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Too many retirees miss out on this valuable super fund benefit

Of the 700 Australians who retire each day, around three in five do so with a pension account from their super fund. That’s according to the latest APRA data that provides superannuation fund pension balances for the year ended June 2021. A little over 350 new superannuation pension accounts are opened every day across Australia’s large super funds. Another 70 people a day will be retiring with an SMSF and moving into a tax-free pension.

Looking at the total account numbers, although members in retirement pay no tax on income or withdrawals from their pension account, there are around two million accounts where tax at a headline rate of 15% per annum is levied on investment income. Why are so many retirees paying more tax than necessary?

The Retirement Income Covenant, recently legislated by Parliament, will require super funds to have an appropriate retirement income strategy for their members from July 2022. Regardless of the legislation, many members already need better retirement solutions. Over time, as the super system fully matures, the proportion seeking to maximise their expected retirement income from their super will increase.

How much money was in the retirement phase?

APRA-regulated funds had a total of $477 billion of member money in retirement income accounts in June 2021. A further $18 billion was represented by members with transition to retirement accounts.

The $477 billion of retirees’ money in large super funds was weighted more heavily to the retail sector (typically run by banks or other types of financial institutions). This effect is largely demographic. Industry funds typically capture members when they join the workforce and so have a younger average member base. The relatively older members in the retail sector have a greater need for advice as they approach retirement, which traditionally was more likely to be provided in that sector.

Public sector super funds also have a larger proportion of members in retirement, reflecting the sector’s more mature status.

APRA reports there were over 1.4 million pension accounts in super funds in June 2021.

The average value in a retirement pension account across all APRA-regulated sectors was over $330,000. This included a notional value for defined benefit pensions which have no account balance, but a higher-than-average retirement benefit.

The average balance varies across the sectors. The highest average balances are typically in the corporate and public sectors, where defined benefits were historically more common.

Millions of retiree accounts kept in accumulation

Average balances in industry fund pension accounts were higher than in retail funds. One explanation could be that the average age of retirees was higher in the retail sector. This could mean that those older retirees did not have the benefit of super for as many years as today’s retirees and so retired with smaller balances.

In APRA-regulated funds, there were many accounts belonging to members who were above preservation age (the age that you can access your super) that had not been rolled over into a pension account.

There were 2.6 million accounts where the member was over 65 (so had met at least one condition of release) but only 1.4 million of these were pension accounts. There were an additional 1.5 million accounts where the member was between 60 and 64 and could have met a retirement condition of release; and 250,000 of these were in a pension account.

Members in retirement who have met a condition of release pay no tax on income or withdrawals from their pension account. So there were potentially around two million accounts where tax at a headline rate of 15% per annum was being levied (unnecessarily) on investment income.

The question is why? What is driving this behaviour? Is it just an oversight? A lack of engagement? Super fund inaction or older members making a conscious decision to treat accumulated super like a savings account?

The fact is, there doesn’t seem to be an answer to these questions.

While most pension accounts are held by members over 65, some are for members younger than 65 (i.e. aged 60-64) who have satisfied a condition of release. There are also those over 65 (so satisfying at least one condition of release) who have super in an account in the tax-paying accumulation phase.

It is often lower balance accounts that are left in the taxed accumulation phase. Higher balance accounts are more likely to be rolled into a pension account.

The average balance in the pension phase tends to be higher than the average for all accounts for people over 65. The table below shows the average balances in pension accounts and accounts (whether pension or accumulation) held by members over 65.

Sector Average member account balance – June 2021

 

Pension account

Member 65+ account

Corporate

$487,699

$383,645

Industry

$396,655

$204,573

Public

$482,164

$307,029

Retail

$291,834

$207,000

Overall average

$330,860

$235,870

Source: APRA Annual Superannuation Bulletin & Fund-level Statistics, June 2021

There was a significant difference between the average balance in a pension account and the average balance of all accounts (including pension accounts) for members over 65. Across the industry sectors, the difference was greatest in the industry fund sector due to the smaller proportion of pension accounts. These funds will have had a higher proportion of lower balance accounts that remained in the accumulation phase.

There was also a skew in the average pension account balances because members with low balances are more likely to withdraw all their super as a lump sum. With the Seniors and Pensioners Tax Offset (SAPTO) allowing a relatively high level of tax-free income, the benefits of tax-free super are less relevant for many retirees – hence the reason for the likely higher rates of withdrawal.

Summary

The latest APRA data on super fund balances show that super is delivering more than ever for new retirees.

Retirees today have had half their career (if unbroken) with 9% or more of their annual income contributed to super, delivering a significant asset for their retirement.

In the coming years, retirees will have had longer in the system and they will have had more years with higher (ultimately 12%) contributions.

Outcomes for members at retirement will continue to improve. The commencement of the Retirement Income Covenant in July will help members benefit from better retirement outcomes to match our world-class accumulation system.

 

Jeremy Cooper is Chairman, Retirement Income, at Challenger. This article was first published by YourLifeChoices and is reproduced with permission.

Important note: All the data used in this article have been extracted from APRA’s Annual Superannuation Bulletin June 2021 edition and Annual Fund-level Superannuation Statistics report June 2021 edition, issued on 31 January 2022 and 15 December 2021, respectively. The validity of the conclusions we have drawn depend on those data being accurate and our being correct.

 

44 Comments
Maurie
June 08, 2022

If a retiree is eligible for a Commonwealth Seniors Health Card, the amount held in pension accounts is assessed under the deeming rules. My understanding is that amounts held in accumulation accounts are not subject to same deeming rules. That could be another reason for retirees commuting pension balances into their accumulation account.

Ruth
June 08, 2022

We don't know how long we will live and would prefer to make withdrawals as required. We do not want to be, for example, having to withdraw set amounts during a deep recession or depression in an inflationary environment which is possible. Once withdrawn, we can't recontribute over age 75. Leave us alone and stop assuming we are stupid or need government 'help'. We have had enough changes. In fact I think future generations won't want to contribute to super at all, because of the constantly changing rules. A young person would be better off buying their own home than investing in superannuation when you consider the constantly changing landscape over the last 40-50 years.

Peter
June 07, 2022

I have a DB Pension that covers my needs when combined with share dividends. I don't need extra from my Accumulation account, so why transfer to Pension Phase and withdraw it? What do I do with those funds? I cannot recontribute to Super as I have reached the $1.6M cap due to the DB pension being notionally assessed as a balance counting towards the Cap. I don't think I am the only one in this situation.

Jon Kalkman
June 08, 2022

If your DB pension is such that you have already reached your $1.6M cap, you cannot transfer anymore from accumulation into pension phase. That’s what the Transfer Balance Cap (TBC) means. No one can have more than the TBC in pension phase when they start their pension, and that may have implications for your spouse if they inherit your pension on your death. Secondly, it also means that you also have reached your Total Super Balance Cap and that means you cannot make any more non-concessional (after-tax) contributions to your accumulation fund. You can of course make concessional (tax deductible) contributions (employer SG, and salary sacrifice) but you need to be working for that. If you still had some headroom under the Total Super Balance Cap, you could contribute to super until age 75 (starting 1 July) and the Downsizer contribution doesn’t count.

Justin
June 08, 2022

I can appreciate this situation. Not dissimilar to my own. My thoughts are to look at withdrawing from an accumulation account and recontribute to a spouse account. If an option. Given most spouses have smaller balances etc, and therefore cap space.

Average Joe
June 07, 2022

My head spins off, reading this article and the comments, So complex for an average Joe!

My question is shouldn't this be a simple, straight forward and tax payer friendly?
Why so many complex rules? What is the genuine purpose for making it so complex?

Keep straightforward taxation and rules for pension on retirement, for god sake it's retirement!

Dudley
June 07, 2022

"Why so many complex rules?": Due to most workers not able or not willing to save for retirement without government commanded Superannuation Guarantee and due to government commitment to Age Pension only for those not able or not willing to save enough for retirement. Ideally, all citizens have the means and willingness to save and invest for their own retirement without government prodding or interference.

Nigel
June 05, 2022

If over 65 and still working can we put our superannuation into pension phase without having to stop work?. This will negate any capital gains tax within super. Is this correct?

Angela
June 05, 2022


Perhaps laws need to be changed so that contributions can be made into the Super pension account

Jon Kalkman
June 06, 2022

The tax on death benefits is calculated by applying a tax of 15% + Medicare to the proportion of the remaining capital in the fund that is derived from concessional (pre-tax) contributions. If the death benefit is an insurance payment, the tax is 30% + Medicare.
In a pension fund, that proportion is set at the start of the pension and is frozen for the life of the pension. Any new contributions would change that proportion.
In an accumulation fund, that proportion keeps changing as the fund earnings are continually added to the concessional portion of the fund. The longer an accumulation fund continues, the higher the death tax on the remaining capital.
Of course, if you are over 60 you can withdraw all of your super tax-free at any time and avoid the death tax altogether, but timing that can be tricky unless you have a terminal illness.

Peter Kane
June 05, 2022

Clearly, the accumulation account , for the most part, is intended to accumulate funds in the pre retirement (employment) phase.

Also, clearly this is not generally being followed. The complexities (especially switching for other reasons) needs to be reviewed and simplified for the average person.

Furthermore, Pension accounts need to be reviewed including minimum withdrawal limits.

This may be, for no other reason, that our life expectancies have largely changed over time, since it’s initial imposition.

Personally, I prefer to control my own money rather than an external body (with its now obsolete and outdated processes) forcing me to withdraw certain pensions (cookey cutter and or on size fits all mentality).

Much juggling and complexities could be avoided if compulsory pension withdrawals could be simply abolished altogether.

The overriding principal should always be KISS. It it is far from this at present.

It is presently “screeming out” for reasonable, over due and timely amendments.

Graeme
June 05, 2022

1. If the minimum withdrawal from your pension account exceeds your income needs, you can simply contribute the excess into an accumulation account (as long as that contribution is less than the non-concessional contribution cap of $110k p.a.). This can be done up to age 75 from 1 July 2022.
2. Whilst money can't be added to an existing pension account, it is quite simple to create a new (additional) pension account to accept a contribution to the pension 'phase'.

Dudley
June 05, 2022

"contribute the excess into an accumulation account":

More tax efficient to keep in Personal Account where personal marginal tax rate = 0%. Where personal marginal tax rate >= 19% then re-contribution to Super Accumulation Account with tax rate 10% to 15% is more tax efficient.

"create a new (additional) pension account":

Ceasing an old 'pension' and commencing a new 'pension' is permitted. Multiple 'pensions' avoided:
. Cease and commute Super Withdrawable ( 'pension' ) Account adding balance to Super Accumulation Account balance.
. Contribute 'excess' to Super Accumulation Account.
. Commute some or all of the Super Accumulation Account balance to Super Withdrawable ( 'pension' ) Account balance.

Jon Kalkman
June 05, 2022

The Seniors and Pensioners Tax Offset (SAPTO) provides a tax-free threshold for those over 65 of $32,279 for singles and $57,948 for couples. Depending on the investment return achieved, that means that seniors can have substantial assets outside super and still pay zero income tax. For some it may beg the question of why they need to remain in super, with all its rules and regulations, just to receive the benefit of zero tax on investment income.

Dudley
June 05, 2022

"tax-free threshold for those over 65 of $32,279 for singles and $57,948 for couples": With Low & Middle Income Tax Offset" increased from $255 to $675": . Single $35,231.76 . Couple: each $33,868.44; combined $67,736.88 ( https://paycalculator.com.au/ )

Dudley
June 05, 2022

ERROR in paycalculator ( reported to author by me ).

SAPTO calculation tapers to $0 at income of $70,763.95 with no super, over 65, spouse. Should be $41,790.

My calculation of tax free threshold for senior couple: each $31,926.20.

Dudley
June 08, 2022

SAPTO in paycalculator.com.au FIXED: Tax free threshold for senior couple each $31,926.19 / y, at which marginal tax rate is 32%. My calculation agrees: each $31,926.20 / y.

Peter
June 05, 2022

RE " it is quite simple to create a new (additional) pension account to accept a contribution to the pension 'phase'. " I expect their would be minimum amounts to start a pension ? - one fund I looked at it was $50,000 .... just saying

Ian Thomson
June 04, 2022

As I understand it, one cannot add to money in a pension phase. So if a retiree woks part time and is paid some super contributions then an accumulation fund is needed to receive that money.

Simon Martin
June 04, 2022

The benefit of having Super assets in pension mode rather than accumulation, is that it's a tax free environment. Zero tax on income and zero tax on capital gains. In accumulation mode, income is taxed at 15% and capital gains are taxed at 15% (or 10% if held for over a year). I suspect that most who qualify to hold a Super pension but remain in accumulation, do not appreciate this significant difference.

Jon Kalkman
June 04, 2022

A likely explanation is that for many Australians, superannuation is a black box and they have no idea that, because they are not personally liable for the tax, their super fund is paying the tax and that leaves them with less retirement savings.
Without expensive advice, many are unaware that there two types of super funds available in retirement with two types of tax treatments, because withdrawals from super are tax-exempt for them personally regardless of which fund the money is withdrawn from.
Many of those who do have the tax-free pension fund are not aware that they have an legal obligation to withdraw increasing amounts (in cash) from that fund as they age, but the fund cannot accept new contributions.Those mandatory pension withdrawals can therefore have significant cash-flow implications if the fund is invested in assets that don’t produce enough income such as residential property. Accumulation funds do not have this mandatory obligation.

Trevor
June 03, 2022

In this article by Jeremy Cooper, he says : "Members in retirement who have met a condition of release pay no tax on income or withdrawals from their pension account. So there were potentially around two million accounts where tax at a headline rate of 15% per annum was being levied (unnecessarily) on investment income. The question is why? What is driving this behaviour? Is it just an oversight? A lack of engagement? Super fund inaction or older members making a conscious decision to treat accumulated super like a savings account? The fact is, there doesn’t seem to be an answer to these questions." Yes Jeremy...there IS AN ANSWER! Because it suits the Government  bureaucrats to collect that extra tax" simply by not informing retirees of their options! In my opinion that is a "dereliction of duty" to their employers!! Thank goodness for people like Graham Hand, Jeremy Cooper, and "Dear Deadly Dudley" who 'shine a light' into that infernal black-hole-of-retirement-finances! I am personally grateful and appreciative of their efforts but shouldn't "our bureaucrats " be providing that service to "us" anyway ? 

Shawn
June 03, 2022

Actually, that sounds like the job of your superannuation trustee. The problem is that financial services law means that almost anything they say to you as an individual would be regulated as Personal Financial Advice - which would cost thousands of dollars per member to provide, and bring down a huge amount of risk on the super fund, which is ultimately paid for by you, the member.

Or they put out general statements - which they all do. But that doesn't get action, partly because at an individual level there are genuinely many considerations which makes the decision complex. Partly because of human nature (there's a whole discipline around behaviourial financial which is about the psychology of money decisions).

Yes, lots of taxes paid as a result, but bureaucrats are largely not the problem.

Denial
June 27, 2022

Shawn for some odd reason unknown to me some people want Big Government as they either can't see or don't want to acknowledge the fundamental need to take personal accountability. Whilst we're at it lets outlaw the ability to commit substance abuse (all unhealthy food, drugs and drink). The super regulations and tax laws are complex because the system is now designed to perpetuate all the "renters". The more changes the better for government bureaucrats, legal and accounting professionals (rather than financial advisers). 

Lene
June 03, 2022

Nowhere does anyone recommend getting good financial advice. It seems that people are in many different situations and the best strategy may vary from one to the other so it needs a comprehensive understanding of the tax and superannuation rules to optimise the outcomes.
On a slightly different subject, so many people complain of hitting the $1.7 million ceiling for tax beneficial super holdings. In my eyes, $1.7 million is a lot of money. By all means save more but don't feel entitled to have the remaining tax-payers subsidise your income from those savings.

Dudley
June 03, 2022

Personal tax free threshold for senior: $33,868.44; marginal tax rate: 19% ( https://paycalculator.com.au/ ).
Super Accumulation Account marginal tax rate: 10% to 15%.
Super Withdrawable ( 'pension' ) Account marginal tax rate: 0%.

If personal marginal tax rate = 0% then keep maximum allowable in Super Withdrawable Account and make minimum required withdrawals or more. Unspent amount will accumulate in Personal Accounts and might earn income.

When personal marginal tax rate is likely to, is, or exceeds 19%, commute capital from Super Withdrawble Account to Super Accumulation Account to reduce capital in Super Withdrawble Account so that Minimum Withdrawals do not increase capital in Personal Accounts after expenditure.

Tony
June 03, 2022

So, what's the benefit????

Stephen
June 03, 2022

Another piece of the jigsaw is the 17% "death tax" when a superannuation death benefit is paid to a non-dependant beneficiary (typically an adult child, when the last of Mum or Dad dies). So whilst the income earned on accumulation account assets is taxed at 15% in the year of income, there's a further 17% to pay on death, if paid to a non-dependant beneficiary. That's because earnings on accumulation account assets are added to the taxable portion of the superannuation account balance each year, inexorably building up the amount on which 17% death tax will be levied. So total tax 15% + 17% = 32%.

So it may be better to hold the investments outside the superannuation system, where income is taxed at 0% if under the (roughly) $33,000 tax-free income threshold for seniors.

Graham Hand
June 03, 2022

Hi Stephen, 15% tax is on the income, 17% tax is in the principal, you can't add them together to get 32% assuming they are the same. And just to clarify, the 17% tax applies to the taxable component.

Stephen
June 03, 2022

Agree. I should have said 15% + (17% x 85%) = 29.45%.
But the point remains that each year's after-tax earnings on accumulation account assets accumulate as "taxable component", increasing the amount at risk of being hit by the 17% death tax. In contrast, earnings on pension account assets accumulate as both tax-free and taxable components, using the ratio established at the time of pension commencement, so the death tax risk there builds up slower.

Geoff
June 02, 2022

I'm currently personally bandying this exact question about in my head...

I'm 61, and retired, although haven't told my super fund, so I'm still in accumulation. I'm waiting for 1 July when I can put $110k into the account which will bring it all close to, allowing for the calculation of value of the DB pension I'm already getting, the $1.7m cap.

I don't immediately need any money from my super fund as I was the beneficiary of a healthy redundancy payment - and it will take a while to run that cash down - so do I leave it in accumulation, and, at a guess, pay about $6k in tax on earnings a year, or put it into pension mode (it's a self-invest fund completely directly invested in equities and has a in-specie transfer facility, so I'll be in the same investments regardless of account type) and have to initially draw out 4%, increasing over time, which is money I don't need to live on, and then have to invest it outside of super - which, added to existing ex-super investments, will put me into tax territory soon enough.

My inclination is to leave it in accumulation for a year or so more, and pay the tax, until life as a retiree is a little more settled, but I will do some calculations and see if that changes my mind.

It also feels somewhat "wrong" to go from paying tens of thousands in tax a year to nothing, just like that. But I guess I'll get used to that.

Mart
June 05, 2022

Geoff - I suspect this is a reasonably common question these days! One comment - due to the extended pandemic provisions you only need to draw a minimum of 2% in 2022/2 tax year from a pension if you start it. Who knows if that rule will be extended ? But, as you say, it's relatively easy to calculate the tax you'd pay by leaving the pot in accumulation versus starting a pension and possibly paying tax on any withdrawn money 'outside super' in due course....

Ian
June 05, 2022

Feels ‘wrong’ to pay no tax ? You mean morally wrong ? If yo feel that way exercise some control over where your money goes and donate to a cause the amount you feel you should be paying in tax. At least you then decide where your money goes rather than just letting it go into a black box.

Sean Black
June 02, 2022

My experience is that the accumulation accounts are performing better than the income stream accounts,that is growth and high growth options,compare the two and it is compelling at this point in time.
One has more financial control and can withdrawal funds as required but more importantly when you do,so if the market is booming great time to withdraw some funds,if the market is falling,I’m not compelled to withdraw .

Possie
June 05, 2022

I have noticed this too with my large super provider. Specifically that when returns are positive, pension account returns are higher than accumulation account returns. However when returns are negative (as they seem to be at the moment), they are more negative for the pension accounts. And it is those with pension accounts who have to take out a minimum amount over the year.

AM
June 06, 2022

I agree with this as well which stopped me from switching my parents accumulation accounts to pension as they dont currently require the pension income. Accumulation accounts all performed better on a 10-year basis than the pension accounts, even after factoring the 15% tax.

However the argument still remains on whether it is worth investing this money personally and staying within the tax-free thresholds. Would be beneficial if you are able to generate the same level of return as within the super funds.

Neil
June 02, 2022

If you’re over 67, don’t need the cash and can’t recontribute the minimum drawdown, it makes sense to leave it in the accumulation account. Also some will exceed the Transfer Balance Cap so have to keep the excess in the accumulation account.

Aussie HIFIRE
June 02, 2022

Funds kept in super in accumulation phase are not counted for the age pension assets test if the owner is under age pension age. So it's quite common to see a couple with a spouse over age pension age getting full age pension because their younger spouse has their super in accumulation phase. Then when the younger spouse is eligible for the age pension their super is converted into pension phase. 

Gerry
June 02, 2022

I enjoyed this article as a general update on super, but it's not explicit on what the 'benefit' is referred to in 'Too many retirees miss out on this valuable super fund benefit'. I think it's that members can set up pension accounts through their super fund, but it would help if the 'benefit' we are missing out is explained in the first paragraph or two.

Robert
June 02, 2022

Maybe they have a defined benefit pension as well so are limited by the cap.

Denise
June 02, 2022

Anyone still paying insurance premiums within super needs to leave enough in the Accumulation account to pay them so cannot roll over the full balance into the pension account.
Anyone still occasionally working and contributing or receiving spouse contributions needs the Accumulation account to receive extra contributions over time, so again could have a small balance in an accumulation account after rolling most into Pension account.

Rob
June 02, 2022

One clear, but only partial explanation, is that there is no minimum draw down while in Accumulation mode and that thought makes more and more sense as you age. Do you really want to be drawing down 6%, or 7% or 9% or 11% or even 14% if you make your nineties?

Many of these accounts will be relatively static so the tax impost will be something less than 15%, likely with franking credit offsets, you can withdraw what you need vs what you are told to by Canberra. Has some merit if you don't trust Canberra!

I suspect, a bit further down the track, for those over 80, forced to draw 7%+, commutation back to Accumulation, from Pension mode will be considered by many

Dudley
June 03, 2022

"I suspect, a bit further down the track, for those over 80, forced to draw 7%+, commutation back to Accumulation, from Pension mode will be considered by many":

At retirement and especially for over 80's , most do not have enough Super to be worth keeping in a Super Withdrawable ( 'pension' ) Account as their personal marginal tax rate = 0%. Unless expecting a large personal income or capital windfall, they would be slightly better off withdrawing all capital from Super and investing directly in something like a Vanguard Diversified fund.

David Knox
June 02, 2022

Thanks Jeremy
A couple of possible explanations for the over 65 accumulation accounts:
1 Some over 65s are still in the workforce and don't want or need two accounts (accumulation and pension) and don't want to pay two sets of fees. Further they don't yet need the income. Of course, they may be paying some extra tax but why make a change to their situation? There is no strong push.
2 Some accumulation accounts for the over 65s will be for those who have a pension account already and have used up their Transfer Balance Cap

 

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