The Policy Maze

Along with market ups and downs and media noise, government policy is one of those things that investors can’t control. The risks that policy change poses to investors were dramatically highlighted by the recent federal budget in Australia, where a cash-strapped government announced the biggest shake-up in superannuation in at least a decade.

The announcement came just hours after another surprise policy change as the Reserve Bank of Australia cut its official cash rate to a record low of 1.75%, citing unexpectedly lower inflation and further signs of an economic slowdown in China.¹

In the budget, the government argued it is seeking to better target tax concessions for superannuation and to bring the system in line with its objective of “providing income in retirement to substitute or supplement the age pension”.²

The changes include:

• A $1.6 million cap on how much individuals can transfer into retirement accounts
• The reduction in the income threshold to $250,000 (from $300,000) for paying a 30% (instead of 15%) tax on concessional super contributions.
• The lowering of the cap on tax concessional contributions to $25,000
• A $500,000 lifetime cap on non-concessional contributions
• A superannuation tax offset for people on incomes below $37,000

Many of these measures had been well flagged, but the $1.6 million retirement account cap was a genuine surprise to most observers, as was the RBA’s rate cut. Indeed, news agency Bloomberg reported on the morning of the central bank meeting that 15 out of 27 economists expected no change in rates.³

While the government says the changes in the tax concessions will not affect 96% of superannuation fund members, there clearly will be implications for many more people in the future as they progress to higher incomes.

Others can argue the rights and wrongs of these particular changes, but there is no question that the complexity and flux in superannuation rules highlight the value that an expert, independent financial adviser can bring to individuals and families.

For instance, how can you maximise your retirement income and minimise your tax? What do the changes mean in terms of when you can afford to retire? What tax-effective investment solutions are available to you outside super? If you come into an inheritance or sell a business, what are your options now?

In the case of the rate cut, people may ask about the effect of interest rate changes or inflation on their retirement saving and what strategies are available to ensure they can maintain their consumption as planned.

There are many possible challenges and questions that advisers can deal with at times like these, not only because of the complexity of tax and regulation but also due to the complexity and variability of people’s lives, circumstances, risk appetites and preferences.

And all of this takes a human advisor, as no robot or sophisticated algorithm can be programmed quickly enough to deal with policy changes that come out of left field.

Yes, change can be unsettling and makes many of us anxious. But the unpredictability of government policy, like the unpredictability of markets, will always be with us.

Like a sailing boat skipper who knows how to set the sails to deal with shifting winds and choppy seas, a good adviser can provide the right combination of structure and flexibility in your portfolio to help you cope with policy change.

The outcome is a degree of comfort and security that you might otherwise miss if you attempted to navigate the complex policy maze all on your own.

1. 1. Statement by Glenn Stevens, Governor, Reserve Bank of Australia, 3 May 2016
2. 2. ‘Tax and Super’, Federal Budget 2016-17
3. 3. ‘Australia’s Central Bank Cuts Rates to Record Low’, Bloomberg, 3 May 2016