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Archives for July 2021

Government superannuation reforms

Government superannuation reforms

In what seems to be the ever changing world of superannuation, the Commonwealth Government has recently passed the following reforms:

Increasing the number of members for a Self Managed Superannuation Fund (SMSF) to six from 1 July 2021.

This is useful for a family business that wants the SMSF to own the commercial property out of which the business trades, thereby ‘keeping the wealth within the family’ rather than contributing rent into the wealth accumulation strategy of an external landlord.

Increasing the number of members in a SMSF will allow for the asset pool to increase thereby opening up investment options and strategies available to the fund in order to meet wealth accumulation objectives.

Extending bring forward rules for Non-Concessional Contributions (NCC) to those 65-66 years old from 1 July 2021.

From the 2020/21 financial year, people aged 65-66 were permitted to make a voluntary contribution into superannuation without having to satisfy the work test. This allows for a NCC to be made up to the now increased $110K maximum limit, per annum from 1 July 2021.

At the time of this introduction to allow those aged 65-66 to make a NCC, the ‘bring forward’ of two future years was not permitted, which of course was inconsistent with the spirit of superannuation. However, it was hotly anticipated that the restriction would eventually be removed, which it has now been. Two future years of NCCs can now be brought forward resulting in a maximum of $330K that can be voluntarily contributed into superannuation for those aged 65 and 66.

Extend pension drawdown relief by 50% over the 2021/22 financial year.

For the last two financial years, the minimum pension payment required to be taken by superannuants from their pension accounts was reduced by 50%.

This was a measure introduced to alleviate the pressure on pension accounts being drawn down unnecessarily, resulting in ‘forced’ asset sales to shore up available cash at a time when financial markets were depressed. In essence, the concept was aimed at increasing the ‘longevity’ of pension accounts.

This measure has been extended into the current 2021/22 financial year. This no doubt will be well received by those in pension mode that don’t require the otherwise ‘normal’ minimum withdrawal.

Superannuation guarantee increase to 10% on 1 July 2021.

This refers to the amount employers are required to ‘compulsory’ contribute into superannuation on behalf of an employee. Previously the rate was set at 9.5% of gross salary, it is now 10%.

Another change to be aware of is the increase in contribution caps for the two different types of contributions. As mentioned above, the ‘NCC’ cap has been increased to $110K per annum. Similarly, the ‘concessional’ or taxable contribution cap has been increased by 10% to $27,500 per annum.

There is further scope and incentive for those in accumulation mode to increase the amount that can be contributed into their retirement asset of superannuation. These are positive steps to alleviate gaps in the retirement system, which will make it fairer for everyone.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Shares on a screen

Time in market, or timing the market?

In hindsight, looking at a chart of a company’s share price, it would be perfectly easy to make money any day of the week, by buying at the bottom and selling at the top.

In practice, it is not easy at all.

It is often the opposite that occurs, with the result that buyers enter near the top of the market, and when the market falls, they decide they don’t want to lose any more money, and they sell out, often near the bottom of that dip. These times are often recognisable because everyone has a stock market tip for you in a topping market, and again at the bottom when all and sundry have decided that they can’t bear it anymore and will put their money in the bank. They have realised a loss, which is difficult to recover.

Our investment team constantly researches markets and companies, before recommending a purchase. We are looking for solid companies, with good management, good cash flow, a solid performance history, preferably a franked dividend, and something where we see some value so far as price is concerned. Fair value of a company sometimes equates to its current share price but may be much more or less than the current market price. We don’t buy if we consider a company over-priced, but we like the underpriced gems that sometimes show up.

At The Investment Collective, we like to utilize a ‘buy and hold’ strategy, populated by the companies where we see value. We may wait to purchase a stock if we think the market price is a bit high compared with what we see as its fair value, and we may also add to an out of favour stock, again, because we see value. We don’t try to find the bottom to buy, and we also don’t try to find the top at which to sell or reduce. Sometimes we are lucky and a trade is executed on one of these days, but our investment philosophy is to hold assets for the long term.

We don’t think that it’s possible to time the market such that our trades are executed exactly at one of the extremes of price, because the movement of the market in the future can’t be known until after the event. Our philosophy is to buy at close to fair value and to hold onto that company for as long as it continues to meet our investment criteria, time in the market. If it fails this test, then it’s out.

Our focus in choosing our investments is not based so much on the present, but on what the company can deliver to us as investors in the future. This means that it may take some time for a company to begin to deliver a very positive impact in a portfolio, again, time in the market.

Investing requires patience and some courage to remain invested if the current market isn’t so rosy. Time in the market – we don’t try to time it.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Elderly couple watching sunset

Temporary minimum pension drawdown relief

Government support comes in all shapes and sizes and the temporary minimum pension drawdown relief was one key measure designed to support retirees at the onset of COVID-19. Superannuation pensions and annuities are subject to rules that determine the minimum and maximum amounts to be paid in a financial year. The legislation allowed superannuation accounts that are currently in drawdown/pension mode to effectively halve their annual drawdown limits and preserve superannuation balances during the COVID-19 market sell-offs.

These rules were initially legislated for the 2019/20 and 2020/21 Financial Year’s (FY):

Referencing the above table, a retiree aged between 65-74 would normally need to draw a 5% minimum amount per annum from their pension accounts. The drawdown relief legislation allows this individual to draw only 2.5%. This preserves the superannuation balance and avoids the need to sell down investments during the height of the market sell-offs.

An example would be a retiree aged 65 with an $800,000 pension balance. Under normal circumstances, 5% must be drawn per annum, which is $40,000. However, with the drawdown relief in place, only 2.5% is required to meet the annual legislated drawdown requirements, which is $20,000.

Benefits of this temporary measure to retirees

  • Preservation of superannuation balance (tax-free nest egg).
  • Avoids crystallising losses (from the volatile COVID-19 sell-offs).
  • Flexibility on where to draw income (access taxable sources before superannuation).

On Saturday 29 May 2021, the government announced that a further extension to this measure is being considered for the 2021/22 FY.

The proposed minimum pension drawdown for 2021/22 FY:

Key takeaways from the May announcement

  • This proposal is not yet law and still needs to be tabled.
  • This measure is not compulsory. Individuals need to review their situation to assess whether the pension halving/reduction will benefit their unique circumstances.
  • The measure will apply to account-based, transition to retirement and term allocated superannuation pensions.

Please keep in mind that there are no guarantees that the temporary minimum pension drawdown relief will be extended into the 2021/22 FY. This is something that we are keeping a close eye on for the benefit of our clients.

If this is something you’d like to take advantage of, please reach out to your Financial Adviser.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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