Superannuation Discussion + market volatility

[cove]

GMOH we decided to not bother. A financial planner may say yes as the tax rate is concessional compared with a top personal tax rate of almost 50%.

 

[nickfromeastryde]

My understanding was that from 1 July 2017, no further contributions other than the SG were permitted once your super balance reached 1.6 million whether in accumulation or pension phase

Stand to be corrected

 

[cove]

I think you may be correct with that Nick as I have been happy just pulling enough out tax free to keep well under that $3.2 million combined amount without having to pay the fiscal fiend. The best part has been getting the tax refund from the franked dividends. I had been so used to paying quarterly even on the SMSF account.
In a good year I can see getting between 7% and 12% plus a bit of capital in the form of pension payments to remain compliant.

 

[QF WP]

A lot of this discussion goes way over my head. What's the 4% mentioned? The compulsory amount you'd have to draw down on super every year?

If I wanted an income of ~$30,000/pa out of super why would I need a final super balance of $750,000? I should be able to achieve that with a much lower super balance?

Superannuation is convoluted.

This is a great point. Our needs change re travel as we age. That’s why I’m doing a lot now. Maybe in 15 years time I’ll be happy tottering pottering in a little cottage garden with a cute fluffy white dog.

Yes JohnK. You have to draw down between 4-9?% in the transition phase. If you are not topping it up each year through SG then capital will diminish.

Yes, once a person has met the preservation age (was 55 originally, now increasing each year [currently 58] until it hits age 60 in a couple of years). The minimum drawdown is 4% for a person under age 65 and if you have a pension in the transitional phase, the maximum drawdown is 10% per annum. The minimum draw down increases after age 65 in tiers, dependent on age. Transition to retirement | ASIC's MoneySmart

Transition as in transition to retirement? I'd like to turn the lights out at 60. That gives me ~6 years to lump as much as I can into Superannuation to avoid PAYG and then decide whether I take it all and manage it myself or let some clown manage it for their own benefit while keeping me happy with some crumbs.

Need some investment ideas.

Being able to finally afford to retire should be the ultimate goal (with an age in mind a good idea). Making your super work hard (being invested in appropriate investments given your time horizon) because the growth on the already invested capital should be more significant than the annual contribution.

 

[QF WP]

Nope. The Regal that mentions is 2013. The Regal I was bitten by, was considerably earlier. I'd guess late '80's. Dual collapse, Regal and Occidental.

From memory, the theft was in the order of $80m.

Ah, now that takes me back to my roots in the industry, remember it (albeit a little hazy now). 1990.

In 1990 in Australia, ‘Occidental Life and Regal Life were unable to meet their obligations due to the improper use of $65 million from statutory funds. Payments by the Bank of Melbourne to remedy the problems that occurred in the settlement process during the aborted sale substantially eliminated any shortfall in assets. The insurance companies were subsequently taken over by Mercantile Mutual Life Insurance Company Limited. The worst affected policyholders lost less than 10 per cent of their policy value and up to one year’s uncredited interest on their savings’

https://www.actuaries.asn.au/Library/Events/SUM/2013/Sum2013PaperAndrew Brown Bimal Balasingham.pdf

 

[QF WP]

The bit I don't get about this statement is you are equating the vehicle (superannuation) with the investment strategy. There are good and bad fund managers, good and bad share investments, property investments etc. but you can equally invest in each of these within and outside super so I don't see why you think super is the problem.

Exactly. The first and most important part of a financial plan are the strategies needed to meet the clients needs (as you mention, use of structures and comparing super v personal investing, risk profiling to understand the clients comfortable levels in each of the asset sectors). Once they are recommended and agreed, then it is finding the right products and services to meet those structures, as well as getting the right amount of money into each of the asset sectors (as that accounts for a large portion of investment return). A much lower portion relates to the fund manager (outperformance versus the median manager or indexes).
Here is a table for the annual returns for all asset classes (I just happen to have it as a saved link): Schroders Multi-Asset Investment Sorter

 

[JohnK]

Being able to finally afford to retire should be the ultimate goal (with an age in mind a good idea). Making your super work hard (being invested in appropriate investments given your time horizon) because the growth on the already invested capital should be more significant than the annual contribution.

I know you are an expert and do this for a living but 2007/2008 is always on my mind.

I was in a balanced fund, and still am in a balanced fund, and lost 25% of my invested capital. The experts didn't see that coming. It took ~6 years for the invested capital to return to 2007/2008 levels and that included yearly super guarantee contributions.

That scenario is unacceptable.

But I don't know better alternatives. Cash intetest rates are poor and if you draw down 4% each year you'd be losing invested capital. Annuities used to be lucrative but not so good now cash interest rates are low. Property would be ideal but you need to spend time researching and managing.

Some decisions over the next 6 years but think making sure $25,000 is invested in superannuation each year could be beneficial in the long run.

 

[QF WP]

My mum was in an aged care facility for 18 months before she died. Before that she was in independent living. For the latter she had to pay $75,000 for a one bedroom unit which was nice. If she left after five years she would get none of that back. Pffft. All gone. Prior to 5 years she would get progressively reducing payments if she left. She moved from that into full care with just 3 months before the five years was up and received $14,000 back.

In the full care facility she was on full aged pension as she and dad didn’t have much at all. She had maybe $100k in the bank from sale of original home and proceeds from independent unit sale. Each month her pension in full was extracted back by the residential care place plus another $300 from her own account.

She actually spent more on aged care living then on any other time in her life. It’s kind of wicked the cost of aged care.

I will not go into aged care. I hated it when mum was there. And she was in a nice home. I vented frequently on here about it. She enjoyed it but as a visitor it was awful.

Am I correct in my assumption that she was in the era of Bonds and not the new RAD/DAP?. The rules of the time were more skewed to the Age Care Facility and thankfully that has changed. The "retention amount" from the independent living contracts with the facility owners was (and still is - as most remain in operation) the closest thing to a rort - as I'm not sure that the original owner of the site should essentially continue to benefit in the valuation of the property. The new system of "retirement resorts" where the owner actually owns the property is a fairer system, but is relatively new. In time I expect this will be the new norm and existing facilities will be challenged in maintaining the contracts that are so one-sided.

As your mum was on the full Age Pension and had little by way of capital to pay the Bond, the way in which the facility got paid was (under the legislation) limited to taking 85% of the Age Pension. However there were Daily Care fees in addition and any ancillary benefits for which she had opted in. Her fees would have been at the higher end of the spectrum.

 

[QF WP]

Nothing to do with the Govt's BS draw down rules IMHO,

If your income requirement is $30k this year, then with inflation running at ~2% then you will need to generate an income of $30,600 next year, $31,212 the following year, and so on.

The only way to generate this growing income (all other things being equal) is to have an investment portfolio that is increasing at least at the inflation rate (hopefully better). Therefore if your investments are returning an average of 6%, you can afford to spend 4%. If you believe your investments are returning an average of 7%, you can afford to spend 5%. If you believe your investments are returning an average of 7% or more in the current climate, you're kidding yourself (IMHO).

Of course, this is an oversimplified explanation and is not advice.

Just think of age pension as doing exactly that..... a couple would need $1,000,000 to earn rake in 3.4%. And even better positioned seeing my uncle is the carer (legitimate as my aunt was rather ill). And they receive the extra $7k or so carers allowance. And then there's the home care package.

Who woulda thought spending all your superannuation would see you rolling in the pension salary package that good !!

For a couple needing $30K indexed for inflation in retirement, a lot will depend on their level of capital and capacity to access Centrelnk benefits. The more personal investment assets the lower the Age Pension, until the shading out provisions take over and no Age Pension is payable. The best part about the Age Pension is that it isn't an asset-backed income stream (like personal investments, superannaution and retirement pensions). For a couple with low assets (or even under the minimum threshold), then the income generated from Centrelink will form the majority of their income towards their target.

 

[QF WP]

The cost and logistics of aged care can be challenging.
We have a family member (in her mid 90's) in care and it is hard to fault the quality of life, cost notwithstanding.
Some folks plan for live in care, but it seems most don't plan at all until something happens
Live in "professional" carers who are well paid seems a great concept save for the cost.
Sadly we have seen several recent examples of progressively less mentally able carees (is that a word?) messing up the process
by interfering with the objectivity of carers who may be tempted to progressively milk assets and minimise the care..

Are you meaning the family members of the care taker? Some are not so well-intentioned and want to limit the expenses so as to maximise their future entitlements. There are levels of stinginess and dealing with clients who have Enduring Powers of Attorney who see the middle ground can take away dome of the problem.

My parents are looking at exactly that - live in care givers until that ceases to be an option due to the extent of their health concerns. They can thankfully afford it and it has been discussed and agreed (with my brother) that our parents wishes are sacrosanct.

 

[QF WP]

I didn’t know about the tax deductibility of these until I read it in this thread. Must say my accountant has been very unhelpful in recent years.

It was only effective 1 July 2017, but your accountant should have been advising you both through generic newsletters or reviewing your personal situation. Unfortunately some are reactive rather than proactive

 

[Steady]

But I don't know better alternatives.

I hear there is money in bees

This is not financial advice....

 

[QF WP]

The $25,000 maximum annual contribution has stopped wealth transfer to the next generation now but was late in coming.Taxing amounts over $1.6 million does make sense.

Has only stopped wealth transfer through the concessionally taxed (15%) environment of superannuation and nil taxed environment of retirement pensions (as transitional to retirement ones are now taxed at superannuation rates), which is the major reason for the government. If a beneficiary receives the death benefit then there are option to contribute in their own names.

Finally make sure you have completed a binding death benefit document so your superannuation can be paid out to nominated beneficiaries in the event of an early demise.

Be aware of the difference between dependent and non-dependent beneficiaries. Also consider the differences between binding and non-binding, as well as lapsing and non-lapsing nominations. Ask your super fund what they offer. Be aware that one can nominate their Estate for some or all of their benefit (particularly if they have no dependent beneficiaries, or have beneficiaries who have inability to manage their own affairs), plus other Estate Planning options.

 

[theblank]

Dont forget the option to live long enough to be a burden to the kids ( thats fair, our mums are doing it to us)
that can come after reverse mortgaging the house to the hilt.

 

[QF WP]

Are these contributions appropriate also when a person already has 1.6m in super?

My understanding was that from 1 July 2017, no further contributions other than the SG were permitted once your super balance reached 1.6 million whether in accumulation or pension phase

Stand to be corrected

Stand to be corrected @nickfromeastryde - or better "clarified". There are two distinct areas in the recent legislation. The first is the "Total Super Balance" which measures both accumulation and pension phase balances. The second is the "Pension Transfer Balance Cap" which measures balances in pension phase at 30 June 2017.

For the "Total Super Balance":

Individuals who have a total superannuation balance of less than $1.4 million at 30 June 2017 and are also aged under 65 at any time in the financial year can bring forward future non-concessional caps to enable non-concessional contributions of $300,000 over three financial years. Individuals with a total superannuation balance of between $1.4 million and $1.6 million will have restricted access to the bring forward provisions. Individuals with a total superannuation balance of greater than $1.6 million at 30 June 2017 will have no non-concessional cap for 2017/2018.

This only talks about non-concessional contributions (to use general terms, they are personal non tax deductible contributions), where there are significant penalties for breaching. That doesn't stop a person from having concessional (employer or personal tax deductible) contributions made to super.
I have just confirmed with a technical team in the industry that a person in this situation may be able to make concessional contributions of up to $25K (which include any SG component), so long as they are employed.

Anybody in this situation should consider talking with an accountant or financial planner to confirm how their personal circumstances fit the position above.

GMOH we decided to not bother. A financial planner may say yes as the tax rate is concessional compared with a top personal tax rate of almost 50%.

Hmmm, a good financial planner would firstly do a bit of research into the clients situation before giving advice either way...

 

[QF WP]

I know you are an expert and do this for a living but 2007/2008 is always on my mind.

I wouldn't call myself an expert (there are plenty with more knowledge than me), however if I don't know the answer, I have the resources to investigate and access an answer. I have lived through the 1987, 1994, 2000 and 2007 corrections (whilst working in the industry) - that helps discussions with clients and prospects.

I was in a balanced fund, and still am in a balanced fund, and lost 25% of my invested capital. The experts didn't see that coming. It took ~6 years for the invested capital to return to 2007/2008 levels and that included yearly super guarantee contributions.

That scenario is unacceptable.

Then you may not be invested in the correct asset allocation. In 1987 most people with high allocations to Aust or Intl shares lost ~45% in 2 days. But don't despair - remember that you are not just investing until you retire and stop contributing, you are investing for the term of your natural life.

But I don't know better alternatives. Cash interest rates are poor and if you draw down 4% each year you'd be losing invested capital. Annuities used to be lucrative but not so good now cash interest rates are low. Property would be ideal but you need to spend time researching and managing.

Some decisions over the next 6 years but think making sure $25,000 is invested in superannuation each year could be beneficial in the long run.

Going all to cash (one of the defensive asset sectors) would not be the answer unless you are accepting a staged reduction in your capital every year. The markets are not factoring in any significant economic growth apart from USA and certain (small) pockets of Europe, so we are in a low return environment for the foreseeable future (unless USA and North Korea start their war).

 

[CaptJCool]

I hear there is money in bees

This is not financial advice....

Buzzy Steady.
Buzzing ever since you mentioned it's the golden bee

Shhhh it's adelaides best kept secret

 

[JohnK]

I wouldn't call myself an expert (there are plenty with more knowledge than me), however if I don't know the answer, I have the resources to investigate and access an answer. I have lived through the 1987, 1994, 2000 and 2007 corrections (whilst working in the industry) - that helps discussions with clients and prospects.

That trend in corrections stands out quite loud. 7 years, 6 years, 7 years and now 10+ years and still going.

I don't want to be around at the next correction. People will lose a lot of money which is not good if you're retired or close to retirement.

 

[casanovawa]

I just shifted my super up from a balanced plan to a growth plan once i learnt that it only takes 5 days to switch it back to a safer plan if i have any doubts about China or other parts of the global economy etc...

I never really looked my my super for ages, at one point not for 10 years or so and the statements were going to an address i was at about 3 shifts ago... But knowing now that I could shift plans to variously more conservative levels I guess back near the GFC I would have been inclined at some point to have tried to shift towards a more cash/defensive plan for the duration although identifying when the issues were starting and when it was ending would also have been problematic and how hard were Australian shares hit as opposed to international shares etc...

I guess from now on I will take a more proactive interest in what sort of areas my super is invested in...

 

[QF WP]

That trend in corrections stands out quite loud. 7 years, 6 years, 7 years and now 10+ years and still going.

I don't want to be around at the next correction. People will lose a lot of money which is not good if you're retired or close to retirement.

Whilst they were correlated (time wise) this cycle is bucking that trend. You planning on going somewhere (dying?) before the next correction, or are you referring to changing investment options to more conservative approach. The closer one gets to retirement, the more conservative some people get - but don't forget you should be aiming to invest for your lifetime, not cessation of work (which only generally means cessation of contributions).