Newsletter
June 2012 Newsletter
Is your superannuation affected by the Budget?
As you are well aware, the situation with the failed Greek elections has really spooked the markets with a view that there is an increasing probability that Greece will leave the Eurozone, which could trigger a disorderly default scenario. With this uncertainty, bond yields are again increasing in Spain and Italy and there is a lot of focus on the solvency of Spain's banking system.
With this uncertainty it is not surprising that markets are volatile, risk is off and investors are heading to the 'safety' of Bonds and Treasuries and the US dollar. This is unlikely to abate until we have some clarity on what is going to happen in Greece and a greater firewall is put in place in Spain, particularly recapitalizing the Spanish banks.
The political pressure on the Eurozone and Germany in particular is intensifying. Last weekend’s G8 meeting – or talkfest – reportedly spent much of the time discussing how to promote global growth and the European debt crisis. The G8 seemed aligned in their support for Greece remaining in the euro. Their joint communiqué stated: “We agree on the importance of a strong and cohesive Eurozone for global stability and recovery, and we affirm our interest in Greece remaining in the Eurozone while respecting its commitments..."
Now whilst the market has not yet accepted this, I believe that collectively the central banks and governments must be preparing for the worst possible outcome, which will involve another wave of coordinated intervention and quantitative easing (money printing). The US Fed Reserve chairman Ben Bernanke knows that at the heart of the US economic recovery is confidence and if this is disrupted then all the efforts to date since the advent of the GFC will be compromised. For this reason I believe the Fed will not hesitate to pull the trigger on QE3 (more money printing) to calm the markets.
Financial austerity measures are outdated and have precedent of not working during the 1930s and being a principal cause of the Great Depression.
The time for austerity measures was before the Global Financial Crisis of 2008, not after the debt incumbent nations such as Portugal, Spain and Greece swallowed the proverbial poison and are nearly ready to fall off their collective perches. Policies need to be aimed at restoring the patient to health and getting them out of intensive care, not making their situation worse. The financial austerity measures that Germany is imposing do exactly that.
In my opinion the actual tail risk of Europe collapsing due to these events is low. I believe it is very unlikely that Greece will either voluntarily or be forced out of the Eurozone in the near term. If you listen to virtually all the market commentators, they say this is a virtual certainty?? The consequences for both Greece and Europe of a Eurozone exit are potentially horrific. We will not get any real clarity on this until after a new Greek government is formed post June 17 Elections. It appears that there is going to be a real game of brinkmanship between Greece and Germany in the meantime. I suspect that Germany will offer an olive branch via the EIB and possibility via a further reduction in interest payments on Greek debt.
In short
- I believe the market turmoil is temporary and will end soon, probably within weeks.
- World leaders, and the leaders in the EU, seem determined to keep Greece within the Euro, and based on this, I feel that the odds are that Greece will remain in the EU and Euro. I expect compromises to be made in coming weeks – on both sides.
- If Greece defaults and exits the Euro in a controlled and orderly way which has probably already been planned, there will be little long lasting effect to the US and Australian stock markets and I expect the market will rally with certainty one way or the other.
- If Greece renegotiates the terms of its agreement and stays in the Euro the market will probably rally quite hard in the second half of 2012.
- Expect the EU to inject growth strategies into struggling economies to support higher growth. A combination of the carrot and the stick so to speak.
My take is, May to June will be volatile with a few bumps in the road ahead, but the second half of the year and the run up to the US Presidential elections should be stronger for US equities, and this should drag the Australian market along with it. Take advantage of the current situation rather than fearing it.
Budget Update - Superannuation
The key Budget Super announcements were clearly directed toward the higher income earners and self funded retirees. This will clearly affect clients who are currently using Transition to Retirement strategies and/or making large Salary Sacrifice super contributions. Please read this section carefully and contact our office to discuss your individual circumstances.
Concessional Contribution cap reduction confirmed
Date of effect: 1 July 2012 and 1 July 2014
The uncertainty around the concessional contribution (CC) cap for people aged 50 and over has been resolved in the short term. On 1 July 2012, the cap will halve from $50,000 to $25,000 for all super fund members aged 50 or over, regardless of their account balance.
The plan to allow those aged 50 or over to contribute up to $50,000 p.a. if they have less than $500,000 in super will be delayed until 1 July 2014. This is to give the Government time to work out the details regarding how they are going to monitor account balances and implement this measure.
Implications
Super fund members aged 50 or over should:
- consider taking full advantage of the current cap by making concessional contributions of up to $50,000 before 30 June this year.
- review your concessional contributions, especially from 1 July, to make sure you don’t exceed the reduced cap.
- consider making non-concessional contributions if impacted by the cap reduction, and
- review your contributions and income payments if using the ‘transition to retirement’ strategy.
30% contributions tax for higher earners
Date of effect: 1 July 2012
As reported in the media before Budget night, the Government plans to increase the tax on concessional super contributions from 15% to 30% from 1 July 2012 for high-earners on more than $300,000.
While this has made employer super contributions (including salary sacrifice) less attractive for individuals who are required to pay 30% contributions tax, it’s still 15% less than the marginal tax rate of 45% they would pay on their salary.
Financial health check for over 50s
If you’re aged 50 or over, some changes are on the horizon this year that couldimpact your retirement plans.
Without good strategic advice, you could miss some significant opportunities or incur higher tax bills. Here’s a rundown of what’s happening and how it could affect you.
What’s happening?
The cap that applies to concessionally-taxed super contributions is scheduled to reduce from $50,000 to$25,000 p.a. on 1 July for people aged 50 or over.
However at the moment, there’s still some uncertainty around this legislation. The Government recently announced that it will discuss retaining the cap at $50,000pa for people age 50 or over, but only for those with less than $500,000 in super.
Whichever way the legislation goes, this change could have significant implications for super investors in this age group.
The concessional contributions cap applies to employer contributions (such as superannuation guarantee contributions and contributions made under a salary sacrifice arrangement) as well as personal contributions claimed as a tax deduction.
Should you do anything before 1 July?
If you think you’ll be affected by the change, you may want to make the most of the higher cap this financial year bymaking concessional contributions of up to $50,000before 30 June. After that date, it’s important to review your contributions with your adviser and reduce them if necessary.
If you exceed the cap, you could end up paying excess contributions tax of 31.5%.
What if you’re not impacted by a lower cap?
Even if you don’t need to adjust your super contributions from 1 July, it’s still important to be aware of the consequences of contributing too much to super.
Since the contribution caps were introduced five years ago, the Australian Taxation Office has issued 65,000people with excess contributions tax bills totaling approximately $400 million. While super is still a very tax-effective place to save for retirement, the benefits can be unwound if you put in too much.
We can look at your current cashflow position, how long you have until you plan to retire and arrange of other factors. We can then help you identify a contribution plan that maximises the benefits of super without triggering tax penalties.