Key points:

• Despite continued volatility, 2019 is likely to be better for diversified investors than 2018 was.
• Recession is unlikely and so too is a long and deep bear market in shares.
• Watch the US trade war, the Fed, global business conditions indicators, Chinese growth, politics and the Sydney and Melbourne property markets

Introduction

2017 was a great year for well diversified investors – returns were solid (balanced super funds returned around 10%) and volatility was low. So optimism was high going into 2018 but it turned out to be anything but great for investors who saw poor returns (average balanced super funds look to have lost around 1-2%) and volatile markets.

As a result, and in contrast to a year ago, there is much trepidation about the year ahead. Having just written lists for Christmas presents and New Year resolutions, We are again motivated to provide a summary of key insights and views on the investment outlook in simple point form. In other words, a list of lists. So here goes.

Five key things that went wrong in 2018

In 2018 global growth was good, profits were up, inflation was benign and monetary conditions were relatively easy. It should have been good for markets. There were five reasons it wasn’t:

• Fear of the Fed – the Fed didn’t really surprise but investors became increasingly concerned that it would overtighten. This reached a crescendo in late December.
• US dollar strength – a rising US dollar is a defacto global monetary tightening and this weighed particularly on emerging countries and US earnings expectations.
• Geopolitics – President Trump’s trade war hit confidence from March and morphed into fears of a broader Cold War with China. Other worries around Trump (with ongoing turmoil in his team, fears of impeachment as the Mueller inquiry progresses and a return to divided government) along with the populist government in Italy also weighed.
• Global desynchronisation – US growth was strong, but it slowed everywhere else.
• In Australia, tightening credit conditions (with fears of a credit crunch due to the Royal Commission) and falling house prices weighed on banks and growth expectations.

Five lessons from 2018

• Global growth remains fragile with post GFC caution lingering. This and technological change are helping to keep inflation down. Trade war fears didn’t help. Amongst other things this means central banks need to tread carefully in normalising monetary policy.
• Investors continue to find it easy to fear the worst – this has been evident in three major circa 20% sharemarket declines since the GFC – in 2011, 2015-16 and now 2018.
• Geopolitics remains a significant driver of markets and economic conditions.
• Government bonds remain a great diversifier – they rallied when shares plunged.
• Stuff happens – history tells us markets have periodic setbacks. 2018 was just another example.

Five big picture themes for 2019

• Policy pause and stimulus – the turmoil in markets and threat to global growth is likely to drive a policy response early this year with the Fed pausing, China providing more stimulus and the ECB providing cheap bank financing. There may also be some fiscal easing in Europe.
• While global growth is likely to weaken a bit further   in the coming months, it’s likely to stabilise and resynchronise as the year progresses helped by policy stimulus, an easing in the $US and by the late 2018 plunge in energy costs.
• Global inflation is likely to remain benign helped by the 2018 growth slowdown and fall in energy costs. In this sense the malaise of 2018 by forestalling inflation and hence monetary tightening has arguably helped extend the economic cycle. The US remains most at risk on the inflation front though given its still tight labour market.
• But expect volatility to remain high given the lower level of spare capacity in the US and ongoing political risk.
• Australian growth is expected to be sub-par as the housing downturn detracts 1-1.5 percentage points or so off growth.

Key views on markets for 2019

• Global shares could still make new lows early in 2019 (much as occurred in 2016) and volatility is likely to remain high but valuations are now improved and reasonable growth and profits should see a recovery through 2019 helped by more policy stimulus.
• Emerging markets are likely to outperform if the $US is more constrained as we expect.
• After a low early in the year, Australian shares are likely to do okay, recovering to around 6000 or so by year end.
• Low yields are likely to see low returns from bonds, but they continue to provide an excellent portfolio diversifier.
• Unlisted commercial property and infrastructure are likely to see slower returns over the year ahead. This is likely to be particularly the case for Australian retail property.
• National capital city house prices are likely to fall roughly 5% led again by 10% or so price falls in Sydney and Melbourne off the back of tight credit, rising supply, reduced foreign demand and possible tax changes under a Labor Government.
• Cash and bank deposits are likely to provide poor returns as the RBA cuts the official cash rate to 1% by end 2019.
• Beyond any near-term bounce as the Fed moves towards a pause on rate hikes next year, the $A is likely to fall into the $US0.60s as the gap between the RBA’s cash rate and the US Fed Funds rate will still likely push further into negative territory as the RBA moves to cut rates.

Six things to watch

• The US trade war – while it may now be on hold thanks to negotiations with China, Europe and Japan these could go wrong and see it flare up again. US/China tensions generally pose a significant risk for markets.
• US inflation and the Fed – our base case is that US inflation remains around 2% enabling the Fed to pause/go slower, but if it accelerates then it will mean more aggressive tightening, a sharp rebound in bond yields and a much stronger $US which would be bad for emerging markets.
• Global growth indicators – if we are to be right, growth indicators need to stabilise in the next six months.
• Chinese growth – a continued slowing in China would be a major concern for global growth and commodity prices.
• Politics – political risks abound in the US with the Mueller inquiry getting ever closer to President  Trump and a return to divided government leading    to risks around raising the debt ceiling and Trump adopting more populist policies. In Europe the main risks are around Brexit, Italy and the EU parliamentary elections in May. Australia’s election risks are more interventionist government policy and tax changes.
• The property price downturn in Australia  –  how deep it gets and whether non-mining investment, infrastructure spending and export earnings are able to offset the drag from housing construction and consumer spending.

Three reasons why global growth is likely to be okay

Global growth indicators are likely to weaken further in the next few months but then stabilise, resulting in okay global growth of around 3.5% this year:

• Global monetary conditions are still easy. While the flattening US yield curve is a concern all other measures of monetary policy show it to be easy – particularly globally.
• Market volatility and associated uncertainty are likely to drive a policy response with the Fed pausing, other central banks easing and possible fiscal stimulus in Europe.
• We still have not seen the excesses – massive debt growth, overinvestment, capacity constraints or excessive inflation – that normally precede recessions.

Three reasons why Chinese growth won’t slow much

• The Chinese Government’s tolerance for a sharp slowing in growth is low given the risk of social instability it may bring.
• Monetary and fiscal policy is being eased.
• In the absence of much lower savings (the main driver of debt growth), rapid deleveraging would be dangerous, and the Chinese Government knows this.

  Four reasons Australia still won’t have a recession

A downturn in the housing cycle and its flow on to consumer spending will detract around 1 to 1.5 percentage points from growth, and growth is likely to be constrained to around 2.5-3%, but recession is still unlikely:

• The growth drag from falling mining investment (which was up to 2 percentage points) has faded.
• Non-mining investment and infrastructure spending are rising.
• Interest rates can still fall further, and the RBA is expected to cut the cash rate to 1%.
• The $A will likely fall further providing a support to growth.

Three reasons why the RBA will cut rates this year

• The housing downturn will constrain growth to, at or below potential.
• This will keep underemployment high, wages growth weak and inflation lower for longer.
• The RBA may ultimately want to prevent the decline in house prices getting so deep it threatens financial instability.

Three reasons why a grizzly bear market is unlikely

Shares could still fall further in the short term given various uncertainties resulting in a brief (“gummy”) bear market before recovering. But a deep (or “grizzly”) bear (where shares fall 20% and a year after are a lot lower again) is unlikely:

• A recession is unlikely. Most deep grizzly bear markets are associated with recession.
• Measures of investor sentiment suggest investors are cautious, which is positive from a contrarian perspective.
• The liquidity backdrop for shares is still positive. For example, bank term deposit rates in Australia are around 2% (and likely to fall) compared to a grossed-up dividend yield of around 6% making shares relatively attractive.

Seven things investors should allow for in rough times

• Times like the present are stressful for investors. No one likes to see their wealth fall and uncertainty seems very high. We don’t have a perfect crystal ball, so from the point of sensible long-term investing the following points are worth bearing in mind.
• First, periodic sharp setbacks in share markets are healthy and normal. Shares literally climb a wall of worry over many years with periodic setbacks, but with the long-term trend providing higher returns than more stable assets. The setbacks are the price we pay for the higher long-term return from shares.
• Second, selling shares or switching to a more conservative strategy after a major fall just locks in a loss. The best way to guard against selling on the basis of emotion is to adopt a well thought out, long-term investment strategy.
• Third, when growth assets fall they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities that pullbacks provide.
• Fourth, while shares may have fallen in value, the dividends from the market haven’t. The income flow you are receiving from a diversified portfolio of shares remains attractive.
• Fifth, shares often bottom at the point of maximum bearishness. So, when everyone is negative and cautious it’s often time to buy.
• Sixth, turn down the noise on financial news. In periods of market turmoil, the flow of negative news reaches fever pitch, which makes it very hard to stick to a well-considered, long-term strategy let alone see the opportunities.
• Finally, accept that it’s a low nominal return world – low nominal growth and low bond yields and earnings yields mean lower long-term returns. This means that periods of relative high returns like in 2017 are often followed by weaker years.

To discuss the implications of these factors with respect to your investment strategy, please feel welcome to contact me.

Source: AMP Capital January 2019

The surge in Bitcoin has attracted much interest. Over the last five years, it has soared from $US12 to over $US8000; this year it’s up 760%. Its enthusiasts see it as the currency of the future and increasingly as a way to instant riches with rapid price gains only reinforcing this view. An alternative view is that it is just another in a long string of bubbles in investment markets.

Bitcoin’s price in US dollars has risen exponentially in value in recent times as the enthusiasm about its replacement for paper currency and many other things has seen investors pile in with rapid price gains and increasing media attention reinforcing perceptions that it’s a way to instant riches.

However, there are serious grounds for caution. First, because Bitcoin produces no income and so has no yield, it’s impossible to value and unlike gold you can’t even touch it. This could mean that it could go to $100,000 but may only be worth $100.

Second, while the supply of Bitcoins is limited to 21 million by around 2140, lots of competition is popping up in the form of other crypto currencies. In fact, there is now over 1000 of them. A rising supply of such currencies will push their price down.

Third, governments are unlikely to give up their monopoly on legal tender (because of the “seigniorage” or profit it yields) and ordinary members of the public may not fully embrace crypto currencies unless they have government backing. In fact, many governments and central banks are already looking at establishing their own crypto currencies.

Regulators are likely to crack down on it over time given its use for money laundering and unregulated money raising. China has moved quickly on this front. Monetary authorities are also likely to be wary of the potential for monetary and financial instability that lots of alternative currencies pose.

Fourth, while Bitcoin may perform well as a medium of exchange it does not perform well as a store of value, which is another criteria for money. It has had numerous large 20% plus setbacks in value (five this year!) meaning huge loses if someone transfers funds into Bitcoin for a transaction – say to buy a house or a foreign investment – but it collapses in value before the transaction completes.

Finally, and related to this, it has all the hallmarks of a classic bubble. In short, a positive fundamental development (or “displacement”) in terms of a high tech replacement for paper currency, self-reinforcing price gains that are being accentuated by social media excitement, all convincing enthusiasts that the only way is up. Its price now looks very bubbly, particularly compared to past asset bubbles

Because Bitcoin is impossible to value, it could keep going up for a long way yet as more gullible investors are sucked in on the belief that they are on the way to unlimited riches and those who don’t believe them just “don’t get it” (just like a previous generation said to “dot com” sceptics). Maybe it’s just something each new generation of young investors has to go through – based on a thought that there is some way to instant riches and that their parents are just too square to believe it.

But the more it goes up, the greater the risk of a crash. Many people also still struggle to fully understand how it works and one big lesson from the Global Financial Crisis is that if you don’t fully understand something, you shouldn’t invest.

At this stage, a crash in Bitcoin is a long way from being able to crash the economy because unlike previous manias (Japan, Asian bubble, Nasdaq, US housing) it does not have major linkages to the economy (eg it’s not associated with overinvestment in the economy like in tech or US housing, it is not used enough to threaten the global financial system and not enough people are exposed to it such that a bust will have major negative wealth effects or losses for banks).

However, the risks would grow if more and more “investors” are sucked in – with banks ending up with a heavy exposure if, say, heavy gearing was involved. At this stage, it’s unlikely that will occur for the simple reason that being just an alternative currency and means of payment won’t inspire the same level of enthusiasm that, say, tech stocks did in the late 1990s (where there was a real revolution going on).

That said, it’s dangerous to say it can’t happen. There was very little underpinning the Dutch tulip mania and it went for longer than many thought.

While crypto currencies and blockchain technology may have a lot to offer Bitcoin’s price is very bubbly.

Source: AMP, November 2017

Friday 22 December 2017 – Closed

Monday 25 December 2017 – Christmas Day

Tuesday 26 December 2017 – Boxing Day

Wednesday 27 December 2017 – Closed

Thursday 28 December 2017 – Closed

Friday 29 December 2017 – Closed

Monday 1 January 2018 – New Year’s Day

Tuesday 2 January 2018 – Open 9 am

Please check with your local office for any variations

While a traditional bank deposit is generally regarded as one of the safest forms of investment, it also currently offers amongst the lowest returns. For those relying on bank deposits to fund their retirement income, the current record low interest rate environment offers little reward.

For those approaching retirement, low interest rates could mean having to rethink their retirement goals, retirement timeframe and potential sources of retirement income. For existing retirees, it could mean having to re-assess their goals. Simply put: low interest rates means more capital is required to fund future income needs.

This raises the question – if interest rates stay low for the foreseeable future, how can you fund the retirement lifestyle you’d hoped for?

Regardless of whether you are preparing for retirement, or are already retired, the answer lies in focusing on factors you can control, rather than those you cannot. Whilst there are many aspects of investing that can’t be reliably predicted, there are many factors you can control, including:

• how much you spend;
• how much you save;
• how much investment risk you are prepared to accept;
• how you structure your investments; and
• how much you pay in fees.

For those still working, it could mean adjusting discretionary spending, so that more funds can be used to boost retirement savings, or additional mortgage payments can be made to reduce the amount owing, or a combination of both. Less spending now means more money for later.

For self-funded retirees, it could mean adjusting discretionary spending by taking fewer ‘big’ holidays or by considering the Age Pension in their future planning.

Inevitably, investors may feel compelled to move further along the risk curve to seek out the retirement income they desire. In other words, they may seek to diversify away from cash and invest a higher percentage of their capital in alternative forms of income producing assets – such as shares, property and infrastructure. This is often referred to as the ‘search for yield’.

Cash vs Alternative Income Assets

The cash rate in Australia is currently 1.50%, with some institutions offering around 3.00% depending on the deposit amount and timeframe. Compare this to shares, where it is possible to receive a 6.00% return (or more), often with the benefits of franking credits.

There are, of course, risks associated with growth assets that can’t simply be ignored, and investors need to feel comfortable that the value of their portfolio will fluctuate over time, as the assets respond to prevailing market conditions. Whilst a regular dividend can help to offset the impact of any future share price falls, there is no guarantee that dividends will continue to be paid at the same rate.

Managing investment risks can be achieved by:

• buying and holding quality assets;
• being prepared to stay invested for the long term; and
• being prepared to ‘capitalise’ on over-heated markets.

Structuring your Assets

The overall structure you employ is the foundation to your portfolio and impacts the net return you receive. Quality assets, poorly structured, can lead to lower real returns.

For self-funded retirees, the decision to hold assets via a super fund or account based pension, or in their individual names can lead to very different results, in the form of:

• Returns – some structures don’t pay tax on earnings, so holding assets in the right structure can lead to higher returns.
• Benefits – some structures offer Centrelink exemptions, so holding assets in the right structure can lead to increased entitlements.

Understanding the difference between structures, and how these relate to you, can be complicated as they relate to an individual’s personal circumstances. This is one area that is definitely not “one size fits all.”

Fees

The fees you pay, whether direct or indirect, will also impact the net return you receive and can make a significant difference over the long term. Fees can generally be categorised into three areas:

• Administration
• Investment
• Advice

It is important to have a good understanding of the total fees you are paying, to be satisfied that you are getting “value for money.”

As outlined above, it is clear that there are many factors to consider when it comes to deciding which approach is best for you. Now, more than ever, due to the current low interest rate environment, it’s worth reviewing your overall position to determine whether your current strategy remains relevant to your needs and lifestyle. Please contact us to discuss your particular situation.

Source: Capstone

If you’re a baby boomer, you may be considering passing down some of your treasured possessions to your children or grandchildren—especially if downsizing your home is on the horizon.  If you’ve already made the assumption that they’ll be willing recipients, you could be in for a surprise.

Increasingly, younger generations aren’t interested in inheriting such items. In fact, possessing lots of ‘stuff’ is out of fashion, leaving many parents to think about where their heirlooms might end up.

 People, priorities and tastes are changing

Just a generation or two ago, younger family members were grateful to receive the solid oak dining table and silver gravy boat—seeing such possessions as an extension of themselves and their family’s past.  However, with the rise of the internet, younger people today more often identify with their social profile than they do family objects from a bygone era.

The Australian dream of owning a house is also less achievable, as prices rise, leading an increasing number of people toward apartment living and leaving less room for family collectibles.  Being tied down by boxes filled with historical items is also not practical for people who are opting to work and travel abroad, but it isn’t all just about the inconvenience.  Over time, tastes and fashions change. Minimalism is in and clutter is out—and shelves that were once filled with ornaments and trinkets have been replaced by clean white walls.

How to part with your prized possessions

It can be a struggle to accept that your children don’t want to hold on to items that have sentimental value to you. It’s not that they don’t love you—they just may not love your stuff.  So, how can you do a clean out without your past being lost?

• Ask your children to pick one or two items—no matter how small—that they want to keep.
• Consider donating big items, like furniture, to local shelters, hospitals or charities. There’s always someone in need who can benefit.
• Scan photo albums onto the computer to create a digital photo book which can be stored online. This way it can be shared with all your family without taking up physical space.
• Consider selling those items that you no longer want, need or have room for. Popular selling sites such as eBay or Gumtree can make it very easy.
• Finally, if you are going to sell any items, make sure you research their value first as you may be selling something of great value.

Looking beyond just your heirlooms

Finding a good home for your prized possessions is important and something you want to think about. What you do with your wealth and other assets down the track will also require thought. Addressing such things early on can give you peace of mind and discussing things with your family could avoid any possible controversy down the track should people not agree on things.

Source: AMP

A number of changes came into effect on 1 July 2017 that limit the amount of money those saving for retirement can put into super. This includes new limits on concessional (or before tax) and non-concessional (or after tax) contributions.

The limit on concessional contributions has been reduced from $35,000 to $25,000 per annum and the limit on non-concessional contributions has been reduced from $180,000 to $100,000 per annum.

Additionally, the threshold where an extra 15 per cent tax (total of 30 per cent) is paid on concessional contributions applies to anyone earning $250,000 or more of ‘income for surcharge purposes.’ This threshold was previously $300,000.

In light of these changes, high income earners (those earning $250,000 and above) may now feel compelled to consider alternative investment structures outside of the superannuation environment that offer similar tax-effective benefits. There are a number of options which may be useful in minimising or deferring tax, such as a family trust, or setting up a private company to hold investments, but for those on high incomes one of the more cost-effective, flexible, and tax-effective options may be an investment bond.

What is an investment bond?

Investment bonds (also known as insurance bonds or growth bonds) have features similar to a managed fund combined with an insurance policy and can be tax-effective for those on high incomes  providing certain rules are followed.

Most investment bonds offer investment options such as cash, fixed interest, shares, property, infrastructure, or a range of diversified investment options, with risk levels ranging from low risk to high risk. The value of the investment bond will rise or fall with the performance of the underlying investments.

A long-term investment strategy

An investment bond is designed to be held for at least 10 years and you can make additional contributions over the life of the insurance bond. To make the most of the tax benefits, each year you can contribute up to 125% of your previous year’s contribution.

Withdrawals

Money can be withdrawn from the investment bond at any time, however if you withdraw your money before the 10 years is up, some of the income may be taxable, depending on when the withdrawal is made. If no withdrawals are made in the first 10 years, any earnings on the bond will be tax-free.

10 year rule

Investment bonds are tax-paid investments. This means when earnings on the investment are received by the insurance company, they are taxed at the corporate tax rate (currently 30%) before being reinvested in the bond. This can make insurance bonds a tax-effective long term investment for those with a marginal tax rate higher than 30%.

If you hold the bond for at least 10 years the returns on the entire investment, including additional contributions made, will be tax-free subject to the 125% rule.  If you make a withdrawal within the first 10 years, the rate at which earnings in the investment bond are taxed will depend on when you make the withdrawal.

The 125% rule

Investors in investment bonds can make additional contributions each year. As long as the contribution does not exceed 125% of the previous year’s contribution, it will be considered part of the initial investment. This means each additional contribution does not need to be invested for the full 10 years to receive the full tax benefits.

If contributions are made to the investment bond that exceed 125% of the previous year’s investment, the start date of the 10 year period will reset to the start of the investment year in which the excess contributions are made. You will then have to wait a further 10 years from this date to gain the full tax benefits.  If you do not make a contribution to the investment bond in one year, any contributions in following years will reset the 10 year rule.

If you are approaching (or have reached) your superannuation contributions limits and would like to find more about investment bonds and whether one may be suitable for you, please contact us.

Source: Capstone. This article contains extracts from ASIC’s Moneysmart website.

What do you really want out of life? Investing in yourself is an important way to prepare for achieving your personal goals. Here are 5 ways to make sure you’re ready to meet the future as your very best self.

1. Take care of your body and mind

Being in poor health can make almost anything feel like an impossible challenge.  That’s why making a commitment to your physical wellbeing is one of the most important ways of investing in yourself.  For some of us that means slowing down and making time to walk, sit and reflect. For other it’s about firing up your energy and drive with exercise in whatever form that takes – a run, swim or session at the gym.

All these activities also hit pause on the constant planning and preparation, stress and anxiety we can all get caught up in. But as well as giving your brain a break now and again, take some time to explore new interests with your mind too by taking a course or reading books that are inspiring and informative. And if reading isn’t your thing, there are thousands of podcasts available that can feed your mind with amazing stories, facts and opinions on hundreds of topics.

2. Celebrate your creative side

When we feel like we’re stuck in a rut, doing something creative can remind you about all the sources of inspiration there are in the world. Being creative also opens up new learning pathways and new social groups too, so it’s a great way to expand your horizons and break out of your routine. If you don’t think of yourself as the creative type, just start by keeping a journal of things you notice that interest and inspire you.  It won’t be long before you’re making connections between these observations and your experiences to come up with your own creative ideas.

3. Work on your bucket list

You might think you’re too young for a bucket list. But if you wait until mid-life or retirement to seek out experiences that will make your life richer, you’ll already be running out of time to make them happen. And they needn’t be as complicated and costly as going on a cruise or cage diving with sharks. Try to include simple things on your bucket list that you can achieve in your local area. Growing a plant from seed, rock climbing or singing in a choir are all things that you might want to try for the first time.  It might take a little time, dedication and research to make it happen but you’ll really enjoy that feeling of satisfaction from your new experiences – and from ticking things off your list.

4. New ways to earn

You’re living in a time when change is a constant and this presents us with a wide range of opportunities as well as risks. One of those risks is losing the income you’re relying on from your job. So an important way of investing in yourself is to look at ways to secure new income streams.  This could mean putting money in property or other assets that will bring you extra income that you can reinvest, save or spend depending on your needs. Or you could be interested in setting up a new business on the side with the ultimate goal of selling it for profit or taking it up as a full-time role.

5. Get a coach

Figuring out what your most important priorities are and how to make time for them in a busy schedule can be challenging.  Working with a coach is a great way to review and set your goals, explore what’s holding you back from achieving them and create a plan and schedule to keep you moving forward. It’s important to find a coach who really understands and cares about what’s important to you so they can help you figure out what’s working and what’s not. Find the right coach and you’ll have a valuable partner who can guide you on the path towards success and wellbeing in your lifestyle and finances.

Source: FPA, Money & Life.

By contributing into your super, you can reduce the amount of tax you pay while adding to your future retirement income.

What is salary sacrifice?

Put simply, salary sacrifice is where you pay a portion of your pre-tax salary or wages as an additional contribution to your superannuation account.

How does it benefit you?

When you choose to make super contributions through a salary sacrifice arrangement, the key benefits for you are:

You can pay less tax – If your annual income and concessional (before-tax) contributions total less than $250,000¹, these super contributions are taxed at a rate of 15 per cent, which will generally be less than your marginal tax rate of up to 47 per cent.

You can add to your super more efficiently – If your marginal tax rate is above 15 per cent, every dollar from your pre-tax pay you put into super through salary sacrificing is worth more to you than that dollar in take-home pay, making it a tax-effective way to boost your super.

You choose the contribution amount – The amount of pre-tax pay that is salary sacrificed into your super can be adjusted to your budget which could help you maintain your current lifestyle. Adding even a small amount a fortnight could potentially increase your super balance at retirement. However, if you earn below $37,000 there may be limited advantage in a salary sacrifice arrangement. Instead, as a low-income earner you can take advantage of the government’s low-income super contribution (LISC) which is a payment of up to $500 per annum directly into your super fund.

How much can you salary sacrifice?

The current annual cap for concessional (before-tax) contributions, including salary sacrifice contributions and employer Super Guarantee (SG), is $25,000.

It’s important to note that any contributions made above the maximum concessional contributions cap will be taxed at your marginal tax rate (plus Medicare). There will also be a charge to cover the cost of collecting this tax later than normal tax.

How can you get started?

Step 1: Contact your payroll or human resources team to confirm whether they offer salary sacrificing.

Step 2: If they do, you need to look at your income and expenses, and calculate how much of your income you can comfortably give up now and invest for your future. That’s where a financial adviser can help you find the most suitable option for your individual financial situation.

Step 3: Then, if you decide to salary sacrifice into super complete the relevant form so your employer can redirect the agreed portion of your pre-tax pay to your super fund. If they don’t have a form it’s best to get this agreement in writing to ensure you can confirm the terms, to avoid any confusion.

What else do you need to know?

Don’t lose your super entitlements – Your salary sacrifice contribution is counted towards your employer contributions. As such, your employer is only required to make super guarantee (SG) payments into your super equal to 9.5 per cent of your pre-tax salary.

To avoid losing any of your entitlements, the Australian Taxation Office recommends that you clarify the terms of your salary sacrifice agreement if you want to ensure your employer still pays you the 9.5 per cent super guarantee.

Salary sacrifice is voluntary – If your employer doesn’t offer or agree to salary sacrifice arrangements and you are under the age of 75, at the end of each year, subject to the concessional contributions cap, and taking into account any previously-made super contributions for that financial year.

Get the right advice

Everyone’s financial situation is different. That’s why it’s a good idea to speak to a financial adviser who can help you secure your retirement income for the future.

Source: Colonial first State

¹ If your income plus your before-tax super contributions are greater than $250,000, you’ll need to pay an additional 15 per cent tax on the salary sacrifice contributions that take your income over $250,000.