Quarterly Steps - Dec 2011

The team at Strategy Steps wishes you a safe and happy Christmas and prosperous New Year!

The changing face of retirement

Gone are the days when we plan to have an “early retirement”. The market volatility has made many Australians more cautious about giving up employment too early as they continue to be worried that they do not have enough money to fund retirement.

The Australian Bureau of Statistics recently conducted a survey[1]on retirement intentions and found that of the 2.6 million people who are over age 45 and employed full-time, 13% do not intend to retire and 41% plan to work part-time before full retirement. The main influence on when to retire is financial stability. The average age for intended retirement is 63 for men and 62 for women. 

These findings have major implications for financial planning advice with the need to help clients set realistic objectives and implement a plan that helps them focus and achieve these objectives. 

Interestingly, of the surveyed workers over age 45 only just over half expect superannuation to form the main source of retirement income and 26% expect to rely on the age pension as the major source. This is in contrast to the current situation where only 17% of retirees reported superannuation as the main source of income and 66% reported it to be the age pension. 

Compulsory superannuation at the current level of 9% has only been in place for 9.5 years so a greater reliance on superannuation should be expected as people move into retirement with the benefit of more years of superannuation, especially if the SG rate does increase to 12%. 

The proposal to remove the upper age limit on compulsory superannuation guarantee (SG) contributions will be a welcome change for those continuing to work at older ages. 

Strategies that will become more important for older workers include: 

• Maximising the use of superannuation contribution caps
• Transition to retirement pensions
• Managing investment portfolios in account-based pensions and the income drawdown strategies. 

[1]ABS, Retirement and Retirement Intentions, Australia, July 2010 to June 2011 (cat. no. 6238.0). 

Contributions caps – still no increases in sight

When contribution caps were introduced from 1 July 2007 the rules allowed for indexation of the standard concessional contribution cap (CCC), but only in multiples of $5,000.

So far, we have not seen an indexation rise, only a halving of the rate to $25,000 a year. If we assume an indexation rate of around 3.0% it is expected to take approximately 6-7 years for indexation to take the cap up to $30,000.

But the government has stalled the indexation with an announcement in the Mid-Year Economic and Fiscal Outlook to pause indexation for one year in 2013/14. This means we are unlikely to see the cap rise until at least 1 July 2014.

If the concessional contributions cap does not change neither will the non-concessional contribution cap change as this is set at six times the concessional cap.

We are also no closer to knowing how the concessional contribution cap will apply for a person over age 50 from 1 July 2012. Under current legislation the cap is due to reduce back to $25,000 on 1 July 2012 but the government had previously announced this would stay at the concessional cap plus $30,000 (currently a cap of $50,000) for people over age 50 only if they have super balances under $500,000. A number of options for how to administer this measure were proposed but these options raised administrative concerns. The government has promised to undertake further consultation on the compliance costs.

Advice implications:

• It will be important to identify clients who are over age 50 and keep them updated on the changes. This may require adjustments to salary sacrifice arrangements from 1 July if the higher cap does not continue to apply.
   
• For clients under age 50, reviews should be undertaken regularly to monitor employer SG contributions (especially where pay rises or bonuses have been paid) to ensure salary sacrifice amounts do not cause the caps to be inadvertently exceeded. 

A new year and a new set of school fees

The start of a new calendar year is a time when parents start thinking about school fees and how to best save for their children’s education.

This creates implications for client reviews: 

• Discuss expectations for future education expenses with parents
• Review budgets and set a savings plan to meet these expenses
• Consider the appropriate products/savings options.

With the removal of the low-income tax offset for children, the decisions on savings options and in whose name to invest are even more important. Coming to the front as tax-effective options are child education funds (insurance bonds) and strategies to pay off the mortgage.

Subscribers to the Desk Caddie^TMservices can find more information underInvesting for Children under Desk Caddie Technical Library. 

What is the chance you will need care?

The chance of needing aged care services during your lifetime is high, with over one million retirees receiving government subsidised aged care services each year. Over half of these people access the at-home HACC services. 

The cost of aged care (in addition to the cost of providing accommodation and personal incidentals) can range from $1,000 per year for basic home support to around $66,000 for a person needing full-time nursing care in a residential facility.

Residential care in particular can be expensive, but the government pays a large portion of the costs to help make aged care affordable for everyone.

However, the reality is that the more money you have, the more choices you will have about where and how you live.  

[2]Australian Government Productivity Commission Inquiry Report: Caring for Older Australians, 28 June 2011.