Forgot to make that super contribution? Don’t despair, you may ‘catch-up’

Forgot to make that super contribution? Don’t despair, you may ‘catch-up’

It’s not uncommon to meet prospective clients who either forgot to make a concessional super contribution the previous year, or didn’t feel it was necessary.

However, all is not lost, with a little understood strategy which, in some circumstances, allows you to make ‘catch-up’ contributions.

So what are ‘catch-up’ contributions?

The rules around catch-up, or more accurately known as ‘Carry-forward’ contributions, simply allow super fund members to use any of their unused concessional contributions cap (or limit) on a rolling basis for five years.

So, if you didn’t make the maximum concessional contributions ($25,000 in 2019/2020), you can carry forward the unused amount for up to 5 years. After 5 years, any unused concessional contributions will expire.

The first year these rules came into force and concessional contributions could be accrued from was the 2018/2019 financial year.

Why were they introduced?

The Federal Government introduced carried-forward contributions to help those who have had interrupted working lives to get more money into superannuation. Those who had time off work to have children, care for children or loved ones, or even those who previously didn’t have the financial capacity to contribute to superannuation all benefit from these rules.

Who is eligible to make carry-forward contributions?

Anyone who has a total superannuation balance under $500,000 as at 30th June in the previous financial year is eligible to make catch up contributions.

What are concessional contributions again?

Concessional contributions are those made from pre-tax dollars. It includes:

  • employer contributions of 9.5% pa of your salary
  • Salary sacrifice contributions.
  • Lump sum contributions to superannuation which you notify your superfund provided that you intend to claim a personal tax deduction.

There is an annual $25,000 limit for concessional contributions.

How does it work?

This can best be illustrated with an example.

Tina has a total superannuation balance of $300,000. After taking a couple of years leave, she returned to work in July 2019.

During the 2019/2020 financial year, Tina was eligible to carry forward her concessional contributions she didn’t make in 2018/2019, however, she chose to not make an additional contribution above her employer contributions of $10,000.

So, for the 2020/2021 year, Tina has a total of $65,000 of eligible concessional contributions. She has done particularly well from her holding in Afterpay shares and decides to sell them giving rise to a significant capital gains tax liability. Tina has a meeting with her adviser at Steward Wealth about how she may reduce this tax liability. Her adviser recommends making full use of the carry-forward provisions and advises her to make concessional contributions totaling $65,000 (including her employer contributions). Not only will she receive a tax deduction for the contribution, but she will also grow her superannuation balance.

Forgot to make that super contribution Dont despair you may catch-up

In summary

Carry-forward provisions are a real opportunity for those who haven’t been in a position to make contributions to superannuation, or who have simply forgotten to do so.

While it can assist in building up your retirement benefit, as you can see from our case study above, careful planning can also make it a very effective tax planning tool.

Superannuation can be very complex and advice really needs to be tailored to each individual. If you would like to discuss further, the Steward Wealth team are more than happy to assist you.

Want an assessment as to how this strategy could work to maximise your financial well-being?

Call Steward Wealth today on (03) 9975 7070.

Beware of experts on yesterday

Beware of experts on yesterday

This article appeared in the Australian Financial Review.

The amazing events of 2020 have been a great reminder that no two share market cycles are the same. The word ‘unprecedented’ has come to be all but worn out, whether it’s to describe the worldwide sell off in February and March, or the rebound in April and May, or the level of government and central bank support doled out along the way.

One thing that doesn”t change, however, is there is no shortage of experts competing to use history as a guide to explain why things just don’t make sense right now or will all end badly. Whether it be warnigns that valuations are too high, share markets are too reliant on a handful of companies, or market signals are being confused by central banks and governments, smart investors need to be wary of what have been called “experts on an earlier version of the world.”

Of course, there are some rules of investing that will always apply, but you also need to allow that markets are a constantly shifting mix of factors. Like ingredients in a recipe, if they are mixed in different proportions, you’ve got a whole new dish on your hands. Some new factor can seem to come out of nowhere and exert such profound influence that it all but squashes the last big trend into insignificance.

Take, for example, the common warning that share markets are expensive based on current price to earnings (PE) ratios compared to long-term historical averages. The price you pay for a share divided by how much that share will earn next year gives you a basic measure of how expensive it is: the higher the number the higher the valuation.

Based on earnings forecasts for the next 12 months, global shares are trading on a PE of 21, versus a 32-year average of 16. Likewise, Australian shares are on 18 versus 14, and the US is 23 vs 16. Nobody likes paying too much for something, and it can take years to recover from overpaying for investments.

However, it’s long been accepted that low inflation is supportive of higher PE ratios, and right now, inflation is much, much lower than it has been over the last 38 years. In fact, inflation and interest rates peaked around 1980 and have been in decline ever since. So it makes perfect sense that PE ratios would be higher now than they were over that long-term average.

 One of the most commonly used techniques to value a company’s share is to do a discounted cash flow, or DCF, valuation. To do that you apply a ‘discount rate’, which is usually based on bond yields, against forecast earnings to see what they’re worth in today’s dollars. The lower your discount rate, the higher will be the present value of those future earnings and thus the higher the share’s valuation.

Right now, 10-year bond yields across the world are about the lowest they’ve ever been. So, again, it makes sense that valuations are higher today than they would have been at any time over the past 40 years.

What about those over-stretched US tech companies we keep hearing about? Again, the comparison needs to be kept in context. Once upon a time the market was dominated by companies whose costs went up in proportion with their sales. Industrial companies required bigger factories, supply chains and distribution networks to sell more widgets.

But now some technology-based businesses can expand their sales enormously without their costs increasing at all. That means the return on equity, which is a basic measure of profitability, for those businesses can be exponentially higher than their industrial counterparts, so it makes sense they will trade on vastly different metrics.

The problem here is an investor with a forty year career of investing in stocks with low PEs, because that’s what worked best for the previous 40 years, will understandably struggle to accept those high PEs are anything but an aberration from sensible valuations. Such an investor is almost undoubtedly an expert in an earlier version of the world.

They would never have bought Amazon shares five years ago when they were on a PE of 741, yet over that period the shares have risen more than six-fold and are still on a PE of 119. Evidently, when it comes to a company like this, a PE ratio is not the right valuation measure to use, and it’s ridiculous to argue the market has got it wrong for five years.

That doesn’t mean those investors won’t make money, it’s just that they’re unlikely to make as much money in today’s version of the world. With bond yields so low, an investment that offers apparently huge scope for growth with high profits becomes extremely attractive.

2020 will be remembered as an extraordinary year, with lessons for both the short and long term. The short-term lesson is just how difficult it is to second guess the market. No matter how certain we might be that something doesn’t make sense, Mr Market really doesn’t care what you think. The long-term lesson is that structural shifts in markets, like inflation and interest rates grinding lower and lower, can be hard to see while they’re happening, but the effects on markets can be profound.

While it’s smart to take on board the lessons from each cycle, we’ve seen time and time again it’s not so smart to presume history will simply repeat itself.

When is the right time to refinance your loan?

When is the right time to refinance your loan?

study by the Reserve Bank of Australia (RBA) earlier this year found the average home loan that is more than four years old is paying an interest rate 0.40% higher than what is currently available for new loans. This may not seem like a lot but on a $500,000 loan it means you are paying $2,000 of extra interest each year that you could probably avoid. During the current pandemic, clients have been looking at ways to reduce their expenses and refinancing activity has reached historical highs. Is now the right time for you to refinance?

Reducing your interest repayments may not be the only reason you could look to refinance. Depending on your personal circumstances, refinancing can also help you to:

  • Renovate your property – you can borrow extra funds to build an extra room, landscape the back yard or renovate your current kitchen.
  • Consolidate your debt – if you have a credit card, personal or car loan, you may be able to fold these into your home loan saving significantly on interest.
  • Releasing equity – you can borrow against the equity you have in your home to fund the deposit on an investment property or just to have extra funds if you need them.
  • Change to loan features that better suit your circumstances – this may include switching from an investment to owner occupied loan or moving to a loan which offers an offset account and credit card.

Refinancing requires you to complete a full application for the new loan. The lender will assess whether you can afford the loan based on your current circumstances, so if you have had a recent reduction of income, or increased expenses, it may affect whether the loan application is approved. Lenders have also adjusted their credit policies in light of the current pandemic and the rules that applied when you were first approved may have changed. You must also consider what has happened to the value of your property since you purchased it. If the value has fallen, it may mean that you are unable to borrow the same amount that you had previously. Conversely, if the value has risen it may present a great time to release equity.

Another factor to consider in refinancing your home loan is the costs associated with moving to another lender. Whilst you may save on repayments, the costs of discharging your current loan and the application fees for the new one may leave you worse off. This becomes more prevalent if you have a small balance or when you are on a fixed rate.

Depending on the change in funding costs of the borrower, it can be very expensive to break a fixed loan before maturity. When they mature, fixed loans will revert to variable which are often less competitive to others in the market. This is an excellent time to assess whether you can move to not only a lower rate, but a loan with the right features for you.

Lenders have recognised that the associated costs of refinancing may hinder your ability to change loans and regularly offer ‘cash back’ incentives of up to $4,000 to overcome this barrier. Whilst it certainly helps, it is important to do the analysis on each scenario. Often those lenders without a cash back offer, but a slightly lower rate, will save you far more over the medium to long term. This is where a mortgage broker can help assess your options.

I always suggest that clients review their loan every two to three years simply to ensure they have the most appropriate product available. Often it will not be the right time to change lenders, but doing the research gives you confidence that you are not overpaying.