YourLifeChoices Retirement Update July 2016 1

How will your retirement plans change in the new financial year?

Will the proposed changes to super have an impact on your retirement income?

Are you one of the 416,000 retirees whose Age Pension will be affected by the new asset thresholds?

How does your household budget compare with the recommended cost of living in retirement?

Is your investment strategy due for a review?

Read on to find the answers.

ISSUE 11 JULY 2016

Retirement Update

YourLifeChoices Retirement Update July 20162

How will super changes affect your retirement plans?

… individuals should continue to save to fund their

own retirement, but not save too much.

Proposed changes to super have left many wondering if their retirement plans still stack up. Adam Gee explains what the changes will mean to you.

Akin to death and taxes, one of the few certainties in life is that the Government (and Opposition) remain unable to keep

their hands off what is now a huge honeypot within superannuation. Both parties have announced a number of policies, which generally reduce the overall attractiveness of Australia’s burgeoning retirement system, particularly for those individuals that have been diligent in saving reasonable amounts to fund their own retirement.

The key changes most relevant to retirees, include:

1. Introduction of a lifetime cap on amounts that can be transferred into a pension product;

2. Changes to tax on transition to retirement (TTR) pensions;

3. Introduction of a lifetime limit for non-concessional contributions;

4. Lowering of the concessional contribution cap back to $25,000 per annum;

5. Tax deductibility for personal contributions; and

6. Extension of contribution eligibility for members to age 75.

I will address each of the changes below and outline the likely impact this will have on retirees and some issues you may wish to consider with your licensed financial adviser in planning for your retirement.

1. Introduction of a lifetime cap on transfers into a pension account

One of the key announcements within this year’s Federal Budget was the introduction of a limit on the amount an individual can transfer from their superannuation account into a pension product. There is a lifetime limit of $1.6m, which effectively reduces the tax concessions available to a retiree, given any earnings on a pension product

are not currently taxed. Any amount in excess of the $1.6m limit must be retained within a superannuation product and the earnings on the balance will be taxed at the concessional rate of 15 per cent.

The Opposition has announced a similar policy, which will tax individuals at the concessional rate of 15 per cent on any earnings that exceed $75,000 per annum on pension account balances.

While both parties’ policies will limit the generous tax concessions currently available, superannuation still remains a very attractive investment, with concessions

still vastly more beneficial than those in relation to assets held outside the superannuation system, which attract tax at a member’s marginal rate. On this basis, we continue to be of the view that individuals should maximise their retirement savings, taking into account the additional limits placed on contributing to the superannuation system outlined below.

2. Changes to tax on TTR pensionsIn a further targeted lowering of the available tax concessions within superannuation, the Government has announced that the present tax-free earnings on TTR pensions will also be removed, such that any earnings on these accounts will be taxed in a similar manner to a superannuation account, attracting a 15 per cent tax impost.

Not surprisingly, the Government’s announcement effectively reduces the concessions available, albeit the TTR pension remains a strong retirement planning tool for those who are genuinely using it to supplement their income when transitioning to retirement.

YourLifeChoices Retirement Update July 2016 3

SuperRatings is an independently owned superannuation research and consulting company providing data analysis, information, consulting services and product benchmarking to the superannuation industry, corporate sector and the general public. SuperRatings prides itself on providing impartial advice to all segments of the market. It actively promotes engagement, education and ownership of superannuation through the provision of a range of research, ratings and consultancy services. Offering the most extensive industry coverage accounting for over $1.2 trillion in funds under management and 22 million member accounts, allows SuperRatings to understand the various costs, fees, products, services and performance of superannuation funds and benchmark these against the broader market.

3. Introduction of a lifetime limit for non-concessional contributions

To further limit the tax concessions available within superannuation, the Government has also announced a lifetime limit on contributions made by individuals from after-tax money, which are known as personal, or non-concessional, contributions. Previously, individuals were able to contribute up to $150,000 per annum into superannuation from after-tax money with the ability to roll forward three years’ worth of the non-concessional contribution cap, such that $450,000 could be contributed in any single year.

Under the announcement, individuals will now be able to contribute a total of $500,000 of after-tax money to superannuation over their entire life, however, the sting in the tail is that the Government will count all contributions made from 1 July 2007 towards the lifetime limit. For example, where an individual may have contributed $50,000 each year since 2007 until a current date to fund their retirement, they would not be able to make any further non-concessional contributions as they will reach this limit in 2016.

4. Lowering of the concessional contribution cap back to $25,000 per annum

Once again, the Government has limited the ability to contribute larger annual amounts to superannuation. The concessional contribution cap (which encapsulates all mandatory Super Guarantee contributions, salary sacrifice contributions and contributions for which a tax deduction is claimed) will be reduced from the current $35,000 per annum to $25,000 per annum.

5. Tax deductibility for personal contributions

Previously, only those individuals that were substantially self-employed (requiring less than 75 per cent of income to come from an employer-

related relationship) were eligible to claim a tax deduction for personal contributions. The Government has announced that it will broaden the tax deduction opportunity to any individual, so personal contributions made to superannuation will be deductible.

While this is a positive change and will provide individuals with greater flexibility, any personal contributions for which a deduction is claimed will be treated as concessional contributions within the superannuation environment and will be subject to the respective concessional contribution cap.

6. Extension of contribution eligibility for members to age 75

Individuals were previously required to meet a range of work tests in order to make contributions after reaching age 65. The Government has announced that these restrictions will be removed allowing any individual up to the age of 75 to make contributions to superannuation.

This will allow individuals to make further catch-up contributions in later life, however, it is important to note that any contributions will be subject to the new limits as noted above.

While it appears that the Government remains committed to the use of superannuation as the key retirement planning tool for Australia, the changes indicate that individuals should continue to save to fund their own retirement, but not save too much.

YourLifeChoices Retirement Update July 20164

Your retirement living costs

March quarter costsIn June, the Association of Super Funds of Australia (ASFA) released the ASFA Retirement Standard. ASFA has kindly allowed YourLifeChoices to share this information.

Expenditure items Comfortable couple

Modest couple

Comfortable single female

Modest single female

Building and contents insurance 32.05 25.37 26.71 25.47Rates 37.64 32.05 32.05 32.17

Home improvements 10.68 0.00 10.68 0.00Repairs and maintenance 18.69 13.35 16.02 16.09

Total housing 99.06 70.78 85.45 73.73

Electricity and gas 56.39 54.41 41.58 40.97Total energy 56.39 54.41 41.58 40.97

Food – groceries and other fresh food 198.71 160.07 110.39 77.27Total food 198.71 160.07 110.39 77.27

Bundle of home phone, broadband, mobile 30.11 15.07 23.65 8.61Total communications 30.11 15.07 23.65 8.61

Household cleaning and other supplies 25.97 15.58 18.70 10.39Cosmetic and personal care items 3.10 2.98 6.96 1.99

Barber or hairdresser 20.78 8.96 14.93 5.00Music and CDs 2.17 0.00 0.32 0.00

Newspapers and magazines 8.32 1.93 8.12 2.43Computer, printer, software 4.26 4.26 4.26 4.26

Household appliances 11.93 3.02 10.16 3.02Pest control, alarm service 12.76 0.00 12.76 0.00

Total household goods and services 89.28 36.74 76.22 27.10

Clothing 56.20 28.10 37.47 17.31Total clothing and footwear 56.20 28.10 37.47 17.31

Car transport and running costs 132.00 87.74 132.00 87.74Public transport 5.12 5.12 2.56 2.56Total transport 137.12 92.58 134.56 90.30

Health insurance 83.61 67.05 42.54 33.53Chemist 24.58 3.35 13.56 1.89

Co-payment and out of pocket 43.14 13.00 29.65 7.80Total health services 151.33 83.41 85.75 43.22

Membership clubs 9.81 1.97 4.92 0.98TV, DVD, digital camera 1.81 0.91 1.81 0.91

Alcohol consumed in home (or equivalent spent) 40.95 15.36 25.59 10.24Lunches and dinners out 81.89 25.49 61.18 30.60

Cinema, plays, sport and day trips 13.73 19.12 6.86 5.89Domestic vacations 78.45 37.26 66.68 18.63Overseas vacations 54.90 0.00 37.26 0.00

Sundry items 30.28 11.76 23.23 7.84Total leisure 311.82 111.87 227.54 75.09

Gifts and/or alcohol or tobacco 0.00 0.00 0.00 0.00

Total weekly expenditure $1,130.01 $656.29 $822.60 $453.59Total annual expenditure $58,922 $34,064 $42,893 $23,651

Weekly expenditure for retirees aged 65–85 IncreasedNo change Decreased

YourLifeChoices Retirement Update July 2016 5

Expenditure items Weekly Monthly Annual

Building and contents insuranceRates

Home improvementsRepairs and maintenance

Total housing

Electricity and gasTotal energy

Food – groceries and other fresh foodTotal food

Bundle of home phone, broadband, mobileTotal communications

Household cleaning and other suppliesCosmetic and personal care items

Barber or hairdresserMusic and CDs

Newspapers and magazinesComputer, printer, software

Household appliancesPest control, alarm service

Total household goods and services

ClothingTotal clothing and footwear

Car transport and running costsPublic transportTotal transport

Health insuranceChemist

Co-payment and out of pocketTotal health services

Membership clubsTV, DVD, digital camera

Alcohol consumed in home (or equivalent spent)

Lunches and dinners outCinema, plays, sport and day trips

Domestic vacationsOverseas vacations

Sundry itemsTotal leisure

Gifts and/or alcohol or tobacco

Total expenditure

How does your spending compare?

Your retirement BuDget

YourLifeChoices Retirement Update July 20166

Should you review your investment options?

Investment choices should be reviewed regularly. Russell Lees of the Australian Investors Association outlines which questions you should be asking yourself.

For many, reviewing your investment choices is about selecting which investment option to select for your superannuation fund. This

decision is between accepting the default option, which is usually the Balanced option, investing more conservatively using the Conservative option, or aggressively using the Growth option. Regardless of whether you’ve chosen a defined investment option or run your own self-managed super fund, an understanding of asset allocation and the different associated risks can significantly help enormously to achieve better retirement outcomes.

Understanding what to expect from each asset class helps you make appropriate investment decisions based on your varying needs and timeframes. Financial theory suggests that by investing in more than one asset class, investors can diversify their investments and reduce risk while maintaining an overall target return.

Asset classesThere are four main types of asset classes, each categorised into either defensive or growth. The table below highlights the characteristics of each one.

Defensive assets – the role of these assets is to provide income

Cash – suitable for investors who have a short-term outlook and a low tolerance to risk, or if market volatility is high. Provides a stable, low-risk income.

Fixed interest – can be more volatile than cash, but are still relatively stable. Income return is usually in the form of regular interest payments for an agreed period of time, usually between one and five years.

Growth assets – the role of these assets is to provide capital growth and income.

Property – this includes direct investments in residential, industrial and commercial property and can also include indirect investment in listed property vehicles such as REITS. This asset class has a higher risk than fixed interest, but less risk than equities.

Less liquid than other asset classes resulting in a higher recommended minimum timeframe.

Minimum suggested timeframe: at least seven years.

Equities – this includes Australian equities and international equities. Returns usually include capital growth or loss and income through dividends, which may be franked (i.e. the company has already paid tax on the earnings). The most volatile asset class but over long periods of time, on average, has achieved higher investment returns. Involves part ownership of a company, enabling investor to share in the profits and future growth. Currency valuations can affect performance of international equities.

Minimum suggested timeframe: five to seven years.

Questions you need to ask yourselfEntering retirement is always an ideal time to review your portfolio and make any necessary changes to its different asset classes. Some typical questions you need to answer are:

• Should I have more capital allocated to equities?

• Do I have sufficient exposure to defensive assets?

• What level of cash should I retain?

• Do I invest in Australian equities or should I have exposure to international equities?

The answers to these and other questions come down to several factors with the main ones being: 1. Your tolerance for risk – can you sleep at night

knowing equities are volatile and moving up and down on a daily basis?

Understanding what to expect from each asset class helps you make appropriate

investment decisions…

YourLifeChoices Retirement Update January 2016 7

Russell Lees is a Partner and Senior Adviser at Sornem Private Wealth. Russell has over 25 years of experience working in financial markets with a background in stockbroking, funds management and international markets. He obtained his Certified Financial Planner (CFP) qualification in 2007, holds post-graduate qualifications in finance and recently became an accredited estate planning specialist with the FPA. Russell is a Director of the AIA, a member on the Melbourne Committee and also runs the Blackburn Local Area Discussion Group.

2. Your investing timeframe – do you need access to your money over the short-term or can you tie up your money for five or more years?

3. Your investing objectives – are you investing for income, capital growth or a mix of the two?

For most retirees, having a mix of all investment classes is ideal. Retirement portfolios are typically built to last a timeframe of 15 or more years. Ensuring your capital provides a good level of income while growing the capital, at least in line with inflation, is the ideal objective for most. In portfolio construction terms, this is known as diversification – the practice of ‘not sticking all your eggs in one basket’.

Investing across a number of asset classes is generally accepted to be a valid risk management strategy. The definition of diversification is reducing risk by investing in a variety of assets within a portfolio. The rationale behind diversification is that a portfolio of different investments will, on average, yield higher returns and pose a lower risk than any individual investment within the portfolio.

For the majority who invest in a balanced portfolio, a typical asset allocation will be 40 per cent defensive assets and 60 per cent growth assets.

Defensive 40 per cent – split 15 per cent to cash and 25 per cent to fixed interest.

Growth 60 per cent – split property 10 per cent, Australian equities 30 per cent and international equities 20 per cent.

One of the keys to successful investment is the regular monitoring, measurement and review of the performance of your portfolio. How will you know if you are ‘on track’ to meet your investment objectives or if individual components of your

portfolio are performing poorly, if you don’t regularly do a review?

There is no hard and fast rule that says when you should review and measure your portfolio. A time-based schedule can be a good approach with the frequency depending on your investment timeframes. For example a property investor with a 15-year investment horizon may only need to review annually, whereas an active share investor may need a monthly review. For most retirees, either an annual, or half-year review, is ideal.

Keep in mind that:• Rebalancing your portfolio doesn’t necessarily

need to occur at every review.• The key to successful reviews is a robust process

that does not get taken over by market volatility or your emotions take over.

Typical questions to consider during a review are: • Have I drawn out more income than the portfolio

has produced?• Has the portfolio performed better than the

benchmark?• Has the portfolio met its short, medium and long-

term goals? If not, what adjustments do I need to make?

The AIA will hold its Annual Conference – Volatility, risk and return… Strategies for an uncertain world – from 7-10 August 2016 at Marriott Resort and Spa, Surfers Paradise.

YourLifeChoices Retirement Update July 20168

Will you be affected by Age Pension changes?

Changes to the asset test thresholds and associated taper rate will affect an estimated 416,000 age pensioners – will you be one of them?

Disclaimer: This material contains general information which has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this advice you should consider its appropriateness having regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that impact your financial and legal circumstances. Date prepared is July 2016.

© YourLifeChoices 2016

On 1 January 2017, the asset thresholds and taper rate that apply to the Age Pension asset test will change. This will result in the

most significant alteration to retirement income this decade.

The asset free threshold is the value of assets that an individual or couple can own before their Age Pension payment is affected. For every $1000 worth of assets held above this threshold, the Age Pension payment is reduced by $1.50 until no payment is due.

From 1 January 2017, not only will the upper threshold reduce, meaning fewer people will qualify for a part Age Pension, the taper rate will also increase to $3 for every $1000 by which the asset free threshold is exceeded, meaning the Age Pension payment will reduce to $0 more quickly.

How many people will be affected?It has been claimed that 170,000 pensioners will be better off, with 50,000 currently receiving a part Age Pension expected to receive a full Age Pension once the thresholds have been changed. A further 120,000 on a part Age Pension can expect their payment to increase by $30 per fortnight. These changes will also see 91,000 lose their Age Pension entitlement and about 235,000 see their part Age Pensions reduce.

Can I get rid of assets before then?Generally, yes you can, but if you’re already in receipt of an Age Pension, you should be aware of gifting rules and how they might affect your Age Pension assessment. You should also consult an independent financial advisor to ascertain the best way to structure your finances to maximise your income.

Current From 1 January 2017

Asset free threshold

Pension cut-off threshold

Asset free threshold

Pension cut-off threshold

HomeownerSingle $209000 $791750 $250000 $547000

Couple (combined) $296500 $1175000 $375000 $823000

Non-homeownerSingle $360500 $943250 $450000 $747000

Couple (combined) $448000 $1326500 $575000 $1023000

So, what are the current thresholds and what will they be from 1 January 2017 onwards?

What if you lose your Age Pension due to the threshold and taper rate changes?Those who are no longer eligible for the Age pension will automatically receive a Commonwealth Seniors Health Care (CSHC) card to help with the costs of prescription medicines, utility bills, rates, etc. The recipients of these CSHCs under this measure will be exempt, indefinitely, from the income thresholds usually applied.