Summary of super changes

Portfolio www.bridgesweb.com.au Quarterly newsletter for Portfolio Watch clients Summer 2006 Watch Summary of super changes The Federal Government announced radical changes to superannuation in its 2006 Budget, proposing to simplify complex tax arrangements, improve retirement incomes and increase incentives for individuals to work and save. Here we outline some of the proposed changes*. Unless otherwise noted, all changes will take place from 1 July 2007. 1 Contents Summary of super changes Contribute to super longer Individuals, including the selfemployed, will be able to salary sacrifice into super up to age 75. This is good news as it enables people to continue investing in the tax-effective super environment longer. Tax-free super payouts for the over 60s Perhaps the biggest change is the abolition of Reasonable Benefits Limits (RBLs), where all pension or lump sum payments from a taxed super fund will be paid tax-free to the over 60s. An RBL is the limit on the amount of concessionally taxed super benefits you can receive during your lifetime. Currently, the Lump Sum RBL is $678,149 and the Pension RBL is $1,356,291 and any benefit amount above these levels is taxed up to the highest marginal tax rate. * hese changes are not yet law. T A super year 2 Minimise the impact of rising interest rates 3 This change may mean rethinking your current super strategies, such as super splitting, which may be less relevant unless you are retiring and are between 55 and 59. Or if you are over 60 and due to retire, you may want to defer your retirement until after July next year to take advantage of the tax-free payouts. Also, to take advantage of the tax-free super payouts, it may now be worthwhile moving other nonsuper investments into your super. Capped contributions With the removal of RBLs on super payouts, comes the new proposed limit to the amount of super contributions you can make each year. The new limit on post-tax (undeducted) contributions will be $150,000 each year for individuals. However, until 30 June 2007 individuals can contribute up to $1 million to top up their super. See page 6 for more details about the new contribution limits. The value of TPS 4 No more excuses 5 Share profile: Macquarie Bank 6 Cap on Post-tax contributions clarified 6 Investment market review 7 Q&A: Pensoin bonus scheme 8 cont ... 2 Summary of super changes… continued Relief from compulsory cashing Previously, if a person reached 65 years of age and did not satisfy the ‘work test’ they were required to roll over their benefit to an income stream product or take it as cash. The compulsory cashing of superannuation benefits for those aged 65 and over ended on 10 May 2006. This means that people are now able to keep money in the tax-effective super environment for as long as they choose, no matter what their age or whether they are working. A super year Another year is almost over and unfortunately we’re still hearing reports that Australians aren’t saving enough for their retirement. It seems that a lot of people reaching retirement age may be forced to rethink their retirement plans and continue to work in order to maintain a comfortable lifestyle. Those wanting a comfortable retirement cannot afford to rely solely on compulsory super contributions and will need to contribute more. Fortunately the Government wants to reduce the savings gap and has proposed some significant changes to super to encourage people to save. Although not yet legislated, the new super rules will hopefully offer people incentive to invest more into the taxeffective super environment. Maybe your current super strategies have become redundant and need revising? Now is a great time to speak with your Bridges financial planner to discuss how you can use the changes to minimise tax, maximise your investments and increase your peace of mind. I hope you enjoy this edition of Portfolio Watch and I thank you for your support throughout this busy year. I wish you and your families a very happy and safe festive season as we all look forward to another mutually rewarding year in 2007. Alex Hutchison Chief Executive Officer However, for those over 65 wishing to make new contributions, a ‘work test’ will still be required, ie working at least 40 hours in a period of no more than 30 consecutive days in the financial year in which you make the contribution. Age-based limits to be abolished Age-based limits, which currently restrict the amount an individual can salary sacrifice into super each year, will be abolished and replaced with a new limit of $50,000 per annum per person, regardless of age. While this is an increase for those aged under 50, it is a significant drop from the current limit for those aged over 50, which is $105,113 a year. To ensure that those aged over 50 are not disadvantaged by the new lower cap, they will be able to salary sacrifice up to $100,000 each year up until 2011/2012. Salary sacrificing additional contributions into super will help boost your super savings, helping you accumulate more for your retirement. Generally, instead of paying income tax at your marginal tax rate you should only pay 15% tax on your super fund contribution. For the self employed Self employed people will be able to claim a full deduction on super contributions, up to the new limits. This replaces the current cap of 100% of $5,000 plus 75% of the balance up to the age based limit. Employer Eligible Termination Payments Employer Eligible Termination Payments (ETPs) will have to be taken as cash as you may no longer be able to roll the ETP into super. With the proposed changes only months away, it is probably a good time to talk with your Bridges financial planner to review your super to ensure you take advantage of these new rules. 3 Minimise the impact of rising interest rates Higher interest rates are generally welcomed by investors, but anyone with non-tax deductible debt such as credit cards or home and personal loans, may be dreading the prospect of another rise in interest rates. To help minimise the impact of interest rate rises we have identified some simple and painless strategies that everyone can follow. Reduce credit card liability Australians are great fans of credit cards and according to the Reserve Bank, in August 2006 we owed $21.5 billion, or an average debt of around $2,235 for each card. Having the right type of card that suits your particular purchasing habits is the first way to protect yourself. If you pay off the balance in full each month, a card that gives a long interest free period, rather than a low interest rate, may be the most suitable. For those who don’t pay off the full balance each month and carry forward an outstanding balance, a low interest option is more important. If you have more than one credit card, now may be time to review the number and types of cards you have. Reward schemes are generally offered at a premium and if you only use your card for emergencies or special purchases, you could be paying a lot extra for a scheme of little or no benefit to you. Consolidate debt If you have a number of cards with outstanding balances and you only manage to pay the minimum owing each month, it may be worthwhile consolidating the balances into a lower interest loan. Consolidating into one debt will reduce your monthly repayments so that if you stay disciplined, you can pay off the debt faster. If you have built up equity in your home, you may be able to consolidate the debt into your mortgage. This option should reduce your total monthly debt repayments, but it will also extend your mortgage and may end up costing you more over the life of the loan. Only paying the minimum repayment on a credit card will end up costing you much more than the item you initially purchased. Once you have reduced the balance on your card you need to be disciplined so that you don’t repeat past mistakes. Reducing your card limit or even cancelling cards may help you stay out of future financial trouble. Mortgage - to fix or not to fix Fixing all or part of your mortgage is an option if you are concerned about being able to meet mortgage repayments if rates continue to rise. Fixing your mortgage rate can give you peace of mind about your repayments for a fixed amount of time. But fixing your entire loan may mean that you will not benefit if rates fall again. Fixing a portion of your mortgage and leaving the balance at the variable rate may give you more flexibility. Interest rates on fixed loans are generally higher than those with variable rates so it may end up costing you more over the longer term. Review your current home loan Maybe now is a good time to review your home loan to check that it is still meeting your needs. Reviewing whether you need the extras or are better off with a cheaper, more basic loan may reduce your monthly repayments as well as saving thousands of dollars over the life of the loan. Fees and charges will apply to any changes to your home loan and you need to work out whether the benefits outweigh the associated costs. And it is usually cheaper to remain with your current lender, as switching may incur establishment fees, stamp duty, etc or even discharge fees with your current lender. It is always recommended that you seek professional advice before making any financial decisions. 4 The value of TPS Your complete investment solution Serious investing is a complex and highly specialised area. It can be a struggle to find an investment solution that lets you invest in shares, property trusts, fixed interest and various managed investments, that is also flexible and tax-effective. The Portfolio Service does all that by providing a sophisticated portfolio research and management service that is designed to help you and your financial planner select and manage your investment portfolio simply and conveniently. Options to suit your individual needs Whether you are thinking about saving, looking to build your wealth, maximise your superannuation or provide an income in retirement, The Portfolio Service offers investors a number of different plans and solutions for every generation: the Personal Investment Plan, Personal Choice, the Superannuation Plan and the Retirement Income Plan. Personal Choice gives you access to five investment options, whilst each of the other Plans gives you access to a wide choice of managed and listed investments, including shares — currently more than 250 investment options. Personal Investment Plan The Personal Investment Plan is a convenient and flexible way to build and manage a diversified investment portfolio. Your money is not locked in and you can access your funds at any time. You can add the Regular Investment Facility to invest a set amount each month. Or you can use the Margin Lending Facility to borrow money so you can invest more and potentially grow your investments faster. Personal Choice Personal Choice is a simple super solution for those just starting out or with smaller superannuation balances. Personal Choice can accept rollovers from other super funds, employer Superannuation Guarantee contributions, salary sacrifice or personal contributions using the Regular Investment Facility. When your Personal Choice savings reach a threshold, you have the option of rolling over your savings into the more flexible Superannuation Plan. Superannuation Plan The Superannuation Plan is a flexible and tax-effective way to save for your retirement. Your employer can make Superannuation Guarantee contributions into your account, you can make personal or salary sacrifice contributions and you can roll over from other super funds. When you retire, your investments in the Superannuation Plan can easily be transferred into the Retirement Income Plan, without incurring capital gains tax. The Superannuation Plan offers many of the same features and benefits of setting up your own selfmanaged super fund, but without the administration responsibility and compliance liability. Retirement Income Plan The Retirement Income Plan is a flexible and taxeffective allocated pension that allows you to convert your superannuation savings into retirement income. You can transfer your superannuation savings into the Retirement Income Plan where you can choose the frequency and level of regular income you receive subject to government approved limits. Insurance Personal Choice and the Superannuation Plan offer personal insurance options, which may take away the hassle of arranging new insurance cover if you change jobs or retire. Why use The Portfolio Service? The Portfolio Service has simplified investing, provides investment solutions for people of all ages and gives you choice, control and convenience. Choice - The Portfolio Service allows you to invest in shares, property trusts, fixed interest and various managed investments to create your investment portfolio - currently, more than 250 investment options are available. cont ... 5 No more excuses Death is often a taboo subject that many people prefer not to discuss. Yet it is an event that we will ultimately all face. Thinking about who is to benefit from our estate or take care of minor children after we pass on needs careful consideration. Your wishes need to be contained in a Will, which is a legal document that provides clear instructions on how your estate is to be distributed and administered. Without a Will the Government is forced to distribute your estate according to a pre-determined formula, which may not match your wishes. Many people find it difficult to plan for the inevitable and find all sorts of excuses for not making a Will, including: 1. I’m too busy/I have no time 2. I’m too young 3. I’ve told my family who my beneficiaries should be 4. I’m single 5. It’s not my problem 6. I don’t like my family anyway 7. I don’t have any significant assets 8. My partner will get my money if I die without a Will 9. I don’t like lawyers 10. It’s bad luck None of these excuses are reasons for not having a Will. In fact the reasons for having a Will are far more compelling. For example, Wills aren’t just for old people or the rich. Anyone who owns a car, has some superannuation or even some sentimental items should have a Will. Never assume that your estate will automatically go to your spouse, partner or other loved ones. It becomes particularly complicated with de facto relationships, divorce or remarriage. Dying without an up-to-date Will could cause undue stress or financial burden for those you leave behind during what is usually a difficult time. Don’t gamble with your estate. Stop the excuses and prepare or review your Will so you determine the distribution of your hard earned wealth. Talk to your Bridges financial planner who can arrange a meeting for you with an estate planning specialist from Australian Executor Trustees Limited. The value of TPS … continued Control - You can combine your investments into a single portfolio so that you and your financial planner have a ‘snapshot’ of your current position at any one point in time. You can even transfer shares you hold directly into The Portfolio Service. Convenience - The Portfolio Service efficiently handles all transactions, provides investment research, gives regular performance reports and recommendations, and removes the paperwork and complexity from investing. You only need to sign one application form to have access to the full range of investments. With The Portfolio Service’s unsigned transactions, you can transact with minimum paperwork and your financial planner can implement your instructions online without delay. You receive one consolidated report to reduce paperwork and make tax time easier. You can also view your portfolio online using the secure Portfolio Watch Online. If you want more information on how The Portfolio Service can help you reach your investment objectives, talk to your Bridges financial planner. 6 Share profile: Macquarie Bank Macquarie Bank (ASX: MBL) Macquarie Bank is Australia’s leading listed investment bank. It has a diversified operational base with significant activities in corporate finance, treasury and commodities, equity markets, funds management and property. Fee income is generated from a number of listed and unlisted specialist funds including a cash management trust, which combined are accounting for a growing proportion of group income. MBL is leveraged to global markets, which we expect to generally perform better than the domestic market. MBL’s specialised, proven infrastructure model is performing well with infrastructure now a strong theme globally. This strength is now increasingly being leveraged in the unlisted space as opposed to Macquarie’s traditional listed funds. Recent trading has seen MBL trade at a discount to its medium term market multiple, though recent good trading announcements should see this gap close. BUY Cap on Post-tax contributions clarified The Government’s proposal to abolish Reasonable Benefit Limits (RBLs) from 1 July 2007, means that the restriction will now be on the amount that can be contributed into super rather than how much can be taken out. The abolition of RBLs could make a significant and positive difference to the income and lifestyle of many future retirees. In addition to the changes to superannuation payouts, the new rules have capped undeducted super contributions. Undeducted or post-tax contributions are those contributions made by an individual from after-tax salary or wages. Individuals cannot claim a tax deduction on these contributions. From 1 July 2007, the new limit will be $150,000 each year for individuals. However, for the period from 10 May 2006 until 30 June 2007, individuals can contribute up to $1 million to top up their super. While there will be an annual limit, individuals under age 65 will be able to bring forward two years of contributions and contribute up to $450,000 in one year and then nothing for the next two years. If you don’t contribute the full $150,000, you won’t be able to carry forward any unused amount; you use it or lose it. Anyone aged 65 and over will also be restricted to contributions of $150,000 a year and will have to meet an eligibility test to contribute to super. All contributions in excess of the relevant limit will be taxed at the highest marginal tax rate of 46.5% including Medicare levy. The Government has indicated that some other contributions such as those from the Government co-contribution and settlements for injury resulting in permanent disablement will not count towards the cap. In addition there will be a lifetime limit of $1 million (indexed) from the sale of small business assets held for 15 years or more. Please note that while these changes are likely to become law, they are not yet legislated. Speak with your Bridges financial planner to find out how you can take advantage of these changes to super contributions. 7 Investment market review Quarter ended 31 October 2006 * Asset Australian shares Index S&P/ASX 200 1 yr return 26.12% 5 yr return 15.32% pa Comments T he domestic market rallied strongly in the last half of the quarter on the back of improved sentiment in global markets and take-over activity. The property trust sector moved higher throughout the quarter, despite concerns over rising interest rates. Overall, valuations fully reflect the earnings outlook. Global markets were strong during the quarter. The US market led the rally and was very strong during the quarter on improved investor sentiment. The markets were pleased that the US Federal Reserve kept interest rates on hold. However, some of the US economic data showed some signs of weakness towards the end of the quarter. Official cash rates were left on hold at 6.0%. In their statements the RBA continued to point to inflationary pressures in the domestic economy. Another rate rise appears likely before the end of the year. Listed property trusts S&P/ASX 300 Property Trusts Accumulation Index 29.13% 16.97% pa International shares MSCI World Index (AUD) 18.62% 8.66% pa Fixed interest and cash UBS Warburg Composite Bond All Maturities Index 4.40% 5.02% pa * Past performance is not a reliable indicator for future performance. Investment returns can go up or down. Our offices Adelaide Albury Albury — HBS Armidale Bacchus Marsh Ballarat Batemans Bay Bathurst Bendigo Bondi Junction Bowral Brisbane Brisbane — Bayside Brisbane — North Quay Canberra Castle Hill Chatswood Coffs Harbour Darwin Dubbo Essendon Geelong Gippsland Gold Coast Gosford Griffith Homebush Honeysuckle Hurstville Launceston Laurieton Lismore Maitland Melbourne Menai Mildura Miranda Newcastle Norwood Nowra Parramatta — George St Parramatta — McNamara Parramatta — North Parramatta — PCU Penrith Perth Perth — King St Port Macquarie St Leonards Sydney — St Martins Tower Tamworth Toowoomba Townsville Wagga Wagga Whyalla Wodonga Wollongong Wollongong — Figtree Head Office 08 8202 7766 02 6041 2122 02 6021 4513 02 6771 2989 03 5367 3400 03 5331 4877 02 4472 7363 02 6331 5111 03 5440 1211 02 9369 2092 02 4862 1230 07 3217 6044 07 3821 1161 07 3236 3711 02 6247 4111 02 8850 1466 02 8448 2000 02 6651 2000 08 8981 7722 02 6881 8177 03 9379 1166 03 5227 7777 03 5144 1622 07 5574 0444 02 4323 7468 02 6964 2122 02 9735 9156 02 4927 5833 02 9570 3222 03 6334 4900 02 6559 9950 02 6622 0353 02 4934 6133 03 9629 8188 02 9541 2357 03 5022 7062 02 9525 5900 02 4926 5255 08 8334 2450 02 4422 1877 02 9635 5305 02 9633 9044 02 9683 4363 02 9841 8207 02 4721 5800 08 9321 1288 08 9481 0501 02 6584 5050 02 9906 8005 02 8262 4000 02 6701 9100 07 4638 3611 07 4725 2910 02 6931 9744 08 8645 8055 02 6024 1722 02 4226 1233 02 4227 3255 02 9028 1000 8 Q&A: Pension Bonus Scheme Q hat is the Pension Bonus W Scheme (PBS)? A he PBS is a Government initiative T that provides a tax-free incentive for older Australians to defer claiming the Age Pension and remain in the workforce. he bonus can only be paid to people T who have not received Age Pension or other income support (excluding Carer Payment) since reaching Age Pension age. Q ow do I join this scheme? H A ou will need to register for this Y scheme with Centrelink, generally within 13 weeks of turning Age Pension age. If you have a partner, both you and your partner must register if you both wish to benefit from the scheme. Q ow much bonus will I receive? H A he amount of bonus you can be T paid will depend upon your marital status during your deferment period, the length of time you have been a qualifying member of the scheme, and the amount of Age Pension you are eligible for when you claim. he maximum period of deferment T which can be taken into account in calculating the bonus payable is five years. ased on current pension rates, the B maximum bonus for a single person is $31,289 and for a couple (combined) is $52,265. Q re there any drawbacks A of the scheme? A he amount of bonus will depend on T the amount of Age Pension you are entitled to receive after ceasing work. If you cannot get any Age Pension, you will not get a bonus. n some cases, the value of the bonus I may be less than the amount of Age Pension forgone. However, continuing to work may bring rewards beyond just the financial benefit. f you die during your deferment I period, your estate will not receive the bonus payment. Q m I required to work a A specified minimum? A es, there is a ‘work test’ that you will Y need to satisfy. The work test requires you to complete at least 960 hours of ‘gainful work’ each year. That’s an average of 20 hours per week for 48 weeks each year. Periods of leave do not count as ‘work’. he requirement for gainful work will T generally be met if: • he work involves a substantial t degree of personal effort or exertion; • he work is for the provision of t goods or a service; and • he work is for financial gain t or reward. he management of a family T company, trust or financial investments is not likely to be considered as gainful work. Q What happens if I get sick? A f you get sick while you are working, I the time that you are sick does not count as hours worked for the ‘work test’. It may be better for you to claim the Age Pension if you are unlikely to return to work. Q an I defer for less than a year in C total, and get a reduced bonus? A o. After registering as a member N of the scheme you need at least 12 months of qualifying membership before a bonus can be paid. Important Note – This is general advice only. It is not possible, when preparing Portfolio Watch, to take into account individual clients’ investment objectives, circumstances and needs. Before acting on any information or advice contained, expressly or implicitly, in Portfolio Watch you should consult an Authorised Representative of Bridges Financial Services Pty Limited (‘Bridges’), AFSL Number 240837. No part of Portfolio Watch may be reproduced without the written consent of Bridges in each case. Bridges, its directors, employees or any associate are not liable for any loss or damage arising as a result of any reliance placed on the contents of Portfolio Watch. To the extent permitted by law all such liability is excluded. Investors will need to contact their financial planner regarding financial products outlined in this newsletter. Funds and Pensions named in PortfolioWatch are issued by Questor Financial Services Limited. AFSL Number 240829. You should obtain and consider the Product Disclosure Statement available from Bridges before investing in any product. (BRIHO2255)