Tag Archives: Superannuation

What happens to superannuation when you break up?

By Robert Wright /February 18,2022/

Depending on the situation, you might get some of your ex partner’s super, or they may get some of yours. See what you need to know.

A divorce from your husband or wife, or a separation from your de facto, could mean a division of your assets and debts, whether they’re held individually or together, and superannuation is no exception.

The agreement or decision to split super is part of the overall settlement process, which will consider all of the assets and liabilities of a couple.

Even if one of you hasn’t contributed to super for a long time, that person could still be entitled to a percentage of the other’s super.

Below we explain a few things you may want to know, noting that if you’re a de facto couple living in Western Australia, different rules may apply, as you’re not subject to the same superannuation splitting laws.

How is super split in a divorce or separation?

There are several ways superannuation can be split.

1. A super agreement can be put in place before, during or after your relationship, as part of a broader binding financial agreement, which can specify how super is to be split upon separation or divorce.
2. If you don’t have a binding financial agreement in place but have agreed how you’d like your super to be split, an Application for Consent Orders can be filed in court, without your attendance, to formalise the arrangement you’ve both come to.
3. If you can’t reach an agreement, you may instead consider applying for financial orders, where a court hearing will determine how super is to be split between the two of you, noting there are time limits in place to do this.

What’s involved in the process?

You may need to get information regarding the value of the super money that could be split between you. You can do this via your or your ex’s super fund, provided the request is for purposes related to the separation.

To get this information, you’ll need to provide various forms to the super fund, which you can locate in the Federal Circuit and Family Court of Australia’s Superannuation Information Kit.

Once the super splitting order is made, whether by consent or after a court hearing, you’ll also need to provide a copy of the order to the super fund for it to be effective.

Depending on the situation, if you want to defer making a decision around how super is to be split, or if you have an older style fund where splitting is not available until you’re eligible to start taking the benefit, you could establish a ‘flagging agreement’ where the super fund is unable to pay out super until the flag is lifted.

What potential costs might you come across?

Super funds may charge an administration fee for carrying out any requests around splitting super. These are separate to any costs for legal or financial advice, or court fees.

With that in mind, it’s worth checking what the super fund may charge for things like:

• an application for information
• a super split
• implementing a flagging agreement
• lifting a flagging agreement.

When will the money be paid?

Because there are rules around when super can be accessed, be aware that splitting super won’t necessarily result in an immediate cash payout, as super is treated differently to other assets and debts.

So, after the agreed amount has been transferred to your or your ex-partner’s super account, the money must remain there until a condition of release is satisfied. What that means is, generally, you can’t access super until you’ve reached your preservation age (which will be between 55 and 60, depending on when you were born) and you retire.

What other things should you consider?

Some couples choose to leave their super untouched. Instead, they factor in the value of their super accounts while dividing up their other assets.

With that in mind, it’s worth knowing the details of all your financial accounts, including your super, noting many Aussies have more than one super account.

You can search for lost or unclaimed super by doing a super search with your current super fund or by logging into your MyGov account.

Where can you go if you need more help?

Working out what you’re entitled to can be complicated which is why it may be a good idea to get independent legal advice, even if things are amicable.

You might also think about consulting with your accountant or financial adviser.

Source: AMP

Constructing a retirement portfolio in a low return world

By Robert Wright /February 18,2022/

Portfolio construction is a much-used term that can be misunderstood. Fundamentally, the term portfolio construction refers to the process of selecting investments to create the optimal balance of risk and return.

By mixing different types of investments and different asset classes, portfolios can be built in a way that maximises the return for any given level of risk.

This concept of risk is fundamental to portfolio construction. The key to effective portfolio construction is understanding that each individual experiences risk differently and investment needs change dramatically as people’s priorities change over the course of a lifetime.

Risk tolerance

Depending on what stage of life they are at, individual investors can have quite different goals.

An investor early in their career can afford to seek higher returns from their investment portfolio by taking a higher level of risk because they have more time to make back any downturns in markets.

They also have less need for income from their investments than someone approaching or in retirement and can weight their portfolio towards growth assets.

A younger investor can be less concerned about inflation than a retiree because they can rely on wages growth that can maintain their purchasing power. They can also afford to lock up investments for a longer period without worrying about liquidity because they have time before they need to draw down on their assets.

In contrast, retirees tend to be more concerned about capital preservation because they need to draw on their asset pool throughout their retirement.

As they are no longer earning income from work, they need to draw income from their portfolio. This means they should consider weighting their portfolios towards income-generating assets.

Any increase in inflation erodes a retiree’s purchasing power as it costs more to maintain standard of living which means their capital can be eroded faster than planned.

And liquidity is critical for a retiree as assets may need to be sold quickly – for example if there is a medical emergency – without punitive valuations.

The concept of sequencing risk is also a critical difference between early and late-stage investors.

Sequencing risk

Sequencing risk refers to the risk of being forced to sell investments after a fall in valuations. A younger investor can typically ride out market volatility and even buy more assets when valuations are low.

However, late career investors and retirees who are forced to sell assets at low prices to fund their lifestyles have no way of regaining the lost value. A sensible portfolio construction process can protect against this.

Hedging risk

A question that often comes up is the role of downside protection in portfolio construction. The answer is different depending on where an investor is at in their investing journey.

Take the example of a pre-retiree and a younger investor with portfolios split equally between equities and bonds going into the global financial crisis (GFC) – with and without downside protection using options strategies.

Without downside protection, the retiree would have seen a pullback in the value of their assets of about 25 per cent and, because they were drawing down on their assets to live their life, they would not have been able to fully participate in the subsequent recovery.

Had they used downside protection on their portfolio, they would have been back on track by 10 years later.

The same is not true of the same strategy deployed by a younger investor. Without downside protection, young investors just keep buying into the market through a downturn and continue to accumulate assets.

But with downside protection – which comes at a cost – they see a drag on their returns, lowering their ultimate savings. It’s a reminder of the difference between younger and older investors.

Human beings also have the potential to make mistakes in their investing lives. If a retiree investor facing the same kind of GFC drawdowns suddenly became risk-averse and shifted their portfolio to 30:70 equities and bonds, this would be an understandable and apparently rational decision to preserve assets.

But markets recover. If that retiree waits until the storm passes and takes three to five years to switch back their allocation to 50:50, they would be 30 per cent worse off than if they did nothing at all.

Asset allocation

So, what assets should retirees look for?

In our view, the key is to seek out desirable risk attributes and not simply take the approach of investing by asset class.

In Australian equities for example, franking credits offer a good income stream for retirees by refunding the tax paid by the underlying companies. It should also be noted, however, that in seeking a higher exposure to Australian equities in pursuit of franking credits, a portfolio will acquire other concentrations of risk, for example: exposure to China. Good portfolio construction should consider and diversify away these concentrations.

In direct assets, infrastructure offers good opportunities for retirees. Many infrastructure assets earn a return on an availability basis regardless of actual usage or economic conditions, providing a stable income. The key consideration for direct assets is liquidity, as holding large allocations of illiquid assets could mean having to disproportionately sell down liquid assets, like equities, at an inopportune time if larger sums of cash are needed for, say, a medical emergency.

For bonds, the traditional defensive characteristics may not be available in a world of near zero interest rates and the potential of rising inflation.

In the last 30-40 years we have seen a terrific run in markets, particularly with bond rates coming down from as high as 16.5 per cent in the case of 10 year Australian government bond yields almost 40 years ago to near zero now. The performance was further buoyed by lower tax rates, falling tariffs and the rise of globalisation.

The corollary of this is that throughout those 40 years, forward return expectations have been declining.

In fact, a fund with a traditional asset allocation split 60:40 between equities and bonds is near its highest ever valuation level.

We believe this means return expectations from investment portfolios should be expected to be lower going forward until interest rates normalise.

Inflation is also a looming threat to portfolios. US annual consumer price inflation pushed up beyond 6 per cent in October of 2021 and there is a risk that price pressures associated with deglobalisation and decarbonisation defy the widely held ‘transitory’ thesis and stick around.

Goals-based investing

Given lower expected returns and higher inflation, what’s the right portfolio response?

Doing nothing is one approach – simply accept that returns are going to be lower.

Another approach is to increase risk – adding riskier, more leveraged asset classes will improve the probability of getting a return but also increase the probability of losing money.

A third approach is to lower your expectations. This means not changing how portfolios are constructed but accepting the likelihood of lower returns and perhaps adjusting things elsewhere in your life accordingly. In our view, this isn’t of much use or comfort however to today’s pre-retirees and retirees.

And the final – and more important – approach is to adjust strategy to those areas most likely to achieve objectives. This could include taking a goals-based approach to investing.

For example, a retiree could decide that rather than taking a traditional asset allocation approach to portfolio construction, they instead want to take on the goal of protecting and maintaining their standard of living in retirement. That goal might be measured by providing returns equal to the consumer price index plus 3.5 per cent as an example.

By focusing on the desired outcomes rather than simply considering traditional asset class allocations, investors can consider including alternative investments and strategies that may not be available under a traditional approach.

Source: AMP Capital

11 things everyone should know about their super

By Robert Wright /October 25,2021/

Super is there to provide you with an income when you stop working and it may provide a tax-effective way to save for your retirement over the long-term.

What’s probably more interesting, is in time, your super may become one of your largest assets. We don’t often think about that, but it’s a good reason why you may want to pay closer attention to it.

Here are some things worth knowing or which may even interest you to investigate further.

1.      Who pays your super

Generally, your super savings will build up over the course of your working life, as money you earn is put into super by yourself, or by your employer under the super guarantee, if you’re eligible.

You can make additional voluntary contributions to your super to boost your retirement savings if you choose to. However, there are limits on the amount you can contribute each year and there are separate caps, depending on the types of contributions you’re making.

2.      Where your money’s invested

Any time money is deposited into your super, it’s invested on your behalf by the trustee of your super fund.

Investments can be made into property, shares, cash deposits and other assets depending on your default investment profile, or if you’ve made your own investment selections.

Most funds will allow you to choose from a range or mix of investment options and asset classes and choosing the most suitable option will typically come down to your attitude to risk and the time you have available to invest.

3.      How to see what your employer’s paying you

Super guarantee (or SG) contributions made by your employer, if you’re eligible, should be at least 10% of your ordinary (not overtime) earnings if you’re making $450 or more each month. Note, others may also be eligible.

Meanwhile, as these contributions may be the foundation of your future savings, it’s important to check they’re being paid correctly. You can do this by reviewing your payslips, checking your super statements, calling your super fund or logging into your online account to see what’s been put in.

Keep in mind, employer super contributions also only have to be paid into your fund four times a year (at a minimum), on dates set by the ATO, which means your super may be paid at different times to your employment income.

4.     Where to go if something doesn’t look right

If your employer hasn’t paid your super, speak to the person who handles the payroll at your work. If you’re not satisfied with what they tell you, you can lodge an unpaid super enquiry with the ATO.

5.      How your current super balance stacks up

In many cases you can check out your super balance online via your super fund’s website or the statements they send you.

Meanwhile, if you’re interested to know how your balance fares and what you might need each year in retirement, the Association of Superannuation Funds of Australia puts out a report each quarter.

If you’re curious to know how your super balance shapes up against others your age, check out the average super balances for employed people of different age groups across Australia.

6.      How to find your lost or unclaimed super

At last count, there was more than $13 billion in lost and unclaimed super waiting to be claimed across Australia.

That can happen when you set up a new super fund and forget to roll over what you accumulated in a previous one, or if you forget to update your details with your providers when you change them.

You can search for lost or unclaimed super by doing a super search with your current super fund or by logging into your MyGov account to find your super funds.

7.      What to look out for if you roll two funds into one

If you have more than one super account, there may be advantages to rolling your accounts into one, such as paying one set of fees and less paperwork.

If you do decide to consolidate, make sure you don’t risk losing features and benefits including life and other insurance that may be attached to the account you’re considering closing

8.      How to check your insurance if you have it

Most super funds let you pay for personal insurance out of the money in your super fund, but there are pros and cons worth weighing up.

For instance, insurance through super can often be cheaper than personal insurance bought outside super, but you may not get the same level of cover.

9.      How to make sure the right people get your money if you pass away

If you don’t nominate a beneficiary with your super fund, your super fund may decide who receives your super money when you pass away, regardless of what you have in your will.

There are generally two types of beneficiary nominations you can make, binding and non-binding.

If you make a binding nomination, your super fund is required to pay your benefit to the person or people you’ve nominated, as long as the nomination is valid when you pass away. Keep in mind, some binding nominations are lapsing and may only remain valid for three years.

If you make a non-binding nomination, your super fund will have the final say as to who receives your super benefits, but they will attempt to find all potential beneficiaries and decide who’s the most appropriate.

10.     What age you can withdraw your super

The government sets general rules around when you can access your super, which typically won’t be until you reach your preservation age (which will be between 55 and 60, depending on when you were born) and meet a condition of release, such as retirement.

At this time, you may choose to take the money as a lump sum, income stream, or even a bit of both.

Meanwhile, there may be some special circumstances where you may be able to withdraw your super early.

11.     When can you no longer contribute to super

Once you turn 75, generally you can no longer make voluntary contributions to your super, with some exceptions, which may include if you’re selling your home and making a downsizer contribution. Compulsory SG contributions made by your employer, if you’re still working, can still be paid.

Many people think of their super as an investment that takes care of itself, but the choices you make about your super today, could make a big difference to your quality of life later on.

Source: AMP

Women and superannuation – how the pay gap can impact your super

By Robert Wright /September 08,2021/

According to the Australian Bureau of Statistics, women are retiring with 37% less than men in their super accounts, which is a frightening thought considering women, on average, live up to five years longer.

So, what’s behind the super gap?

The super gap is partly due to the lower average earnings of women. Data from the Workplace Gender Equality Agency, reports that the full-time remuneration gender pay gap in Australia is 13.4% compared to males.

While many have blamed the “wage gap” on gender, Harvard Business Review research suggests women ‘ask’ for pay rises as much as men do, however, they are far less likely to actually get them.

The study also suggests that while men are successful in negotiating a pay rise 20% of the time, women were only successful 15% of the time.

This in turn impacts retirement savings, as the less money you earn, the less superannuation you will receive because your Superannuation Guarantee contributions are based on your level of income.

The second reason for the super gap, is that women typically take time out of the workforce to raise children. The absence of ongoing superannuation contributions can have a significant impact on the final amount women can end up with in super.

What can be done to address the super gap?

One of the simplest ways to catch up on lost super contributions, is to make additional contributions to super along the way. Small amounts over longer periods of time may be easier to commit to, for example, making additional contributions may be enough to narrow the gap caused by taking time out for the workforce.

If you are getting closer to retirement, you may consider maximising the amount you are contributing each year in concessional contributions up to the $27,500 limit (or higher if you have previous unused concessional cap amounts).

Keep in mind, however that any contribution you do make to super will be preserved, and unable to be accessed until you meet a condition of release from super. Most commonly this would be reaching your preservation age and then retiring.

In addition, it’s worth considering if you are in an appropriate super fund, which meets your needs, including the level of insurance cover you have and whether you may reduce this if you no longer need it.

Consider the fee structure of the super fund and also pay attention to how your super is being invested, for example – if you have a long time until retirement, you may benefit from increasing your exposure to growth assets.

For women in relationships, a problem shared could help close the retirement gap. This is because your spouse can split up to 85% of their concessional contributions each year with you.

Furthermore, if you earn less than $40,000 per annum, your spouse may be eligible for a tax offset of up to $540 for a $3,000 contribution (made with after-tax money).

Take control of your super as soon as possible; little changes early can potentially make a big difference in the long-term.

Source: BT