Provision Newsletter

With a Transition to Retirement strategy you can continue working and access your super.

Retirement used to represent a sharp break with the past—one day you were working full time, the next you were sitting at home with the rest of your life ahead of you. These days, the transition doesn’t have to be quite so abrupt.

Many Australians are keeping themselves active and engaged by continuing for longer in the workforce on a part-time or contractual basis. In fact, more than two in five Australians who work full time and intend to retire are looking to reduce their hours first.[1]

The good news is that in the few years prior to retirement you can start to draw an income from your retirement nest egg while you continue working and contributing towards your super.

Access your super the smart tax way

If you’ve reached your super ‘preservation age’ (currently 55 but rising to 60), you can take some of your existing super as an income stream to help make your transition to retirement a smooth one.

This is called a transition to retirement (TtR) strategy. And it can be very tax effective.

• You can continue to work and contribute towards your super using tax-effective salary sacrifice contributions.

• You can top up your income with a tax-effective income stream from your retirement account (between 4% and up to 10% of the account balance can be drawn each year).

• And there’s even a way to ‘refresh’ your TtR strategy every year for potentially even more tax benefits.

There are two main ways you can use a TtR strategy.

1.    Less work, potentially the same after-tax income

The first option is a TtR strategy that may allow you to cut down your working hours while maintaining the same level of after-tax income.

Let’s say you’re over 55, you earn $75,000 a year before tax and you have $250,000 in your super. You want to cut back your working hours, which will reduce your before tax salary from $75,000 to $53,500.

As shown in the table below, by using a TtR strategy, you can maintain your after-tax income, despite reducing your work hours.

But it does come at a price—your super balance may dwindle over time as you draw down your pension payments.

2.    Same hours, more super

The other option is a TtR strategy that may allow you to maintain your work hours, but increase your salary sacrifice contributions to super, and supplement your income with a TtR pension so that there is no reduction in your after-tax income.

So let’s say you’re over 60, earning $60,000 a year before tax and you have $200,000 in your super, and you choose to use the full amount to start a pension.

As shown in the table below, together with your pension income, you can salary sacrifice $24,380 a year and still receive the same amount of after-tax income in your pocket.

What’s more at the end of the year, you’ve boosted your super by $953. If you do this for ten years, that’s potentially an extra $9,530 for your retirement, simply by managing your money in a different way.

Finding the right balance

A TtR strategy can be an effective way to boost your super savings, but it also has superannuation, taxation and social security implications.

We can help you strike the right balance and work out how to make your transition to retirement.

To find out more about TtR strategies or whether a TtR strategy may be suitable for you, call us today on 07 5447 7740.

What you need to know

Any advice in this document is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.

The examples provided are illustrative only and are not an estimate of the income you will receive or fees and costs you will incur. The examples are based on the following assumptions:

• $35,000 p.a. concessional cap for individuals aged 60 and over, and after allowing Superannuation Guarantee contributions of 9.25%, the concessional cap is not exceeded.
• Tax rates for 1 July 2013 have been applied
• Individual earns less than $300,000 pa

[1] http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/61A0264E827F59C4CA25768E002C8F72/$File/62380_jul%202008%20to%20jun%202009.pdf

Dr. Shane Oliver shares his thoughts on interest rates, the death of car manufacturing in Australia and the opportunities for investment markets this year. Read on for some insightful answers.

Why are interest rates so low and do you expect to see rates increase this year?

The interest rates we now have are necessary to support the economy as the mining boom slows and the Reserve Bank seeks to boost growth in areas such as housing, retail, construction and tourism.

Low interest rates are not so much a sign of weakness, more a sign of changed attitudes. Australians have a lot more debt than 20 years ago. And since the GFC they have become more cautious about spending. So given higher consumer debt and greater caution, you need lower interest rates than might previously have applied to get the economy going again.

The official cash rate will probably stay at 2.5% for another six months or so as we’re seeing tentative signs of improvement in the economy. By September or October we’re probably going to see stronger growth leading to rate increases to 2.75% and then 3% by the end of the year.

Why are Australian house prices so high in global terms? Are we in danger of creating a property bubble?

We’re building about 7,000 fewer dwellings every year than we need. Combined with the absence of an economic crisis, this lack of supply means house prices have stayed relatively high—unlike many other developed countries, where the housing market collapsed during the GFC.

Our house price to income ratio is well above the global average. One day that may fall back to the global norm but in the absence of a big supply surge or a major economic crisis, it’s hard to see that happening via a collapse in house prices.

There is always a risk of a property bubble developing and in fact we have had local bubbles in parts of Australia over the last decade.

But even though house prices are quite expensive, I don’t see a bubble at present.

I’m not sure this is the best time to buy an investment property as the rental yields are so low. If you allow for costs, the net rental yield for a house is about 1% and for a unit 2.5%, which is quite low. Term deposits deliver 3.5% and shares are yielding around 5.5% with franking credits.

You’ve got to get spectacular capital growth to make it stack up, which seems unlikely. So I don’t think we’re going to see a crash but I don’t see fantastic returns from residential property investment either.

What implications does the death of the car manufacturing sector have for the wider Australian economy?

It’s obviously bad news, particularly for those directly affected, but also because it comes at a time when the economy is struggling to pick up and the mining boom is slowing down.

But we need to keep it in perspective. Manufacturing has been in long-term decline since the 1960s. The manufacturing share of employment 50 years ago was about 25% and today it’s down at around 8%.

So it’s just a just a continuation of what we’ve seen over many years. I think it does make sense to let these industries go although like many Australians I would like to know we still make cars. But unlike me not enough Australians buy them so we only have ourselves to blame.

Other countries can make cars more efficiently than we can so we should move on to making other things. Over the next few years the bulk of new jobs will come from other areas like construction, services, health, education, finance and tourism.

Where are the best opportunities in investment markets this year?

International shares are likely to continue to provide good returns as the global economy continues to recover, especially if the Australian dollar maintains its downward trend, as I suspect it probably will.

Australian shares should also enjoy a good year, underpinned by stronger profit growth—which we’re already starting to see with some good company results.

At the other end of the scale, the returns on fixed interest and cash are quite low and these asset classes are going to remain constrained.

And then in between you’ve got commercial property and infrastructure probably doing OK but more in the 8-10% range.

What you need to know

This document was prepared by AMP Capital Investors Limited (ABN 59 001 777 591, AFSL No 232497). This document, unless otherwise specified, is current at Tuesday, 25 February 2014 and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after that date. While every care has been taken in the preparation of this document, AMP Capital Investors Limited makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance.

This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

AMP’s digital tools can help you take control of your money and own your tomorrow

Technology is changing the way we live. Whether it’s buying our groceries or finding out what’s happening in the world, we expect instant access. And it’s no different when it comes to our money.

At AMP we’re helping you access your finances on the move, wherever and whenever you like.

Go digital with AMP’s new mobile app—on iPhone, Android and soon on tablet

AMP. Own Tomorrow is the first app in Australia where you can access your banking, insurance, investments and your super—all from one place.

We’ve got mobile banking covered, with everything you’d expect to access your AMP Bank account on the go, including transferring money, viewing your account balance, rediATM maps and more.

You can even set up alerts to tell you when your AMP Bank account balance is low and when money is paid in or taken out.

And we’re putting super, insurance and investments where they belong—right in the centre of your financial world so it's quick, easy and mobile.

You can check your super balance, beneficiaries and investments as well as your insurance inside and outside super.

You can also:

• set up alerts that tell you when payments hit your super account; and

• get help to start consolidating your super accounts.

My Portfolio—your secure online gateway

To access AMP’s new mobile app, you’ll need to activate your online account at My Portfolio – your secure online gateway to your AMP accounts.

With its fresh look and easy-to-use navigation, My Portfolio is a great way to access up-to-date information about your super, insurance and investment portfolio, and take control of your super future.

Myth #1: Rising unemployment means growth can’t recover

Whenever there is a downturn this argument pops up. But if it were true then economies would never recover from recessions or slowdowns. But they do. Rather, the boost to household spending power from lower mortgage rates and any tax cuts or stimulus payments during recessions eventually offsets the fear of unemployment for those still employed. As a result they start to spend more which gets the economy going again. In fact, it is normal for unemployment to keep rising during the initial phases of an economic recovery as businesses are slow to start employing again fearing the recovery won’t last. Since share markets lead economic recoveries, the peak in unemployment usually comes after shares bottom. In Australia, the average lag from a bottom in shares following a bear market associated with a recession to a peak in unemployment has been twelve and a half months.

Based on All Ords. Source: Bloomberg, Thomson Financial, AMP Capital

Hence the current cycle where the share market has gone up despite rising unemployment and headline news of job layoffs is not unusual.

Myth #2: Business won’t invest when capacity utilisation is low

This one is a bit like the unemployment myth. The problem is that it ignores the fact that capacity utilisation is low in a recession simply because spending is weak. So when demand turns up, profits rise and this drives higher business investment which then drives up capacity utilisation.

Myth #3: Corporate CEOs, being close to the ground, should provide a good guide to where the economy is going

Again this myth sounds like good common sense. However, senior business people are often overwhelmingly influenced by their own current sales but have no particular lead on the future. Until recently it seemed Australian building material CEOs saw no sign of a pick-up in housing construction even though it was getting underway. Now it’s widely accepted. This is not to say that CEO comments are of no value – but they should be seen as telling us where we are rather than where we are going.

Myth #4: The economic cycle is suspended

A common mistake investors make at business cycle extremes is to assume the business cycle won’t turn back the other way. After several years of good times it is common to hear talk of “a new paradigm of prosperity”. Similarly, during bad times it is common to hear talk of a “new normal of continued tough times”. But history tells us the business cycle will remain alive and well. There are no such things as new eras, new paradigms or new normals.

Myth #5: Crowd support indicates a sure thing

This “safety in numbers” concept has its origin in crowd psychology. Put simply, individual investors often feel safest investing in a particular asset when their neighbours and friends are doing so and the positive message is reinforced via media commentary. But it’s usually doomed to failure. The reason is that if everyone is bullish and has bought into the asset there is no one left to buy in the face of more good news, but plenty of people who can sell if some bad news comes along. Of course the opposite applies when everyone is bearish and has sold – it only takes a bit of good news to turn the market up. And as we have often seen at bear market bottoms this can be quite rapid as investors have to close out short (or underweight) positions in shares. The trick for smart investors is to be sceptical of crowds.

Myth #6: Recent returns are a guide to the future

This is a classic mistake investors make which is rooted in investor psychology. Reflecting difficulties in processing information and short memories, recent poor returns are assumed to continue and vice versa for strong returns. The problem with this is that when its combined with the “safety in numbers” myth it results in investors getting into an investment at the wrong time (when it is peaking) and getting out of it at the wrong time (when it is bottoming).

Myth #7: Strong economic/profit growth is good for stocks and vice versa

This is generally true over the long term and at various points in the economic cycle, but at cyclical extremes it is invariably very wrong. The big problem is that share markets are forward looking, so when economic data is really strong – measured by strong economic growth, low unemployment, etc – the market has already factored it in. In fact the share market may then fret about rising costs, rising inflation and rising short term interest rates. As an example, when global share markets peaked in October/November 2007 global economic growth and profit indicators looked good.

Of course the opposite occurs at market lows. For example, at the bottom of the global financial crisis (GFC) bear market in March 2009, economic indicators were very poor. Likewise at the bottom of the mini-bear market in September 2011 economic indicators were poor and there was a fear of a “double dip” back into global recession. But despite this “bad news” stocks turned up on both occasions, with better economic and profit news only coming along later to confirm the rally. History indicates time and again that the best gains in stocks are usually made when the economic news is poor and economic recovery is just beginning or not even evident, as stocks rebound from being undervalued and unloved.

Myth #8: Strong demand for a particular product or stock market sector should see stocks in the sector do well and vice versa

While this might work over the long term, it suffers from the same weakness as Myth #7. By the time demand for a product (eg, new residential homes) is really strong it should already be factored into the share prices for related stocks (eg, building material and home building stocks) and thus they might even start to start to anticipate a downturn.

Myth #9 Countries with stronger economic growth will see stronger equity market returns

In principle this should be true as stronger economic growth should drive stronger revenue growth for companies and hence faster profit growth. It’s the basic logic why emerging market shares should outperform developed market shares over time. But it’s not always the case for the simple reason that often companies in emerging countries may not be focussed on maximising profits but rather may be focussed on growing their market share or social objectives such as strong employment under the influence of their government.

Myth #10: Budget deficits drive higher bond yields

Its common sense that if the government is borrowing more (higher budget deficits) then this should push up interest rates (the cost of debt) and vice versa, but it often doesn’t turn out this way. Periods of rising budget deficits are usually associated with recession or weak economic growth and hence weak private sector borrowing, falling inflation and falling interest rates so that bond yields actually fall not rise. This was evident in both the US and Australia in the early 1990s recessions and evident through the GFC that saw rising budget deficits and yet falling bond yields.

Myth #11: Having a well diversified portfolio means that an investor can take on more risk

This mistake was clear through the GFC. A common strategy had been to build up more diverse portfolios of investments with greater exposure to alternative assets such as hedge funds, commodities, direct property, credit, infrastructure, timber, etc, that are supposedly lowly correlated to shares and to each other. Yes, there is a case for such alternatives, but last decade this generally led to a reduced exposure to truly defensive asset classes like government bonds. So in effect, investors actually began taking on more risk helped by the “comfort” provided by greater diversification. But unfortunately the GFC exposed the danger in allowing such an approach to drive an increased exposure to risky assets overall. Apart from government bonds and cash, virtually all assets felt the blow torch of the global financial crisis, as supposedly low correlations amongst them disappeared.

Myth #12: Tax should be the key driver of investment decisions

For many, the motivation to reduce tax is a key investment driver. But there is no point negatively gearing into an investment to get a tax refund if it always makes a loss.

Myth #13: Experts can tell you where the market is going

I have to be careful with this one! But the reality is that no one has a perfect crystal ball. And sometimes they are badly flawed. It is well known that when the consensus of experts’ forecasts for key economic or investment indicators are compared to actual outcomes they are often out by a wide margin. Forecasts for economic and investment indicators are useful, but need to be treated with care. And usually the grander the call – eg prognostications of “new eras of permanent prosperity” or calls for “great crashes ahead” – the greater the need for scepticism as such strong calls are invariably wrong.

Like everyone, market forecasters suffer from numerous psychological biases and precise point forecasts are conditional upon information available when the forecast is made but need adjustment as new facts come to light. If forecasting the investment markets was so easy then everyone would be rich and would have stopped doing it. The key value in investment experts’ analysis and forecasts is to get a handle on all the issues surrounding an investment market and to understand what the consensus is. Experts are also useful in placing current events in their historical context and this can provide valuable insights for investors in terms of the potential for the market going forward. This is far more useful than simple forecasts as to where the ASX 200 will be in a year’s time.

Conclusion

The myths cited here might appear logical and consistent with common sense but they all suffer often fatal flaws, which can lead investors into making poor decisions. As investment markets are invariably forward looking , common sense logic often needs to be turned on its head when it comes to investing.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Michael Price, AMP Capital’s Co-Head of Australian Fundamental Equities, talks to Morningstar’s Tim Murphy about the return prospects for income stocks.

Chapters in this video;

• How can you find income in the equities sphere? (00:25)

• What do valuations look like in those high-yielding sticks, and where are the opportunities? (01:02)

This video must be taken in its entirely and any given chapter viewed in isolation does not represent the entire message.

Michael Price, AMP Capital’s Co-Head of Australian Fundamental Equities, talks to Morningstar’s Tim Murphy about the return prospects for income stocks.

Chapters in this video;

• How can you find income in the equities sphere? (00:25)

• What do valuations look like in those high-yielding sticks, and where are the opportunities? (01:02)

This video must be taken in its entirely and any given chapter viewed in isolation does not represent the entire message.