June has arrived and so has winter, as the financial year draws to a close. Now that the federal election is out of the way, it’s time to focus on planning for the future with more certainty.
Cost of living pressures, inflation and interest rates were major concerns in the lead-up to the May federal election. The Reserve Bank of Australia (RBA) lifted the cash rate for the first time in over 11 years from 0.1% to 0.35%, as inflation hit 5.1%. This followed the US Federal Reserve’s decision to lift rates by 50 basis points to 0.75-1.00%, the biggest rate hike in 22 years as inflation hit 8.5%. Global pressures are largely to blame, from war in Ukraine and rising oil prices to supply chain disruptions and food shortages. The price of Brent Crude surged a further 27% in May.
As a result, the RBA has cut its growth forecast for the year to June from 5% to 3.5% and raised its inflation forecast from 3.25% to 4.5%. On the ground, the economic news is mixed. New business investment fell 0.3% in the March quarter but still rose 4.5% on the year. The NAB business confidence index fell from +16.3 point to +9.9 points in April, still above its long-term average. Adding to inflationary pressures, labour and materials shortages and bad weather saw building costs rise 2.8% in the March quarter, while retail trade rose further in April to be up 9.6% over the year.
On the positive side, unemployment fell further from 4% to 3.9% in April, the lowest rate since 1974, while annual wages growth rose slightly in the March quarter from 2.3% to 2.4%, still well below inflation.
A super end to the financial year
As the end of the financial year approaches, now is a good time to check your super and see what you could do to boost your retirement nest egg. What’s more, you could potentially reduce your tax bill at the same time.
There are a handful of positive changes to super due to start next financial year, but for most people, these will not impact what you do before June 30 this year.
Among the changes from 1 July, the superannuation guarantee (SG) will rise from the current 10 per cent to 10.5 per cent.
Another upcoming change is the abolition of the work test for retirees aged 67 to 74 who wish to make non-concessional (after tax) contributions into their super. This will allow eligible older Australians to top up their super even if they are fully retired. Currently you must satisfy the work test or work test exemption. This means working at least 40 hours during a consecutive 30-day period in the year in which the contribution is made.
But remember you still need to comply with the work test for contributions you make this financial year.
Also on the plus side, is the expansion of the downsizer contribution scheme. From 1 July the age to qualify for the scheme will be lowered from 65 to 60, although other details of the scheme will be unchanged. If you sell your home that you have owned for at least 10 years to downsize, you may be eligible to make a one-off contribution of up to $300,000 to your super (up to $600,000 for couples). This is in addition to the usual contribution caps.
While all these changes are positive and something to look forward to, there are still plenty of opportunities to boost your retirement savings before June 30.
For those who have surplus cash languishing in a bank account or who may have come into a windfall, consider taking full advantage of your super contribution caps.
The annual concessional (tax deductible) cap is currently $27,500. This includes your employer’s SG contributions, any salary sacrifice contributions you have made during the year and personal contributions for which you plan to claim a tax deduction.
Claiming a tax deduction is generally most effective if your marginal tax rate is greater than the 15 per cent tax rate that applies to super contributions. It is also handy if you have made a capital gain on the sale of an investment asset outside super as the tax deduction can offset any capital gains liability.
Even if you have reached your annual concessional contributions limit, you may be able to carry forward any unused cap amounts from previous years if your super balance is less than $500,000.
Once you have used up your concessional contributions cap, you can still make after-tax non-concessional contributions. The annual limit for these contributions is $110,000 but you can potentially contribute up to $330,000 using the bring-forward rule. The rules can be complex, especially if you already have a relatively high super balance, so it’s best to seek advice.
Government and spouse contributions
Lower income earners also have incentives to put more into super. The government’s co-contribution scheme is aimed at low to middle income earners who earn at least 10 per cent of their income from employment or business.
If your income is less than $41,112 a year, the government will contribute 50c for every after-tax dollar you squirrel away in super up to a maximum co-contribution of $500. Where else can you get a 50 per cent immediate return on an investment? If you earn between $41,112 and $56,112 you can still benefit but the co-contribution is progressively reduced.
There are also incentives for couples where one is on a much lower income to even the super playing field. If you earn significantly more than your partner, ask us about splitting some of your previous super contributions with them.
Also, if your spouse (or de facto partner) earns less than $37,000 a year, you may be eligible to contribute up to $3000 to their super and claim an 18 per cent tax offset worth up to $540. If they earn between $37,000 and $40,000 you may still benefit but the tax offset is progressively reduced.
As it can take your super fund a few days to process your contributions, don’t wait until the very last minute. Please speak to us for more information or advice.
How to manage rising interest rates
Rising interest rates are almost always portrayed as bad news, by the media and by politicians of all persuasions. But a rise in rates cuts both ways.
Higher interest rates are a worry for people with home loans and borrowers generally. But they are good news for older Australians who depend on income from bank deposits and young people trying to save for a deposit on their first home.
Rising interest rates are also a sign of a growing economy, which creates jobs and provides the income people need to pay the mortgage and other bills. By lifting interest rates, the Reserve Bank hopes to keep a lid on inflation and rising prices. Yes, it’s complicated.
How high will rates go?
In early May, the Reserve Bank lifted the official cash rate from its historic low of 0.1 per cent to a still low 0.35 per cent. The reason the cash rate is watched so closely is that it flows through to mortgages and other lending rates in the economy.
To tackle the rising cost of living, the Reserve Bank expects to lift the cash rate further, to around 2.5 per cent.i Inflation is currently running at 5.1 per cent, which means annual wages growth of 2.4 per cent is not keeping pace with rising prices.ii
So what does this mean for household budgets?
Mortgage rates on the rise
The people most affected by rising rates are likely those who recently bought their first home. In a double whammy, after several years of booming house prices the size of the average mortgage has also increased.
According to CoreLogic, even though price growth is slowing, the median home value rose 16.7 per cent nationally in the year to April to $748,635. Prices are higher in Sydney, Canberra and Melbourne.
CoreLogic estimates a 1 per cent rise would add $486 a month to repayments on the median new home loan in Sydney, and an additional $1,006 a month for a 2 per cent rise.
The big four banks have already passed on the Reserve Bank’s 0.25 per cent increase in the cash rate in full to their standard variable mortgage rates which range from 4.6 to 4.8 per cent. The lowest standard variable rates from smaller lenders are below 2 per cent.
Still, it’s believed most homeowners should be able to absorb a 2 per cent rise in their repayments.iii
The financial regulator, APRA now insists all lenders apply three percentage points on top of their headline borrowing rate, as a stress test on the amount you can borrow (up from 2.5 per cent prior to October 2021).iv
Rate rise action plan
Whatever your circumstances, the shift from a low interest rate, low inflation economic environment to rising rates and inflation is a signal that it’s time to revisit some of your financial assumptions.
The first thing you need to do is update your budget to factor in higher loan repayments and the rising cost of essential items such as food, fuel, power, childcare, health and insurances. You could then look for easy cuts from your non-essential spending on things like regular takeaways, eating out and streaming services.
If you have a home loan, then potentially the biggest saving involves absolutely no sacrifice to your lifestyle. Simply pick up the phone and ask your lender to give you a better deal. Banks all offer lower rates to new customers than they do to existing customers, but you can often negotiate a lower rate simply by asking.
If your bank won’t budge, then consider switching lenders. Just the mention of switching can often land you a better rate with your existing lender.
The challenge for savers
Older Australians and young savers face a tougher task. Bank savings rates are generally non-negotiable, but it does pay to shop around.
By mid-May only three of the big four banks had increased rates for savings accounts. Several lenders also announced increased rates for term deposits of up to 0.6 per cent.v
High interest rates traditionally put a dampener on returns from shares and property, so commentators are warning investors to prepare for lower returns from these investments and superannuation.
That makes it more important than ever to ensure you are getting the best return on your savings and not paying more than necessary on your loans. If you would like to discuss a budgeting and savings plan, give us a call.
Norman Sinclair – MFinPlan, AFP ASIC No. 249943.
Stephen Vigh – CFP, BBus (Acc & Man), Dip FP ASIC No. 239508
Kyle Medson – CFP, BCom (FinPlan & Inv) ASIC No. 328912 SFG Capital Holdings Pty Ltd trading as Sinclair Financial Group, ABN 42 609 798 469
Authorised Representative of Oreana Financial Services Limited
ABN 91 607 515 122, Australian Financial Services Licensee No. 482234
Registered Office Level 7, 484 St Kilda Road Melbourne, Victoria 3004 Australia
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