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Superannuation

Why Australia needs an institute for applied ethics

Capitalism depends on government to provide a trusted framework of rules around it. But when politics turns into reality TV, we must ask the ethical questions ourselves.

The capitalist model, detailed in Milton Friedman’s 1962 classic, Capitalism and Freedom, is often criticised by non-economists for celebrating the pursuit of self-interest.

Yet capitalism’s claims to moral legitimacy come not only from its promotion of liberty, but also from its impressive claims to aggregate economic efficiency. Specifically, capitalism claims to produce community outcomes that are Pareto optimal, meaning that no one person can be made better off without at least one other person being made worse off.

Except as required by the law of the land, individuals in a capitalist system are not obliged to attend to the interests of another. They are free to pursue persistently divergent interests, as workers, investors and consumers. And those who run businesses have no social responsibility beyond the pursuit of profit.

But while the capitalist model is founded on the pursuit of self-interest, it will not function in the absence of trust. Mutual confidence in the functioning of the capitalist system is critical to its claimed efficiency benefits. A lack of trust means a suboptimal number and size of transactions, and underinvestment in innovation, with significant implications for the level of aggregate economic activity, productivity and real income growth. Moreover, a sudden loss of trust can have catastrophic social consequences, as the global financial crisis of 2008-09 illustrates.

A recent report by Deloitte Access Economics, commissioned by The Ethics Centre, explains how large gains in economic activity can be achieved with modest improvements in levels of trust.

Readers of this newspaper have observed how trust in business has been undermined by apparent failures to meet community expectations in the treatment of customers in many sectors of the economy, including through impenetrable information disclosures, automated customer call centres and store closures. And, like all other Australians, they would be wondering about their capacity to cope with the many ways in which businesses and governments might make use of advances in AI and robotics.

In the capitalist system, businesses are not to concern themselves with meeting community expectations, except to the extent that doing so increases profit. Ensuring that business meets community expectations is the responsibility of government.

As Friedman puts it, capitalism relies upon a functioning democratic system that both enables and obliges its citizens to elect governments to ‘‘determine, arbitrate and enforce . . . a framework of law’’ to ensure ‘‘free and open competition’’ and protection from ‘‘fraud or deception’’. And Friedman goes on to explain, if somewhat grudgingly, that government also has responsibility for attending to negative externalities and making adequate provision of public goods.

Capitalism casts business and ‘‘the rest of us’’ (Friedman’s expression) as adversaries, and government as our protector.

So, it is something of a paradox that, year after year, surveys of ‘‘the rest of us’’ report that, among the principal institutions affecting our lives – businesses, not-for-profit entities, government and the media – it is government that enjoys the least trust.

Capitalism demands a lot from government. Mostly, our political leaders fall short. Instead of attending to frameworks of law and enforcement, many have preferred the role of business-bashing critic, pointing an accusatory finger at business executives, not themselves, for having failed the pub test or for failing to meet community expectations.

It may be the case that the 24/7 reality TV show, through which citizens get to observe the workings of modern politics, encourages this sort of spectacle.

Yet, no matter its explanation, it is corrosive of effective governance, which depends upon elected officials having some detachment from outrage and mania, not seeking energetic immersion in it.

We have a problem.

Following the global financial crisis, serious thinkers around the world began questioning whether the adversarial contest at the core of the capitalist system might not be its Achilles heel.

Capitalism proposes a system in which business is motivated by nothing other than profit, and its executives by nothing other than self-interest, and leaves it to the rest of us, also motivated by nothing other than self-interest, to elect politicians to protect us with laws that we cannot possibly comprehend and regulatory bodies with which we can have no meaningful contact. This is not an arrangement designed to build trust.

Recent global efforts to make more transparent the social and environmental impacts of business activity, and to have business leaders accept accountability to the community for these impacts, seem to me to be steps in the right direction.

But these will only take us so far. The big problem we have is that, as individuals and as a community, we confront a set of ethical questions that are just damned difficult. And we have not invested sufficiently in respected institutions that might help us think them through.

In all democracies, there is a compelling case for centres of expertise that facilitate sober reflection. This is why we fund universities, a professional public service and, within the public sector, institutions that enjoy a higher level of independence, such as the CSIRO and the Productivity Commission.

Yet, when you reflect on the recent and emerging causes of a loss of trust in democratic capitalist systems, and the economic and social gains that would come from addressing them, you have to think that something is missing. That is why I have come to the view that it is time for us, as a community, to invest in an Australian Institute for Applied Ethics. This is a modest investment, promising very large rewards.

Ken Henry is a former Treasury secretary, and one of 1600 signatories of an open letter calling for federal funding for an Australian Institute for Applied Ethics.

Why Australia needs an institute for applied ethics2024-03-08T16:36:12+11:00

HOW TO NOT OUTLIVE YOUR SUPER

Retirement Work out which of these five retiree types you are to guide your spending after you stop working, says Joanna Mather.

Longevity risk – or the prospect that you will live longer than you anticipate and therefore run out of retirement savings – keeps many people up at night.

Take actuary David Orford, the managing director of annuities business Optimum Pensions, whose mother died of a heart attack at 72. Her father also died of a heart attack at 72. Orford, 62, has had a heart bypass operation and takes cholesterol medication and reckons it is possible he will live longer than his father who died at 93.

Then again, 47 per cent of people die before they reach life expectancy, and he could get hit by a bus tomorrow.

‘‘People often say variability of investment returns is the biggest risk postretirement, but I think it’s 100 per cent longevity risk,’’ Orford says. ‘‘That’s apart from losing your spouse, which has no effect on women but results in reduction of life expectancy for men.’’

The point is not to be flippant about Orford’s mortality but to acknowledge that life expectancy projections are just that – best guesses. As such, the biggest financial question many people face is how to budget for an enjoyable retirement while minimising the risk of outliving their savings.

The retirement income of most Australians comes from the government-funded means-tested age pension, an account-based pension (an amount withdrawn regularly from superannuation), or a combination of both.

How much to spend

Even before they get to longevity risk, many retirees struggle with working out how much to spend.

‘‘Clients ask three things,’’ says David Reed, who runs Sydney-based The Retirement Advice Centre. ‘‘‘When can I retire?’ ‘How much can I spend each week?’ ‘How long is it going to last?’ And the thing that answers all of those questions is their withdrawal rate.’’

There are some free guides. The federal government’s Moneysmart website offers a retirement income calculator, as do many superannuation funds.

The Association of Superannuation Funds of Australia developed a ‘‘retirement standard’’ in 2014 and updates it regularly to track changes in cost of living.

The current ASFA standard for a ‘‘comfortable’’ lifestyle is $71,723 income a year for couples and $46,620 for singles. The lump sum required for a ‘‘comfortable’’ lifestyle for a couple is $690,000 and $595,000 for a single. A ‘‘comfortable’’ lifestyle includes the occasional restaurant meal, an annual domestic trip and an international trip once every seven years.

The annual income guide for a ‘‘modest’’ lifestyle is $50,981.27 for couples and $32,417.48 for singles. The lump sum required for a ‘‘modest’’ lifestyle is $100,000 for both a couple and a single.

‘‘There tends to be a level of conservatism built into the way many people spend their money in retirement,’’ says Jonathan Scholes, who specialises in wealth management at financial advisory and accounting business Findex. ‘‘As financial planners, we are often talking to clients about taking that holiday or buying that new car rather than necessarily saving for when they are 95.’’

‘‘In many instances, our clients are sacrificing their own personal standard of living to leave more to the children and their beneficiaries. But we still do have individuals who spend more money than perhaps their capital allows.’’

For a fee, financial planners will use life expectancy data, actuarial insights and computer modelling to devise suggestions for how much clients can confidently spend each year.

With that in mind, Smart Investor asked Challenger’s head of technical services, Andrew Lowe, to model five typical retiree types to see how much they might be able to draw from their savings each year without running out of money before they hit life expectancy.

The five retiree scenarios are: age pensioner; part age pensioner couple; self-funded couple soon to become part age pensioners; self-funded couple; and self-funded single. The modelling uses Challenger’s retirement illustrator tool for financial advisers, based on assets and super balances at age 67.

Different scenarios

Each scenario is detailed on the next page, while the graphic above shows the annual sum each retiree type might be able to spend based on their superannuation, other savings, age pension eligibility and life expectancy.

The table on the next page shows the ‘‘safe spend’’ for balances from $200,000 to $3.8 million.

For each scenario, Lowe provides an amount at which the retiree/s can have varying levels of confidence – ranging from 50 per cent to 80 per cent – that they won’t outlive their savings.

Given the federal government wants superannuation funds to ensure customers have access to financial products that guarantee lifetime income and Challenger is in the business of selling annuities, Lowe has included the purchase of a CPI-linked lifetime annuity in two of the five scenarios.

Annuities provide guaranteed income over a set period in exchange for an upfront cost – Lowe’s scenarios involve using 20 per cent of super savings to buy an annuity.

All superannuation in the scenarios is assumed to be invested 50 per cent in growth assets such as shares and 50 per cent in defensive assets such as bonds.

All modelling is to life expectancy, which is the age(s) to which an average Australian of a given age can expect to survive (or at least one of the people in a couple is expected to survive), based on Australian life tables 2015-17.

‘‘In many ways the key is confidence,’’ Lowe says. ‘‘When retirees have the confidence that they will have money available later, they can spend more earlier in their retirement. Current behaviour, with the majority drawing only the minimum, suggests that retirees do not have that confidence to spend.’’

The mandated drawdown rate from super in retirement ranges from 5 per cent to 9 per cent according to age, and many people use the minimum rate as a rule of thumb for what they should spend.

For many retirees, this results in unnecessary penny-pinching, according to the federal Labor government, which has called for submissions to a Treasury review looking at how to give retirees more confidence to spend their retirement savings, either via new products or better advice.

‘‘The problem is most retirees do not have access to the appropriate products to help them maximise their super over their lifetime,’’ Assistant Treasurer Stephen Jones said when he launched the review in December. ‘‘In fact, 84 per cent of retirement savings are held in account-based or allocated pensions, with only 3.5 per cent held in annuities. Unlike account-based pensions, annuities offer the option of receiving regular payments for life, regardless of how long a person lives.’’

Brisbane couple Glenn and Annette Mitchell purchased an annuity when they retired in 2014. They ran a business manufacturing sheepskin seat covers for 34 years and felt capable of managing their retirement finances.

‘‘That was a mistake,’’ says Glenn, a father of two and grandfather of four. ‘‘We did not know the rules that governed Centrelink benefits and the impacts of investments on pension entitlements.

‘‘The biggest issue for us was the income from our rental property investment was not sufficient to sustain our outgoing expenses throughout retirement, so we needed an alternative, assured income.’’

Glenn says that the annuity lifted the couple’s annual income from roughly $44,000 a year to $89,000.

Some would argue the government-funded, means-tested age pension paid by Centrelink is the ultimate longevity hedge. If you run out of money, then you’ll qualify.

The Treasury discussion paper says retirees tend to worry about the upfront cost of annuities, don’t like the idea that large sums of money are ‘‘locked away’’ when health or aged care emergencies might arise, and are worried about ‘‘wasting capital’’ if they die at an early age.

Superannuation funds and insurance providers are working on ways to make annuities more attractive, such as allowing the withdrawal of capital in an emergency.

The government is trying to figure out ways it could make the products cheaper by taking on some of the insurance risk.

Retiree types

Age pensioner | The first retiree type is a single woman who is renting and eligible for the full age pension. She has $300,000 in super, $30,000 in cash and term deposits and $10,000 worth of personal assets (such as cars and jewellery). She has a life expectancy of 90.

Lowe’s modelling shows she can draw $45,400 a year (indexed with inflation each year) with 80 per cent confidence she can maintain that level of annual spending to her life expectancy. If her retirement savings run out, she will need to rely on the age pension, currently $28,514 a year for a single ($42,998 for couples). ‘‘If she were to ask me how much she could spend in retirement, I would take her maximum rate of age pension – which is $28,500 – and combine it with [an account-based pension using] her $300,000 super to find she can buy a very confident additional level of income,’’ Lowe says. ‘‘She can have a 50 per cent degree of confidence that she could spend $48,600 a year and a 90 per cent degree of confidence at $43,500 a year.’’

Part-pensioner couple | The home-owning couple in this scenario has $650,000 in combined super, $50,000 in cash and deposits and $20,000 of personal assets. Their life expectancy is 94.

If they draw a combined income of $70,100 a year, they have an 80 per cent chance of having sufficient funds to maintain that budget to age 94.

Initially, less than one-third of their income comes from the age pension and two-thirds from super and private savings. But over time the age pension increases to represent more than half of their income.

Self-funded couple soon to become part-pensioners | As homeowners with $1 million in super, this couple just misses out on qualifying for the age pension when they retire at 67, although they will become eligible in a couple of years.

They can draw a combined income of $78,200 a year with 80 per cent confidence they will not outlive their savings.

If the couple allocates 20 per cent of their retirement savings to a CPI-linked lifetime annuity (at a cost of $200,000), their confidence level rises to 89 per cent.

The annuity would guarantee lifetime income of an extra $10,500 a year.

Self-funded retiree couple | These homeowners have $1.6 million in combined super, $100,000 in cash and term deposits and $50,000 of personal assets.

They can draw a combined income of more than $97,000 a year with 80 per cent confidence that they will not outlive their savings.

If they were comfortable with a 50 per cent degree of certainty, they could dial up their annual drawdown to $110,000 a year. They are likely to become eligible for a part-pension later in life.

If they invested 20 per cent of their super savings in a lifetime annuity ($320,000), they would get more than $16,500 a year of guaranteed, CPI-linked income for as long as they live and their account-based pension would last longer.

Self-funded single | This single homeowner has $1.9 million in super, which puts her at the upper end of what is allowed in tax-free retirement phase super accounts. She is also likely to be eligible for a part age pension later in life.

With an 80 per cent level of confidence, she is unlikely to run out of money spending $111,500 a year. For the first decade or so of retirement, her income is derived from an account-based pension and other income (interest on savings) until she becomes eligible for a part age pension at 90.SI

HOW TO NOT OUTLIVE YOUR SUPER2024-01-29T16:59:20+11:00

How your SMSF stacks up, in eight charts

Take control DIY super funds can build wealth for a luxury retirement. Here is who has them, and what they invest in. Tom Richardson reports.

Australia’s system of compulsory superannuation means most workers have substantial retirement savings by midlife, with smart investment decisions and savings discipline the key to unlocking a blue-chip retirement.

Most Australians build their retirement wealth within an industry or retail superannuation fund, but others use a self-managed superannuation fund (SMSF) that they set up (in accordance with Australian Tax Office rules).

Given the average Australian male between 45 and 49 has just $224,200 in superannuation (as of 2022, according to Deloitte), and the average woman’s balance is just $146,400 for the same age group, many Australians, particularly in midlife, see setting up an SMSF as a better option to boost their retirement savings.

These funds are described as ‘‘selfmanaged’’ because the members make their own decisions about what investments to buy and hold in the fund.

‘‘SMSFs are subject to the same tax concessions as other types of super funds and the same rules when it comes to not being able to access your money until you retire,’’ says Peter Burgess, CEO of the SMSF Association.

The funds are set up as trusts and require a deed that outlines their governance and names the trustees who are also the legal owners of the assets.

Here are seven charts that explain who has SMSFs, what they invest in, and the average size of their balance.

What are SMSFs and how popular are they?

In Australia, there are 610,287 funds boasting self-managed assets under management totalling $878 billion, ATO data shows.

The total number of SMSFs in operation has been growing steadily (the number has risen to today’s 610,287 from 580,479 in 2021 and 533,716 in 2015).

The graph below shows industry super funds manage the highest amount of superannuation money at $1.2 trillion, followed by the SMSF sector.

More people are opting for SMSFs because they can have control and flexibility over their investments, and there are certain investment rules set up for SMSF investors, Burgess says.

‘‘So, for example, you’re not restricted to choose investments from a menu like you typically are in larger funds – you can invest in shares, residential or business property for example,’’ he says.

Contributions up to $27,500 per year (including compulsory super) may be made per member into SMSFs during a financial year at concessional tax rates of 15 per cent, which is commonly lower than other income tax rates.

Women and young people are two demographics driving the rising uptake of SMSFs, says Drew Meredith, a director at private wealth manager Wattle Partners.

‘‘I put this down to greater levels of financial literacy, given the popularity of podcasts and education in the last three years post the pandemic,’’ says Meredith.

What type of person has an SMSF?

The tax office’s data shows about 69 per cent of all SMSFs have two members as trustees, as cohabiting or married couples commonly combine funds.

Single members represent 24 per cent of all funds and 7 per cent of funds have three to six members. Funds with three to six members may also include children, other family or unrelated investment partners.

‘‘A self-managed super fund is a fund that has no more than six members. The vast majority have one or two members normally as spouses, so the members are the trustees,’’ says Burgess.

The highest proportion of average income per SMSF member is between $0 and $20,000, at 22.5 per cent. This reflects the fact that 55.1 per cent of members are 60 or over and are retired or semi-retired.

(The median Australian employee earned $65,000 in 2022, the Australian Bureau of Statistics says.)

The chart above shows at least 40 per cent of SMSF members earned above the median income even after accounting for the fact that many have relatively low incomes in retirement. In other words, many SMSF members may be asset rich, but income poor because of their advanced age.

‘‘There is a tendency for those with higher levels of wealth to be better engaged with their investments,’’ says Meredith.

‘‘It tends to be that those with higher asset levels want greater control of their money, or at least transparency over where it is invested. They tend to see it as a real asset, not someone else’s.’’

Meredith also says that much SMSF advice is driven by financial advisers, who are unaffordable to many, so it’s natural that those on higher incomes, getting financial advice, might gravitate to them.

‘‘As you get more money, you want more control, it’s also driven by financial advice and SMSFs are more recommended by financial advisers to people with significant assets of $500,000 or more.’’ he adds.

When do most people start an SMSF?

According to the ATO, the average age of an SMSF member is 61.

‘‘The majority of SMSFs are set up by retirees, so they tend to have more cash as they need it and more income-producing, rather than growth, assets,’’ says Meredith.

Many people wait until they are nearing retirement, or their super balance has tipped over a certain amount, before starting an SMSF because at that point it becomes more cost-effective to have money in a DIY fund.

Meredith says SMSFs in the accumulation phase (before retirement) are often set up by professionals in blue-collar jobs, or by successful small business owners.

SMSFs with more than $500,000 should be cheaper to run than paying an industry or retail fund’s fixed fees on an annual basis, says Burgess. For example, paying an industry fund 1 per cent would equal $5000 in fees paid every year on a balance of $500,000, with SMSFs able to be run at a cheaper cost than this per year.

‘‘For individuals with large balances, SMSFs can be typically cheaper than being in a large fund once you go over $500,000,’’ says Burgess. ‘‘But remember you have that additional responsibility as the trustee of your fund, although you might not have the same protections that come with being in a large fund.’’

What is an SMSF’s typical balance?

As SMSF members contribute more to their funds over time, their balances increase on top of investment returns via capital growth and dividends. This means older investors tend to have accumulated the highest balances, says Meredith. By the time SMSF members reach their mid-70s, they have an average of about $1.4 million.

But the median SMSF size – discounting the impact of exceptionally high balances – is $467,187.

According to data from SMSF platform provider Class, the average contribution per member in financial 2022 for concessional (or pre-tax) amounts taxed at a lower rate was just over $20,000. The average non-concessional (after-tax) contribution was just over $60,000 per year. This shows many members have significant disposable incomes to invest in their SMSFs.

What do SMSFs invest in?

SMSFs’ largest single investments are listed shares at $260 billion. Data from Class shows the most popular shares to invest in on its platform are Commonwealth Bank, BHP, Woodside Energy and Westpac.

Blue chips are common holdings as they’re among Australia’s largest companies and pay good dividends, Meredith explains.

‘‘Retirees need cash and want to see income coming in so the easiest way to do that is to get dividend income coming in and hold cash, as you still have to pay the bills in retirement,’’ he says.

‘‘An SMSF is like an extra bank account for retirees, and you can get 5 per cent on cash now, so people like to have it more than ever.

‘‘Plus with companies that pay fully franked dividends you get franking credits, so you get a free kick of around an extra 30 per cent [of taxable income benefits] if you’re in retirement or pension phase.’’

After listed shares, the next biggest asset class is cash and term deposits totalling $147.4 billion. Then there’s $108.3 billion in unlisted trusts, $81.1 billion in nonresidential property, $52.7 billion in listed trusts such as managed investment schemes, $53.2 billion in other managed investments, $44.8 billion in residential property, $14.1 billion in overseas shares, $10.1 billion in debt securities, and $943 million in cryptocurrencies.

Residential property is not necessarily more attractive than other investible asset classes because, while it can be bought via an SMSF, it cannot be lived in by the SMSF owner or rented by them or anyone related.

‘‘An SMSF can acquire residential property as long as it’s not being acquired from someone related to the fund. Once the property is sold down the track, if it’s owned by the fund it’s taxed at concessional rates of CGT compared to other types of investment vehicles,’’ Burgess says.

Other asset classes including artwork and overseas property make up the difference to take the total value of SMSF assets to $876.5 billion as at June 30, up from $843.7 billion at the same time in June 2022.

How much do retirees end up with?

According to ATO data for the tax year to June 2021, the average SMSF member balance for those aged between a standard starting retirement age range of 60 to 64 is $911,974 – it is, however, skewed by some exceptionally large SMSF balances.

This is far higher than the average (non-SMSF) superannuation balance of $402,838 for men aged between 60 and 64, or $318,203 for women the same age.

Meredith says SMSF investors tend to have higher incomes, financial education and literacy, which explains why they accumulate larger balances by retirement age. SI

How your SMSF stacks up, in eight charts2023-11-21T14:39:03+11:00

THE PRICE OF RETIREMENT

Golden years Whether it’s overseas holidays with the family, or a more modest life closer to home, there are retirement plans to suit every budget, writes Duncan Hughes.

About 3000 Australians retire every week and the most pressing question for many is: have I saved enough? The Association of Super Funds of Australia regularly updates what it calls its retirement income standard, which attempts to show what is needed for a ‘‘modest’’ versus ‘‘comfortable’’ retirement.

Assuming mortgage-free home ownership, the annual budget for a couple seeking a comfortable lifestyle is about $70,000, and $45,000 for modest, the analysis shows.

Consultancy BDO has built on that information to provide some estimates for what might be described as an affluent lifestyle. Roughly speaking (very roughly speaking because there are so many caveats), a lump sum at retirement of between $2.5 million and $3 million could provide an annual income of about $150,000, BDO financial advisor Kelly Kennedy says.

At this level, a couple can probably plan two luxury holidays a year, home renovations every five to 10 years and comprehensive health insurance.

‘‘Everyone’s retirement planning is a puzzle with unique pieces that fit their lifestyle,’’ Kennedy says, adding that the most common mistake is not planning early enough. It is also very important for couples to agree on their goals and expectations before they formally exit the workforce, she says.

‘‘If you need to make changes or sacrifices in the lead-up to retirement, being on the same page can make that less challenging.’’

The budget for affluent retirees is about four times that of a couple retiring with “modest” private savings of about $100,000 and access to the government-funded age pension, giving them $45,000 a year.

As official figures from the Australian Bureau of Statistics show, the retirement phase of life is increasingly long. Women retiring at the age of 64 have a typical life expectancy of another 20 years – for men it is 16 years.

So, where to start?

The government-sponsored MoneySmart Retirement Plan (https://moneysmart.gov.au/retirement-income/retirement-planner) is free and can estimate income from super and the age pension, how contributions, investment options and retirement age affect retirement income, as well as how working part-time or taking a break from work affect a super balance.

‘‘The big questions new retirees ask is how much do they need for a comfortable retirement, how long will their savings last, will it keep up with inflation and how can they make it last longer,’’ says Wayne Strandquist, president of the Association of Independent Retirees (AIR), which represents current and future partly and fully self-funded retirees.

For many Australians, the age pension remains a critical part of retirement planning, particularly for older retirees who need to top up on depleted lump sums, he says.

Olivia Maragna, co-founder of Aspire Retire Financial Services, which typically advises high-net-worth clients, recommends pre-retirees monitor their lifestyle and living costs by checking their bank and credit card accounts over a three-month period and then multiply by four to get an approximation of annual spending.

‘‘A lot of people say they do not live lavishly but are surprised to find their annual budget is around $250,000,’’ she says.

Fund manager Paul Huggins is more fortunate than many in that he can afford to live very well in retirement. He says a good lifestyle will mean being able to pursue hobbies ranging from buying art and fine wines to long days on the golf course, travelling, or indulging in his passions: classic cars.

He is provisioning for the typical budget of a classic car enthusiast, which is between $100,000 and $250,000, and says although money is important, the most successful retirees are those with plenty of interests. ‘‘I don’t have a retirement date,’’ Huggins says. ‘‘I get the most joy from cars and working.’’

Other would-be retirees might find planning and budgeting a bit more challenging.

Author Bec Wilson, who is next week launching a new podcast about preparing retirement with Nine, which owns AFR Weekend, says the first step is to take time to build a vision of life post-work. The process can take months or even years, she says. ‘‘Take time to ponder your goals and dreams. Read as widely as you can for inspiration.’’

The second step is to break those dreams down into specific line items from which to construct a budget. ‘‘I suggest people budget their retirement costs out in two separate spreadsheets – one for budgeting your cost of everyday living, and the other for budgeting out your one-off expenses,’’ Wilson says.

‘‘Both need to be based on specific itemised expenses you expect.’’

Think particularly hard about the first 10 to 15 years of your retirement because they are the years when spending is typically highest because retirees are in the best health, Wilson says.

‘‘Maybe there’s a special multi-generational family holiday that you want to fund your family on to celebrate an anniversary or significant birthday.

‘‘Then think about your cars, and how often you might want to replace them, and how much you want to allocate, as a periodic budget, and how that would divide back to an annual figure. And think about what you might need in your budget to maintain your home, or modify it to age with you.’’

The third and final step in the budgeting process is to try and work out what that looks like for you as a total capital amount over your lifetime. And, seek advice.

‘‘Financial advisers have excellent software that they can plug all your budget numbers into and project how much you might need to live your retirement dreams, and they’ll keenly use all the hard work you’ve done here to get there,’’ Wilson says.

BDO’s Kennedy says the amount needed for retirement varies for each client depending on lifestyle, age and whether they want to provide for their children or ‘‘SKI’’, an acronym for ‘‘spend kids’ inheritance’’.

‘‘I’ve even had clients saying the last cheque can bounce,’’ she says.

‘‘But then I’ve had other clients who want to retain the value of their capital throughout retirement because they want to leave a specific legacy. And some people might have charitable and philanthropic wishes. Clients are also asking about how providing a house deposit for their adult children is going to impact my ability to fund my retirement.’’

When working on scenarios with clients, Kennedy builds in assumptions such as the likelihood that expenses will decrease by about 10 per cent every five years.

She says some of the common mistakes of retirement planning include underestimating the impact of inflation, which can be especially hurtful for people on fixed incomes.

Another is underestimating how long you will live, or longevity risk. ‘‘I generally do modelling for my clients to age 100 because it’s best to err on the side of caution,’’ she says.

Working out a lump sum with which you need to retire is also tricky. Wilson says simply multiplying the total expense budget per year by the number of years you plan to live will not calculate the amount you need.

‘‘You need to consider how your total investments will compound over time,’’ she says. ‘‘The 10/30/60 rule of thumb says that we generate 60 per cent of our investment returns during our retirement years from the money we have invested – so you many not need as large a topline amount as you think.’’

A recent Intergenerational Report found that many retirees are living too frugally because they feared they would run out of money before they died and not be able to afford medical care.

Treasurer Jim Chalmers is among those calling on super funds to produce better ways to give members confidence that their retirement savings will last.

Greg Lowe, 64, and his partner Marina are attempting to boost their super savings by using their real estate investments to achieve a ‘‘comfortable retirement’’ income of about $70,000 a year.

The Canberra-based maintenance officer is using the large backyard of his Canberra investment property to build a three-bedroom apartment to generate additional rental income.

‘‘It may be pretty valuable,’’ says Lowe, a father of three adult children and three grandchildren, about his retirement income strategy.

Strong demand and rising rents help to offset fluctuating returns in their account-based pension caused by volatility in global equity and bonds markets.

For Lowe, the ASFA retirement lifestyle guide predicts the couple will be able to have one holiday in Australia a year, own a reasonable car and afford an occasional bottle of wine.

They will also be able to continue private health insurance, take part in a range of regular leisure activities and buy good clothes.

Brendan Ryan, principal of Later Life Advice, an independent financial adviser, says couples who own a home and have an asset test threshold of just over $1 million could still be eligible for a part-age pension. “If you are eligible for $1 of pension you can unlock a suite of discounts, entitlements, rebates and preferential thresholds,’’ Ryan says.

Some retirees experiment with ways to boost their budgets, including tapping equity in the family home or downsizing and adding extra contributions to super.

Frank Walmsley, a director of Canberra Granny Flat Builders, says many people coming up to retirement have big gaps in their super because mandatory funding was not introduced until 1992.

‘‘They are using a second house on their property to generate income for their retirement,’’ Walmsley says. He says typical three-bedroom backyard apartments costing around $300,000 are producing rents of about $700 a week in Canberra.SI

THE PRICE OF RETIREMENT2023-10-17T10:32:46+11:00

RBA change is coming, like it or not

More people, more input, more cooks in the kitchen. That’s ultimately the price the Reserve Bank of Australia will pay for a couple of years of bad or miscalculated calls, made in response to the pandemic.

Ironically, the review was conceived in the pre-COVID days when the RBA was criticised because inflation was running below its 2 to 3 per cent target range. All the attention is on what has happened since.

When money was flooding into the financial system and the economy, it is now clear the RBA board was too slow to apply the handbrake. The result is the highest level of inflation since the 1990s and an unprecedented 10 straight rate rises that were never going to be popular with ordinary Australians or politicians. No one seems to care that the unemployment rate is around its lowest level in nearly 50 years.

Right or wrong RBA governor Philip Lowe wears the blame. He will be all over the newspapers and nightly television news bulletins, even though markets (equities, bonds, currency) barely blinked. Mr Market saw the review coming, and now says the changes are some way off.

From the market’s perspective, next month’s budget is more material. Treasurer Jim Chalmers needs to set up the books for the next few years, which means finding more money. The economy is finely poised: it would be tempting to throw money around to ease cost of living pressures, although money’s tight and the inflation doesn’t need stoking.

In the meantime, old-head RBA watchers said it was a significant day. The fact that the central bank, which has such a great impact on Australians’ daily life, was subject to such scrutiny made it a historic day.

Lowe and the RBA will be hauled over the coals for what happened a few years ago, even though it was just as much the government stoking the fire that continues to burn today. The critics argue he should be accountable for the combination of low rates, forward guidance, yield curve control, quantitative easing and the term funding facility, which combined to whipsaw the economy and may yet cause a recession.

Of course, Lowe’s monetary policy is just one tool.

Once the commotion passes, we should all still be worried about the rising cost of rent and energy and how both can be addressed. The review doesn’t change that.

The review prompted plenty of thinking about the RBA, its corporate governance, board composition and decision-making. It recognised that in more normal times, the RBA had done well to keep inflation around the midpoint of its 2 to 3 per cent range for the past 30 years.

However, it is the past few years, a wartime for central bankers when no one escaped with a goldilocks path out the other side, that will now shape the direction of Australia’s monetary policy system.

What’s the answer to it all? Get more people involved in the decision-making. A specialist monetary policy board, fewer board meetings and more outsiders sitting around the table.

Reading between the lines, there seemed to be concern about how insular the RBA either is, or has become. Lowe is a perfect example; he’s got a great temperament for the governor’s job, is clearly smart and well regarded by colleagues and peers globally, but he is an RBA lifer and ingrained in current-day practice.

The creation of a new nine-person Monetary Policy Board, widely tipped by pundits, is about getting more rigorous thinking into rates decisions.

The nine people would include the RBA governor, deputy governor, Treasury secretary and six outsiders. The review recommends that ‘‘external members should be able to make a significant contribution to monetary policy setting through expertise in areas such as open economy macroeconomics, the financial system, labour markets, or the supply side of the economy, and in the context of decision-making under uncertainty’’.

So, this specific rate-setting board should mean more challenge and debate to the house view, which appears to have become more entrenched. At the same time the review calls for RBA’s operatives to spend more time with board members, making it a bit of an each-way bet but a good use of what is a big and expensive research team. (The need to spare a day a week or so in the RBA’s offices surely tilts the external board positions towards academics.)

The undertones were that the board wasn’t functioning properly, either because it didn’t have the right people or the right information. Lowe defended his board at a press conference yesterday, saying discussion around the boardroom table was robust and not dominated by himself.

It’s all well and good to have more people in the room on rates decision day, but it does not mean the board will function more efficiently or come to better decisions.

But big boards do not necessarily mean better outcomes. Corporate Australia is littered with poor boards and ‘‘jobs for the directors club’’ type attitudes that ruin what can be otherwise good businesses.

Often the bigger the board, the more constipated the decision-making process. The other scourge is chairmen roping in old mates and colleagues from other boards.

Ultimately, whether a separate and bigger Monetary Policy Board works will depend on who is on it. It was a logical and welcomed decision to create the separate board, and clear rate-setters of the governance-type matters that tend to dominate board meetings.

The review recommended a transparent appointment process, starting with advertised expressions of interest. External members would be appointed for five years, and up to another year depending on the circumstances.

There would also be fewer board meetings; eight not 11. And the governor would have to front the press following each meeting to explain the board’s decision, with more emphasis on the expected path of inflation and the labour market. That shouldn’t prove too onerous. External board members would also be required to make one public address each year.

The idea of more communication is conceptually good, although post-meeting press conferences can be a double-edged sword. We’ve seen Federal Reserve chairman Jay Powell mix his messages in a live setting, which can leave the market with more questions than answers.

Fewer meetings mean more time between rates decisions and arguably more punting and reading the crystal ball for fixed income investors. There could be more focus on monthly/quarterly economic data, to fill the information void between meetings.

Market economists liked that there could be more briefings, as it should (in theory) help them with their forecasts. They also probably like that there would be an unattributed published vote after each policy decision.

Other parts of the review said RBA should work more closely with the government/ Treasury, although it remains to be seen how. The review said fiscal and monetary policy should be set separately, however the RBA and Treasury needed to ‘‘have a good understanding of the intentions of the other and informs better policy choices’’. The two institutions are already close, but the review said their co-operation should include increased information sharing on risks, scenarios and policy constraints, and some joint scenario analysis.

Lowe was gracious at his press conference, although it was clear he did not love all the recommendations. For example, he bristled at any notion rates decisions were his alone and thinks it’s important to be careful with the number of public messages out of the RBA to ensure consistency and stability.

Lowe said he would leave his reappointment to the RBA top job in the Treasurer’s hands. He said he would be happy to go around for another term if asked. If not, he said he would find another way to contribute to society.

The fact that the RBA was subject to a 294-page review and there were 51 recommendations suggests change is on the cards.

Next week’s CPI reading could be material to the situation. Economists are tipping a number just shy of 7 per cent.

For all the focus on Lowe, in the near term the real attention should be on Chalmers and the budget. That’s the real showstopper for the economy.

a.macdonald@afr.com 

RBA change is coming, like it or not2023-04-24T16:53:10+10:00

Financial Planning Message – December 2022

As 2022 draws to a close we are reminded of the recent period of intense volatility in capital markets and the reality that a global recession is likely next year.

 

Markets are pricing in a lower probability of a recession in Australia.

 

This in turn will depress corporate earnings and valuations across all asset classes and significantly increase default rates among high-risk borrowers.

 

The correction to valuations is likely to be more severe during this economic cycle due to valuations starting from elevated levels compared to previous corrections.

 

We are also yet to experience a high number of fixed loans move from fixed interest rates of sub 2% to levels of 5%+ prevailing rates, something in the order of $500bn are due to mature in mid to late 2023.

 

This will no doubt impact the already depressed property market in Australia.

 

All the major banks and APRA are keeping a close eye on this development as we progress into 2023.

 

As inflationary pressures persist ( highest in 40 years ), geopolitical tensions and tight labour supply, the  central banks are forced to aggressively press on with higher interest rates and keep for much longer.

 

The RBA has so far moved the cash rate from .1% in March 2022 to now 3.1%, markets are now pricing in another two .25% increases in early 2023 before a potential pause to evaluate the impact on inflation.

 

The Federal Reserve was pricing in a rate increase of just 1% in December 2021, it is remarkable that their view now is that it is likely to peak at approximately 5.25%.

 

Consequently, 2023 is poised to exert added stress to highly leveraged borrowers, specifically those that have acquired property / equities in 2021 / 2022, are now in nil or negative equity positions.

 

It is worth noting that during this business cycle, we have had an explosion of companies that have become addicted to cheap debt, on the other hand, these same companies are not generating sufficient cashflow to support increased interest payments.

 

Clearly, there will be consolidation particularly in property related businesses in 2023.

 

There are no doubt significant headwinds for Australian households and the economy in general as we enter 2023.

 

Accordingly, extreme caution and sound strategies need to be implemented for the year ahead, including but not limited to :-

  • Be clear on what and who matters given the many conflicting sources of information and ‘investment opportunities’ across the media.
  • Understand your portfolio and position appropriately taking into account your forward plans and risk / return / management costs.
  • Review cashflows and eliminate unnecessary lifestyle costs in light of higher interest rates in 2023.
  • Let’s not forget managing your tax position, this is always relevant be it during your working life, in retirement ( with respect to investments) or as part of your estate plan.
  • Focus on what can be controlled / influenced as opposed to factors over which we have no control or influence.
  • Make incremental ‘dollar cost savings’ as opposed to taking a significant position when investing.
  • Diversification and history are our best friends, reflect and actively rebalance asset allocations.
  • Consider Dividend Reinvestment Plan ( DRP) in light of the attractive valuations.
  • Confirm borrowing / refinancing options well before due dates and explore potential savings across relevant lenders – competition appears to be intensifying across the major lenders.
  • Insurance is always important, however potentially critical during extreme business cycles as are likely to unfold in 2023. It is not desirable to execute forced sales at depressed values.

 

In closing, we would like to take this opportunity and thank you for placing trust in AMCO since inception 26 years ago and making our Integrated Wealth Management practice what it is today.

 

We are aware of the challenges you are facing during these uncertain times and are there to advise and navigate all matters with professional care and promptness.

 

It is vital that fundamental mistakes are prevented during these critical periods, hence the need for sound advice.

 

From the team at AMCO, we wish you and your loved ones good health, peace of mind and prosperity in the year ahead.

 

Merry Christmas.

 

 

Danny D. Mazevski 

Chartered Tax & Financial Adviser

FIPA   CTA  FTMA  MBA (Un.NSW/SYD)  Dip.FS   JP

Financial Planning Message – December 20222022-12-22T08:01:23+11:00

Financial advisers question Hostplus returns

Critics question why Hostplus was crowned Australia’s best balanced superannuation fund over one and 10 years, saying the rankings rely on unpublished valuations of unlisted assets akin to ‘‘marking your own homework’’.

Only three of more than 70 MySuper funds – the balanced options defaulted into by about 14 million workers – made money for members in the year ended June 30, says a SuperRatings report published by The Australian Financial Review on Friday.

Hostplus, the $82 billion hospitality industry super fund, topped the ranking with a return in its balanced option of 1.6 per cent. It also retained its spot as market leader over a 10-year outlook, with an average return of 9.7 per cent a year.

Sam Sicilia, the fund’s chief investment officer, attributed the result in part to investments in unlisted assets, especially infrastructure projects such as airports, bridges and seaports that had ‘‘monopolistic’’ and ‘‘inflation beating’’ characteristics that protected the portfolio against the global sell-off in bond and equity markets.

But some financial advisers, who under law are the only individuals who can recommend a consumer invest in a particular super fund, have questioned the role played by the valuations of these unlisted assets, which are done behind closed doors and are not released to members or the public.

Chris Brycki, founder of investment adviser Stockspot and a funds management market analyst, said members were ‘‘completely in the dark’’ about funds’ unlisted asset valuations.

‘‘Many funds never reveal either the frequency or methodology of the so-called independent valuations,’’ he said.

‘‘The problem here is that it’s highly questionable whether Hostplus have revalued all of their overweight unlisted assets . . . to reflect current public market valuations. It’s the same as someone marking their own homework and then bragging about being top of the class.’’

If Hostplus is overvaluing its private equity investments, which make up 8 per cent of the fund, then it could have an ‘‘overstated’’ impact on balanced returns, Mr Brycki added.

In May 2020, research house Lonsec (which owns SuperRatings) downgraded Hostplus’ balanced option from ‘‘recommended’’ to ‘‘investment grade’’. The Lonsec review found the fund suffered from ‘‘high, structural allocation to illiquid assets’’, ‘‘greater liquidity risks’’, and ‘‘management costs at the higher end’’.

Mr Sicilia said he was familiar with the criticism, and had been ‘‘attacked’’ on Twitter by some who believed the fund had too much exposure to unlisted and illiquid assets (meaning they are difficult or time-consuming to sell).

But he was adamant that unlisted investments were critical in defending member savings against the volatility in public sharemarkets.

‘‘I don’t care about liquidity,’’ he said, adding that he did care about ‘‘liquidity management. I don’t want the listed version. I want the unlisted version, with the expert valuation.’’

As the superannuation system matures, funds need to remain focused on how they value their assets, said SuperRatings executive director Kirby Rappell.

The firm receives returns from funds and monitors fund websites, and reviews information against public disclosures and its own data.

‘‘As part of our ratings review process, we seek to build an appropriate understanding of funds valuation processes and oversight,’’ said Mr Rappell.

Wealth adviser Steve Blizard, of Roxburgh Securities in Perth, said he did not trust industry funds when it came to closed-door valuations. He said league tables can be misleading as they rely on internal metrics and data.

Financial advisers question Hostplus returns2022-07-22T15:55:48+10:00

New research shows you don’t need $1m in super to retire

New analysis challenges the widely touted view that couples need $1 million in super to enjoy a comfortable retirement lifestyle, with Choice spin-off Super Consumers Australia saying retirees with low spending patterns can potentially bow out of the workforce with $88,000 in super, without their living conditions deteriorating.

The new research analysed pre-retiree and current retiree spending patterns to determine what it takes to live a ‘‘low’’ spending, ‘‘medium’’ spending and ‘‘high’’ spending lifestyle in retirement.

A single pre-retiree aged 55-59 who plans to spend around $55,000 a year in retirement is considered to have a ‘‘high’’ level of spending, and as such needs to save $745,000 by the time they’re 65, the analysis found, based on this retiree owning their home, or not paying rent or a mortgage.

But if they’re planning a lifestyle with a medium annual spend of $44,000, they’ll need $301,000 and if they’re planning ‘‘low’’ spending of $34,000 a year, they’ll need $88,000.

All cohorts are assumed to also receive the age pension, which is expected to make up 91 per cent of income for retirees within the low-spending cohort.

Meanwhile, single retirees aged 65-69 with medium- to high-level spending patterns require between $258,000 and $743,000 by the age of 65.

Couples aiming for similar lifestyles will require between $352,000 and $1.02 million in savings, the research found. Single retirees planning a more modest annual spending need $73,000 by the time they’re 65, while couples need $95,000.

Super Consumers Australia suggested its medium-spending target of $258,000 in savings by retirement would provide a single person a comfortable retirement. However, that figure is at odds with ASFA’s Retirement Standard, which suggests a single person will need $545,000 to achieve a comfortable retirement.

‘‘Having credible targets, based on actual spending, means people can confidently spend and get on with enjoying their retirement,’’ said Super Consumers Australia director Xavier O’Halloran.

The high, medium and low savings targets are based on what people tend to spend in retirement, and include a ‘‘buffer’’ to provide confidence that their savings can weather market turmoil and are based on growth asset allocation assumptions of a 60/40 split and a mean one-year nominal net return of 5.60 per cent.

Mr O’Halloran took aim at the common belief that retirees need $1 million in superannuation.

Noting that couples with high spending patterns will need around $1 million to maintain their standards in retirement, he added that the message that all retirees will generally need $1 million to retire is ‘‘actually quite harmful’’.

‘‘That can lead to over-saving, it can lead to them making sacrifices during their working life that they don’t need to make, if they just want to maintain their standard of living.

‘‘It also sees some people in that higher bracket pass away with a significant amount of savings still left over.’’

New research shows you don’t need $1m in super to retire2022-07-22T15:54:08+10:00

Small business pays the cost of rising wages

Average pay rates among small businesses have grown by more than 4 per cent this year off the back of the tightest labour market in decades, according to new research.

Data on more than 130,000 small to medium businesses using technology software firm Employment Hero shows the average hourly rate of 1.75 million employees increased 1.4 per cent between May and June, and 4.3 per cent since January.

The company’s inaugural SME index suggests labour shortages in low-paid jobs such as hospitality have started to bite.

Employment Hero chief executive Ben Thompson said changes in average rates could be influenced by lack of staff as much as wage growth.

‘‘We’ve seen a lot of change in industry engagement – people moving from hospitality and retail into knowledge work – and if that means we’ve seen some senior roles with high salaries terminated through resignation and moving from one sector to another, then that could definitely affect the average rate of pay,’’ Mr Thompson said.

‘‘For example, in healthcare if you saw a lot of highly experienced mature-age nursing staff resigning due to COVID burnout that could lead to a decrease in the average wage.’’

The report found retail, hospitality and tourism experienced an increase in average hourly rates of 4.7 per cent from May to June.

However, healthcare suffered a decrease in its average rate of 4.2 per cent. Agriculture, mining and energy experienced the biggest fall, 11.6 per cent.

Overall, the Employment Hero report found medium-sized firms, which also experienced the biggest increase in staff, were driving the most recent surge in average hourly rates.

Small businesses (fewer than 20 employees) and large businesses (more than 200) had their average hourly wage growth marginally decline.

Asked how they would deal with this year’s minimum wage increase of up to 5.2 per cent, about 24 per cent of 500 respondents said they would ‘‘have to review prices’’ and 16 per cent said they would need to work more hours.

About 11 per cent said they would have to let staff go and 10 per cent planned to outsource work locally. About 7 per cent said they would seek to identify cost savings outside of pricing and staffing changes.

The report follows an analysis by JP Morgan economist Jack Stinson last week that suggested wage growth was still tepid because vacancies were concentrated in industries such as hospitality that also had the lowest margins.

‘‘Such firms are less willing to bid wages up to levels above marginal product,’’ Mr Stinson’s analysis said.

‘‘The consistently high level of unfilled vacancies should then be read as a partial signal that firms cannot fill positions at any cost, explaining some of the disconnect between very low unemployment and middling wage growth.’’

Whitehaven Coal chief executive Paul Flynn told The Australian Financial Review his ASX-listed company had been relying on paying retention bonuses ‘‘on a quarterly basis, just to make sure people stay put because the market is very, very tight’’. ‘‘All the miners are running hard and then the government is competing for the same labour with all the infrastructure building they have got going around the country … so the government is contributing to a lot of the inflationary pressure by their own actions here so that is challenging for us,’’ he said.

Small business pays the cost of rising wages2022-07-22T14:58:31+10:00

What It Means For Your Money

There are numerous opportunities for astute investors and consumers to take advantage of. Aleks Vickovich and our expert writers break it down.

As expected, the Morrison government’s pre-election budget had plenty of sweeteners. The 2022-23 budget documents revealed total expenditure of $628.5 billion, of which social security and welfare ($221.7 billion) made up the lion’s share, alongside funding for health ($105.8 billion), education ($44.8 billion), defence ($38.3 billion) and transport and communications ($18.9 billion).

Included was a one-off, $8.6 billion package of short-term handouts described by The Australian Financial Review as a ‘‘shameless voter bribe’’.

Whether the cash splash is effective remains to be seen, with voters to go to the polls in May. But the budget’s short- and long-term measures contain a range of opportunities that astute investors and consumers may seek to take advantage of.

Here’s what you need to know.

Women

Australian women remain on track to earn $2 million less than their male counterparts due to what economists and critics deem a lacklustre, pre-election federal budget.

While it included $9 million in funding to support emerging female entrepreneurs and $58 million in funding for endometriosis, experts warn the measures do not go far enough to promote women’s earnings capacity and – in the case of the paid parental leave changes – may even backfire.

The government’s paid parental leave scheme will now be 20 weeks shared at the couple’s discretion at the minimum wage. Previously, primary carers – who tended to be mothers – were eligible for 18 weeks, while partners were eligible for two weeks. The income test will be changed to a household limit of $350,000 each year rather than the individual test.

‘‘It’s done under the guise of flexibility and allowing more leave sharing between partners,’’ says Grattan Institute CEO Danielle Wood. ‘‘That’s great in the small percentage of households that want to do that, but my theory is it will actually lead to more gendered norms around who cares [for children] in the early years.’’

That policy, coupled with no movement on childcare, confirms Grattan modelling that finds the average mother will earn $2 million less over her lifetime compared to the average father, says Wood.

‘‘[The budget] was a missed opportunity to address some of the disincentives to women’s workforce participation, particularly the higher cost of childcare,’’ she adds.

Industry groups also characterised the budget as lacking for women.

Tax Institute analysis of childcare costs and subsidies found the secondary earner, who is often the mother, faces a steep disincentive to return to full-time paid work.

‘‘If they’re back to a full-time schedule, the secondary earner is only gaining $6 extra for the tenth day of work in a fortnight. By the time they’ve commuted to work and bought a morning coffee, they’re paying to go to work that day,’’ says Tax Institute tax policy and advocacy general manager Scott Treatt.

‘‘The secondary earner in a family can be taxed at an effective rate, including net childcare costs, of more than double the top personal marginal tax rate. This makes returning to work financially impossible for many parents who might otherwise like to.’’

LUCY DEAN

Retirees

In a measure foreshadowed by the Financial Review in March, the government committed to extending its changes to the superannuation minimum drawdown requirement for another year. ‘‘The government has extended the 50 per cent reduction of the superannuation minimum drawdown requirement for account-based pensions and similar products for a further year to June 30, 2023,’’ the budget documents said.

‘‘The minimum drawdown requirements determine the minimum amount of a pension that a retiree has to draw from their superannuation in order to qualify for tax concessions.’’

Drawdown rates range from 4 per cent to 14 per cent, depending on age. The extension of the halved rate would drop the rate from 7 per cent to 3.5 per cent for someone aged between 80 and 84.

While the budget billed this measure as ‘‘supporting retirees’’, experts say it would really only benefit retirees who have already accumulated substantial wealth outside super.

Peter Burgess, deputy chief executive of the SMSF Association, says the extension allows individuals who have access to outside funds to withdraw less than they would ordinarily have to under the normal policy conditions.

‘‘This means they can retain more in their super pension account – which is tax-free – for longer,’’ he says.

The tax benefits of keeping more money in a super environment are clear, says Lisa Papachristoforos, a partner at accounting firm Hughes O’Dea Corredig.

Wealth held in a super fund in pension mode incurs no tax on income and capital gains, she points out – as opposed to income held in an individual’s name, which is taxed at marginal rates.

But tax advantages are not the only potential benefit. The extension of the minimum drawdown also provides ‘‘continued flexibility’’ on how much retirees need to withdraw to fund standard of living, Papachristoforos adds.

Aside from tax efficiencies, leaving more money in super means more can be invested, generating further returns.

Plus, while the policy may be aimed at retirees, all super fund members may profit from the extension regardless of their age or distance from retirement.

‘‘Super funds are potentially faced with an additional year of lower minimum pension withdrawals paid to their members, allowing them to utilise that forgone withdrawal at a pooled level for investment purposes,’’ Papachristoforos says.

‘‘As such, extending the minimum drawdown rule could positively affect all superannuants, not just those drawing an income stream from their account, and the investment managers of super money will have more funds to invest.’’

Certified financial planner Josh Dalton, of Dalton Financial Planners, agrees there are potential tax minimisation benefits from the extended minimum drawdown policy, as well as the prospect of opening up more money to be invested in markets.

But he warns the measure is not suitable for all retirees. ‘‘Retirees need to estimate their annual expenditure and get a good grasp on how much income they can live on comfortably,’’ he suggests.

‘‘They can then decide to reduce their pension payments in line with their budget estimate and conserve more of their account-based pension capital if it suits.’’

ALEKS VICKOVICH

Home buyers

Borrowers planning to apply for the expanded Home Guarantee Scheme should start preparing their applications soon because competition is expected to be fierce, say lenders.

First home-loan applications surged when previous allocations were announced to allow first home buyers and single parents to get into the property market with a deposit of between 2 per cent and 5 per cent without needing to pay for expensive lenders mortgage insurance.

Applicants need to choose a loan from a lender on the scheme’s list that offers the rates, terms and conditions best suited to their needs. It has to be a principal and interest loan. Investors are not eligible.

Prospective borrowers should gain pre-approval for their loan from the lender, which will involve providing identification, age, proof of income, a prior property ownership test, proof of deposit and intention to be an owner-occupier.

Applicants also need to ensure their loan application is within the price caps set for each city. For example, it is capped at $800,000 for Sydney’s central business district and $500,000 for Ballarat in regional Victoria.

The First Home Guarantee, which supports eligible first home buyers to build or purchase a new or existing home with a 5 per cent deposit, has been increased from 10,000 offers to 35,000 a year from July 1. It is capped at $125,000 annual income for individuals and $200,000 for a couple.

There are also 5000 places for the Family Home Guarantee, which enables eligible single parents with dependents to enter or re-enter the housing market with a deposit from 2 per cent.

Mortgage broker Elodie Blamey says single mothers and fathers can earn up to $125,000 – excluding childcare support – to be eligible. ‘‘Unlike the Home Guarantee Scheme, it is not being used nearly enough,’’ she says. Many single parents might not be aware of the scheme and its conditions, or consider themselves eligible.

Merinda Brooks, a single parent with a three-year-old son, says: ‘‘It has absolutely changed my life.’’

The speech pathologist says it would have been challenging to save a 10 per cent deposit. ‘‘I was working really hard but unsure about how I could have otherwise got a deposit together,’’ she adds.

There are also another 10,000 places a year under the Regional Home Guarantee scheme for anyone who has not owned a property for five years, on the condition they purchase a newly built home or build.

Lenders are awaiting additional details from the government before advising potential borrowers.

DUNCAN HUGHES

Patients

Government changes to the Pharmaceutical Benefits Scheme safety net thresholds, making medicines more affordable, is good news for many self-funded retirees, according to a leading super specialist.

Lower safety net thresholds for the PBS mean potential savings for retirees, and may create an opportunity for others who have ‘‘grandfathered’’ account-based super pensions.

From July 1, the PBS safety net thresholds will be reduced from $326.40 to $244.80 for concession patients, and from $1542.10 to $1457.10 for general patients, which means fewer scripts before the safety net is reached.

Patients will also reach the safety net sooner with 12 fewer scripts for concession patients and two fewer scripts for general patients.

‘‘This is good news for self-funded retirees who do not hold a Commonwealth Seniors Health Card,’’ says Colin Lewis, head of strategic advice for Fitzpatricks Private Wealth.

‘‘There may also be the opportunity for advisers to consider clients who have an underperforming ‘grandfathered’ account-based pension but feel trapped for fear of losing the card if they move.’’

Many CSHC holders have account-based pensions that are ‘‘grandfathered’’ after the income test rule change on January 1, 2015. Account-based pensions started after that date are deemed under the card’s income test, whereas nothing counted with existing pensions. For this reason, many are reluctant to switch pensions or super funds for fear of losing their CSHC.

‘‘It is a matter of doing the numbers.’’ says Lewis. ‘‘Deemed income from a new pension may not push a cardholder over the CSHC income threshold but, where it does, the cost of losing the card is now reduced with a lower safety net, and the potential return from a new pension may well exceed this cost.’’

The same concern may contribute to some self-funded retirees maintaining self-managed super funds rather than switching to a possibly better-performing and cheaper retail or industry fund.

DUNCAN HUGHES

Small business owners

Improving workforce skills, incentives for employing apprentices and increasing investment in technology and digitisation are among the opportunities. Small and medium businesses with a turnover of up to $50 million are getting an additional 20 per cent deduction for the cost of external training provided to employees.

That means a business will be able to deduct $120 for every $100 spent on a course.

As an example, a business needs to train 10 employees in administrative skills to manage jobs. The company enrols them at a cost of $430 per employee. In addition to the $4300 deduction, the company can claim an additional $860 deduction, being 20 per cent of the expense.

There is also $2.8 billion over five years to increase apprenticeships, including $5000 payments to apprentices over the first two years of their apprenticeships, and $15,000 to qualifying employers paid as 10 per cent for first- and second-year apprentices and 5 per cent for third-year workers.

For example, a business employing an apprentice for $40,000 a year will receive $1250 every six months for two years to help with the cost of training. The company can apply for payments of $4000 in the first and second years, and $2000 in the third year.

The calculations were provided by financial adviser Cameron Harrison.

Businesses are also eligible for another 20 per cent deduction for expenses on digital upgrades, such as cyber security systems or subscriptions to cloud-based services, up to $100,000. Installation has to be completed by June 30, 2023 to be eligible.

‘‘This is a no-brainer,’’ says Greg Travers, a director of William Buck. ‘‘Businesses know they need to digitise, and now the government is giving them an incentive to do it. The benefit is not huge . . . but it helps.’’

Digitisation means more pre-filling, data-matching and data-sharing for the Australian Taxation Office.

‘‘The measures are designed to reduce compliance costs for businesses, but also make it easier for the ATO and other revenue authorities to data-match and share information,’’ Travers says. These measures include using real-time data to calculate PAYG tax instalments.

Sam Pratt, chief executive of Render Networks, which develops broadband connectivity, says while it was a good budget for infrastructure, there needs to be more support for the digital economy to keep it competitive with the US and Europe.

Changes to the taxation of employee share schemes will help smaller companies, particularly technology start-ups, attract and retain skilled workers. Limits on the value of shares an employer can issue to employees has been increased from $5000 to $30,000, which puts it in line with international standards.

DUNCAN HUGHES

Aged care residents

With medication management long regarded as the bane of residential aged care, funding to link care facilities with community pharmacists and onsite pharmacists should bring some comfort to residents and nurses.

The delivery of wrong and/or excessive medication has long been an issue waiting to be addressed.

However, at the heart of this and other positive reforms flagged for the aged care sector in the federal budget lies a major problem – recruiting and retaining qualified staff.

Notably absent from the spendathon was any mention of the wage increase for existing or future aged care workers that is so desperately needed to deliver the existing services, let alone promised ones.

Pharmacists are as desperate for the implementation of a workforce plan as the aged care sector, putting a huge question mark over the success of a potentially good idea before it is even rolled out.

The ongoing release of 80,000 home care packages in 2021-2023 – taking the total to about 275,600 people by June next year – is welcome confirmation of intentions to assist older Australians to remain living independently at home.

But the delivery of the packages and other at-home support is also dependent on attracting a suitably skilled workforce to meet the demand.

It is the same for the 8500 new respite services also announced previously as part of an $18.8 billion, five-year reform program following the Royal Commission into Aged Care Quality and Safety.

On that front, the $48.5 million for 15,000 additional aged care training places for new and existing personal care workers, to a total of 48,800 places, is a positive move.

More money for more training is always welcome, says Sean Rooney, chief executive of Leading Age Services Australia and representative of the Australian Aged Care Collaboration. But he says the budget failed to address the key fundamental deficiencies identified in the royal commission – wages and the viability of aged care homes.

Sticking with the commitment to reform the residential aged funding model through the introduction of the Australian National Aged Care Classification Transition Fund, the budget included an additional $34.60 per bed per day.

The proposed residential aged care funding model, scheduled to begin on October 1, is designed to align residential aged care funding to the care needs of each resident.

The starting price is $216.80 a day per resident for standard care – with more for dementia-related care – compared to about $180 a day per resident under the old funding model.

Council on the Ageing chief executive Ian Yates will be looking to see that the additional money is spent on increasing the number of care minutes with residents as intended by the royal commission, which recommended care homes have a target of 200 minutes per resident per day.

Exactly how that will be measured is yet to be worked out. But Yates wants the government to commit to publishing how many minutes of care each residential facility is being funded to deliver, compared to the number of minutes actually delivered, as part of its new star rating system.

With an election on the way, there is still hope for further announcements that will directly benefit older Australians and those who deliver the care they deserve.

Unlike the government, the opposition has centred its budget promises on fixing the aged care workforce with a $2.5 billion pledge for measures, including a wage rise.

BINA BROWN

Young Australians

Successive budgets chasing the ‘‘grey vote’’ have allowed structural flaws in Australia’s economy to form, with younger generations and economists now calling for bold conversations to help strike out the unwieldy debt bill.

The budget features a projected $78 billion deficit for 2022-23. The deficit is expected to linger for the next 10 years, with gross debt peaking in 2025.

While a deficit isn’t necessarily a problem if the debt brings sustained productivity or lifestyle improvements, Australia’s ability to wind back high levels of spending will be the key issue for younger generations, says the Grattan Institute’s Wood. ‘‘We shouldn’t be so fixated on the deficit per se, especially coming out of COVID-19; it partly reflects that we did need to spend a lot to respond, and that it was appropriate to do so,’’ she says.

‘‘But we should think about the structural budget deficit over time, and that does look a bit concerning.’’

Wood says Australia’s spending appears to be fixed at a higher level after COVID-19, with more money flowing through to defence, aged care and the National Disability Insurance Scheme.

‘‘We haven’t really talked about how we’re going to pay for that over time,’’ she says. ‘‘The risk is if we don’t do anything about that and debt continues to creep up as a share of the economy – that’s the concern that young people, quite rightly, might have.

‘‘It’s that longer-term picture and the lack of clarity around how we’re going to square those numbers.’’

The co-founder of intergenerational fairness advocacy group Think Forward, Sonia Arakkal, agrees government debt is a complex issue, but is concerned that the budget puts older generations’ needs before younger generations’ current and future needs.

‘‘Young people have a sophisticated understanding of the economy – we’re a very highly educated generation . . . we want policymakers to take into account our interests,’’ she says.

‘‘So, if they are accruing debt in our name, it should be debt that is invested in climate change or infrastructure – not pork-barrelling in particular marginal seats or particular states.’’

Faced with baked-in higher spending, an ageing population and a need to decarbonise, Arakkal – who is leading calls for a parliamentary inquiry into intergenerational fairness – is calling for Australia’s political class to engage in more difficult conversations about equality.

‘‘We have a system that is overly reliant on income taxes and doesn’t treat asset taxes in the same way, and we shouldn’t be punishing people for working. We should be looking at taxes that are inefficient, like capital gains tax, or how we tax superannuation,’’ she says.

‘‘We need to be having those conversations to set the younger generation up for success.“

There are two options for tackling the deficit, says Wood.

The first is to find ways to make the economy grow faster, as a faster-growing economy will essentially ‘‘fritter away’’ the debt burden.

‘‘Looking at policies which actually promote productivity and growth is important, so that could be tax reform, reforming cities, and how we do planning and zoning regulation?’’ she says.

Supporting more women to return to the paid workforce after having children is also a key way to uncap economic potential, Wood says, expressing disappointment at the budget’s muted changes in that area.

‘‘Over time, I think taxes will have to rise, even if we do tick some boxes on the growth front,’’ she says.

‘‘It’s inevitable that as government has increased as a share of the economy, that there will have to be an increase in taxes to pay for that. That has to be done carefully. What we shouldn’t do is just rely on income tax to do all the heavy lifting, which is what we’ve done historically.’’

LUCY DEAN

Households

Those earning up to $126,000 will be eligible for an additional one-off $420 that will be paid when their 2022 tax return is lodged. There’s also a one-off cost of living payment of $250 to eligible income support recipients and certain concession cardholders. Fuel excise (a federal tax imposed on each litre of petrol) will be halved, intended to reduce the cost of fuel by 22¢ a litre. In addition, costs of taking a COVID-19 test to attend work are tax deductible from July 1.SI

DUNCAN HUGHES

What It Means For Your Money2023-04-21T14:15:56+10:00