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The First Home Super Saver Scheme is a valuable initiative to help first time buyers overcome the challenges of entering the property market. Purchasing a home is a significant financial milestone, but the ever increasing property prices make it challenging for first time buyers in Australia to enter the market. To help ease this burden, the Australian government created the FHSSS. The FHSSS is an initiative aimed at helping first time buyers save for their first property purchase. It enables eligible individuals to make voluntary contributions into their super fund, which can later be withdrawn for the purpose of financing their first home deposit. One of the main benefits of the scheme, which became operational from 1 July 2017, is it allows aspiring homeowners to save money for their first property within their super fund, taking advantage of tax concessions and potentially accelerating their path to home ownership. In this guide, we will outline the details of the FHSSS, including how it works, how to participate in it and the benefits it offers. Qualifying for the First Home Super Saver Scheme To participate in the FHSSS, you must meet certain eligibility requirements: Be at least 18 years old. Never have owned property in Australia (including an investment property, commercial property or land). Have not previously released FHSSS funds. Occupy the property you buy as soon as practicable and for at least 6 months within the first 12 months you own it once it’s practical to move in. Contributions under FHSSS Under the scheme, you can make voluntary contributions to your super fund specifically for the purpose of purchasing your first home. These contributions fall into two categories: Concessional contributions – these are before tax contributions made through salary sacrificing or employer contributions. The maximum concessional contribution allowed per financial year is $27,500. Non-concessional contributions – these are after tax contributions made from your personal savings. The total non-concessional contribution allowed is $110,000. Accessing the savings Once you have made voluntary contributions, you can apply to release these funds along with associated earnings for purchasing your first home. The released amount is subject to the following limits: Maximum of $15,000 of voluntary contributions made in a financial year. Maximum of $50,000 in total across all years. Tax benefits The primary advantage of the FHSSS lies in the tax concessions it offers. Voluntary super contributions under the scheme are taxed at a concessional rate of 15% within your super fund, which is generally lower than most peoples’ marginal tax rate (the rate you pay on your income). Additionally, when you withdraw the funds to buy your first home, they are taxed at your marginal tax rate, but you receive a 30% tax offset, effectively reducing the tax burden. Steps to utilise the FHSSS There are quite a few stages involved in the process of participating in the scheme and accessing the funds when the time comes to buy your home, but by following these steps, the process will be fairly straightforward: Check eligibility – Before diving into the scheme, ensure that you meet all the eligibility criteria outlined earlier. Determine savings goal – Assess how much you need to save for your first home purchase and how long it might take you to reach that goal. This will help you plan your contributions accordingly. Super contribution strategy – Create a super contribution strategy that combines before and after-tax super contributions to maximise your savings. Keep in mind the annual contribution limits to avoid exceeding them. Inform your super fund – Notify your super fund about your intention to utilise the FHSSS. They will provide you with the necessary information and forms to make eligible contributions. Make voluntary contributions – Begin making voluntary contributions to your super fund, ensuring they are designated as FHSSS contributions. Regularly monitor your progress towards your savings goal. Apply for release – Once you are ready to purchase your first home, apply to the Australian Taxation Office (ATO) to release your FHSSS funds. The ATO will assess your eligibility and process your request. Use the savings – Upon approval, you will receive the released funds and earnings into your bank account. These funds can now be used to purchase or construct your first home. Benefits and considerations The FHSSS offers several benefits for aspiring homeowners, including: Tax savings – The scheme provides significant tax benefits, allowing you to save money faster than with a regular savings account. Accelerated savings – By contributing through your super, you can take advantage of compound interest and potentially accumulate a larger deposit for your home. Flexible contributions – You can adjust your contributions as per your financial situation and take advantage of bonus contributions from employers if available. Joint applications – If you are purchasing a property with your partner, both of you can use the FHSSS to maximise your savings. Despite its advantages, there are some considerations to bear in mind: Early release penalty – If you decide not to purchase a property after releasing your FHSSS funds, you may face a tax penalty, which can offset some of the scheme’s benefits. Impact on retirement savings – Withdrawing funds from your super may reduce your retirement savings. Ensure that you are comfortable with the tradeoff between home ownership and retirement savings. Property market fluctuations – The real estate market is subject to fluctuations and the value of your potential home may decrease over time. Summary The FHSSS is a valuable initiative to help first time buyers overcome the challenges of entering the property market. By taking advantage of the tax concessions and the savings opportunities it offers, eligible applicants can accelerate their path to home ownership. However, it’s essential to consider the long-term impact on your retirement savings and understand the eligibility criteria and withdrawal process before committing to the scheme. If you meet the eligibility criteria and plan wisely, the FHSSS can be a powerful tool to help make your dream of home ownership a reality. Source: MLC

Government Age Pension payments increased on 20 March, so if you’re one of the millions of eligible Australians, you’ll have a little more to spend. The increases are designed to help address inflation and cost of living increases. Here’s what happened. Age Pension payments increase in March 2024 due to indexation Here are the maximum Age Pension payment rates that came into effect from 20 March, which are paid fortnightly, along with their respective annual equivalents. Single payments rose by $19.60 per fortnight, while combined payments for couples increased by $29.40. Maximum Age Pension payments from 20 March 2024   Fortnightly* Annually* Single $1,116.30 $29,023.80 Previous payment $1,096.70 $28,514.20 Couple (each) $841.40 $21,876.40 Previous payment $826.70 $21,494.20 Couple (combined) $1,682.80 $43,752.80 Previous payment $1,653.40 $42,988.40 *Includes basic rate plus maximum pension and energy supplements The payment rate increased 1.8%, indexed to inflation. Payments last increased in September 2023 and are likely to change again when they are next assessed this coming September. Tip: Depending on how much super you have, you may be eligible to receive Age Pension payments in addition to income from your super savings. Income and assets test thresholds increase for the Age Pension The government reviews the Age Pension income and assets test thresholds in July each year. The upper thresholds also increase in March and September each year in line with Age Pension payment increases. Whether you are eligible for the Age Pension depends on your age, residency and your income and assets. If your income and assets are below certain limits (also known as thresholds), you may be eligible. When determining how much you’re entitled to receive under the income and assets tests, the test that results in the lower amount of Age Pension applies. Following are the income and assets test thresholds that apply as at 20 March, compared with previous thresholds. Assets test thresholds comparison The lower assets test threshold determines the point where the full Age Pension starts to reduce, while the upper assets test thresholds determine what the cutoff points are for the part Age Pension. If the value of your assets falls between the lower and upper assets test thresholds, your entitlement will reduce. The higher your assessable assets, the lower the amount of Age Pension you are eligible to receive. Your family home is exempt from the assets test but, your investments, household contents and motor vehicles may be included. Asset test thresholds from 20 March 2024   Full Age Pension limit Part Age Pension cutoff Single – Homeowner $301,750 (unchanged) $674,000 Previous threshold $301,750 $667,500 Single – Non-homeowner $543,750 (unchanged) $916,000 Previous threshold $543,750 $909,500 Couple (combined) – Homeowner $451,500 (unchanged) $1,012,500 Previous threshold $451,500 $1,003,000 Couple (combined) – Non-homeowner $693,500 (unchanged) $1,254,500 Previous threshold $693,500 $1,245,000   Income test thresholds comparison The lower income test threshold determines the point where the full Age Pension starts to reduce, while the upper income test threshold determines what the cutoff point is for the part Age Pension. Income includes things like payment for employment or self employment activities, rental income, and a deemed rate of income from financial investments such as managed funds, super (if you are over the Age Pension age) or account-based pensions commenced after 1 January 2015. Income doesn’t include things like emergency relief payments. Income test thresholds from 20 March 2024   Full Age Pension limit Part Age Pension cutoff Single $204 per fortnight (unchanged) $2,436.60 per fortnight Previous threshold $204 per fortnight $2,397.40 per fortnight Couple (combined) $360 per fortnight (unchanged) $3,725.60 per fortnight Previous threshold $360 per fortnight $3,666.80 per fortnight If you have income between the lower and upper income test thresholds, your entitlement will reduce as your level of income rises. For example, the Age Pension payment for a single person earning more than $204 per fortnight will reduce by 50 cents for each dollar earned over $204. For a couple earning more than $360 per fortnight combined, the Age Pension payment for each person will reduce by 25 cents for each dollar earned over $360. Tip: The Work Bonus may allow you to receive more income from working, without reducing your Age Pension. The maximum Work Bonus balance that you can accrue is $11,800. Source: Colonial First State

Encouragingly the International Monetary Fund (IMF) raised its global growth forecast for 2024, following ‘surprisingly resilient’ economic conditions. IMF officials now expect global GDP growth of 3.2% this year. Despite this positive news, major share markets lost ground in April following five months of unbroken gains. Ongoing geopolitical uncertainty, particularly in the Middle East, was unsettling and prompted some investors to lock in profits from the recent strong rally. Inflation also remains above central bank targets in most key regions, prompting investors to reassess their outlook for interest rates. According to consensus forecasts, only one rate cut is now anticipated in the US in the remainder of 2024. Notwithstanding a moderation in the growth rate in the March quarter, the world’s largest economy appears to be performing well despite elevated borrowing costs. This could reduce the urge for policymakers to lower interest rates. Government bond yields in the US and other key regions moved sharply higher against this background, which was a headwind for bonds and resulted in negative returns from major fixed income indices. US Somewhat alarmingly, US inflation has re-accelerated. Headline consumer price inflation rose to an annual rate of 3.5% in March and the ‘personal consumption expenditure’ measure, favoured by Federal Reserve officials, also ticked higher in the first quarter of 2024. These readings arguably make it more difficult for policymakers to justify lowering interest rates. Labour market trends remain firm too. More than 300,000 new jobs were created in March, which was nearly 50% above the estimate. Combined with historically low unemployment, the hiring frenzy is exerting upward pressure on wages and making it less likely that inflation will fall meaningfully in the near term. Australia Both headline consumer price inflation and the trimmed mean measure came in higher than expected in the March quarter, which was a blow to Reserve Bank of Australia officials and anybody hoping for a rate cut in the near term. Unfortunately, despite some movement in the right direction, pricing pressures are proving persistent and could prevent policymakers from lowering official interest rates. At the beginning of April, two rate cuts in 2024 had been priced into markets. By month end, these expectations had been fully removed from forecasts. Most observers now expect Australian interest rates to remain at 4.35% for the foreseeable future. Consumer confidence remained subdued against this backdrop and deteriorated for a second consecutive month in April. New Zealand There are lingering hopes that interest rates will be lowered in New Zealand this year, although it is worth noting that the country already has some of the highest borrowing costs among developed countries. Although inflation is running well above target, investors are still hoping for one or two rate cuts in the remainder of the year. Elevated borrowing costs have undoubtedly affected confidence levels in the country. Business confidence fell sharply in April and firms reduced staff numbers in the March quarter. The unemployment rate has ticked up to 4.3%, which is the highest level for three years. Europe The initial estimate of GDP growth in the Eurozone suggested last year’s recession in Europe is over. The economy grew 0.3% in the first three months of 2024. According to other preliminary estimates, consumer price inflation in Germany eased to an annual rate of 2.2%, down from 2.5% in February. This was the lowest inflation rate for nearly three years. More importantly, with inflation in Europe’s largest economy now close to the European Central Bank’s 2.0% target, investors were increasingly hopeful that interest rates could be lowered in either June or July. There were growing suggestions that the Bank of England could lower interest rates in next few months too. Consensus forecasts indicate official borrowing costs in the UK could be lowered in either August or September. Asia Chinese officials hinted they will consider lowering interest rates to support activity levels, if required. This may not be required, with the world’s second largest economy showing some signs of improvement. Chinese GDP grew 1.6% in the first quarter of the year, taking the annual growth rate to 5.3%. Factory output has improved, suggesting export demand remains intact, although services-related demand appears less strong. Retail sales fell short of consensus expectations in March. Most of the attention in Japan was on the yen, which weakened to its lowest level in more than 30 years against the US dollar. There was speculation that the Bank of Japan had intervened in FX markets to try and arrest the very sharp currency sell-off. Australian dollar The Australian dollar drifted slightly lower against the US dollar, closing down 0.7% to 64.7 US cents. This move appeared to reflect broad-based strength in the US dollar. The AUD actually appreciated by more than 1% against a trade-weighted basket of international currencies. The AUD added 3.6% against the Japanese yen, breaking through ¥100 and closing at its strongest level since 2007. Australian equities The S&P/ASX 200 Accumulation Index returned -2.9% over the month, breaking a five-month winning run. The prospect of interest rates remaining high for longer than was previously forecast affected sentiment towards consumer discretionary stocks. The sector fell more than 5%, with investors mindful that high borrowing costs could impede spending on discretionary goods and services. On the positive side, utilities stocks tended to fare relatively well. The sector returned 4.8% in April, making it the best performer in the S&P/ASX 200. AGL Energy was a standout performer, closing the month up 13.4%. Materials stocks (+0.6%) benefited from improving economic indicators in China, which augur well for future demand for various commodities including iron ore, copper and aluminium. Gold-related stocks also continued to perform well, with the gold price reaching a record high of US$2,391/oz in mid month. BHP Group (-4.6%) announced a US$39 billion takeover bid for UK-based miner Anglo American. The proposal was rejected by Anglo American. Small caps fared slightly worse than their larger cap peers, with the S&P/ASX Small Ordinaries Index declining 3.1%. Online retailer Kogan.com was among the worst performers … Read more

Cash has been one of the best performing defensive assets over the past three years. When compared with global bonds (a riskier asset class), a typical portfolio of term deposits would have returned a cumulative 12.6% in comparison to -8.5% for global bonds over the three years to December 2023. With interest rates expected to stay higher for longer, cautious investors would be right to question whether other asset classes are worth the risk. But are the tides changing? On paper cash still appears to be king; however, these healthy returns are attributed to accelerated inflation and rising interest rates, an environment we may be moving away from. Inflation has been trending downwards for months and rate cuts are predicted to begin before the end of 2024. In this paper we explain why we believe now is a good time to revisit your asset allocation. What is a bond? A bond is a loan made by an investor to a borrower, generally a company or government. Typically, the borrower pays the investor interest (coupons) periodically over the term of the loan and then returns the initial value (principal) of the loan back to the investor at an agreed upon future date. Bond values are linked to the borrowers perceived ability to pay back the loan as well as interest rates. For example, when interest rates rise, newly issued bonds offer higher coupons, making them more attractive and equivalent existing bonds with lower coupons less attractive, reducing their value. How do bonds differ from term deposits? Bonds are expected to provide higher returns over the long term because investors require compensation for assuming investment risk. Bonds also provide the opportunity for capital growth as well as higher income. This compares with term deposits where interest payments are lower but guaranteed by a bank – providing more security. Whilst income is guaranteed, the real value of a term deposit often diminishes over time due to inflation, which erodes your purchasing power (figure 1). Figure 1 also shows that bonds are subject to greater risk over shorter time horizons which means they won’t be suitable for everyone. Your initial investment can go down in value and when you invest in funds this can be offset through the distributions, reducing your income. This primarily occurs when interest rates are rising and become unpredictable as they have in recent times. Investors need to determine, with support from their adviser, whether trading term deposits capital guarantee for the potential increased return of a bond investment is suitable to their circumstances. Why now? In an environment where inflation is trending down and rates are expected to be cut, long term bonds should perform well as this is the environment when you typically experience the most capital growth (see figure 2). Term deposit rates are also forward looking. In other  words, you don’t need to wait for central banks to reduce cash rates before you start to see term deposit returns fall. There are already signs of this happening. Whilst  very recent, 1-year term deposit rates came down by 0.05% in January and we expect this trend to continue (although this won’t necessarily be a smooth journey). Whilst seemingly insignificant, this could be meaningful for larger investors. Particularly where capital growth has no role to play and investors don’t require the capital guarantee of cash. What happens if the economy deteriorates? If a recession were to occur, interest rates are more likely be cut quicker to encourage spending, resulting in bond prices rising. This would be supported by increased demand as investors move away from higher risk assets such as equities. If we don’t enter a recession and achieve a soft-landing scenario, rates will likely trend down more slowly to bring inflation in line with central banks’ targets; once again favouring bonds due to the inverse relationship between interest rates and bond values. Conclusion We believe it is critical to take a diversified approach to investing to help manage portfolio risks through different market conditions. The balance and mix of assets will depend on each investor’s ability and willingness to take on investment risk as well as how much of their capital they need guaranteed. That said, we believe now is a great time to be reassessing your asset allocation. Investors looking for capital growth who don’t need capital guarantees should consider introducing bonds into, or back into, their investment portfolio and doing so before central banks begin to cut rates. While cash rates may seem alluring, it is important to remember the distinct roles bonds and cash play in a portfolio. Cash is best reserved for short-term spending needs that require a guarantee as it will not provide the long-term capital growth and inflation protection of other assets. It may seem daunting as we have been through a period of significant market volatility but over the long term, we have high conviction that bonds will provide better risk adjusted return outcomes for investors who are able to take on the increased risks offered by bonds. As always, we recommend speaking to your financial adviser to get tailored advice based on your unique circumstances prior to making any investment changes. Source: Perpetual

With the Australian dollar trading below long-term averages and expected to rise as the US dollar peaks, it’s time to think about protecting overseas investments with hedging. The following are the reasons why: Hedging can offset currency movements Rising AUD could crimp returns on overseas assets. The Aussie dollar is below its long-term average against the US dollar, indicating it might be time for investors to consider adding currency hedging to global equities portfolios. Hedging can protect a portfolio against foreign-exchange fluctuations by offsetting currency movement effects on the Australian dollar value of an overseas investment. The Australian dollar’s floating exchange rate means its value is determined by the market through supply and demand. This allows the currency to adjust naturally to economic situations, helping protect Australia from economic shocks. But the currency’s movements can add an extra layer of uncertainty to global investments. This can add to returns from overseas assets when the Aussie falls or crimp returns as the Aussie rises. One of the conundrums of investing globally is what to do about currency, as foreign currency exposure presents an additional risk for global equity investors. An investor needs to consider not only whether the global asset they are invested in will generate a return, but whether exchange rates will move in their favour – or against them. This is why some investors opt for currency hedging, to reduce the impact of currency fluctuations on their portfolio. What is hedging? Simply put, a currency hedge is an instrument that offsets any currency movement effect on the returns of an overseas investment. As a result, investment returns should reflect the actual returns in the overseas country in which they were made, without any additional impact from foreign exchange movements. This gives investors the option of being able to invest offshore without having to worry about currency movements impacting on their investment choice. What does hedging mean for investing? Consider an Australian investor who buys a US stock and finds that it doubles in value. If the Australian dollar did not move relative to the US dollar during the period of investment, then the gain would be 100 percent. But if the Australian dollar halved in value, the value of the investment in Australian dollar terms would rise by a further 100 percent – reflecting both the original return on the shares, as well as the exchange rate effect. The same process could happen in reverse. If the Australian dollar doubled in value, then this would completely offset the USD rise in the value of investment, leaving the investment value in Australian dollars unchanged. These examples are extreme, but they highlight the degree to which currency movements can significantly boost, or significantly negate, the value of overseas investments when they are made. Is now the right time to hedge? Foreign exchange movements can often be supportive for Australian investors and augment global returns. Most global equity funds in Australia are ‘unhedged’ – meaning returns reflect both the stock and exchange rate movements. But with the Australian dollar trading below its average exchange rate since floating in 1983, it may be time to consider taking a hedged position. Since the float in 1983, the Australian dollar has risen as high as $1.10 relative to the US dollar in July 2011 and as low 48c in April 2001. These large swings in currency exchange rates can have significant impacts on investors returns. No one can be certain about the future value of the Australian dollar, but it now trades below the average exchange rate it’s enjoyed against the US since 1983. The dollar has sold down to current levels partly because the RBA’s cash rate is lower than that of many offshore central banks, including the US Federal Reserve. Australia’s battle against inflation has been a few months behind America’s. The RBA is under pressure to keep interest rates a bit higher for a bit longer to contain inflation, just as the Fed appears poised to reduce interest rates. That could well be a catalyst for a strengthening in the Australian dollar. Impact of commodity prices Stronger commodity prices could also be supportive of a higher Australian dollar. All investing involves risk, no matter the asset. That’s why some active portfolio managers use different hedging tools to help balance risks and opportunities within portfolios. For those who do not want exposure to currency movements, a fully hedged global equity fund would serve that purpose. Investors could also choose to have a mixture of fully hedged and unhedged funds if they do not have a firm view regarding currency movement. Source: Perpetual

Risk is about tolerating the potential for losses. Understanding your risk appetite allows you to make well informed decisions about your money. For some people, risk means excitement and opportunity. For others, it invokes feelings of fear and discomfort. We all experience a degree of risk in our everyday lives – whether it’s simply walking down the street or having investments in the share market. Everyone has a risk profile that defines their willingness to accept risk. It’s usually shaped by age, lifestyle and goals and is likely to change over time. Risk is about tolerating the potential for losses, the ability to withstand market movements and the inability to predict what’s ahead[1]. In financial terms, risk is the chance that an outcome will differ from the expected outcome or return. It includes the possibility of losing some or all of your original investment[2]. Often you may not be aware of your risk appetite until you’re facing a potential loss, so loss aversion becomes a significant factor when making decisions related to risk. What is risk appetite and risk tolerance? Risk appetite and risk tolerance are used interchangeably but are different. Risk appetite is a broad description of the amount of risk an investor is willing to accept to achieve their objectives. It’s a statement or series of statements that describes their attitude towards risk taking[3]. Risk tolerance is the practical application of risk appetite3 and considers the degree of variability in returns an investor is willing to bear. As an investor, you should have a good understanding of your attitude towards risk. If you take on too much risk, you might panic and sell at a bad time. But if you don’t expose yourself to enough risk, you may be disappointed with your returns and potentially unable achieve your objectives. How do I work out my risk appetite? Think about how you might answer these questions: How much money do I have to invest? How much money am I willing to lose? How worried would I be if share markets fell dramatically? Am I planning to track my investments daily? Would I consider investing in different types of investments? Your age, income and investment objectives all help determine your risk appetite. Age: generally younger investors with a longer time horizon to invest are more willing to take greater risk with their money to earn higher potential returns. Older investors with a shorter investment timeframe may be more cautious as they’ll need their money to be more readily available and have less time to recover from a loss. Income: people who earn more money and have a higher disposable income can typically afford to take greater risks with their investments. Investment objectives: be clear about why you’re investing and when you think you’ll need to withdraw your money, as well as how long you need the money to last. Saving for a holiday or a deposit on a home is quite different from investing for your retirement. Risk and Return The relationship between risk and return underpins all financial decisions. The more risk an investor is willing to take, the greater the potential return. However, investors expect to be compensated for taking on this additional risk and should realise that taking on more risk doesn’t guarantee higher returns. What type of investor are you? High: willing to risk losing more money for the possibility of better returns. Moderate: willing to endure short-term loss for the prospect of better long-term growth opportunities. Conservative: willing to accept lower returns for a higher degree of liquidity or stability. Whatever your risk appetite, you should always consider both risk and return before making decisions about what to do with your money. Although shares and property are generally considered to be higher-risk investments, even more conservative investments like bonds can experience short-term losses. No investment is completely risk free. This explains why smart investors typically have a diversified portfolio that includes several different types of investments. Risk and Diversification Don’t think that just because your friends invest in shares you should too. If you don’t have a lot to invest or you’ll want to access your money in a few years, shares may not be the right type of investment for you. By understanding your risk appetite and being honest about what you want to achieve, you’re more likely to be comfortable with your investment decisions. A financial adviser can help you understand your risk appetite, as well as create a portfolio that suits you. The simplest way to minimise investment risk is through diversification. A well diversified portfolio will usually include different asset classes, like shares, property, bonds and cash, with exposure across different industries, markets and countries. The idea is to reduce the correlation between the different types of investment and have a good balance of assets which move in different directions and at different times. So, if some of your assets perform poorly, others may be performing well, offsetting the poor performers. Although diversification doesn’t guarantee you won’t suffer a loss, it’s an effective way to minimise risk and help investors realise their financial goals. Make informed decisions You should monitor both your risk appetite and your investment portfolio over time. Your risk appetite is likely to change as you get older, and as your income or family situation changes. Similarly, you should review your portfolio to ensure the risk level is still suited to your overall investment objectives. Financial markets are constantly changing, which means the underlying assets you’re invested in could change too. If you’re a confident investor, you should check that it’s still on track to generate the level of return you want and importantly, at a comfortable level of risk. If you prefer to speak with a financial adviser, they too can help you undertake regular reviews and rebalance your portfolio, as necessary. By understanding your risk appetite, you’re in a better position to make well informed and transparent financial decisions. It will help you identify opportunities … Read more

Key points Seven key lasting impacts from the Coronavirus pandemic are: “bigger” government; tighter labour markets; reduced globalisation and increased geopolitical tensions; higher inflation; worse housing affordability; working from home; and a faster embrace of technology. On balance these make for a more fragmented and volatile world for investment returns. But it’s not all negative. Introduction It’s four years since the COVID lockdowns started. The pandemic ended when it morphed into the less deadly Omicron variant in late 2021, but just as a sound can reverberate around a room the effects of the pandemic continue to reverberate in economies. Putting aside the long-term health impacts this note looks at 7 key lasting economic impacts. Bigger government and more public debt The malaise of the 1970s ushered in “smaller” government in the 1980s in the Thatcher, Reagan, Hawke and Keating era. But the political pendulum started to swing back to “bigger” government after the GFC and COVID has given it another push. Memories of the problems of high government intervention in the 1970s have faded and there is rising support for the view that government is the solution to most problems – via regulation, taxes, spending or education campaigns. The pandemic added to support for “bigger” government: by showcasing the power of government to protect households and businesses from shocks; enhancing perceptions of inequality; and adding support to the view that governments should ensure supply chains by bringing production back home. It’s combining with a desire for governments to pick and subsidise clean energy “winners”. Source: IMF, Australian Government, AMP IMF projections for government spending in advanced countries show it settling nearly 2% of GDP higher than pre-COVID levels. The success of governments in protecting households from the worst of the pandemic has also reinforced expectations they would do the same in the next crisis. The pandemic ushered in even bigger public debt just as the GFC did. While high inflation helped lower debt to GDP ratios in 2022 it’s settling at higher levels than pre-pandemic. Source: IMF, AMP Implications – While there may initially be a feel good factor, the long-term outcome of “bigger” government is likely to be less productive economies, lower than otherwise living standards and less personal freedom. It will take time before this becomes apparent though. Meanwhile, higher public debt means: less flexibility to respond with fiscal stimulus to a crisis; a greater incentive for politicians to inflate their way out; and interest payments being a high share of tax revenue. Tighter labour markets and faster wages growth In the pre-pandemic years, wages growth was relatively low and a key driver was high levels of underemployment, particularly evident in Australia. After the pandemic, labour markets have tightened reflecting the rebound in demand post pandemic, lower participation rates in some countries and a degree of labour hoarding as labour shortages made companies reluctant to let workers go. As a result, wages growth increased, possibly breaking the pre-pandemic malaise of weak wages growth. Source: ABS, AMP Implications – Tighter labour markets run the risk that wages growth exceeds levels consistent with 2% to 3% inflation. Reduced globalisation/more geopolitical tensions A backlash against globalisation became evident last decade in the rise of Trump, Brexit and populist leaders pushing a nationalist gender when the benefits of free trade were being questioned. Also, geopolitical tensions were on the rise with the relative decline of the US and faith in liberal democracies waning resulting in a shift from a unipolar world dominated by the US, to a multipolar world as regional powers (Russia, Iran, Saudi Arabia and notably China) flexed their muscles. The pandemic inflamed both – with supply side disruptions adding to pressure for the onshoring of production; conflict over the source of and management of coronavirus; it heightened tensions between the west and China; and it appears to have added to nationalism and populism. So, the days of global free trade agreements and falling defence spending seem long gone for now. Rather we are seeing more protectionism (e.g. with subsidies and regulation favouring local production) and increased defence spending. Implications – Reduced globalisation risks leading to reduced potential economic growth for the emerging world and reduced productivity if supply chains are managed on other than economic grounds. And combined with increased geopolitical tensions resulting in more defence spending it could result in a more inflation prone world than was the case. Higher prices, inflation and interest rates A big downside of the pandemic support programs was the surge in inflation. The combination of massive money printing along with a big increase in government payments to households (e.g. Job Keeper) resulted in a massive boost to spending once lockdowns were lifted which combined with supply chain disruptions, also flowing from the pandemic, to cause a surge in inflation. Inflation is now starting to come under control as the monetary easing and spending boost has been reversed and supply has improved again but the pandemic has likely ushered in a more inflation prone world by boosting “bigger” government; adding to a reversal in globalisation; and adding to geopolitical tensions. All of which combine with aging populations to potentially result in more inflation. Implications – Higher inflation than seen pre-pandemic means higher than otherwise interest rates over the medium term which reduces the upside potential for growth assets like shares and property. Worse housing affordability At the start of the pandemic, it was thought the economic downturn and higher unemployment and a freeze in immigration would cause a collapse in home prices and they did initially fall. But not by much as it was quickly turned around by policy measures to support household income, allow a pause in mortgage payments and slash interest rates and mortgage rates to record lows. What’s more the lockdowns and working from home drove increased demand for houses over units and interest in smaller cities and regional locations. As a result, Australian home prices surged to record levels. Meanwhile the impact of higher interest rates in the … Read more

While living a long and healthy life is a goal for most of us, it does raise a valid question. Is there a chance that you could outlive your savings? Why does living longer matter in retirement? The risk of outliving your savings is known as longevity risk. With Australians living for longer it is more important than ever to make sure your savings will go the distance. Research* shows that Australians retiring today are living a staggering ten years longer than in the 1990s. When improvements in medical care and living standards are taken into account a 65-year-old today can expect to live well into their 90’s and may now spend up to three decades in retirement. Source: Challenger Life Company estimates The retirement income challenge A big challenge for Australian retirees is how to plan for retirement income that will last a lifetime. Income from super such as an account-based pension is generally not guaranteed which means payments will stop as soon as your account balance runs out. Poor share market performance can also put you at risk of outliving your savings. Adding a source of regular income such as a lifetime annuity to your retirement income plan can help you manage the risk of outliving your savings. Feel confident your retirement income will last as long as you do Living for longer requires a smarter approach to planning your income in retirement. The good news is that it doesn’t need to be complicated. It starts with three key steps. Understand how long your super and savings will last. As a rule of thumb, you should plan to be able to meet your essential expenses for the rest of your life. Get support from the Age Pension. If you’re eligible, the Age Pension can form part of your safety net income. Bear in mind that even the full Age Pension entitlement may not be enough to cover the cost of living of a modest retirement. Secure your retirement income with a regular lifetime income stream. A lifetime annuity can boost your safety net income with regular income for life, giving you confidence you can pay for your essential expenses even if you live to age 100 or older. Managing the risk of outliving your savings – what are the options? Talk to a financial adviser about how long your super and/or savings may last. Check your eligibility for the Age Pension. The sooner you prepare to apply for the Age Pension the better, as it cannot be back-paid. Consider a regular lifetime income stream such as a lifetime annuity to complement your retirement income. *Challenger Retirement Income Research, September 2019 Source: Challenger

In this article we look at some of the ways you can better manage the high cost of living by investing, increasing your income or reducing expenses. Key takeaways Investing a portion of your income is one way you can keep up with a high cost of living. Shopping around for the best deals on your home loan, electricity and insurance, can end up saving you hundreds of dollars over the long-term. You can find an extra source of income outside of your 9-to-5 job by earning passive income or renting out your garage space, for example. With the bare essentials becoming – well, expensive, it’s not surprising that many people are looking for new ways to save money or increase their income. The good news is there are steps you can take to manage a higher cost of living and stay on top of your bills. Managing a higher cost of living Here are three ways that could help you better manage a higher cost of living. #1 Continue investing Investing a portion of your income is one way you can keep up with, or even outpace, a higher cost of living. While changes to interest rates or sharemarkets may cause many people to second guess themselves when making investment decisions, it’s important to stay focused on your long-term goals and avoid being influenced by short-term market volatility. Having a diversified investment plan – money invested across many asset classes and in many industries – will help to cushion you from major sharemarket falls. If you’re new to investing, it’s a good idea to consult with a financial adviser who can provide guidance based on your circumstances and specific goals. Regularly review your investment portfolio to ensure it remains on track and make adjustments as needed. #2 Find ways to reduce expenses Reducing your expenses doesn’t mean sacrificing quality of life. It involves making intentional choices, such as cooking at home or exploring cost effective leisure activities. Small changes can significantly impact your overall financial health. Shopping around for the best deals on your home loan, electricity and insurance, can end up saving you hundreds of dollars over the long-term. You may also want to consider cutting down on subscriptions or memberships you don’t use, and make sure you’re getting all the concessions you’re entitled to such as rebates or pensioner discounts. Home loans One of the simplest ways to reduce mortgage debt beyond paying more than the minimum repayment, is to review your home loan. Many mortgage lenders are competing for new business so it’s worth checking if your interest rate and features are still competitive. Switching to another mortgage lender may get you a better rate – helping you to pay off your mortgage faster. Insurance Regularly assess your insurance policies to ensure you’re adequately covered without overpaying. Bundling policies or shopping around for better rates can lead to substantial savings. Electricity Consider using some of these energy saving tips: Check out government and council rebates to reduce your energy bill Switch to energy efficient lightbulbs Consider installing solar panels: while costly initially, this can save thousands of dollars over the long-term Water savings: install a water efficient showerhead and only run the dishwasher on a full load Only heat and cool the rooms you’re using and use a timer Unplug unused electronics Hang-dry your laundry rather than using a dryer. Groceries While food might be a necessary expense, there are ways to save without compromising quality. Meal planning is a simple way to get better at grocery shopping to reduce wasting food. You could also consider finding recipes that use the same ingredients as you’re more likely to use up an entire bag of vegetables or a fresh bunch of coriander. Alternatively, consider growing your own vegetables. #3 Increase your income Although there isn’t always a quick or easy way to increase your income, there are options for earning extra cash to cover more immediate expenses. You can find an extra source of income outside of your 9-to-5 job by: renting out a room or parking space pet sitting dog walking online tutoring or explore a side hustle such as market research. You may also want to consider investigating avenues for earning passive income to earn money without actively working. This could include investments in shares, real estate or starting an online business. While building passive income takes time, it can become a valuable asset in beating the high cost of living. Lastly, while it may not be easy to increase your pay overnight, you could consider ways to use your job performance to get a salary increase if you can prove you’ve gone above and beyond. Keep an eye on the job market and be open to exploring new opportunities. Sometimes, switching jobs can result in a substantial salary increase. And always invest in your skills and education to make yourself more marketable. Summary The high cost of living in Australia may seem daunting, but with strategic planning and informed decision making, it’s possible to achieve financial stability. Remember, it’s not about how much you make but how well you manage what you have. Source: MLC

Let’s run through some things to keep in mind to decide what level and type of cover you need. Finding your insurance sweet spot It can take days – and a whole lot of stress – to figure out what type of insurance cover is best for you and how much of it you need. And the thought of making a decision that could have a major impact on your life down the track can feel daunting. The good news is, we’ve got some great pointers for you. The ‘what does your gut tell you’ test: sleeping easy at night Numbers certainly have their place in calculating the right level of insurance cover – but it’s also about how much of a safety net you’re willing to pay for and what cover is going to help you sleep well at night. Thinking about these questions – and whether you’re likely to lose sleep over the answers – can be a good starting point when thinking about the insurance you need: Is someone relying on me to pay the mortgage? How long would my savings last if I lost my income? How would I cope having medical treatment whilst having to work? Will this insurance give me more peace of mind? What type of cover do I need? When deciding on the cover you need, it’s worth keeping in mind the pros and cons. With trauma cover, for example, a claim payout means you’ll have a lump sum to help you meet the costs of medical treatment when your life is interrupted by a serious illness. Income protection, on the other hand, will pay you a set amount each month when you’re unable to work due to illness or injury and there may be a waiting period before you start getting your payments. Both types of cover could definitely help if you were to have a brush with cancer or a stroke that’s serious but not life-threatening. And if it’s a condition that leaves you unable to work or care for yourself for the rest of your life, then you may be eligible for a claim payout on a Total and Permanent Disablement (TPD) policy. Taking out every type of policy is one way to make sure you’ve got the cover you need if the worst were to happen.  But this ‘cover all bases’ approach might cost more than you can afford. So how do you choose a combination of policies and premiums that adds up for you? It’s all about you The type and level of insurance cover that’s right for you, very much depends on your situation. There is no automatic answer or cookie cutter approach to getting it right for you. This is why working with a financial adviser can be a great way to choose insurance cover that suits your circumstances. They can take your personal situation into account and use their expert knowledge to make recommendations that are a good fit. Getting covered for a year’s worth of your salary can be a good starting point. Knowing you’ve got 12 months of income to see you through a period of illness can do a lot for your finances and peace of mind. But when illness strikes there may be more to it than getting regular payments to help cover your regular expenses. That’s why expert advice can be so important in helping you decide whether Income Protection or Trauma cover – or both – are the best choice for your circumstances. Things to keep in mind If you’re taking a DIY approach to narrowing down your options, these are some of the critical factors that are going to influence what’s best for you: You and your circumstances Your work, age and partnership status The number and age of any dependants Whether you’re a renter or home owner How much you owe on your home loan (if you have one) Your expenses and debts Your total monthly living expenses How much you owe in loans and debts (apart from your main mortgage) Your income and assets Your annual income – and your partner’s income if applicable Any additional income you or your partner earn Any assets you have – including cash, property and investments A good rule of thumb for your level of cover You probably don’t have a seven-figure salary or a $10 million dollar property you’re paying off. Getting enough cover to give you some peace of mind and a bit of breathing space if your health takes a turn for the worse may be enough.   Source: MLC