Winter 2012

Super Investor

Winter 2012

Inside>> Rule changes >> Super facts>> Market update>> Annuities>> Retirement strategies

Super InvestorWinter 2012

What’s inside2 Super — Rule Changes & the 2012/13 Budget

3 Some super facts to think about

4 5 top tips to a successful life after work

6 Annuities: Regular & dependable income

8 Transition to retirement strategies

10 Pension age on the rise

11 Spend better to live better

13 Case study — Divorce

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We understand investors are nervous. The Australian sharemarket lost $120bn in May – effectively all the gains of the last six months. Trading in June started dismally with the Australian sharemarket dropping another $24bn one day and then picking it up again later the same week. It is likely super returns for the 2011/2012 financial year will once again be subdued.

All our experts agree we are in for a period of volatility around the stabilisation of Europe, we need confirmation of China’s growth story continuing, and that markets such as the US are recovering according to expectations.

Time is a healer for markets, so over a five-year horizon it is important to consider short-term uncertainty but not lose sight of the investment objective. From a market perspective, once we are on the path to resolution, markets will start to reflect valuations based on fundamentals rather than macro economic uncertainties. A flexible approach is important because volatility is still a major factor and we believe the next two years will be more about managing risk not chasing returns.

BT Chief Economist Chris Caton sees no reason to change his bullish end of year forecast for the ASX 200 to reach 4700. While the outcome in Europe is by no means certain, a lot of bad news is already priced in. It’s certainly an interesting time to be an investor.

Market update

Caton’s Corner

Dr Chris Caton, BT’s Chief Economist, writes ‘Caton’s Corner’ every month. To read the latest edition of Caton’s Corner, visit bt.com.au/insights where you can also subscribe to his daily podcasts.

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12/13

Death and taxes remain the only constants in life. The Government continues to tweak the super rules almost every budget and certainly when they are looking for more money to spend.

Super — Rule Changes and the 2012/13 Budget

It may be disheartening to your long-term savings that the rules surrounding them change, but it doesn’t lessen the importance of making money work for you over the long-term. Super continues to be one of the most tax effective vehicles for saving for your retirement.

The biggest change this year is capping the maximum concessional contributions to $25,000. So if you’re 50 or more and you were looking forward to playing catch up — this will not be so easy to do. The rules have stated that $25,000 will be the cap for the next two years regardless of our age.

The Government has announced that from 2014 it will revert back to a higher concessional contributions cap for those over 50, but only for those with less than $500,000 in super. Further, if you’re earning above $300,000 a year, you will be paying

This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.

an additional 15% on your concessional contributions (30% in total). This measure was announced in the Budget but has not been legislated as yet.

However, from 2012/13, if you’re earning up to $37,000, the Government will effectively refund the contributions tax taken from your concessional contributions by up to $500, through making a contribution into your super account.

And, good news for everyone receiving the Super Guarantee, is that from 1 July 2013, you will be receiving an additional 0.25% of super, taking your SG to 9.25% of your salary to be paid into super by your employer. This will be increased gradually until it reaches 12% in 2019/2020 financial year.

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12/13 1_ Source: CentreLink

2_ Source: The ASFA Retirement Standard, February 20123_ Source: ASFA, ABS 2009/10

Current pension (per fortnight)

Pension needed for a “comfortable retirement” (per fortnight)

Some people may have little or no idea what their magic number might be. If you are one of these people it may be worthwhile to check out a superannuation calculator such as the one at www.moneysmart.gov.au . Before you start on the journey, below are some retirement facts to think about:

>> The maximum pension amount for a single person at the moment1 is $695.30 per fortnight (or $18,077.80 per annum) and for a couple is $1048.20 per fortnight ($27,253.20 per annum)2

>> That income is way short of the amount calculated by superannuation industry group the Association of Superannuation Funds of Australia (ASFA) for what it calls a “comfortable retirement” — $1,549 per fortnight ($40,407 per annum) for a single person and $2,119.14 per fortnight ($55,249 per annum) for a couple3. This assumes you don’t have to pay any rent or mortgage payments.

>> To reach that income, ASFA estimates a single person will require $430,000 in super, while a couple will require $510,000 (assuming they also receive a part pension).

How much money will you need to save in super to live comfortably in retirement? Some people call it their “magic number” — a goal on the horizon they work hard for today so they may enjoy tomorrow.

Some super facts to think about

Single pension

$695.30

$1,549

Couple pension

$1,048.20

$2,119.14

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51 Plan ahead

“Many people don’t make the time to take stock of their new circumstances when they stop earning a full-time salary,” says Melbourne-based Anne Graham from McPhail HLG Financial Planning.

“It is important to look beyond the next five years and plan for at least 20 years. That means working with your financial planner to develop a cashflow plan that takes into account things such as holidays, health expenses and potential aged care expenses. And be disciplined about following the plan. Too often, I see people sabotage their own plan.”

People also need to think about what happens to their money once they are no longer there, says Sydney-based Richard Kerkmez from Westpac Financial Planning.

“There are certain steps you may be able to take to minimise the taxable component of your super, to reduce the tax bill your adult children may face when they receive your inheritance.”

2 Take time to adjust

Andrew Whelan is a financial planning practice manager with St.George Financial Planning and the author of the book “Peace, Wealth and Happiness”. In his research for his book, he spoke to many people about their journey in retirement. One of the recurring themes he found was the challenges people faced transitioning to their new lifestyle.

“That first Monday after the farewell on Friday can be really hard for a lot of people. Some feel that they have lost the perceived social status that comes with their jobs. It’s important that people take time out to adjust to their new lifestyle and think hard about what they are really going to do on that first morning when they sit at the end of their bed and think about the day ahead.”

When you stop working hard for your money, it is vitally important that you get your money working hard for you. We asked three expert financial advisers for their top tips on helping people get the most from their retirement savings.

5 top tips to a successful life after work

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4 Know your entitlements

You’ve paid taxes all your life. So you need to make sure you receive all the entitlements you have paid for in your working life.

“I tell my clients to not be too proud to get all the benefits they are entitled from the government,” says Anne Graham. “I ask them what they would do if they walked out of my office and found $200 on the footpath. Would you let it flutter away in the breeze?”

Those benefits not only include the age pension but also the vast array of discounts available from holding the Pensioners Concession Card for people who are eligible for the age pension, including savings on prescriptions, property and water rates, reduced energy bills, a telephone allowance, public transport fares and motor vehicle registration. People over 60 and no longer working full-time should also check their eligibility for the great discounts offered by the state-based Seniors Card.

5 Educate yourself

Of course, the best advice of all is to get professional advice. A financial planner can help you navigate all the tax, superannuation and social security rules to make your money work harder for you.

But before you see your financial planner, it is a good idea to get up to speed on key financial concepts and strategies. Andrew Whelan says it is a good idea for people approaching retirement to read up on things like annuities, transition to retirement (TTR) strategies and non-concessional contributions.

“I suggest to pre-retirees that they spend an hour every week reading things they may not have looked at before such as the personal finance pages in the newspaper or websites such as CentreLink ( www.centrelink.com.au ), and educational websites such as the government’s MoneySmart site ( www.moneysmart.gov.au ).”

3 Review your investment strategy

Once you stop working full-time, your whole relationship with money changes. Your investments become your income source so it is important to take a flexible approach to your investment strategy, according to Richard Kerkmez.

“You don’t need to try to solve your 30-year retirement strategy in one go. Reviewing your investments regularly and having a strategic review of your asset allocation annually will help you adapt to your changing needs and changes in market conditions.”

This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.

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When you are thinking about how to pay for your day-to-day expenses in retirement, chances are that you will look for a reliable and regular income. That’s why many retirees are now using annuities to form the backbone of their income.

An annuity is a simple, flexible investment product that pays you a regular and guaranteed income. Because the income is set at the outset, it allows you to securely budget for your expenses. And if you invest your super in an annuity and you are over 60, the income you receive is tax free. It’s a very powerful combination that gives you great flexibility and security to build an income strategy in retirement.

FlexibilityAnnuities allow you to tailor your income payments to suit your needs. You can choose:

>> The term of the investment — you can select a fixed term from one year to 15 years.

>> The amount of capital returned to you at the end of the term — you can elect to receive all of your original investment back at the end of the term or have your capital included in your regular payments over the term.

>> Timing of your income payments — you can choose to have your income paid monthly, quarterly, half-yearly or yearly.

When you are thinking about how to pay for your day-to-day expenses in retirement, chances are that you will look for a reliable and regular income. That’s why many retirees are now using annuities to form the backbone of their income.

Annuities: Regular & dependable income

It’s a very powerful combination that gives you great flexibility and security to build an income strategy in retirement.

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SecurityPart of the reason for the popularity of annuities in the past few years has been the stability they provide during volatility in sharemarkets, property markets and cash rates. With annuities, you don’t need to go to the local bank branch to check out term deposit rates or pore over newspapers to see how your shares are performing. You will be paid a guaranteed rate of income that you choose when you invest, no matter what is happening in the markets.

RisksThe main trade-off for these benefits is that with annuities you can’t access your money before the end of the term. This risk can be reduced by combining your annuity income with income from another source such as an account-based pension.

Also, the interest rate paid on the money may be slightly lower than you could achieve elsewhere. This lower rate is to compensate the annuity provider for providing you with guaranteed income payments for sometimes very long periods.

To find out more about annuities speak with your financial adviser or call our Customer Relations team on 132 135.

For more information on annunities visit bt.com.au or call 132 135 (Monday to Friday 8.00am – 6.30pm, Sydney time)

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Because salary sacrifice uses before-tax dollars, you can actually contribute more to super than you withdraw, without missing the income.

Transition to retirement strategies

If you are between 55 and 65, a transition to retirement strategy may be a great way to tax-effectively boost your super balance in the lead up to retirement.

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Introduced in 2005, the transition to retirement rules aim to help people make a smooth transition to life after full-time work. The rules allow you to keep the same take-home pay while at the same time either reducing your working hours or putting more into your super.

How does the strategy work?The transition to retirement (TTR) rules allow people who are 55 or over to access their super while still working. Basically, they allow you to roll your current super into what is called a “transition to retirement pension” which pays you a regular income.

You can use this extra income in one of two ways.

1 Reduce your working hours and use the TTR pension to supplement your income.

2 Increase your super balance by salary sacrificing (contributing to super using your before tax salary) and use the TTR pension to supplement your income. Because salary sacrifice uses before-tax dollars, you can actually contribute more to super than you withdraw, without missing the income.

The other big advantage of this strategy is that any earnings on money you roll into the TTR pension are tax free, rather than taxed at 15% as they are in your super fund or at up 46.5% as they are outside of the super system.

The information provided is factual only and does not constitute financial product advice. Before acting on it, you should seek independent financial and tax advice about its appropriateness to your objectives, financial situation and needs.

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PFor men, it is the first increase in the pension age since the federally legislated age pension was first introduced into Australia, almost 100 years prior. For women, it is a continuation of a trend. From 1910 to 1995, women could qualify for the pension at age 60. From 2014, that will rise to 65 and then will continue to rise again (for both men and women) in 2017 before settling at 67 at 2024.

By raising the pension age, the Government hopes to claw back some of the rises in social security and health spending for the elderly, increase the pool of workers and raise more income tax revenue.

In May 2009, the federal Government announced one of the biggest changes to the age pension in Australia’s history — the pension age would increase from 65 to 67.

Pension age on the rise

1_ Natasha Robinson, David Uren “Push to raise pension age above 67” The Australian, Sept 19, 2009

This change may not be as sudden as we think though — statistics show that people are already working longer. According to The Australian newspaper1, 26% of men and 12% of women aged 67 are still working now. Ten years ago, only 16% of men and 8% of women worked to the age of 67. And the Government believes the trend will continue, with Treasury predicting about 41% of men and 22% of women still working at age 67 in 20 years time.

For people approaching retirement, it is important to work with your financial adviser to review your projected income over the next 10 years. For those planning to retire at or before 65, it may mean increasing your super contributions now. For those planning to work until 67, it may give you an extra two years to increase the size of your retirement savings.

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Spend better to live better

Have you ever wondered why some people seem to have more money to spend? They have the same income as

you, but always seem to be going away on holidays or treating themselves to nights out.

The secret weapon for many of these people is budgeting. People who know where they spend their money tend to have more money to spend.

This skill becomes even more important when you stop working full-time. It doesn’t mean stop enjoying yourself, but it does mean you need to plan ahead and make sure you are spending your money on the things that are really important to you and not frittered away on needless expenses.

Using a budget planner helps you to understand the aspects of your spending that you have the most control over. The purpose of the budget planner below is not to tell you how to spend your money; it is to help you understand where you are spending and what choices are available to you. Take a few minutes to fill in your expenses and then calculate your annual costs. Then review your budget regularly to make sure it reflects your spending properly.

If you start getting serious about your budgeting, there are some great websites and iPhone apps (such as iXpenseIt) that can help you track your expenses and get an even better picture of where you are spending your money.

If you are looking at cutting corners to shave a few extra dollars off your expenses, here’s a few tips collected from the experts; financial advisers who spend their working hours helping people live better in retirement.

>> Review services such as gas, electricity, phone, banking and insurance to see if there are better deals in the market or if you can bundle services.

>> Think about your energy costs. The beer fridge in the garage may be costing you hundreds of dollars a year. Do you really need to wash your clothes in hot water and use the clothes dryer?

>> Never shop on an empty stomach. If you often find yourself in a shopping centre hankering for a coffee or bite to eat, try having lunch and a coffee before you leave home. And always use a shopping list to avoid other impulse buying.

>> Cook extra at dinner and freeze it. This can help avoid emergency takeaways.

>> Sell unwanted items on online auction sites or have a garage sale.

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Expense Item

Frequency Amount ($)

(Annual, Monthly, Weekly)

Annual Amount

($)

Living expensesRentHome mortgage paymentsCouncil ratesWater ratesElectricityGas/OilTelephoneHouse and contents insuranceHousehold repairs and maintenanceFurnishings and appliancesGroceries, meat, fruit & vegetablesAlcohol, cigarettes, gamblingHealthHealth insuranceChemistMedical/dental/ opticalCar/transportRunning costs/ petrol/fuelRegistration and third partyCar insurance

Expense Item

Frequency Amount ($)

(Annual, Monthly, Weekly)

Annual Amount

($)

Maintenance/service/repairsLicence fees/finesPublic transport/taxi faresLoan/lease paymentsCaravan registration & maintenancePersonalClothing and footwearEntertainment/dining out/moviesSport/recreation/hobbiesHaircutsGifts/presents/ChristmasHolidaysBooks/ magazines/ newspapersLife insurancePets/vet feesCharities/ donationsMiscellaneous

Total annual expenses

Spend better to live better (continued)

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Case study

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs.

Marriage break-up

I am a 45 year old woman who has been out of the workforce for the past 10 years. My husband and I recently divorced after 23 years of marriage. He is 51 and has $400,000 in his super fund. I have only $60,000 in my super. The joint house is worth $1 million (with no debt) and we have around $50,000 in joint savings. We have two children. My 16 year old son is at high school and my 21 year old daughter finishes university next year. Can we split the two super funds equally, or is it better if he keeps his super and I take the house?

The rules around divorce are complex so make sure you get advice from a family lawyer about the rules and your entitlements.

You are able to split super accounts on divorce, so you can effectively treat super as just one component of the asset pool to be divided. The question of whether you should split the super in half or take the house depends on: your needs now and in retirement, your future working arrangements, custody arrangements for the children, whether you are prepared to sell the family home, and what your former husband is willing to accept or bound to accept from court rulings.

For simplicity’s sake, let’s assume you split the pool of assets equally with your former husband and were prepared to sell the family home and start working again until retirement. From a long-term perspective, consider splitting the super to give yourself a good base to build on over the next 20 years. Alternatively, you could use the proceeds from the sale of the house to make an after-tax contribution to super and buy a smaller house or apartment with the remaining money. Whatever you decide, it is very important to consider your long-term financial health as well as your medium-term needs such as housing and supporting your children through the final years of school and university.

As there could be tax implications, you should seek advice from a financial adviser about your own personal circumstances.

Visit bt.com.au to learn more about super and investments. Here you can find:

> BT Chief Economist, Chris Caton’s regular economic updates > Super calculators to help you better plan for your future

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. The information in this publication may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be accurate at its issue date. The information in this Newsletter is factual only. It does not constitute financial product advice. Before acting on this information you should seek independent financial and taxation advice to determine its appropriateness to your objectives, financial situation and needs. Superannuation is a long-term investment. Generally, contributions to a superannuation fund are preserved. The government has placed restrictions on when you can access your preserved benefits. In general, benefits will not be able to be paid until a member is age 65, or has permanently retired and is above his/her preservation age (i.e. 55 years up to 60 years depending on when the member was born). The Government has set caps on the amount of money you can add to superannuation each year on a concessionally taxed basis. Currently the cap is $25,000 per person pa for the 2011/12 financial year. If you are aged 50 or over, the annual cap is $50,000 until 30 June 2012. In addition, the government has set a cap on the amount of money that you can add to superannuation each year on a non-concessionally taxed basis. The cap is $150,000 per person pa. Those under age 65 can ‘bring forward’ two years’ worth of personal contributions, allowing them to contribute up to $450,000 per person over a three year period. For more detail, you should speak with a financial adviser or visit the ATO website. There may be a fee for accepting rollovers. Before requesting the rollover, you should check with your other fund/s to determine whether there are any exit fees for moving your benefit, or other loss of benefits (e.g. insurance cover). These projections are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The results ultimately achieved may differ materially from these projections. The information is current as at 30 June 2012. © BT Financial Group 2012. BT13064B-0612mc