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'It’s your money' schemes transfer super from young to old

(We have left this article unedited despite the Coalition losing the 2022 election because it canvasses the issues on early access to super and home ownership, while the proposal to lower the age for downsizer was supported by Labor).

Following the announcement of the new Coalition policy to allow withdrawals from super to buy a first home, leading economist Saul Eslake wrote in Crikey:

"We now have almost 60 years of unambiguous and unequivocal evidence telling us that anything that allows Australians to pay more for housing than they otherwise would - first homeowner grants, stamp duty concessions, mortgage deposit guarantee schemes, shared equity schemes, preferential tax treatment for property investors, and indeed lower interest rates or reductions in credit standards - results, primarily, in higher house prices rather than higher rates of home ownership."

Another policy modification will reduce the age to 55 for making downsizer contributions to superannuation.

There is an unintentional symmetry in these two policy initiatives whipped up in the final week of the 2022 election campaign. First home buyers can take money out of super to buy a home from older owners who can put the money back into super.

Saul Eslake estimates the purchasing power for a couple may rise $500,000 (based on taking $100,000 from super adding to a deposit and borrowing four times as much), making it feasible to pay $500,000 more for a home which is almost the amount that an older couple can add to super.

It's a potential transfer of super from younger to older generations, regardless of how much the latter already holds in this tax-advantaged environment. Older, wealthier people with more in super and younger people with less ... is that what super schemes should facilitate?

It's your money

A week out from the election, Prime Minister Scott Morrison found a ‘wedge’ policy, something Labor will not match, giving him a point of contention with an “It’s your money” theme many aspiring homeowners will like.

The election campaign proves again that superannuation is never far from the headlines of Australian politics, especially when combined with the hot topic of housing. However, a deeper look at the changes shows the debate is barely worth the profile as a major issue in the final days. The policy will help a small number of people to own a home sooner compared with genuine initiatives to make home ownership more affordable over the longer term.

Details of the two new superannuation policies

Let's look closer at the two so-called ‘gamechanger’ policies.

1. First home buyers can withdraw up to $50,000

The new policy allows first home buyers to withdraw up to $50,000 from super provided it is less than 40% of the super balance, requiring $125,000 in super to draw the maximum. Money taken out must be put back when the house is sold, including a proportion of capital gain.

The ASFA table below shows average super balances for people aged 30 to 34 are between $51,175 for men and $42,240 for women (it's from 2019 but the latest available). It's only when men are over 40 and women are over 45 that average balances exceed $120,000. With a 10% super guarantee, a person earning a healthy $100,000 putting $10,000 a year into super compounded at 5% annually would take 10 years to reach $125,000.

On the campaign trail, Scott Morrison has issued many statements about offering flexibility and choice with super: “This is about increasing the choices available to you, with your super. It’s your money.” He told Tracy Grimshaw on A Current Affair, when she said super is for retirement: "I’m sorry, it is their money. It’s not owned by the super fund, it’s not owned by the government, it belongs to them."

Criticisms came from many quarters, especially within the superannuation industry, due to:

  • Upward pressure on house prices
  • Loss of superannuation intended to fund retirement
  • Possible extension to other worthy schemes, such as buying an electric vehicle or starting a business.

There is already a First Home Super Saver (FHSS) scheme which allows voluntary super contributions of up to $15,000 each financial year and from 1 July 2022, up to $50,000 can be released. That means a couple could take up to $200,000 from super. Compulsory contributions under the SG are not included.

It is also already possible to purchase an investment property with superannuation funds (such as through an SMSF) but members are not permitted to live in it.

Many younger people will withdraw money from super if given the chance. The Government allowed access to up to $20,000 at the start of COVID. Qualification was relatively easy and almost $38 billion was released based on 4.8 million applications.

However, superannuation was designed to provide money to live on in retirement, which is why there are complex preservation rules that allow some access at 55 but most must wait until 65. By invoking an 'it's your money' philosophy, the Government is undoing the original principles of superannuation. Mr Morrison said that superannuation belonged to Australians and “We’re not going to tell them what to do with it, they’ll make their own decisions”.

This is a false claim to justify the policy. Other than in limited cases, superannuation is locked away for retirement until a Condition of Release is met. We do tell people "what to do with it".

2. Allow people over 55 to make downsizer contributions

The Prime Minister also announced that the Coalition will allow Australians aged 55 and over to contribute up to $300,000 ($600,000 for a couple) to their superannuation when they sell the family home. This contribution is not subject to the usual cap on superannuation amounts.

In fact, the money does not need to come from the sale. A house can be sold for $1 million and another bought for $1 million, and a couple can put $600,000 into super from another source.

It is a variation on the existing downsizer contribution which currently applies for people aged 65 years or older, but the eligible age is moving to 60 on 1 July 2022. The new rule extends this to the age of 55. It looks like an election gimmick as the agreed move from 65 to 60 is not even effective yet.

This ability to increase super has been a good benefit for older retirees. Since 1 July 2018, downsizer contributions totalling almost $10 billion have been made into tax-advantaged retirement savings vehicles.

This policy is likely to be used by retirees who are not receiving the age pension as the net proceeds from the sale of a home transfers capital into super, which is measured in the age pension eligibility test. It is of best use to people with over $1.6 million in super who currently cannot make additional non-concessional contributions.

But it adds little to retirees below the cap. Using the bring-forward rules, from 1 July 2022, someone aged 55 could put $330,000 into superannuation every three years already. They could sell their house now and put it into super.

So this policy is helping the already-wealthy with large super balances who will be able to protect another $600,000 from high marginal tax rates. 

Home versus super in retirement

Many economists warn that further releases to buy homes will add to property prices. For example, CPA Australia’s General Manager, Jane Rennie, told the AFR:

“We caution against implementing any demand-based solutions that may inflate house prices further, such as the Coalition’s Super Home Buyer Scheme or Labor’s Help to Buy policy. We don’t support the use of mandatory superannuation contributions for purposes which are unrelated to retirement savings, like home ownership." 

However, buying a home does contribute materially to financial independence and ultimately retirement saving. Although superannuation comes with significant tax benefits, so does owning a home, especially in retirement. The family home is excluded for eligibility for the age pension and also capital gains tax and other social security rules.

When the industry body, ASFA, quotes its retirement standards for modest ($38,997) or comfortable ($59,837) annual incomes, it assumes retirees own their own home and are in good health. It is a massive step to financial security for people to own their own house rather than rent when they no longer earn a salary.

Scott Morrison is correct that helping people buy a house is a major retirement issue. He said:

“The best thing we can do to help Australians achieve financial security in their retirement is to help them own their own home.”

What he refuses to acknowledge, which even Superannuation Minister Jane Hume conceded, is the extra purchasing power may be eaten up in higher prices. The measure is yet another demand-side initiative. The McKell Institute estimates that buyers accessing an additional $40,000 from their super will add between $31,000 and $100,000 to prices depending on the capital city.

Another possible impact is further fuel on the inflation fire, and the Westpac table below shows a major factor in the recent spike in inflation was housing costs. While interest rates are rising at the moment and pushing prices down, this policy is not due to come into effect until 1 July 2023 when the rate rise cycle may have paused.

The devil in the detail

As a policy announcement rushed out in the last week of the campaign, many questions remain unanswered.

1. Does a person need to record the value of the share of the home belonging to super to ensure the amount in super for retirement is accurate? 

2. What is the process of allocating the super fund's share, given the vast number of major and minor improvements made to a family home over decades? Will there be a deduction on the improved value for the cost of a new fence, paving the courtyard or replacing the lights?

3. What are the reporting obligations? How will the ATO ensure the correct value is returned to the super fund in 30 years?

4. Will the amount returned to super be exempt from all contribution cap rules in the relevant year?

5. How will the policy affect labour mobility and future house purchases when sale proceeds are not available for the next rung on the housing ladder?

And watch for property spruikers promoting super access as a way to enter an overheated market.

At some stage, it would not surprise if the monitoring and measurement complications remove the need to return the money to super, or at least allow a rollover to another home.

A two-tier opportunity?

For most people, home ownership in retirement is vital for security and wellbeing, and policies should assist this goal. Many young people will be happy to trade off future super balances for earlier home ownership.

Whether it is financially beneficial depends on a complex mix of rates of return on super versus house prices, costs of renting, borrowing expenses, relative taxation treatments and social security implications. Buying a home also comes with significant leverage. In Australia where leases are short and renters are regularly moved out at little notice, there is considerable 'psychic income', as economists call it.

But it’s likely the first home owner policy is another step to inequality in housing and superannuation balances. Eslake goes as far as saying the policy will be:

"Greeted with despair by first home buyers who will see it rightly as pushing their dreams further out of reach."

The average age of a first home buyer is 36, and they make up about 30% of the market. For those with the average super for a 30- to 34-year-old of about $50,000, access to 40% or $20,000 will not help much towards the average house costing $1 million, even if doubled for a couple. This policy will not bring lower-paid workers or those without substantial other savings into the system.

However, a couple earning more money, perhaps a little older, might have $100,000 each in super and can access $40,000 each or $80,000. This is a decent boost to add to their own, say $120,000, giving a deposit on a $1 million home. Borrowing capacity is also enhanced by a larger deposit.

But this wealthier couple was already well on their way to owning a home, so it's likely to purchase was brought forward. The policy has no income or property value caps. As Crikey revealed, the 1998 budget measures paper reported:

"A superannuation for housing scheme could not be targeted efficiently to those individuals who would not otherwise achieve home ownership before retirement. It would also reduce retirement incomes and national savings."

The question is whether there are enough of these people that prices will be driven up. A particular risk appears around 1 July 2023 when additional buying power is injected into the home market in a particular segment. 

Add the relaxation of the downsizer age to policies offering broader access to the Seniors Card and cheaper medicines, Labor's dumping of capital gains tax and negative gearing changes, and the continuing favoured status of the family home, and we have another election favouring older voters. It’s as if the Government wants to transfer super benefits between generations and the older folk win again. OK, Boomer.

 

Graham Hand is Editor-at-Large for Firstlinks. This article is general information and does not consider the circumstances of any investor, and is based on an understanding of the proposals at time of writing.

 

28 Comments
John
May 24, 2022

Overall to me it would seem housing ownership and superannuation should be totally separate life objectives and never really discussed or confused as a common topic.

Tony
May 24, 2022

Morrison made a schoolboy error when he said
“It’s your money”
It’s NOT your money until you reach age 60 and retire.
The Libs have spent 30 years trying to destroy superannuation.
We can all be grateful they failed yet again.

Tony
May 24, 2022

Step 1 in tackling affordability is to remove all tax incentives for property “investments”.
When the negative gearers leave the field, there will be less demand which will lower prices. At the same time, renters will be more able to afford to buy.
Everything else is fluff and does not tackle the core problem.
As support for this proposal, there are several hundred thousand properties empty in Australia, and many more vastly under utilised.
Most of these would be sold and freed up to buyers, helping to address the so called supply shortage.

Dudley
May 24, 2022

"Everything else is fluff and does not tackle the core problem.":

Core problem is low real interest rates - de-compounds saving and compounds net rental + appreciation return.

Other businesses also can deduct expenses from taxable income.

GMS
May 22, 2022

Why would I downsize? To move away from public transport, amenities and medical support. And on top of it to be hit with an obscene amount of stamp duty? Sorry that’s not gonna happening - needs a much bigger incentive!

Also I think ASFA needs to review their standards they are removed from reality - might have been written to support uptake from Superannuation. And by the way the figures quoted in the article are for 85 years and over for 65 years and over it is ($64,771.-/$41,929.-). And I don’t think the difference to the age pension of 38,809 warrants the differences listed in their document and scaremongering what you can’t afford with the age pension.

Ever since I entered the adventure of self funded retirement I also embarked on diligent book keeping which never was on my agenda before. And the result is:

all the food (and we live and eat quite well) and some grog I buy at Aldi (which is not separated out in my spread sheet - we don’t want to overcomplicate things)
rates and house and contents insurance
fully insured and maintained car
electricity, water and a very warm 4 BR-house in winter
high speed NBN mobile phones for each of us
private health insurance and non specsaver glasses

Costs us somewhere between $28,000.- and $30,000. So, even the age pension would leave $8,000.- to $10,000 for discretional spending or repairs or else. Not quite the dim picture ASFA paints.

Rod
May 20, 2022

Male vs Female balances
I find the 2019 table of balances very interesting. Much is made of the apparent significant discrepancy in male vs female super balances however the table seems to indicate only 5 to 10% at age 65-69 (depending upon whether average or median). This seems fairly low when women apparently retire (on average) four years earlier. I would have anticipated a larger difference given the outrage generated and the fact that many husbands and wives also do decide that having children means some time out of the workforce for one partner (generally the wife).
Graham, what am I missing here? Shouldn't the difference be larger?
Thanks
Rod

AlanB
May 19, 2022

"Scott Morrison: “The best thing we can do to help Australians achieve financial security in their retirement is to help them own their own home.”

I see a lot of criticisms of this latest proposal from readers and writers of articles, but I don't see a viable alternative being propsed that allows first home buyers - our sons and our daughters, to get into an affordable home.

So what suggestion do YOU have that will get more First Home Buyers into a home, without pushing up the prices of houses and defeating the objective of housing affordability?

Here is one suggestion I believe will work if we have the guts to implement it.

Only allow Australian citizens to buy Australian houses.

This will eliminate competition from cashed up overseas Chinese and other non-citizen buyers who we so often see lining up to buy or bid for homes and directly or indirectly pushing up all house prices and reducing the supply of affordable houses for young Australians struggling to get a home.

Excluding non-citizens from buying Australian property will reduce housing demand and housing prices.

Yes, there will be howls of protest from the real estate industry, but we betray our own children if we continue to allow wealthy overseas buyers to out-bid Australians for an essential human need. A home of their own.

Housing unaffordability is a crisis of our own making, but it can also be fixed if we have the will. We owe it to our kids.

Dudley
May 20, 2022

https://firb.gov.au/guidance-resources/guidance-notes/gn6

'Foreign persons are generally prohibited from purchasing established dwellings in Australia. However, in recognition that temporary residents need a place to live while in Australia, temporary residents are generally allowed to purchase one established dwelling to use as their principal place of residence.'

https://www.theguardian.com/australia-news/2021/jul/08/more-than-80-of-australians-mistakenly-believe-chinese-investors-are-driving-up-house-prices

'Data compiled by the National Australia Bank shows foreign investors made up only 3.7% of new home sales and 2.2% of established homes in the March quarter.'

DavidB
May 20, 2022

You’ll probably find the majority of those “Chinese” lining up are Australians and a few dozen are probably related to me ??

AlanB
May 20, 2022

RBA: Chinese investment in Australian residential and commercial property has increased significantly in
recent years
https://www.rba.gov.au/publications/fsr/2016/apr/pdf/box-b.pdf

Global Times: Chinese investors warm up to buy Australian properties
https://www.globaltimes.cn/page/202105/1222716.shtml

ABC: Chinese foreign investors have cooled on Australian properties, but overseas buyers are tipped to return
https://www.abc.net.au/news/2021-07-02/chinese-overseas-buyers-australia-property-housing-investors/100259470

Daily Mail: Cashed-up Chinese buyers swarm Australia's housing market as the collapse of Evergrande looms https://www.dailymail.co.uk/news/article-10377347/Chinese-buyers-swarm-Australias-housing-market-collapse-Evergrande-looms.html

John Woolfield
May 19, 2022

As several persons above have stated, supply is the issue. The "downsizer" option requires an extra house as we still only have one house if there is no supply. Politicians once again demonstrating their lack of knowledge of the real world.

David Wilson
May 19, 2022

The Coalition's proposal for first home buyers to withdraw up to $50K from their super is a last minute measure and does virtually nothing to address housing affordability for the majority of (voiceless) low income earners. In fact, by increasing demand it likely makes things worse for them. Naturally, this proposal is being cheered on by the real estate industry and the usual property related vested interests. 

James
May 19, 2022

Overall a somewhat negative take on both policies, particularly the Coalition's.
Some observations:
1. Housing affordability is a complex problem, but new land supply, constantly hindered by states and councils, is a more significant factor, as are development costs, taxes and stamp duty!
2. Any scheme that adds money will elevate prices to a greater or lesser extent. At present rising interest rates will dampen buyers enthusiasm and ability to pay these inflated prices. Prices will fall to meet the market. Also the example given possibly increasing a couple's purchasing power by $500 k is far fetched, given that most first home buyers won't have the $100 k to extract from their super!
3. Older Australian's downsizing may free up homes in cities closer to work centres (they may retire elsewhere) and although first home buyers will be unlikely to buy these, other aspirational buyers will, generating a turnover/chain effect, making cheaper vacated homes potentially available for those first home buyers.
4. Young people need money to get a start in property now. They can't live in the money trapped in super. When they are better paid in the future, through job changes or promotions, they will be able to put a lot more money back into superannuation. Under the Coalition, if the home is sold, the super money plus capital gain (CGT free) is returned to their super.
5. I know from a recent Noel Whittaker newsletter on the Coalition scheme, he was pleasantly surprised (previously he was dead set against these ideas) when he crunched the numbers and conceded that although a person may have a little less in super (if they didn't put the money back in) they were streaks ahead, by leveraging their original stake into a significant tax free equity capital gain in their own home.
6. It's a bit of property diversification away from typical super equities mix etc
7. Super funds have a lot of vested self interest in pooh poohing this. Are you surprised? They make circa $30 billion in fees per annum!

Dudley
May 19, 2022

Mortgage 30 y term, 50000 principal & interest payment per y, 1000000 principal;
= RATE(30, -50000, 1000000, 0, 0)
= 2.84%

Same term, same payment, principal 500000, interest rate that could be supported:
= RATE(30, -50000, 500000, 0, 0)
= 9.31%

So if interest rates were to increase from 2.84% to 9.31%, mortgages supportable by $50,000 per y payments would decrease from $1,000,000 to $500,000.

James
May 20, 2022

A return to more historically "normal" interest rates would indeed be a good thing. Deflate ridiculous asset bubbles, including house prices, and offer more reasonable returns on new issue bonds, term deposits and savings. Win win!

Stephen
May 19, 2022

If the LNP thought this was a great policy, rather than a great gimmick, would they have left the announcement to a week before an election?

A hasty announcement from a party polling badly tells you all you need to know.

Trevor
May 19, 2022

Open Boarders Immigration and migration within a country I would have thought has been driving up house prices and a young person moving from a rental property to a property of their own would free up a rental property.

Alan George
May 19, 2022

I thought super was a mechanism to fund retirement. It is based on compound interest which generates high returns after 20-30 years. Einstein remarked that compound interest is the eight wonder of the world. Withdrawing funds early in your career greatly reduces your returns. Someone once suggested that each new born baby (about 300 000 per annum) have $1 million deposited into a future fund independently managed. With conservative returns of 6-7% per annum this would generate significant returns to fund education, home deposits and retirement. I would also suggest that there is an urgency to teach life skills in schools as a core subject with emphasis on budgeting, investing, goal setting, decision making, relationships etc.

Kevin
May 19, 2022

There are a lot of problems there Alan.Where does the govt find this $300 billion, that's $300,000,000,000.When does it start,say 1/7/2022.Congratulations,you were born a millionaire.Born on the 30/6/2022,ah well bad luck, a life as a pauper may be your lot.Then they have to find this money every year,is it index linked?
Who pays for the person born on 30/6/2022.
Who collects the management fees on this $300B and rising every year?They all seem to be variations on all problems will be solved if the govt gives me more money.Failing that all problems will be solved if the govt makes somebody else pay more tax and tells me I don't have to pay any tax.
Compounding is great,all you need to learn is rule of 72,you can go a long way on that.My super fund has returned just over 9% CAGR since the mid 1980s.Should I have started that in 1982 with $20K then that grows to $640K.Far more than I had in super and at far less cost than a %age of my wages every year. $ cost averaging just isn't very good at all.
Compounding will make you retire in comfort.Say you are 40 years old,retirement age may be 70 or higher by the time you retire.You have 30 years,have a word with your friendly bank manager and borrow $100K.You'll have a nice $950K in super more than you would have had.Pay that $100K loan back as fast as you can.
Do you think you could count on one hand the number of people that planned ahead in 1982 and borrowed what was then a good sum of money.
Do you think you could count the number of people that will do that on one hand today.I'll just compound a good sum of money ($100K )for the next 30 years at what seems to be a reasonable rate of return.

Dudley
May 19, 2022

"With a 10% super guarantee, a person earning a healthy $100,000 putting $10,000 a year into super compounded at 5% annually would take 10 years to reach $125,000.":

Whereas contributing $27,500 per year would take:
= NPER(5%,-(1-15%)*27500,0,125000)
= 4.86 years.

But the policy does not go nearly far enough. A couple saving to buy without mortgage:
= NPER(5%,-2*(1-15%)*27500,0,1250000)
= 17.40 year.
which is much to long, possibly requiring delaying children.

Therefore the solution is to crash house prices by exterminating negative real, after tax, interest rates.:
= NPER(15%,-2*(1-15%)*27500,0,500000)
= 6.85 years to own without mortgage.

AndyB
May 19, 2022

With reference to the $300,000 downsizing contribution, I am sure this policy is very much welcomed by those who qualify. But it seems to me that there are unintended effects in its implementation, as follows:

Let’s say, for example, an older retired couple sells a large house for a large price and buys a small house for a much smaller price, leaving at least $300,000 in hand to take advantage of the policy. Although this releases a large house for somebody to buy, it would likely be of no interest to a first home buyer because of the high price. Conversely, the cashed up older couple would be competing with the first home buyer for the smaller cheaper house, thus tending to force up prices at the lower end of the market. I can’t really see any winners there.

One aspect of the $300,000 downsizing contribution policy that almost never gets a mention is that the main barrier to qualification is the requirement for the house being sold to have been owned for at least 10 years. Since the average ownership of residential properties is around seven years, this limitation makes no sense, other than as a deliberate tool to ensure very few can qualify. In my view, a 5-year rule would be more appropriate and would be sufficient to deter anyone from buying and reselling to take advantage of the downsizing policy.

John
May 24, 2022

I would agree. Unintended outcome being both age groups potentially trying to buy the same property. Also agree on the idea of a 5 or 10 year rule re buying & selling though needs some thought.

David McDonald
May 19, 2022

As Saul Eslake has eloquently highlighted, this policy fails Economics 101 - more money available to purchasers with no increase in supply = higher prices willing to be paid and therefore a win for house sellers not buyers!

Jack
May 19, 2022

Stamp duty is a major factor limiting the desire to make downsizer contributions. Sure it's good to have more in super but it comes with a $100,000 price tag.

Jack
May 19, 2022

Downsizer contributions may also reduce your age pension because money is moved from a non-assessable asset, the family home, to an assessable asset, your super balance. That is why the government is encouraging it - to reduce the cost of the age pension. For many people it is also the largest disincentive for doing it.

Dudley
May 19, 2022

"Downsizer contributions may also reduce your age pension":

No need to downsize to make contribution - just need to sell home owned for >= 10 years and be age >= 55.

Therefore it is possible for those with little super and too much personal cash to Upsize home, contribute $300,000 to super and Downside cash to arrange assessable assets to <= $405,000 then claim full Age Pension; result being capital gains tax free home and contribution and tax free CPI indexed Age Pension.

Lisa
May 19, 2022

Might as well just do a renovation and stay in your familiar neighbourhood. No point paying all those real estate agent fees, stamp duty etc.

Steve.S
May 20, 2022

Well said Lisa..
People should not work on being the richest person in the graveyard...

 

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