RBA not budging on cash rate until 2024

Posted on 11 October 2021
RBA not budging on cash rate until 2024

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

The Reserve Bank of Australia governor Philip Lowe is sticking to his long held view that the cash rate won’t be lifted before 2024.

As widely anticipated by economists, the RBA left the official cash rate at a record low 0.1 per cent following its monthly board meeting on Tuesday.

Dr Lowe reiterated the cash rate will not be increased until inflation is sustainably within the two to three per cent target range, saying such conditions will not be met before 2024.

“This contrasts with several other central banks that seem to be bringing rate hikes forward and arguably reflects more confidence on the RBA’s part that the current spike in global inflationary pressure is transient,” AMP Capital chief economist Shane Oliver said.

However, Dr Lowe remained fairly upbeat about the economic outlook beyond the current spate of lockdowns in the nation’s two largest states – NSW and Victoria.

“The Delta outbreak has interrupted the recovery of the Australian economy and GDP is expected to have declined materially in the September quarter,” Dr Lowe said.

“This setback to the economic expansion in Australia is expected to be only temporary. As vaccination rates increase further and restrictions are eased, the economy is expected to bounce back.”

However, he said there is uncertainty about the timing and pace of the bounce-back, and it is likely to be slower than that of earlier in the year.

“In our central scenario, the economy will be growing again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year,” Dr Lowe said.

Among its policy toolkit, the RBA will continue to target the April 2024 government bond yield at 0.1 per cent, while buying bonds at a rate of $4 billion a week until at least February 2022 with the aim of keeping market interest rates and borrowing costs low.

Dr Lowe said the package of policies is providing substantial and ongoing support to the Australian economy.

“Borrowing rates are at record lows, sovereign bond yields are at very low levels and the exchange rate has depreciated over recent months,” he said.

“The fiscal responses by the Australian government and the state and territory governments have also been providing welcome assistance in supporting household and business balance sheets.”

Dr Lowe also gave little away about what the banking regulator, the Australian Prudential Regulation Authority, may introduce to take the heat out of the housing market.

He said housing prices are continuing to rise, although turnover in some markets has declined following the virus outbreak.

But housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors.

“The Council of Financial Regulators has been discussing the medium-term risks to macroeconomic stability of rapid credit growth at a time of historically low interest rates,” Dr Lowe said.

“In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate.”

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The superannuation health check

Posted on 8 October 2021
The superannuation health check

Money and Life
(Financial Planning Association of Australia)

Does your super deserve a clean bill of health? Managing your super might seem tricky, but it doesn’t need to be. With a few simple tweaks, you can put the basics in place to last you a lifetime. Here’s how to do a quick and easy health-check on your super.

It’s likely that your super will provide much of your income in retirement, so it’s worth spending a little bit of time upfront to get it working for you. Here’s what you can do now, to make sure you’re on track for a comfortable retirement.

  1. Consolidate your accounts

Consolidating your super into one account makes it easier to manage, plus, you’ll save a fortune in fees. That adds up to a higher account balance when you retire. It’s easy to consolidate your super using the Australian Taxation Office’s (ATO) online services, accessed via your MyGov account.

Before you consolidate your super, do your research and choose the best super fund for you. Also check your insurance cover and make sure you can get similar cover with your new fund. This is especially important if you’re over 40 or have a pre-existing medical condition.

Read more: A guide to retirement in Australia

  1. Check for ‘lost’ superannuation

Nowadays it’s really easy to find any ‘lost’ or unclaimed superannuation. Super providers are required to pay all low and inactive account balances to the ATO, who hold onto it until you make a claim. The ATO will then transfer your funds to the super account you nominate. To check whether you have any lost super, simply log into your MyGov account and click on ‘Manage my super’.

  1. Compare your fund’s performance

How well your fund performs can have a big impact on your retirement savings. That’s because superannuation isn’t just a way of saving for retirement. Rather, when your employer pays money into your super, the funds are invested on your behalf by your super provider, with the aim of generating a return.

Keep an eye on how your super is performing by checking your annual account statement. Always look at the returns over a longer time period, like five or 10 years, as this eliminates any short term volatility.

If you’re choosing a new fund, check their investment performance on their website. Always compare like with like, for example, a balanced option with another balanced option, over the same time period. If you’re not sure whether your fund is performing well, or you’d like advice on which fund is right for you, speak to a financial planner.

Read more: Superannuation 101 – Your guide to a happy retirement

  1. Review your fees

All super funds charge fees in return for managing your money. How much you pay in fees can have a big impact on your retirement balance, so it pays to shop around. Look for low fees combined with good returns. You can find out how much your current fund charges by checking your account statement or looking on their website.

  1. Evaluate your investment options

Within each super fund, you’re given a choice of how your super is invested. Each investment option comes with its own level of risk and reward, so take the time now to review your settings and make sure they’re right for you. Your investment strategy should be tailored to your age, stage of life, super balance, values and appetite for risk. For advice on how to invest your super, contact your super fund or speak to a financial planner. 

Read more: Super milestones to hit in your 20s, 30s and 40s 

  1. Check your insurance

Taking out insurance through your super fund can be a cost effective way of protecting yourself and your family against the unexpected. Most funds offer products such as life insurance, total and permanent disability (TPD) and income protection. The fees are taken out directly from your super account.

To do a health check on your cover, find out what you’re covered for and how much insurance you have. Will it be enough to support you and your family if you were to lose your income? Are there any waiting periods you need to serve before receiving the funds? And have you chosen a beneficiary to receive your payments, if you were to pass away? Speak to a financial planner for advice if you’re unsure.

  1. Make extra contributions 

Last, but not least, consider making extra contributions to your super. Every extra dollar you contribute now could be worth thousands by the time you retire. There are even some tax benefits to making extra super payments.

There are a couple of different ways you can contribute to your super:

  • Salary sacrifice – This is where your employer pays an agreed amount from your pre-tax salary to your super fund. This can be a tax effective strategy, because the payments are taxed at 15 per cent (up to the concessional contributions cap) instead of your usual marginal tax rate. From 1 July 2021, the concessional contributions cap is rising to $27,500. Be aware that if you exceed the concessional contributions cap, you’ll need to pay extra tax on those contributions.
  • After-tax (non-concessional) contributions – You can also make payments directly from your take-home salary to your super fund. These are called ‘non-concessional contributions’ because they’re not taxed in your super fund. From 1 July 2021, you can make up to $110,000 in non-concessional contributions each financial year.

Read more: Get your super back on track

The great thing about super is that it’s a long term investment. That means once you get it set up right, you don’t need to do a whole lot again for a while. Just review your settings each year when you receive your account statements, and whenever your life circumstances change.

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Are you on track for a comfortable retirement? If you’d like advice on any aspect of retirement planning, including your superannuation, investments or insurance, speak to a Financial Planner.

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New orders for underperforming super funds

Posted on 7 October 2021
New orders for underperforming super funds

Andrew Brown
(Australian Associated Press)

More than one million superannuation account holders will receive notice from their funds saying they have underperformed.

New requirements will force 13 super funds to write to 1.1 million members on Monday, urging them to switch where they invest their savings.

The notice comes after the funds were found by the financial regulator to have failed key performance tests.

The tests found that $56.2 billion was invested into underperforming funds.

It’s the first time the measures have been taken under the federal government’s new Your Future, Your Super reforms.

Superannuation Minister Jane Hume said the measures were designed to make super funds more accountable.

“If your fund has underperformed, they will write and tell you that they have not delivered on their promise and to direct you to the YourSuper comparison tool so you can see which fund might better suit you,” she said.

“The bright sunlight on accountability will be an uncomfortable reality for some.”

The super fund tests were carried out by the Australian Prudential Regulation Authority, which examined 76 MySuper investment options.

Next year’s performance tests will be expanded to include a larger range of superannuation products.

Funds that fail the tests twice in a row will be banned from taking any new members.

It’s estimated that Australians pay more than $30 billion each year in superannuation fees, with the industry worth an estimated $3 trillion.

Your Future, Your Super reforms came into effect from July this year.

Senator Hume said the letters by super funds would help people to switch over their funds to better-performing providers.

“The comparison tool is part of the reforms that are estimated to save Australian workers $17.9 billion over 10 years,” she said.

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Millennials and money: what does the future hold?

Posted on 6 October 2021
Millennials and money: what does the future hold?

Money and Life
(Financial Planning Association of Australia)

With the rising cost of housing, an aging population, climate change and now a pandemic falling squarely on the shoulders of Australia’s millennials, how is this generation faring financially?

The first millennials (born between 1981 and 1996) are turning 40 this year. Still, despite more than twenty years in the workforce, it seems their financial wellbeing isn’t guaranteed.

Commonwealth Bank study has found that almost two thirds (61 per cent) of millennials (also known as ‘Gen Y’) don’t have a regular savings plan, while 1 in 10 are still living pay cheque to pay cheque. A third (31 per cent) say they don’t feel comfortable talking about money.

Yet, millennials haven’t let go of the great Australian dream. More than half (58 per cent) are holding out hope they’ll be able to buy a house in the next five years. Currently only 28 per cent of millennials own their own home, according to the study.

Structural challenges 

After a decade of slow economic growth, little to no wage growth and spiralling housing costs in our major cities, it seems millennials are feeling the pinch.

While older households have done well from rising house prices and superannuation, research by the Grattan Institute shows that the wealth of millennial households has barely moved since 2004.

“Poorer young Australians have less wealth than their predecessors and are far less likely to own a home,” the study’s authors say. “In contrast, older households’ wealth has grown by more than 50 per cent over the same period because of the housing boom and growth in superannuation assets.”

Contrary to popular belief, the report’s authors say there’s no evidence that millennial spending habits are to blame for stagnating wealth.

“In fact, younger people are spending less on non-essential items such as alcohol, clothing and personal care, and more on necessities such as housing, than three decades ago.”

No issue with soy lattes and avocado brunches then it seems.

A COVID-19 legacy?

Adding to the financial worries, more than a third of millennials (37 per cent) say they’ve been affectedfinancially by the COVID-19 pandemic, the highest of any generation.

And, while the pandemic has further stifled wage growth, it’s also is forcing many to ‘shelter in place’, choosing job certainty over career advancement. It’s unclear what the longer term impact of this will be, but redundancies and lack of career progression in some industries is likely to shape our workforce for years to come.

Resilience in the face of hardship

Despite the cards being (economically) stacked against them, it seems Gen Y are a resilient bunch. There’s evidence to suggest they’re more financially savvy than previous generations.

A study by Afterpay[1] found that more than 80 per cent of millennials budget, compared with only two-thirds of older generations. They’re also 30 per cent more likely to save regularly than their parents.

UBank agrees, saying that Aussie millennials take an active interest in managing their own finances, and are the most likely to budget.

“Despite 45% of the population admitting their finances have been negatively impacted in the last six months [by COVID-19], we’re seeing millennials emerge as being quite resilient,” said UBank executive, Philippa Watson.

“They’re taking the opportunity to implement budgeting and saving strategies to keep their financial goals, such as buying a home, on track, with many putting away half their salary each month,” Watson said.

A transfer of wealth

While the wealth of millennials pales in comparison to older generations, that could be about to change. According to the experts, Australia is on the verge of its largest ever handover of wealth, with up to $3.5 trillion in assets set to pass from baby boomers to millennials over the next 20 years.

Boomers are said to be the wealthiest generation in history, having lived through some of the most prosperous years on record. How much of that wealth they’ll pass down to their heirs is anyone’s guess though. Boomers will spend close to thirty years in retirement on average, so they’re just as likely to spend their ‘hard earned cash’ rather than gifting it to their heirs.

Financial wellbeing top of mind

With the millennial generation now hitting their thirties and forties, major life events like home ownership, marriage, children and saving for retirement are taking centre stage. Good money management and financial planning are becoming increasingly important, especially given the structural, economic and environmental challenges they face.

It’s a positive sign then that 1 in 2 millennials say they want to have more open discussions about money, with more than half of those (54 per cent) keen to know how to get ahead financially, according to the Commonwealth Bank research.

For a generation that came of age during the global financial crisis, a global pandemic just over a decade later might feel doubly unfair. But it seems millennials are nothing if not adaptable, and resilient. Getting the right financial planning advice now will help millennials navigate the challenges that come with this stage of life and ensure their financial wellbeing far into the future.

If you’re in your thirties or forties, now is a great time to start planning for your financial future. Speak to your Financial Planner® about ways to achieve financial security and freedom for yourself and your family. You can find a CFP® professional near you using our Match My Planner tool.

[1] Afterpay Touch Group Limited (2020). How Millenials Manage Money: Facts on the spending habits of young Australians. Retrieved from https://www.aph.gov.au/DocumentStore.ashx?id=185d5f3a-88fb-455e-b939-36daf31e66a7. Accessed 29 August 2021.

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What’s the difference between stepped and level premiums?

Posted on 5 October 2021
What’s the difference between stepped and level premiums?

Clarity
(OnePath)

Know the difference between stepped and level premiums

Life insurance premiums are predominantly based on the risk of certain events happening to you. Because health risks increase with age, life insurance premiums will generally increase over time.

That’s why most insurers offer two common ways of paying for, and managing, the costs of your cover over time:

  1. Stepped premiums: when the cost of your cover is recalculated each year based on your age at your policy anniversary. Generally this means your premium will increase each year as you get older.
  2. Level premiums: where premiums are calculated based on your age when any cover started. Your premium is generally averaged out over a number of years, which means you avoid increases in your premium due to age at each policy anniversary. This means your cover is more expensive than ‘stepped premiums’ at the beginning of your policy, but generally gets cheaper (relative to stepped premiums) as your policy continues.

Regardless of whether your policy is on stepped or level premium, premium rates and premium factors are not guaranteed or fixed and many life insurers in Australia have repriced premium rates in the past.

Stepped or level premiums – which is right for you?

Generally, this depends on how long you’re planning on keeping your insurance. If you’re planning on keeping your policy for longer than 10-12 years, level premiums may save you money over the life of your policy.

‍You may also be able to use a combination of stepped and level premiums.

For example, if you think you might want to reduce your level of cover down the track (e.g. when you’re kids are grown up or you’ve paid down debt),you may be able to use level premiums for the portion of cover you think you’ll keep longer and stepped premiums for the additional cover.

This is something your financial adviser can help you with.

Repricing is a possibility regardless of which structure you choose

It’s important to note that at policy anniversary the premium may still increase (even with level premiums), because age is just one factor that determines your premium. Other factors that impact premium (such as claims trends in Australian population) can result in a repricing of your insurance cover.

When insurers reprice stepped or level premiums, they don’t do it for an individual policy within a specific group unless they do it for every policy in that group.

To decide whether you’re better off on stepped or level premiums going forward, we recommend you speak to your financial adviser. They can help you understand your policy as well as any repricing activity that’s recently occurred, so you can make an informed decision.

A graphical example

Below is an illustration of stepped v level premiums, showing the difference between the two when you look at increases due to age. Other types of premium increases aren’t shown on this graph.

For illustrative purposes only. This graph illustrates age-based premium increases for stepped against level for all covers. This premium comparison has been calculated, assuming all other factors affecting the premiums are excluded.

Both stepped and level premiums can increase due to factors other than age.

Premium rates and premium factors are not guaranteed or fixed, and insurers have increased premium rates in the past and may increase in the future.

We recommend that you refer to the relevant product disclosure statement and policy documentation, and speak to your financial adviser, to understand other factors affecting your premiums.

 

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