These limits, however, have just become a little more generous.

The Total Super Balance (TSB) threshold which determines whether you can make non-concessional (after-tax) contributions in a financial year is assessed at 30 June of the previous financial year. The TSB at which no non-concessional contributions can be made this financial year will increase to $1.7 million from $1.6 million.

Just to confuse matters, the same limit applies to the amount you can transfer from your accumulation account into a retirement phase super pension. This is known as the Transfer Balance Cap (TBC), and it has also just increased to $1.7 million from $1.6 million.

If you retired and started a super pension before July 1 this year, your TBC may be less than $1.7 million and you may not be able to take full advantage of the increased TBC. The rules are complex, so get in touch if you would like to discuss your situation.

Reduction in minimum pension drawdowns extended

In response to record low interest rates and volatile investment markets, the government has extended the temporary 50 per cent reduction in minimum pension drawdowns until 30 June 2022.

Retirees with certain super pensions and annuities are required to withdraw a minimum percentage of their account balance each year. Due to the impact of the pandemic on retiree finances, the minimum withdrawal amounts were also halved for the 2019-20 and 2020-21 financial years.

Time to prepare

There’s a lot for super fund members to digest. SMSF trustees in particular will need to ensure they document changes that affect any of the members in their fund. But these latest changes also present retirement planning opportunities.

Whatever your situation, if you would like to discuss how to make the most of the new rules, please get in touch.

Market movements & review video – July 2021

Stay up to date with what’s happened in Australian and global markets over the past month.

Our July update video takes you through key economic indicators so you can understand how the Australian economy is faring as we recover from the COVID-19 induced recession of 2020.

Please get in touch if you’d like assistance with your personal financial situation.

The post PWS News: July 2021 appeared first on Professional Wealth Services.

There was a raft of positive economic news in March, which should make the Federal Treasurer’s job a little easier when he hands down the Budget on May 11. The Australian economy staged a remarkable V-shaped recovery in 2020, growing 3.1% in the December quarter and 3.4% the previous quarter – the biggest 6-month lift on record – after plunging into recession in the first half year. The main contributor was iron ore, which has doubled in price since March last year.

As the vaccine rollout began and restrictions eased, business and consumer confidence rebounded. The NAB Business Confidence Index rose to an 11-year high of +16.4 points in February while the ANZ-Roy Morgan Consumer Confidence rating hit a 7-year high of 124 points in March, up 30% over the year.

Confidence was reflected in a recent surge in new vehicle sales, housing construction and property values. It was also boosted by a fall in unemployment from 6.4% to an 11-month low of 5.8% in February. Company profits have also remained strong, with 86% of ASX200 companies reporting a profit in the December half year. Although aggregate earnings fell 17%, dividends were up 5% on a year ago with an estimated $26 billion currently flowing to shareholders. The strengthening economy saw the Aussie dollar shed 2c to US76c in March.

It’s not all plain sailing though. Temporary coronavirus JobSeeker and JobKeeper payments ended on March 31.

Market movements & review video – April 2021

Stay up to date with what’s happened in Australian and global markets over the past month.

Our April update video also takes you through key economic indicators so you can understand how the Australian economy is faring as we recover from the COVID-19 induced recession of 2020.

Please get in touch if you’d like assistance with your personal financial situation.

Making a super split

Separation and divorce can be a challenging time, often made all the more difficult when you have to divide your assets. So how do you go about decoupling your superannuation?

In years gone by, superannuation was not treated as matrimonial property, so divorce settlements typically saw one party keeping the house and the other keeping their super. In a sense, neither party won. One ended up with a house but no money for retirement while the other had nowhere to live but money for his later years.

To remedy this situation, since 2002 super can be included when valuing a couple’s combined assets for a divorce settlement. After all, these days super is probably your second largest asset after your family home.

While super is counted in the calculation of the total property, that does not mean it is mandatory to split the super – the choice is yours.

Unlike the early 2000s, both partners are likely to have superannuation these days although traditionally women will still tend to have lower balances.ⁱ On average, women retire with just over half the super balance of men and 23 per cent of women retire with no super at all.

As a result, many divorcing couples may end up splitting super along with their other property.

How to split your super

If you decide to split your super, then you have three avenues, but keep in mind that all require legal advice.

The three ways to split your super are:

• A formal written agreement that both you and your partner instruct a lawyer stating you have sought independent advice,
• A consent order, or
• A court order.

A court order is the last resort if you can’t agree on a property settlement.

You can split your super as you choose both in terms of the amount and the timing. You can split it as a percentage or as an agreed figure and you can choose to split it immediately or at some time in the future. Much will depend on each of your life stages.

But whatever you decide, you MUST comply with the superannuation laws. Money received from your partner’s super must be kept in super unless you satisfy a condition of release. You also need to be mindful of taxable and non-taxable components and divide them equally.

How does it work?

Say the superannuation balances of a couple is $500,000 with John having $400,000 and Susie $100,000. If the property settlement on divorce was decided as a straight 50:50 split and it included the super, then John would need to give $150,000 of his super to Susie.

Susie would nominate a fund and the money would be transferred.

If you have a binding financial agreement or a court order, this transfer of assets from one fund to another will not trigger a CGT event. But if you don’t have such an agreement, then John would trigger a CGT event on the $150,000 he transferred. Susie, meanwhile, would have the advantage of resetting the cost base on her received $150,000. So, a win for Susie, but not for John.

If John happened to be in the pension phase but Susie was still too young, the money that is transferred from his super to Susie will be treated according to his situation. As a result, Susie would be able to access the money before she reached preservation age.

What about SMSFs?

If you have a self-managed super fund, the situation could get a little more complicated as you have to deal with the issue of trusteeship.

If there are only two members/trustees in the fund and Susie chose to leave, then John would either have to find a new trustee within six months or change to a corporate trustee where he could be the sole director.

Assets within an SMSF can also prove an issue, particularly if a sizeable proportion of the fund was tied up in a single asset such as commercial premises. How easy would it be to actually sell the premises? What if the property was John’s business premises and the means by which John was in a position to pay Susie child support? These are questions that need addressing.

If you are in the process of divorce or considering it, why not call us to help you plan your finances before and after the event.

i https://www.afr.com/companies/financial-services/women-less-than-equal-in-retirement-20201203-p56khb#

Bonds, inflation and your investments

The recent sharp rise in bond rates may not be a big topic of conversation around the Sunday barbecue, but it has set pulses racing on financial markets amid talk of inflation and what that might mean for investors.

US 10-year government bond yields touched 1.61 per cent in early March after starting the year at 0.9 per cent.ⁱ Australian 10-year bonds followed suit, jumping from 0.97 per cent at the start of the year to a recent high of 1.81 per cent.ⁱⁱ

That may not seem like much, but to bond watchers it’s significant. Rates have since settled a little lower, but the market is still jittery.

Why are bond yields rising?

Bond yields have been rising due to concerns that global economic growth, and inflation, may bounce back faster and higher than previously expected.

While a return to more ‘normal’ business activity after the pandemic is a good thing, there are fears that massive government stimulus and central bank bond buying programs may reinflate national economies too quickly.

The risk of inflation

Despite short-term interest rates languishing close to zero, a sharp rise in long-term interest rates indicates investors are readjusting their expectations of future inflation. Australia’s inflation rate currently sits at 0.9 per cent, half the long bond yield.

To quash inflation fears, Reserve Bank of Australia (RBA) Governor Philip Lowe recently repeated his intention to keep interest rates low until 2024. The RBA cut official rates to a record low of 0.1 per cent last year and launched a $200 billion program to buy government bonds with the aim of keeping yields on these bonds at record lows.ⁱⁱⁱ

Governor Lowe said inflation (currently 0.9 per cent) would not be anywhere near the RBA’s target of between 2 and 3 per cent until annual wages growth rises above 3 per cent from 1.4 per cent now. This would require unemployment falling closer to 4 per cent from the current 6.4 per cent.

In other words, there’s some arm wrestling going on between central banks and the market over whose view of inflation and interest rates will prevail, with no clear winner.

What does this mean for investors?

Bond prices have been falling because investors are concerned that rising inflation will erode the value of the yields on their existing bond holdings, so they sell.

For income investors, falling bond prices could mean capital losses as the value of their existing bond holdings is eroded by rising rates, but healthier income in future.

The prospect of higher interest rates also has implications for other investments.

Shares shaken but not stirred

In recent years, low interest rates have sent investors flocking to shares for their dividend yields and capital growth. In 2020, US shares led the charge with the tech-heavy Nasdaq index up 43.6%.^iv

It’s these high growth stocks that are most sensitive to rate change. As the debate over inflation raged, the so-called FAANG stocks – Facebook, Amazon, Apple, Netflix and Google – fell nearly 17 per cent from mid to late February and remain volatile.^v

That doesn’t mean all shares are vulnerable. Instead, market analysts expect a shift to ‘value’ stocks. These include traditional industrial companies and banks which were sold off during the pandemic but stand to gain from economic recovery.

Property market resilient

Against expectations, the Australian residential property market has also performed strongly despite the pandemic, fuelled by low interest rates.

National housing values rose 4 per cent in the year to February, while total returns including rental yields rose 7.6 per cent. But averages hide a patchy performance, with Darwin leading the pack (up 13.8 per cent) and Melbourne dragging up the rear (down 1.3 per cent).^vi

There are concerns that ultra-low interest rates risk fuelling a house price bubble and worsening housing affordability. In answer to these fears, Governor Lowe said he was prepared to tighten lending standards quickly if the market gets out of hand.

Only time will tell who wins the tussle between those who think inflation is a threat and those who think it’s under control. As always, patient investors with a well-diversified portfolio are best placed to weather any short-term market fluctuations.

If you would like to discuss your overall investment strategy, give us a call.

i Trading economics, viewed 11 March 2021, https://tradingeconomics.com/united-states/government-bond-yield

ii Trading economics, viewed 11 March 2021, https://tradingeconomics.com/australia/government-bond-yield

iii https://www.reuters.com/article/us-oecd-economy-idUSKBN2B112G

iv https://www.smh.com.au/politics/federal/growth-prospects-for-australia-and-world-upgraded-by-oecd-20210309-p57973.html

v https://rba.gov.au/speeches/2021/sp-gov-2021-03-10.html

vi https://www.washingtonpost.com/business/2020/12/31/stock-market-record-2020/

vii https://www.corelogic.com.au/sites/default/files/2021-03/210301_CoreLogic_HVI.pdf

The post PWS News: April 2021 appeared first on Professional Wealth Services.

There was a raft of positive economic news in March, which should make the Federal Treasurer’s job a little easier when he hands down the Budget on May 11. The Australian economy staged a remarkable V-shaped recovery in 2020, growing 3.1% in the December quarter and 3.4% the previous quarter – the biggest 6-month lift on record – after plunging into recession in the first half year. The main contributor was iron ore, which has doubled in price since March last year.

As the vaccine rollout began and restrictions eased, business and consumer confidence rebounded. The NAB Business Confidence Index rose to an 11-year high of +16.4 points in February while the ANZ-Roy Morgan Consumer Confidence rating hit a 7-year high of 124 points in March, up 30% over the year.

Confidence was reflected in a recent surge in new vehicle sales, housing construction and property values. It was also boosted by a fall in unemployment from 6.4% to an 11-month low of 5.8% in February. Company profits have also remained strong, with 86% of ASX200 companies reporting a profit in the December half year. Although aggregate earnings fell 17%, dividends were up 5% on a year ago with an estimated $26 billion currently flowing to shareholders. The strengthening economy saw the Aussie dollar shed 2c to US76c in March.

It’s not all plain sailing though. Temporary coronavirus JobSeeker and JobKeeper payments ended on March 31.

Market movements & review video – April 2021

Stay up to date with what’s happened in Australian and global markets over the past month.

Our April update video also takes you through key economic indicators so you can understand how the Australian economy is faring as we recover from the COVID-19 induced recession of 2020.

Please get in touch if you’d like assistance with your personal financial situation.

Making a super split

Separation and divorce can be a challenging time, often made all the more difficult when you have to divide your assets. So how do you go about decoupling your superannuation?

In years gone by, superannuation was not treated as matrimonial property, so divorce settlements typically saw one party keeping the house and the other keeping their super. In a sense, neither party won. One ended up with a house but no money for retirement while the other had nowhere to live but money for his later years.

To remedy this situation, since 2002 super can be included when valuing a couple’s combined assets for a divorce settlement. After all, these days super is probably your second largest asset after your family home.

While super is counted in the calculation of the total property, that does not mean it is mandatory to split the super – the choice is yours.

Unlike the early 2000s, both partners are likely to have superannuation these days although traditionally women will still tend to have lower balances.ⁱ On average, women retire with just over half the super balance of men and 23 per cent of women retire with no super at all.

As a result, many divorcing couples may end up splitting super along with their other property.

How to split your super

If you decide to split your super, then you have three avenues, but keep in mind that all require legal advice.

The three ways to split your super are:

• A formal written agreement that both you and your partner instruct a lawyer stating you have sought independent advice,
• A consent order, or
• A court order.

A court order is the last resort if you can’t agree on a property settlement.

You can split your super as you choose both in terms of the amount and the timing. You can split it as a percentage or as an agreed figure and you can choose to split it immediately or at some time in the future. Much will depend on each of your life stages.

But whatever you decide, you MUST comply with the superannuation laws. Money received from your partner’s super must be kept in super unless you satisfy a condition of release. You also need to be mindful of taxable and non-taxable components and divide them equally.

How does it work?

Say the superannuation balances of a couple is $500,000 with John having $400,000 and Susie $100,000. If the property settlement on divorce was decided as a straight 50:50 split and it included the super, then John would need to give $150,000 of his super to Susie.

Susie would nominate a fund and the money would be transferred.

If you have a binding financial agreement or a court order, this transfer of assets from one fund to another will not trigger a CGT event. But if you don’t have such an agreement, then John would trigger a CGT event on the $150,000 he transferred. Susie, meanwhile, would have the advantage of resetting the cost base on her received $150,000. So, a win for Susie, but not for John.

If John happened to be in the pension phase but Susie was still too young, the money that is transferred from his super to Susie will be treated according to his situation. As a result, Susie would be able to access the money before she reached preservation age.

What about SMSFs?

If you have a self-managed super fund, the situation could get a little more complicated as you have to deal with the issue of trusteeship.

If there are only two members/trustees in the fund and Susie chose to leave, then John would either have to find a new trustee within six months or change to a corporate trustee where he could be the sole director.

Assets within an SMSF can also prove an issue, particularly if a sizeable proportion of the fund was tied up in a single asset such as commercial premises. How easy would it be to actually sell the premises? What if the property was John’s business premises and the means by which John was in a position to pay Susie child support? These are questions that need addressing.

If you are in the process of divorce or considering it, why not call us to help you plan your finances before and after the event.

i https://www.afr.com/companies/financial-services/women-less-than-equal-in-retirement-20201203-p56khb#

Bonds, inflation and your investments

The recent sharp rise in bond rates may not be a big topic of conversation around the Sunday barbecue, but it has set pulses racing on financial markets amid talk of inflation and what that might mean for investors.

US 10-year government bond yields touched 1.61 per cent in early March after starting the year at 0.9 per cent.ⁱ Australian 10-year bonds followed suit, jumping from 0.97 per cent at the start of the year to a recent high of 1.81 per cent.ⁱⁱ

That may not seem like much, but to bond watchers it’s significant. Rates have since settled a little lower, but the market is still jittery.

Why are bond yields rising?

Bond yields have been rising due to concerns that global economic growth, and inflation, may bounce back faster and higher than previously expected.

While a return to more ‘normal’ business activity after the pandemic is a good thing, there are fears that massive government stimulus and central bank bond buying programs may reinflate national economies too quickly.

The risk of inflation

Despite short-term interest rates languishing close to zero, a sharp rise in long-term interest rates indicates investors are readjusting their expectations of future inflation. Australia’s inflation rate currently sits at 0.9 per cent, half the long bond yield.

To quash inflation fears, Reserve Bank of Australia (RBA) Governor Philip Lowe recently repeated his intention to keep interest rates low until 2024. The RBA cut official rates to a record low of 0.1 per cent last year and launched a $200 billion program to buy government bonds with the aim of keeping yields on these bonds at record lows.ⁱⁱⁱ

Governor Lowe said inflation (currently 0.9 per cent) would not be anywhere near the RBA’s target of between 2 and 3 per cent until annual wages growth rises above 3 per cent from 1.4 per cent now. This would require unemployment falling closer to 4 per cent from the current 6.4 per cent.

In other words, there’s some arm wrestling going on between central banks and the market over whose view of inflation and interest rates will prevail, with no clear winner.

What does this mean for investors?

Bond prices have been falling because investors are concerned that rising inflation will erode the value of the yields on their existing bond holdings, so they sell.

For income investors, falling bond prices could mean capital losses as the value of their existing bond holdings is eroded by rising rates, but healthier income in future.

The prospect of higher interest rates also has implications for other investments.

Shares shaken but not stirred

In recent years, low interest rates have sent investors flocking to shares for their dividend yields and capital growth. In 2020, US shares led the charge with the tech-heavy Nasdaq index up 43.6%.^iv

It’s these high growth stocks that are most sensitive to rate change. As the debate over inflation raged, the so-called FAANG stocks – Facebook, Amazon, Apple, Netflix and Google – fell nearly 17 per cent from mid to late February and remain volatile.^v

That doesn’t mean all shares are vulnerable. Instead, market analysts expect a shift to ‘value’ stocks. These include traditional industrial companies and banks which were sold off during the pandemic but stand to gain from economic recovery.

Property market resilient

Against expectations, the Australian residential property market has also performed strongly despite the pandemic, fuelled by low interest rates.

National housing values rose 4 per cent in the year to February, while total returns including rental yields rose 7.6 per cent. But averages hide a patchy performance, with Darwin leading the pack (up 13.8 per cent) and Melbourne dragging up the rear (down 1.3 per cent).^vi

There are concerns that ultra-low interest rates risk fuelling a house price bubble and worsening housing affordability. In answer to these fears, Governor Lowe said he was prepared to tighten lending standards quickly if the market gets out of hand.

Only time will tell who wins the tussle between those who think inflation is a threat and those who think it’s under control. As always, patient investors with a well-diversified portfolio are best placed to weather any short-term market fluctuations.

If you would like to discuss your overall investment strategy, give us a call.

i Trading economics, viewed 11 March 2021, https://tradingeconomics.com/united-states/government-bond-yield

ii Trading economics, viewed 11 March 2021, https://tradingeconomics.com/australia/government-bond-yield

iii https://www.reuters.com/article/us-oecd-economy-idUSKBN2B112G

iv https://www.smh.com.au/politics/federal/growth-prospects-for-australia-and-world-upgraded-by-oecd-20210309-p57973.html

v https://rba.gov.au/speeches/2021/sp-gov-2021-03-10.html

vi https://www.washingtonpost.com/business/2020/12/31/stock-market-record-2020/

vii https://www.corelogic.com.au/sites/default/files/2021-03/210301_CoreLogic_HVI.pdf

The post PWS News: April 2021 appeared first on Professional Wealth Services.