24 NEWCASTLE HERALD Thursday, September 24, 2015

business PERSONALFINANCE

Superannuation issafeNOELWHITTAKER

Retirees need not be

worried about changes.

The biggest risk for most retirees is an over-emphasis on cash.

Noel Whittaker is the author of Making Money Made Simple, andnumerous other books on personal finance. His advice is general innature and readers should seek their own professional advice beforemaking any financial decisions. Email: noelwhit@gmail.com.

HOW safe is my super? What do youthink the government has in store forus? The person who asked thesequestions is an executive in his early50s who is busily trying to get hisfinances in shape to retire at age 65.

For a person of his age I am notoverly concerned. There have beennon-stop changes to thesuperannuation system since itbecame universal more than25 years ago, but there has been noelement of retrospectivity. Yes, thereare many voices now saying thesystem is too generous, but they tendto be focusing on those few peoplewho have more than $5 million insuper, and who are certainly notrepresentative of the majority.

So what can we expect? Thepresent government has promisedno changes in their present term, butthis has only a year to run at most.Opposition Leader Bill Shorten hasalready announced Labor’sintention to increase thecontribution tax to 30 per cent forpeople whose adjusted taxableincomes are in excess of $250,000 ayear. This is not a huge leap from thepresent system, where the 30 percent tax applies to people withincomes of over $300,000.

Under the present system, there isa 15 per cent tax on earnings fromsuperannuation funds in theaccumulation phase, but thisreduces to zero once the fund enterspension mode. Under the Gillardgovernment there was a proposal totax the income of a pension fundonce fund income exceeded $100,000a year per member. This was a fairlymild proposal because the 15 percent tax was only on the excessincome over $100,000. But thepredictable outcry ensued, and theproposal did not become law.

It is now Labor policy toreintroduce this tax, but they havemade it tougher – it will apply onceincome exceeds $75,000 a year. Giventhe failure of the last attempt, thechances of this getting through mustbe considered slim, but even if it did,it’s probable only a few who wouldbe affected.

Think about a couple with$4 million in super, with a portfoliothat is spread in a fairly

conventional manner between cashof 30 per cent, local shares 35 percent, international shares 25 percent, and listed property 10 per cent.The income, including frankingcredits, would be about $73,000 each,which would still keep it under thethreshold for Labor’s new tax. Isuspect when they start doing thenumbers, they will realise it’s notworth the pain.

The Association ofSuperannuation Funds of Australia(ASFA) has put out a proposal thatmoney in pension phase be cappedat $2.5 million per member. It mightbe easy in theory, but devilishlydifficult in practice. Is the intentionto take the balance at June 30 andsimply switch the excess, if any, toaccumulation mode? If the markethas a sudden fall or rise, or if thereis a big withdrawal, do you have to gothrough the whole process again?

But once again we’re talking about

balances of $5 million and over,which won’t worry mums and dads.

Emails arrive continually frompeople who are concerned that thegovernment will change the rules toprevent withdrawal of lump sums. Ido think at some stage in the futurethe government of the day mightdecide to compel retirees to takepart of their superannuation as anincome stream, but that may be along way off. It would be a bravegovernment that compels retirees tolock up part of their retirementfunds in an annuity when interestrates are at historic lows.

Yes, more change is inevitable.But in my view the biggest risk formost retirees is an over-emphasis oncash in their portfolio because theyare averse to risk. Many retirees cannow expect to live 25 years or moreafter they retire. For them, holdingmoney in cash may be one of theriskiest strategies of all.

Q The increase in value of myapartment will produce a pro rata

capital gain on its sale, as it was initiallyan investment property. I gather fromprevious columns that holding costsfor the whole ownership period can bededucted from the profit prior to thepro rata calculation of capital gain. Doyou think this unexpected largesse ofthe ATO might extend to water rates?The unit block has one water meter,and the usage charges are dividedequally between apartments beforecharges are applied. This appears tohave some characteristics of a holdingcost.

A Yes providing the expenses havenot otherwise been claimed as a

tax deduction ie against the rent. The

relevant section is 110-25(4) of ITAA1997 – it is very wide, including repairsand maintenance so could alsoinclude cleaning materials and lightglobes.

Q I’m 24, single, working full time ina graduate job. I have $88,000 in

savings, no debt and no HECS. Whereshould I park my capital? Thesharemarket seems to be taking aslide and the prospect of taking onsignificant debt with home mortgage isdaunting. Is the best investment abank account?

A I certainly think cash is the bestplace for short-term. Bear in mind

if you invest in shares, you should havea 10-year timeframe in mind.

From go to whoa: five ages of financial security

Feeling rich means having different priorities for each decade.

Dominique Bergel-Grant is adirector, financial planner andmortgage adviser with Leapfrog

DOMINIQUE BERGEL-GRANT

WE often get caught up in watchingand commenting on other people’sfinancial successes – or evenfailures. Having worked with clientsfor 15 years, the one thing I know isthat you never know what is underthe hood.

Time and again, I see people wholook financially ‘‘happy’’, but spendthe nights worrying about how theywill pay their next bill. What is onthe surface is often just a mask toimpress family, friends and peers.

Those who I see who are reallyhappy and secure about their moneyseem to have lost the fear aboutwhat their future holds. So what isthe magic dollar number that ismaking these people happy?

For a 28-year-old, it is getting ontothe property ladder, not justscraping in, but having built up

30 per cent equity in the property sothey are ready to jump and make thenext investment.

For a couple starting a family, it isknowing there is plenty of money set

aside in their mortgage offsetaccount to cover the loss of incomewhile one or both of them take timeoff with the baby – while stillknowing that their superannuation

balances and home are growingin value.

In your early 40s, happiness oftencomes down to being able to providethe education and home you wantfor your children. It requires a clearunderstanding of what yourcashflow looks like from week toweek and year to year. This is thetime when use of your sparecashflow and equity is key. Theseare the years that leveraging cansecure your financial future.

By the time you are in your early50s, the focus changes to the harshreality of looming retirement.Especially for executives, the risk oflosing their role due to aredundancy becomes very real andhaving the financial security to knowyou can afford to stop work at anypoint is critical.

When you reach retirement, whatis the magic number? A lot ofstatistics are thrown around. A

common example is being able toretire on two-thirds of your salary, or$1 million. However, this often fallswell short. The simple reality is thatthose I see most successful andhappy in retirement have a portfolioboth inside and outsidesuperannuation.

They have a share portfolio thatprovides them with liquidity and twoinvestment properties providingregular income. Most importantly,their home is paid off.

Building to this is something thatneeds to start early. It is thefoundations you build in your 20s,30s and 40s, the financial plans andframeworks you establish early, thatwill determine future financialfailure or success.