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'Your trusted source for wealth management tips and information.'
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ContinuumFP eNewsletter October, 2016
- a 5-minute read before links
Welcome to the October 2016 edition of the ContinuumFP eNews. In this month’s news, we cover topics that are of interest to a broad range of our readers –
- Retirement issues;
- Investment notes; and
- A ContinuumFP update.
Introduction
As lawmakers to the nation, the Commonwealth government enacts many laws regarding the financial and economic well-being of the country (as well as for the peaceful conduct of life in Australia); and its agencies make decisions that impact the economy financially and otherwise. In this newsletter, we address the effect of the revised guidelines for determining the level of (any) Age Pension payable to those of eligible age; and we look at the minutes from the October meeting of the Reserve Bank of Australia (the RBA) for some guidance on the economic outlook for the near-term at least.
Age Pension – The Income Test and the Assets Test
Those of our readers who have had any engagement with Centrelink, either personally or on behalf of relatives or friends in determining eligibility for the Age Pension, will be aware that there are two financial tests that are used in determining whether there is any entitlement to that benefit – and if so, how much will be paid. These tests are The Income Test; and the Assets Test.
Broadly speaking, the income test comes into effect if the claimant is earning income (whether from physical work or from passive investment): it allows for a pension recipient to be able to supplement their benefit by working – but operates on a sliding scale, with the consequence that the more they earn, the less pension benefit they will be paid. At the prescribed ceiling level of earning, the benefit entitlement ceases. (There are special rules that apply to singles and couples, home-owners and non-home-owners; and those with/ without dependent children.)
These similar groups are also recognised within the framework of the assets test. Under this test, applicants are allowed a full pension at the ‘base asset level’, but their entitlement tapers away, as the value of their assets increase – again, until the specified ceiling level of assets is held, completely eliminating entitlement to the pension.
On 20 March; and 20 September each year, the entitlement to pension – and the income and asset ranges – are subjected to indexation so as to try to preserve some relativity for the Age Pension beneficiaries.
There is a significant change coming about from 1 January 2017.
From the beginning of the 2017 calendar year, the base and ceiling ranges will change in respect of the assets test; and the tapering of entitlement, will be at the rate of $3 per $1,000, instead of the previously applied $1.50 per $1,000. This change will impact people of Age Pension age (currently 65 years of age), in one of a number of possible ways –
- Some will lose their pension entitlement completely;
- Some will experience a reduction in the benefit they receive;
- Some will experience an increase in their benefit: - and yet others
- Will qualify for the Age Pension for the first time.
[As this is one of those dreaded ‘budget-saving’ measures, the number of those who lose their pension and/ or those experiencing a reduction, will no doubt exceed the number who will become eligible (either for the first time, or for an increase). There is to be some grandfathering around the Commonwealth Seniors Card; and the Seniors Health Card, so that it is expected that anybody of eligible age at 1 January 2017 and who holds one or both of these cards, will continue to hold it despite any change to their pension amount.]
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The RBA, interest rates and housing prices
On the first Tuesday of most months (they skip January each year), the RBA Board meets to consider the state of the Australian economy and to decide whether the prevailing ‘cash’ rate of interest should be changed to modify the behaviour of the economy. A couple of weeks after each meeting, the RBA Board releases the Minutes of the meeting held, giving interested readers some insight into what influenced their decision – and as to what direction they might be considering appropriate in the near-term. On the first Tuesday in October 2016, they resolved to leave the historic low rate of interest unchanged, at 1.50% p.a.
The following extracts have been taken from the Minutes of that meeting: we believe that they are matters that will have an impact on some of our readers:
Terms of Trade (an important consideration, given that the trends in the terms of trade are an important indicator as to future direction in interest rates: if the terms of trade are in favour of Australia – our exports exceed our imports – rates are likely to increase over time; if on the other hand, the terms of trade are working against our economy, the cash rate is more likely to be reduced):
The RBA Minutes, say - ‘Australia's terms of trade were expected to rise again in the September quarter, following the first increase in a few years in the June quarter. Members noted that if the terms of trade were to be little changed over the forecast period, as expected, it would be more positive for profits, wages and fiscal revenues than if the decline in the terms of trade seen over recent years were to continue.’
[The Board is inferring that even a flat-line of terms of trade would be more beneficial outcome for the coming quarter, than would a continuation of the downward trend that had prevailed for the previous couple of calendar years.]
Housing market (an important consideration for families, employment and investors in the real property market: an active housing market supports higher levels of employment, helps families to feel more confident in their financial position; and encourages investors to participate in rental activity):
The RBA Minutes, say - ‘In the established housing market, conditions had eased relative to a year earlier, although there had been some signs that conditions had strengthened a little more recently. …. In contrast, turnover and housing credit growth had been noticeably lower than a year earlier and the value of housing loan approvals had been little changed in recent months. Conditions in the rental market had continued to soften, particularly in Perth, where population growth had been easing and the rental vacancy rate had risen.’
[The Board is telling us that house buying has freed up a little in recent times, after a brief period when the year-on-year comparison showed a decline in property valuations: in spite of this, fewer applications are being lodged for home loans.]
Household debt (an important issue for families as they manage their budgets and seek to provide as well as they can for the competing demands for the necessities of life, to provide for their future – but to also enjoy the comforts of life in our times):
The RBA Minutes, say - ‘Members noted that some risks from household lending had lessened a little further over the past six months. Lending standards had been strengthened and housing credit growth had slowed. The level of non-performing mortgage loans had risen over 2016 to date, but remained low. The household debt-to-income ratio was high and drifting up, although most other indicators suggested that household finances were in reasonable shape.’
[In an alert to investors in the banking sector, the Board is indicating that household (family) debt is growing relative to family income, but because property values are holding strongly, the modest increase in the number of non-performing home loans is not yet a concern. No doubt this is a message to the Banks to monitor this situation closely.]
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Taxing children’s investment income
Parents often make investments in the name of their children: they do this for a number of reasons, including to use the management of that investment as a way to teach their offspring some principles of financial management. Done thoughtfully, this can be an excellent springboard to understanding wealth management when the intergenerational wealth transfer from parents to children occurs.
The taxation consequences of investing in the name on children under the age of 18 years, can be counter-productive to this objective. Before implementing a strategy such as this, we recommend that parents consult with both their accountant and a financial planner.
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Our website Library article, ‘Children’s Investment Income Taxed’ has been popularly referenced over the past few months and so we draw it to your attention for more information on this subject. It shows some of the consequences – and some possible strategies to avoid those consequences – of investing in the name of children (minors) who are not ‘excepted’ for tax law purposes, without adequate planning.
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...and finally, did you know…?
Client relationship building
We are enjoying the increase in activity since the government has ‘gone back to work’ after the hiatus in the middle of the year, leading up to the Budget; and then the marathon election campaign – followed by the marathon effort to determine who would form our government.
Whilst there has been some volatility (turbulence) in the markets, our role in supporting clients to make sound investment decisions – and to stick with them, is equally as important, if not more so, as when the markets on a prolonged upward trend. We are told that clients are more comfortable with their financial position, knowing that we are there to help them understand these market movements.
Whilst the workflow has returned to a more regular pace now, we welcome new referral work – and appreciate your efforts in recommending us to your friends, family and work colleagues. If you have recently referred somebody to us, please let us know so that we can watch out for their contact – and ensure that we express our appreciation for your support in an appropriate way.
The Team at
Continuum Financial Planners Pty Ltd
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Continuum Financial Planners Pty Ltd is a Corporate Authorised Representative of Securitor Financial Group Limited ABN 48 009 189 495 | AFSL 240687 Level 8, 260 Queen Street, Brisbane QLD 4000
