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Final cut on the new super tax · The Money Puzzle

0:10
Speaker 1: Hello, and welcome to the Australians Money Puzzitlive podcast. I'm
0:13
Speaker 1: James Kirby. Welcome aboard everybody. So we did want to
0:17
Speaker 1: know if you had any questions relating to the final shape, Okay,
0:21
Speaker 1: the final we are to believe the final picture if
0:24
Speaker 1: you like, on the new super tax. And you certainly
0:27
Speaker 1: came to the party with a lot of correspondents and
0:30
Speaker 1: a lot of questions. And I don't blame you because,
0:33
Speaker 1: as I said, this is a new tax on top
0:36
Speaker 1: of an existing complex tax system. I'm not surprised. So
0:39
Speaker 1: we're going to have a look at that today. We're
0:41
Speaker 1: also going to take a look a brief look basically
0:45
Speaker 1: at annuities, which is something I know, I get correspondents
0:49
Speaker 1: on all the time and in some ways it's changing.
0:51
Speaker 1: And I have to say I'm not the first person
0:54
Speaker 1: to say, if there was a really good annuity out there, hey,
0:56
Speaker 1: why wouldn't you buy it? If there was and if
0:59
Speaker 1: you could trust that was worth paying for. My guest
1:02
Speaker 1: today is one of the favorite guests of listeners on
1:05
Speaker 1: the show. It's James Gerard of Financial Advisor dot com
1:08
Speaker 1: Dot you. How are you, James?
1:11
Speaker 2: I'm doing great.
1:11
Speaker 3: Thanks for having me on, James, and I guess before
1:14
Speaker 3: we get going, I just wanted to call you.
1:15
Speaker 2: Up on something.
1:16
Speaker 3: I understand that on a podcast recently you spoke about
1:19
Speaker 3: gold and as soon as you did that, you cursed
1:22
Speaker 3: the trillion dollar gold industry. It fell by six percent.
1:26
Speaker 3: So what have you got to say about yourself? And
1:27
Speaker 3: what are you reckon about gold?
1:28
Speaker 1: That's right, the commentator's curse. Do you ever watch cricket?
1:31
Speaker 1: You know the guy comes out and says, this is
1:33
Speaker 1: a new batsman. He's really good, he's fabulous, he's so
1:35
Speaker 1: good where he's a new talent. He's coming through the
1:38
Speaker 1: bank out for a dock. Yes, something like that, but
1:41
Speaker 1: not quite not quite James, Okay, fair enough. I've been
1:45
Speaker 1: wanting to do the story on gold. First of all,
1:48
Speaker 1: let's clear the air. We have talked about gold for
1:50
Speaker 1: years on the show. We regularly support the buying of
1:52
Speaker 1: gold consistently so and I completely stand by that.
1:56
Speaker 2: First of all.
1:57
Speaker 1: Then we had Gemma Dale on from Naptrid. She was
1:59
Speaker 1: really good, and we talked about gold and where it's
2:02
Speaker 1: going to go and is it a good investment, and
2:04
Speaker 1: we talk specifically and let it just in case you
2:07
Speaker 1: missed this. Morgan Stanley Chief Investment Strategists, possibly the most
2:11
Speaker 1: influential investment strategist in the world, the one to whom
2:16
Speaker 1: twenty five of the top one hundred and fifty planners
2:19
Speaker 1: on the Baron's list would be listening to, because it's
2:22
Speaker 1: Morgan Stanley Wealth Management dominate the top players of financial advice.
2:26
Speaker 1: And he had said that he recommended this is hard
2:29
Speaker 1: to believe that you lift your allocation to gold to
2:33
Speaker 1: a level of twenty percent. Now, everyone can lift an
2:35
Speaker 1: allocation to go to whatever level they wish. But anyway,
2:41
Speaker 1: funny thing, don't you know? The day after gold had
2:43
Speaker 1: its worst day in twelve years and it fell six percent.
2:46
Speaker 1: But here we are, it's Thursday morning, and I notice
2:49
Speaker 1: that as I speak looking at the gold price right now,
2:52
Speaker 1: that fall is over. For now, it would seem gold
2:54
Speaker 1: is stabilizing. And I am completely comfortable with James with
2:58
Speaker 1: gold as an acid allocation under these circumstances. And we
3:02
Speaker 1: did say more than once it wouldn't go up on
3:04
Speaker 1: a straight line. So I try to back on you, sir,
3:08
Speaker 1: Where do you stand on gold? If I am, if
3:10
Speaker 1: I'm sitting across your desk, and I say I really
3:13
Speaker 1: think I should have gold and I don't have any
3:14
Speaker 1: What do you say?
3:16
Speaker 3: It's an interesting one because gold was much more attractive
3:19
Speaker 3: for two three thousand dollars an ounce rather than over
3:22
Speaker 3: six thousand dollars an ounce. I would say you had
3:26
Speaker 3: to be my client years ago. We've built up gold
3:27
Speaker 3: exposure for our clients, which is typically between two to
3:29
Speaker 3: five percent of their portfolio.
3:31
Speaker 2: So they're happy.
3:32
Speaker 3: But if you're someone who's seen it in the news,
3:34
Speaker 3: you're looking at the lines in Mardin Place in Sydney
3:37
Speaker 3: of people standing there wanted to buy gold bullion for
3:39
Speaker 3: their super fund. I'd say, look, it's still got the
3:43
Speaker 3: men term, it's got tow wings. You got very smart
3:45
Speaker 3: people who were back in gold. However, things don't go
3:48
Speaker 3: up in a straight line, as you say, so I'd
3:50
Speaker 3: be waiting for a bit of a pullback, like on
3:52
Speaker 3: the six percent drop day by on the dips.
3:55
Speaker 1: Yeah. What do you think of the Morgan Stanley Michae Wilson.
3:58
Speaker 1: I think it was chief investment officer at Morgan Stanley,
4:01
Speaker 1: the most powerful financial advisor group in the world, really
4:05
Speaker 1: saying twenty percent allocation.
4:09
Speaker 2: Yeah, that's a really big call.
4:11
Speaker 3: And I don't to throw shade his way, but you know,
4:13
Speaker 3: why didn't you recommend that when the global price was
4:15
Speaker 3: three thousand? And that's why you recommending it.
4:19
Speaker 1: It's only a couple of weeks old. It's only a
4:21
Speaker 1: couple of weeks ago. Gemma was Jemma who brought it up.
4:25
Speaker 1: Said she literally double checked it because similarly she was like,
4:28
Speaker 1: good lord, you know, because you know, basically it would
4:31
Speaker 1: seem that gold bulls are talking about a five percent allocation.
4:34
Speaker 1: So folks, there you are. It's not cheap, but it's
4:38
Speaker 1: a six percent cheaper than it was earlier in the week.
4:40
Speaker 1: Make your own mind of Okay, we have so many
4:43
Speaker 1: questions and so many issues. Understandably, people wanted to know
4:48
Speaker 1: about the final shape of the new super tax.
4:52
Speaker 2: Now this is really.
4:52
Speaker 1: Important and I think everyone should get across this. And
4:56
Speaker 1: you might say, oh, you know, three million, don't worry
4:57
Speaker 1: about it, it's not a problem for me. Well, you know,
5:02
Speaker 1: if you were very if you had three million and
5:05
Speaker 1: you were very conservatively invested, the income of that would
5:10
Speaker 1: not be would not be enormous at all. And you
5:13
Speaker 1: will be surprised how many people are in the look
5:15
Speaker 1: they say eighty thousand it's going to be much much
5:17
Speaker 1: bigger figger than that very quickly with inflation and everything else.
5:21
Speaker 1: So I know it's indexed, but and that's one of
5:23
Speaker 1: the things, by the way it will be indexed in
5:25
Speaker 1: new arrangements. One of the questions that I have today,
5:28
Speaker 1: and I think I'll actually just read it out because
5:30
Speaker 1: it captures a lot of issues. It's from Bruce and
5:34
Speaker 1: he says, I read that from July next year, earnings
5:39
Speaker 1: on Super in retirement will be taxed, will be tax
5:43
Speaker 1: free up to two million at this point onwards it
5:46
Speaker 1: will be taxed at fifteen and then from three million
5:49
Speaker 1: onwards it will be taxed at thirty percent. At ten million,
5:53
Speaker 1: it will be taxed at forty percent. Is this new
5:56
Speaker 1: or has something changed now? I think in thet VNS
6:00
Speaker 1: debate and coverage about the new supertax about how you
6:03
Speaker 1: were going to be a new tax over three million,
6:05
Speaker 1: people seem to have forgotten that in fact Super is
6:08
Speaker 1: taxed over two million, right, so Super is taxed. Tell
6:11
Speaker 1: me if this is wrong, and we just call this out.
6:13
Speaker 1: If you've more than two million and Super, the earnings
6:16
Speaker 1: on that is taxed at fifteen percent, and then and
6:20
Speaker 1: that's how it is right now and from July one
6:23
Speaker 1: next year.
6:24
Speaker 2: Additionally, if you.
6:27
Speaker 1: Have super over three, the earnings are taxed at a
6:31
Speaker 1: new fifteen or at a new fifteen, and that basically
6:34
Speaker 1: brings it up to thirty percent. Similarly, if you are
6:38
Speaker 1: so fortunate as to have super over ten million, then
6:42
Speaker 1: another layer of tax comes in on top of that
6:45
Speaker 1: and it brings it up to forty percent. An extra
6:47
Speaker 1: ten is that how I got it right? Is that
6:49
Speaker 1: what our listeners need to know you have.
6:52
Speaker 2: Yeah, I can probably just add a little bit more
6:55
Speaker 2: to that.
6:56
Speaker 3: In terms of that two million dollar cap that the
6:59
Speaker 3: government lovelicating our lives, and that they did that from
7:01
Speaker 3: twenty seventeen, they introduced this thing called the transfer balance cap,
7:06
Speaker 3: and so they said that, okay, people can move up
7:08
Speaker 3: to one point six million dollars into their retirement phase
7:13
Speaker 3: and not pay any tax. And that's been indexed over
7:15
Speaker 3: the years and now as it's a two million dollars,
7:18
Speaker 3: so for people who had retired between twenty seventeen and now,
7:23
Speaker 3: they may not have the full two million dollars and
7:25
Speaker 3: maybe anywhere from one point six million dollars up to
7:28
Speaker 3: two million dollars. That's onnly clarification that I'd add to that.
7:31
Speaker 1: And by the way, folks, there are other clarifications, but
7:34
Speaker 1: unfortunately the show doesn't last for four hours, so we
7:37
Speaker 1: can't get through them all. But just at the risk
7:40
Speaker 1: of simplification, what you need to know is from during
7:45
Speaker 1: one next year. That is the new layout and it's steep.
7:48
Speaker 1: You know, super is not as good as it used
7:50
Speaker 1: to be. People would be paying thirty percent tax. A
7:54
Speaker 1: lot of people would be paying thirty percent tax in
7:56
Speaker 1: that band over three million below ten on the earnings
8:01
Speaker 1: on the amounts above that number, and property I think
8:04
Speaker 1: is particularly caught in it. Now, James, here comes a
8:07
Speaker 1: trickier part, which is about CGT. I wonder should I
8:11
Speaker 1: read one of the questions again. I think I will,
8:14
Speaker 1: just to really shows what many people think and then
8:17
Speaker 1: and then you might clarify as to what the reality is.
8:20
Speaker 1: So the question from Paul. One thing I find quite
8:23
Speaker 1: curious in the light of the treasurers walking back on
8:26
Speaker 1: the tax of unrealized gains has been the lack of reporting.
8:31
Speaker 1: Highlighting a major issue for SMSF owners are all super
8:36
Speaker 1: savers that holding off on selling an asset in their
8:39
Speaker 1: fund after they go into retirement. My understanding, Okay, let's
8:43
Speaker 1: listen to this really clearly, says Paul. My understanding is
8:47
Speaker 1: that under the current law, and I haven't seen anything
8:50
Speaker 1: or heard anything changing, this is that once you convert
8:54
Speaker 1: to the pension phase, all income and capital gains are
9:00
Speaker 1: at zero. Okay, Is that true or force?
9:04
Speaker 3: That's absolutely true, and that's a legitimate strategy. I actually
9:08
Speaker 3: advised a client on this about two weeks ago. He
9:11
Speaker 3: has a self managed super fund. He has several property
9:14
Speaker 3: assets inside of that fund. He's fifty nine. He turns
9:18
Speaker 3: sixty in December, and one of the properties held by
9:21
Speaker 3: the superfund is a perspective development site and he wants
9:25
Speaker 3: to start along this pathway to start developing and getting approvals.
9:29
Speaker 3: And once he starts to do that and the property
9:31
Speaker 3: gets revalued, the valuation will be much higher. So I've
9:35
Speaker 3: said to him, don't do anything just now, just wait
9:37
Speaker 3: till your sixty. We can then kick your super fund
9:40
Speaker 3: into the retirement phase. He will stop working at that
9:44
Speaker 3: point in time as well. That's an important thing as well,
9:46
Speaker 3: because you need to be sixty and have retired or
9:49
Speaker 3: be in between jobs. And he won't pay a cent
9:51
Speaker 3: in tax if he then sells that property after the
9:55
Speaker 3: valuation goes up.
9:56
Speaker 2: So absolutely can do.
9:59
Speaker 1: Now in terms of the capital what they call that
10:04
Speaker 1: when people are over we talked it earlier. If you
10:07
Speaker 1: recall and we make it clear again about how much
10:10
Speaker 1: tax the new taxes are and they kick in over
10:13
Speaker 1: those caps. When you're over those caps, how does capital
10:18
Speaker 1: gains work?
10:20
Speaker 3: People commonly think that fifty percent that discount applies to
10:25
Speaker 3: capital gains inside a super but it doesn't. It's a
10:27
Speaker 3: different discount rate. It's actually a one third discount rate.
10:31
Speaker 1: So for the people, James, I just want to interrupt
10:34
Speaker 1: you because this is the catch you see, you know,
10:37
Speaker 1: but explain to listeners because what you've just said, I
10:41
Speaker 1: would say it contradicts, but it needs to be clarified.
10:43
Speaker 1: There is capital gains right in the super system for
10:47
Speaker 1: some people at some levels. So it could you spell
10:49
Speaker 1: out when they face it?
10:52
Speaker 3: Yeah, absolutely so for majority of people who have say
10:55
Speaker 3: five hundred thousand dollars in their super account, when they
10:58
Speaker 3: retire while they they work in they get taxed at
11:02
Speaker 3: between ten and fifteen percent on capital gains if they
11:05
Speaker 3: hold the investment. They're super fun for less than twelve
11:08
Speaker 3: months and sell it, there's a fifteen percent capital gains
11:10
Speaker 3: tax bill. If they hold it for more than twelve months,
11:12
Speaker 3: they get a one third discount, which drops it to
11:14
Speaker 3: ten percent.
11:15
Speaker 2: When they retire over.
11:16
Speaker 3: The age of sixty and other caveat have less than
11:19
Speaker 3: two million dollars in SUPER, they pay zero capital gains tax.
11:24
Speaker 1: Yeah, let's say for this new regime, there are two
11:30
Speaker 1: sets of people that this capital gains tax can affect.
11:38
Speaker 2: In SUPER.
11:39
Speaker 1: There are the people who have retired and they're over
11:41
Speaker 1: the cap. That is, the amounts they have over the cap.
11:44
Speaker 1: And we'll assume they didn't take it out of SUPER.
11:45
Speaker 1: We assume we leave they left it in right. Those
11:48
Speaker 1: amounts that are over the caps, they default, if you like,
11:51
Speaker 1: into accumulation, don't they is that if they left it
11:54
Speaker 1: in right, they default into the accumulation. And similarly, people
11:57
Speaker 1: who are quite wealthy and haven't retired yet, that money
12:00
Speaker 1: is also classified as accumulation when they're over the caps.
12:05
Speaker 1: So the discount that you're talking about that is applied
12:08
Speaker 1: to capital gains in the supersystem for people who are
12:14
Speaker 1: over the caps. That discount, as you say, it's one third.
12:20
Speaker 1: It's not just to make things complicated, it's not the
12:22
Speaker 1: usual discount, right, which is it's fifty percent after you
12:26
Speaker 1: hold an acid after twelve months. In this case, it's
12:29
Speaker 1: one third if you hold an acid after twelve months. So,
12:31
Speaker 1: James Gerard, does that mean the capital gains discount for
12:35
Speaker 1: those affected by capital Gains in Super moves to what number?
12:40
Speaker 1: Does it move to?
12:42
Speaker 2: Ten?
12:42
Speaker 1: Twenty and twenty seven?
12:44
Speaker 2: Is that it? Have? I got it right? That's it? Yeah,
12:46
Speaker 2: that's it. So that the normal fifteen percent drops to ten.
12:49
Speaker 3: And then if you have more than three million dollars
12:52
Speaker 3: in Super you pay that thirty percent tax on income,
12:55
Speaker 3: and then if you've hold the asset for.
12:56
Speaker 2: More than twelve months twenty percent.
12:58
Speaker 3: Then new big one at ten million dollars, where it's
13:00
Speaker 3: forty percent two thirds of twenty seven percent.
13:04
Speaker 1: So for our listeners before they before in deep frustration
13:08
Speaker 1: and tears, they actually close, they actually just walk away
13:12
Speaker 1: from this podcast. They turn it off because they think
13:14
Speaker 1: it's too hard. Can we just say, in very conceptual terms,
13:19
Speaker 1: most people most of the time don't play capital Gains
13:21
Speaker 1: in Super correct. However, people over the caps of which
13:26
Speaker 1: there are at least eighty thousand we know in at
13:29
Speaker 1: least retirees, not to mention wealthier people who haven't retired yet.
13:36
Speaker 1: They do pay capital gains and they do get the
13:38
Speaker 1: discount that's in capital gains. Is that a more thorough picture.
13:43
Speaker 3: Then they is thorough without confusing the numbers too much.
13:47
Speaker 1: And I hope so okay, okay, folks, is that clear?
13:51
Speaker 1: Oh boy, I mean, we have to do it. We
13:54
Speaker 1: have to tell you, we have to go through this.
13:56
Speaker 1: I know it's tortuous, but hey, you need to know.
13:59
Speaker 1: All right, that was very good, It was really useful.
14:02
Speaker 1: Tell me about the new super tax, anything else we
14:06
Speaker 1: need to know.
14:08
Speaker 3: The other thing that you need to know is that
14:10
Speaker 3: there are two things I would say. One is that
14:12
Speaker 3: the wealth element, the wealth tax component, has been scrapped.
14:15
Speaker 3: So that was that hugely unpopular proposal to tax unrealized
14:20
Speaker 3: gains every year.
14:21
Speaker 1: So that's firmly it's deadonbury, we hope. Yeah.
14:25
Speaker 3: The other thing is that it still needs to pass
14:28
Speaker 3: the Senate, and the labor parties still need the support
14:31
Speaker 3: of either the Greens or the crossbenches. And I was
14:34
Speaker 3: digging through the Green's website trying to find what they
14:37
Speaker 3: think of this amended proposal from the Treasurer and they're
14:40
Speaker 3: not that happy actually, so I don't think they're going
14:42
Speaker 3: to support it, they said the Green spokesperson, the Economic
14:46
Speaker 3: Justice spokesperson, said that this just enables rich Australians to
14:49
Speaker 3: keep hoarding investment properties and then went on to say
14:52
Speaker 3: things about it's labor blackflip Greens one fair attack system.
14:56
Speaker 3: They want the wealthare to pay more tax. So in short,
14:58
Speaker 3: they're not really going, yeah, we're on board of this.
15:01
Speaker 1: Yes, they didn't want the caps to be so high
15:03
Speaker 1: basically in dollar terms. Politically, we would hope that this
15:07
Speaker 1: gets clarified and done. Chances are that what they'll do
15:10
Speaker 1: with the Greens is they'll do a package whether they
15:12
Speaker 1: say if you say yes to this, we'll also do
15:14
Speaker 1: this and this, and they will get it through. And
15:17
Speaker 1: the other reason that folks I left it until this
15:20
Speaker 1: show to clarify and all that was because there was
15:23
Speaker 1: very intermittent communication from the Treasurer's office about that CGT
15:27
Speaker 1: and how it would actually apply. They didn't do it
15:30
Speaker 1: on the day of the announcement and it's been coming
15:32
Speaker 1: out in dribs and drabs since then. So I thope
15:35
Speaker 1: today we would take the opportunity to make it really
15:37
Speaker 1: clear to the extent that it can be really clear.
15:40
Speaker 1: So you just listen to it again, okay, because it
15:42
Speaker 1: all makes sense. All right, We'll be back in a moment. Hello,
15:52
Speaker 1: Welcome back to the Australians Money Puzzle podcast. James Kirby
15:56
Speaker 1: here with James Girard, financial advisor, regular contractor of course
16:01
Speaker 1: to the Wealth section on the Australian. Okay, so we've
16:06
Speaker 1: covered gold hot issue, we've covered super tax hot issue.
16:10
Speaker 1: Now here's something really interesting. I think this is really
16:14
Speaker 1: shocking myself. I was, okay at a report during the
16:17
Speaker 1: week and do you know in the cohort age group
16:24
Speaker 1: in Australia of the over fifty fives, okay, that is
16:27
Speaker 1: the cohort coming through and just about to retire, almost
16:34
Speaker 1: half of them, almost half fifty six percent of them
16:38
Speaker 1: are going to retire with the mortgage, which was unknown.
16:42
Speaker 1: I mean it was like unknown. Traditionally in Australia, people
16:45
Speaker 1: did not retire with mortgages, just didn't happen. And so
16:48
Speaker 1: this whole issue of how we deal with retiring and
16:53
Speaker 1: how we finance our retirement is becoming front and center.
16:57
Speaker 1: And I think you'll find when the super tax debate,
17:00
Speaker 1: like dissires as it may in the weeks ahead. This
17:03
Speaker 1: is going to become a huge thing retirement income and
17:06
Speaker 1: how it works, and how it should work, and whether
17:09
Speaker 1: people so for instance, should be so at risk in
17:12
Speaker 1: the markets with their super So once upon a time
17:16
Speaker 1: when people had super you know, they didn't have to
17:17
Speaker 1: worry about the markets, right, they had to find benefit pensions.
17:20
Speaker 1: It didn't matter if there was a stock market crash.
17:22
Speaker 1: They got what they were going to get. Most of
17:24
Speaker 1: us are not in that boat. Vast majority of the
17:26
Speaker 1: listeners in this show aren't in that boat. One of
17:29
Speaker 1: the things that's put forward all the time as a
17:32
Speaker 1: potential solution are annuities. James, would you explain in simple
17:36
Speaker 1: but not simplistic times what an innuity is?
17:40
Speaker 3: Of course, James, So when annuity works whereby you give
17:44
Speaker 3: a lump sum of cash to the annuity provider and
17:48
Speaker 3: in exchange for that lump sumber of cash, they will
17:51
Speaker 3: promise to pay you a regular income for the rest
17:55
Speaker 3: of your life and doesn't matter if you live to
17:58
Speaker 3: eighty one, which I found out was the men's average
18:01
Speaker 3: life expectancy, or eighty five if you're women, or if
18:04
Speaker 3: you live to one hundred that will keep paying you
18:06
Speaker 3: that payment that they promise to pay you, and they'll
18:08
Speaker 3: increase it with inflation each year. And so that's attractive
18:12
Speaker 3: to some people. And then there's some SENTI link benefits
18:15
Speaker 3: attached to it as well.
18:17
Speaker 1: I thought it was very attractive depending on how much
18:19
Speaker 1: they pay you and how much it costs. I mean,
18:21
Speaker 1: the concept is terribly attractive, or at the very least
18:25
Speaker 1: you could. You know, a person might say, okay, you know,
18:28
Speaker 1: I'll take half the risk out of my super I
18:31
Speaker 1: put half of it into annuity. It'll pay me X
18:33
Speaker 1: per year, and then I'll I will use my investment
18:39
Speaker 1: skill and ambition to improve everything else. But traditionally I
18:45
Speaker 1: don't know you and I know why because there's a
18:47
Speaker 1: bad history of annuities in Australia. But there's a lot
18:51
Speaker 1: of talk more recently that they are coming back in
18:55
Speaker 1: our market. It's very heavily dominated by one operator called Challenger,
18:59
Speaker 1: but there are talks, there are a serious sort of
19:02
Speaker 1: hite papers, etcetera coming out that the government could actually
19:06
Speaker 1: stimulate this market, maybe even underpin this market providing annuities.
19:12
Speaker 1: What do you think?
19:13
Speaker 2: What's your view?
19:14
Speaker 1: I know you were very skeptical about them for a
19:15
Speaker 1: long time. Where do you come from now and has
19:17
Speaker 1: anything improved?
19:19
Speaker 3: I still don't have the greatest opinion of them for
19:22
Speaker 3: the pure fact that when you calculate the amount of
19:27
Speaker 3: payments that they give you, or maybe if I jump
19:29
Speaker 3: back a step, when you give them a bucket load
19:31
Speaker 3: of money, they need to do something with it to
19:33
Speaker 3: be able to pay you your regular annuity payments. So
19:36
Speaker 3: they go invest it primarily into bond markets. I put
19:39
Speaker 3: a little bit into share markets, but they need to
19:40
Speaker 3: protect that capital so it's there to pay you your
19:43
Speaker 3: regular payments. So they've got to be really conservative, really
19:46
Speaker 3: conservative with it. And so where the RBA cash rate
19:51
Speaker 3: drops to zero point one percent and the bond portfolio
19:54
Speaker 3: that companies like Challenger have a pay next to nothing
19:56
Speaker 3: in interest, that then relates to the of how much
20:00
Speaker 3: they'll pay you every month if you approach them to
20:02
Speaker 3: take out an annuity. But as we're seeing over the
20:05
Speaker 3: past couple of years, the RBA cash rate go up
20:07
Speaker 3: so many times, and even though's coming down the other side,
20:09
Speaker 3: it's still relatively high the rate of return that you
20:12
Speaker 3: get from an annuity. If you break it down, if
20:14
Speaker 3: you go all right, how much are they paying me
20:16
Speaker 3: every month between now and my expected life expectancy. The
20:19
Speaker 3: rate of return that you get from that is around
20:21
Speaker 3: about four percent. So my argument is that why don't
20:25
Speaker 3: you just take your money, chuck it into a term
20:27
Speaker 3: depositor or an online bank account, earn your four percent,
20:30
Speaker 3: and just bypass the complexity of an innuity. So that's
20:33
Speaker 3: my cynicism of it. But I'd say on the pro
20:37
Speaker 3: side of an annuity two reasons. One, if your family
20:41
Speaker 3: genes are very good and mother, grandmother, great grandfather lived
20:46
Speaker 3: to over one hundred, well, then you have a chance
20:49
Speaker 3: of beating quote unquote beating the annuity company because they're
20:52
Speaker 3: calculating their payments based on you living somewhere between eighty
20:55
Speaker 3: one to eighty five years of age.
20:56
Speaker 1: But you could be an actuary outlier.
21:00
Speaker 2: Winner. You be an outlier. If you're an outlier, you're
21:03
Speaker 2: going to beat the annuity company.
21:05
Speaker 3: But an outlier on the good end, you don't want
21:07
Speaker 3: to die early, but you die later, you win.
21:09
Speaker 2: The other thing is that.
21:10
Speaker 1: If you die early, not only do you die early,
21:12
Speaker 1: which is disappointect, but you'll finance someone else and their annuities.
21:17
Speaker 2: That's right.
21:18
Speaker 3: Yeah, And then the other case of annuities is where
21:20
Speaker 3: you set at the fringe of eligibility for the age pension, which,
21:23
Speaker 3: if I remind all of our listeners, people can apply
21:25
Speaker 3: from age sixty seven. So you turn sixty seven and
21:29
Speaker 3: you have let's just say, a few hundred thousand dollars
21:31
Speaker 3: over the maximum threshold for either a full pension or
21:34
Speaker 3: a part pension, and you really want to get this
21:36
Speaker 3: age pension, you can put some money into annuities and
21:39
Speaker 3: basically only sixty percent of the income and the value
21:44
Speaker 3: of the annuity is counted towards center link and so
21:46
Speaker 3: that on paper helps you get down your assets test
21:49
Speaker 3: threshold and then can increase your age pension entitlement. So
21:52
Speaker 3: that's the other use case of an annuity from my perspective.
21:55
Speaker 1: That's in a government complex, but perhaps useful to some
22:00
Speaker 1: attempt by the government to stimulate this market of annuities
22:05
Speaker 1: because the annuities people were saying that they were in
22:07
Speaker 1: some way sort of you know, that they weren't being
22:09
Speaker 1: treated as fairly as they might have been in the market.
22:12
Speaker 1: I don't think that people have been rushing into that one,
22:14
Speaker 1: have they.
22:16
Speaker 3: No, there's been more interesting annuities, you know, go back
22:19
Speaker 3: six months to a year and a half ago as
22:21
Speaker 3: the RBA cash rate went up, because those monthly payments
22:24
Speaker 3: on offer, we're going up as the underlying rate increase.
22:27
Speaker 3: So I would say there has been more interest there,
22:29
Speaker 3: but still the issues that exist for annuities that are there,
22:32
Speaker 3: and so most advisors will construct portfolio that don't have
22:36
Speaker 3: those same capital restrictions. Remembering that innuity companies take your
22:40
Speaker 3: capital if you die under this lifetime annuity, but they
22:44
Speaker 3: will give you back part or all of the capital
22:46
Speaker 3: if you die relatively quickly, So go check the term
22:49
Speaker 3: the conditions yourselves, but something roughly like if you die
22:52
Speaker 3: in the first eight years of taking out a lifetime annuity,
22:56
Speaker 3: most of the neuity companies will go, all right, fair enough,
22:58
Speaker 3: we'll give you back your whole one hundred percent of
23:00
Speaker 3: what you put into this annuity. But if you die
23:03
Speaker 3: somewhere between eight to fifteen or sixteen years, it's on
23:06
Speaker 3: a sliding scale down to woulds that you get part
23:08
Speaker 3: of the capitol back, But then when you hit that
23:09
Speaker 3: sort of fifteen year mark, you get nothing back if
23:11
Speaker 3: you die after that point.
23:13
Speaker 1: And when you say that, the cash rate influences how
23:17
Speaker 1: much you're paid. You do a deal where you get
23:20
Speaker 1: paid so much for sure.
23:23
Speaker 2: Always.
23:24
Speaker 1: So it's really the cash right influences the terms on
23:28
Speaker 1: which you begin. That's it, because once you begin, it's
23:33
Speaker 1: a promise right, and it doesn't vary.
23:34
Speaker 2: They take that risk. That's it. You're you're fixed. You're
23:38
Speaker 2: you're fixed in your your rate.
23:39
Speaker 3: So from my perspective, annuities are more attractive when the
23:42
Speaker 3: RBA cash rate is at its highest.
23:44
Speaker 1: Yes, yeah, good point, good point. And you know, ironically,
23:48
Speaker 1: maybe we're at the bottom of the cycle here. That's
23:50
Speaker 1: what Tim Lawas was saying on Tuesday. He doesn't think
23:53
Speaker 1: there's much more in it in terms of where we are. Okay,
23:57
Speaker 1: very interesting, we'll be back in the moment with some
23:59
Speaker 1: very good questions. Hello, Welcome back to The Australian's Money
24:09
Speaker 1: Puzzle podcast. James Kirby here with James Girard of Financial
24:12
Speaker 1: Advisor dot com dot au regular on the show. Okay,
24:16
Speaker 1: there was a question on a new recease. It was
24:19
Speaker 1: from Dean and he is inside Australian super and he
24:24
Speaker 1: talks about how they've continually deferred their Income Strategy Products
24:29
Speaker 1: CIPO what he calls it. He says naturally, Challenger and
24:33
Speaker 1: others provide an option. But as industry super funds are
24:36
Speaker 1: not for profit, I expect their products could be more attractive. Yeah,
24:39
Speaker 1: well that's a logical dean. So his question is what's
24:43
Speaker 1: the delay in releasing them? Are they too complex? Are
24:47
Speaker 1: they too high risk? Does no one want to move first? Yeah?
24:50
Speaker 1: Hard to know that one, I said chicken and egg.
24:53
Speaker 1: I suppose to some degree, if more people, you know,
24:55
Speaker 1: if more people want them, there'll be more products. But
24:57
Speaker 1: because they are somewhat subdued still they remain i won't
25:01
Speaker 1: say marginal, but a minority product as opposed to our
25:04
Speaker 1: majority product. There's a lot more governments could do and
25:08
Speaker 1: big super funds could do to amp up this area.
25:12
Speaker 1: And maybe not all our listeners and maybe even not
25:15
Speaker 1: our typical listener would go for a Newsies, but there
25:18
Speaker 1: are many people who would. And you know, what's the
25:21
Speaker 1: price of peace of mind? What's the price? I've been
25:23
Speaker 1: able to not look at the fact that the markets
25:26
Speaker 1: are becoming more volatile and worrying about them as the
25:29
Speaker 1: vis climbs as we speak, as we get big moves,
25:32
Speaker 1: you know, even like gold going down six percent in
25:34
Speaker 1: a day that's volatility, and that's what is okay when
25:37
Speaker 1: you're accumulating. But I'm sure if you've been retired for
25:40
Speaker 1: thirty years or something, it gets a bit tiresome. All
25:42
Speaker 1: right now. The final question is from Tina. Hi James
25:49
Speaker 1: love the podcast, learned a lot, even bought my first shares.
25:51
Speaker 1: Good for you, Tina. A friend recently inherited a home
25:56
Speaker 1: but was advised if she sold it within twelve there
26:00
Speaker 1: would be no capital gains tax. Is that the case
26:03
Speaker 1: only in New South Wales? And is that still the
26:06
Speaker 1: case if she rented it out in a twelve month period? Okay,
26:10
Speaker 1: this is not advice. This is for all the Tinas
26:12
Speaker 1: in the world who might know people all around New
26:14
Speaker 1: Southwars and further Afield in something of a similar situation.
26:19
Speaker 1: You've got to break that question down, James, are reconic
26:21
Speaker 1: component parts?
26:22
Speaker 2: Do you want to have a girl?
26:24
Speaker 3: I will, and thank you for the general advice disclaim.
26:27
Speaker 3: I was going to crank it out, but you did
26:28
Speaker 3: a very good job of doing that, So you're right
26:31
Speaker 3: breaking down this question.
26:32
Speaker 2: There's probably three different parts to it.
26:35
Speaker 3: There's the capital gains tax part after someone dies and
26:39
Speaker 3: Tenna's mentioned twelve months, but it's actually twenty four months.
26:42
Speaker 2: So if unfortunately someone.
26:43
Speaker 3: Passes away and you inherit their home, their principal place
26:47
Speaker 3: of residence, you have up to twenty four months to
26:50
Speaker 3: dispose of that property and not pay any capital gains tax.
26:55
Speaker 3: So that's one thing to note. The next thing is
26:57
Speaker 3: with regards to is this only a New South Wales
27:00
Speaker 3: seeing No, it's not so. The rules around taxation of
27:04
Speaker 3: estates and capital gains tax is governed by the Income
27:07
Speaker 3: Tax Assessment Act of nineteen ninety seven, which is a
27:10
Speaker 3: federal act, so it's not a state based thing. And
27:13
Speaker 3: then the third one, I don't know the answer. You
27:15
Speaker 3: have to speak to a tax person, which is what
27:17
Speaker 3: happens if you rent out the property within that two
27:19
Speaker 3: year period and then you sell it. I would have
27:22
Speaker 3: thought that because when you're alive, you can move out
27:24
Speaker 3: of your home for up to six years and you
27:26
Speaker 3: get this scene called the former residence CGT exemption, So
27:29
Speaker 3: you can move out of your home, rent it out
27:31
Speaker 3: as long as you don't buy another property, you can
27:34
Speaker 3: resume living back in your home again within six years
27:37
Speaker 3: and not pay any capital gains tax down the track
27:39
Speaker 3: when you sell your property. So Basically, the Tax Office
27:42
Speaker 3: disregards that you used your home as an investment property
27:45
Speaker 3: for up to six years. But I'm not sure if
27:47
Speaker 3: that rule transposers when somebody dies, and.
27:50
Speaker 1: We don't want to guess. I mean, you'd like to
27:52
Speaker 1: say it should, but who knows. Who knows what those
27:55
Speaker 1: people in the tax office have cooked up on that one.
27:58
Speaker 1: Oh key, terrific. Thank you very much, James, love you
28:01
Speaker 1: to have you on the show as usual, My pleasure.
28:04
Speaker 1: Thank you, James, and keep the emails coming the money
28:07
Speaker 1: Puzzle at the Australian dot com dot au. Talk to
28:10
Speaker 1: you soon.