Superannuation Discussion + market volatility

[tgh]

a lot safer as well

for now… but for how long ??
Soaking the rich has now changed to soaking the self sufficient.
There are more of us (although not enough to swing seats) and we set a bad example.

 

[cove]

It is time we taxed retired/ retiring politicians excessive pensions some of which run at over $5 million net present value compared with our $1.6 million limit.

 

[Flying mermaid]

What is annoying are two statements

- this is not an increase in tax
Ok no it isn’t, but the net result is as though the superfund is being taxed 30% on dividends.

- this only hits the wealthy
Well no it doesn’t. A retiree with a modest SMSF will be hit in the same %. Actually worse for them as they are more likely to just have banks and Telstra and the amount they are losing, even though small probably means more to them than a wealthier retiree.

 

[JohnK]

If Shorten gets in and the change to refunding franking credits, it will mean a major review of investments and earnings in my superfund. .

Good or bad?

 

[andye]

I'm always taken that these statements project the budget savings on the basis of no-one altering their investment mix and tax affairs as a result. Many will surely find a way to mitigate

On another note, this can't be good news for the blue-chip 'income' stock companies, who will be relatively disadvantaged to 'growth' companies and other classes*. I'm not certain but I think the ability of investors to do well in retirement from these is part of Australia's financial stability

*edit-OTOH one could argue that they are currently relatively advantaged

 

[Flying mermaid]

Good or bad?

Bad from my perspective. .

 

[get me outta here]

Interesting article there, "With almost $18 billion of super money unclaimed in Australia, it's worth knowing if any of it's yours and how to go about getting it." Do you make up the age group with the most lost super?

An interesting read from research conducted in November 2017 (some of the top misleading super myths): Separating fact from fiction when it comes to superannuation

 

[RB]

At present the publicity seems to be concentrating on self-funded retirees. I think other people in managed funds also need to be reading up on the dividend imputations impact.
This AFR article seems to note Keating has some input into the policy
Labor to end share dividend cash perk in $59b grab | afr.com

 

[JohnM]

It is time we taxed retired/ retiring politicians excessive pensions some of which run at over $5 million net present value compared with our $1.6 million limit.

Retired people, even when over 60, on government-based 'old style' defined benefit superannuation pensions are taxed on a PAYG basis according to the standard tax scales (even if the NPV is <$1.6M). That is because the standard 15% tax was not paid during the contribution phase (because employer contributions were notional). At tax time, a 10% rebate is allowed.

If the NPV is >$1.6M, higher rates of tax based on the standard tax scales apply to the earnings on the excess over the $1.6M.

I always remember when Costello announced 'tax free' superannuation in the 2006 budget for implementation in 2007, a reporter made a pointed comment/question on how good it would be for him (Costello). Costello replied that, unlike people in defined contribution funds (at which the reforms were primarily directed), his superannuation pension would be taxed. But his response failed to get broadly picked up or be generally understood. Judging from what I occasionally read, even some superannuation/financial commentators do not appear to know the taxation status of government DB schemes.

 

[Pushka]

If Shorten gets in and the change to refunding franking credits, it will mean a major review of investments and earnings in my superfund. .

I will cash all mine in I think. What a damn nerve while they leave all their own pensions completely in tact.

 

[QF WP]

It is time we taxed retired/ retiring politicians excessive pensions some of which run at over $5 million net present value compared with our $1.6 million limit.

They operate under the same rules as us (just have a more significant contribution level) and it depends on whether the actual contributions are paid (like the majority of us, known as funded benefits) and whether they are defined benefit accounts or defined contribution accounts.

If the super benefit comes from consolidated revenue (thus known as an unfunded benefit), then instead of the income being tax free over age 60 (at present in the vast majority of cases for us mere mortals) the income is taxed at marginal rates. So they don't get it both ways.

 

[Flying mermaid]

I will cash all mine in I think. What a damn nerve while they leave all their own pensions completely in tact.

It certainly will make investing in overseas shares and local property in the SMSF more attractive. Will wait for the dust to settle.

Bought a big chunk of Telstra a year ago and although the divvy has dropped and the price cratered it still was a nice regular income. Now it is looking a bit threadbare as an investment. .

I love the way Shorten is promising bigger write offs for business. Not that I am against promoting business investment, but it feels a bit like rob the doddery old pensioners in order to help the grasping businesses (Who aren’t sharing their bigger profits with employees anyway).

 

[lovetravellingoz]

Why does so much of the investment advice advocate a conservative investment mix for superannuation on retirement? Supposedly a "low risk" strategy.

If one say retires at say 60, most people should have 20+ years to spend that super.

Having the majority in bonds, fixed interest and cash would seem to me to be actually the high risk strategy as it guarantees poor performance. The ride may be smoother, but you are losing money.

Whereas having super with more volatile investments may go up and down more, but history would say that over that 20+ year journey that you will generate significantly more return and will thus have more to spend over that journey?

So why does it really matter if there are periods of lesser return?

Yes some people may have very little funds, but probably most reading this forum will have a healthy to very good balance and so combined with any other investments that they 9including where they live) have they will have the capacity to ride the lows, and to draw down on possibly other investments f they wish to maintain a certain spend each year.

Up to now I have mainly been equities based. With my wife and I now being 57/56 in preparation for retirement I am increasing the diversity in our super to smooth things somewhat and to guard against the effects of a share-market crash by broadening the mix to include more property investments and alternative assets. But I fail to see the sense in fleeing to large proportions of bonds, fixed interest and cash. What am I missing?

 

[get me outta here]

International equities have been doing well for a while now, and I have been taking advantage of that.

 

[There'sOnlyOneJimmy]

- - - snip
With my wife and I now being 57/56 in preparation for retirement I am increasing the diversity in our super to smooth things somewhat and to guard against the effects of a share-market crash by broadening the mix to include more property investments and alternative assets. But I fail to see the sense in fleeing to large proportions of bonds, fixed interest and cash. What am I missing?

I don’t think you’re missing anything.
At our age [in the absence of special individual circumstances, existing illnesses, etc.] we have to make our plans on the basis that we’ll live for another 30 years or so. Of course some will have more or less time to enjoy, but you’ve got to play the percentages.
For those who have stopped or are near stopping employment, that’s a long time for the nest egg to last. So it’s very important to have a significant proportion of the funds invested in growth assets.
Those investors that take the ultra-conservative path, with all/most of their funds in term deposits and the like, will get their capital eroded by the compounding effect of lower income returns, and ongoing inflation.
As an example, my funds are mostly in growth assets and over the last 2 years have grown by 20% (that’s overall, not each year unfortunately ;-). If instead the same funds had been in term deposits and the like, then the return would probably have been something like 6% - 8% over that time. While I admit that the last couple of years have been a good time to be in the market, if even half of that disparity played out on average over the 30 year timeline, the Growth Assets Vs Term Deposit difference would be enormous.
Of course its important to be able to ride through the inevitable market drops. With that in mind, I always have about 2-3 years of consumption in cash-like assets, after taking into account the normal income that the investments generate. For example (using fictional information) if I plan to consume $100,000 per year, and the investments generate $70,000 per year, then I aim to have at least $90,000 ($30,000 x 3yr) invested in cash-like assets. That way I (hope that) I won’t need to sell any assets at a bad point in the market cycle.

Disclaimer: I’m not an Investment Advisor. This is not advice. YMMV. Etc.

 

[burmans]

- this only hits the wealthy
Well no it doesn’t. A retiree with a modest SMSF will be hit in the same %. Actually worse for them as they are more likely to just have banks and Telstra and the amount they are losing, even though small probably means more to them than a wealthier retiree.

This hurts anyone or any entity who is on an average tax rate of less than the company tax rate and has share/managed fund investments that get franking credits.

This demography of people would tend (in general terms) more towards those who are somewhat well off but I agree there will be many who are relatively poor but still have some share investments and hence would be hit by this.

 

[QF WP]

Why does so much of the investment advice advocate a conservative investment mix for superannuation on retirement? Supposedly a "low risk" strategy.

If one say retires at say 60, most people should have 20+ years to spend that super.

Having the majority in bonds, fixed interest and cash would seem to me to be actually the high risk strategy as it guarantees poor performance. The ride may be smoother, but you are losing money.

Whereas having super with more volatile investments may go up and down more, but history would say that over that 20+ year journey that you will generate significantly more return and will thus have more to spend over that journey?

So why does it really matter if there are periods of lesser return?

Yes some people may have very little funds, but probably most reading this forum will have a healthy to very good balance and so combined with any other investments that they 9including where they live) have they will have the capacity to ride the lows, and to draw down on possibly other investments f they wish to maintain a certain spend each year.

Up to now I have mainly been equities based. With my wife and I now being 57/56 in preparation for retirement I am increasing the diversity in our super to smooth things somewhat and to guard against the effects of a share-market crash by broadening the mix to include more property investments and alternative assets. But I fail to see the sense in fleeing to large proportions of bonds, fixed interest and cash. What am I missing?

Happily you're missing nothing. Most people fear losing money more than they fear making it. So it is a natural reaction to people of lesser market knowledge to flee to the "safe havens" of defensive assets (cash and fixed interest) during periods of volatility. Much work has been done in the industry to try and educate people about risks (market, foreign exchange, sovereign, timing, etc) but to the average person that's just too complex.

The only two things that should change in (real) retirement are:

1. Contributions stop
2. Income starts (with that income or any lump sum withdrawals [commutations] for those over age 60 being tax free

The greatest issues with individual bonds (or bond funds) are their duration and credit risk. Any potential increase in interest rates (highest risk or rate movement at the moment in the USA, through some parts of Europe and much less so here in Australia) is the potential loss of capital (as bond markets must be thought of as the inverse of the stock markets). So those that have been fleeing to bonds could actually be entering an investment without full knowledge of the risks pertaining to that asset. So again, they risk losing money and continuing to perpetuate the loss of capital.

 

[QF WP]

As a good tool, Schroders Investment Management have this set of charts on their investor website. You can change the years (going back to 1970 but strangely up to only 2014 - they really need to update, I'll have a chat wit them tomorrow at lunch). So it's reasonably interactive.

Schroders Multi-Asset Investment Sorter

Their wall chart, up in my office, gives a similar story but only for last 20 years (ending 2016). New one out sun updated to 2017. I tell clients to focus on the colours (not the asset sector names) and for them to tell me which colours are more in the upper quartile, or two quartiles, more regularly (of course, doesn't work well with people who are colourblind ) .

 

[JohnK]

I don't quite understand why people are factoring on spending the same amount at 85 years of age as you would at 60 years of age?

Surely you are going to slow down somewhat along the way and not be as active? Maybe I've got it all wrong.

 

[Pushka]

I don't quite understand why people are factoring on spending the same amount at 85 years of age as you would at 60 years of age?

Surely you are going to slow down somewhat along the way and not be as active? Maybe I've got it all wrong.

And JohnK you are not thinking of some of the extra costs associated with ageing. Medical care. Nursing home costs. Some items will fall like food, others will rise. Nothing to do with activity but living.