Have you heard the news? Inflation is skyrocketing in Australia and across the globe. Why? Governments have been printing and distributing money like it was going out of fashion for two and a half years (since COVID-19 arrived on the scene). The war in Ukraine and strong consumer demand are all adding to inflationary pressures here and abroad.

Why does inflation happen?

• Cost-push inflation: the cost to produce goods or services increases (higher petrol prices).
• Demand-pull inflation: suppliers cannot meet consumer demand needs when something is popular (prices naturally increase).

Why is inflation bad?

Less purchasing power (your money doesn’t go as far), fewer savings (the more you have to spend, the less you have to save) and loss of goods and services (like everything in life there are always winners (supermarkets, fuel suppliers and funeral parlours) and losers (generally discretionary spending).

Economies across the world are now doing everything they can to reduce inflation before it gets out of control (for some countries it may be too late). The main weapon against inflation is to increase interest rates which is commonly referred to as contractionary monetary policy. This reduces the money supply in the economy and by increasing the cost of credit, it reduces consumer and business spending. Higher interest rates on government securities (treasury bonds, bills and notes) make them more appealing to businesses and investors and it guarantees a rate of return. This, in turn, makes riskier investments like equities less appealing to investors.

The reality is governments have minimal options in the way of reducing inflation. The most common way is contractionary monetary policy (raising interest rates), but the downside is that it could tip the economy into recession. There is usually a lag of three to four months before the impact of interest rate rises is felt through the economy, so at the moment we are only feeling interest rate effects from April this year.

What does inflation mean for your investments?

Generally, higher inflation is usually seen as a negative for stocks because it typically results in:

• Increased costs of raw materials and labour
• Increased borrowing costs
• Earning expectations reduced.

Usually, due to the increased uncertainty of the value of money in the future, all of the above put downward pressure on stock prices.

In times of high inflation, investments in gold and commodities are generally seen as safe havens for investors. Energy and agriculture producers generally fare better in times of high inflation as people will always need to eat.

No doubt the inflationary and interest rate roller coaster will continue for the remainder of 2022 and well into 2023.

If you require assistance in navigating the coming economic environment, contact our experienced team of financial advisers. We can help you identify strategies to help you reach your financial goals and aspirations.

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.

The pros and cons of a six-member SMSF have been extensively discussed in the financial services industry. One thing we know for sure is that a six-member fund is not for everyone. The majority (more than 93%) of SMSFs in the industry are either single-member SMSFs or two-member SMSFs.

Below are some pros and cons of having a six-member SMSF:

Pros:

• You can have more money (greater purchasing power). This will allow for greater diversification of assets or investment in higher-value assets.
• This could allow your children to invest their super in more substantial investments and achieve economy of scale, especially when their super balance is low.
• Having more members in your super fund will also reduce the cost of managing your family members’ super, i.e., a new SMSF setup cost, ATO levies and other costs, as the fees are spread across more members.
• If your children make regular super contributions, it will be easier to make your pension payments.
• The taxation strategies may be implemented more efficiently.
• Easier to meet Australian Super Fund residence requirements when/if you or your children travel overseas for an extended period of time.

The drawbacks include:

• Lifestyle considerations. Two sets of investment strategies may be required. However, differing investment timelines between the parents and kids may not be a major issue if all members agree on a range of diversified assets.
• Disputes and conflicts between members can make the decision-making and fund administration difficult. Who does what and the rules about the fund’s operation will need to be decided and documented in advance.  The SMSF’s Trust Deed will need to be reviewed and updated to cater to the increase in member numbers.
• Voting rights can be necessary within a six-member SMSF.  The children may outvote their parents, especially when one parent gets old and becomes incapacitated.  Having voting rights based on each member’s balances or any other method may need to be considered.
• Excessive transparency of the parents’ superannuation balances could cause potential financial abuse.
• Possible death benefit disputes. Succession planning and future control of an SMSF become more important with more member SMSFs.
• The forced sale of assets. The SMSF may be required to sell assets to allow for superannuation splitting. Sound planning may be required for situations where children need to move their super benefits to another super fund.

If you are thinking of getting your children into your super fund, a thorough review of your family situation and specialized personal advice are required. Get in contact with our experienced team of advisers so we can help you identify a superannuation strategy that works for you and your retirement goals.

Reference – this article is written in conjunction with Monica Wang @ Moneta Super

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.