Cash rate sits at record low

The Reserve Bank of Australia (RBA) recently announced an unprecedented reduction in the official cash rate of 0.25% to 1.00%, which is the lowest on record.

This will have implications for cash returns on fixed interest investments such as term deposits which are often a significant portion of a Self-Managed Superannuation Fund (SMSF) investment portfolio. It will also impact on self-funded retirees who have assets outside of superannuation.

Whilst most banks and financial institutions have factored in these rate cuts to some extent, the full impact will be felt once existing term deposits come up for renewal.

There is some debate among analysts around what economic changes can be expected over the next 12 months. Many commentators are predicting a further rate cut of at least 0.25% this calendar year with further consequential effects on cash investment returns.

The future is bright for SMSFs, however these lower cash returns may result in slower growth of some superannuation balances and, for those in pension phase, the possibility of having to sell assets to meet minimum pension withdrawal standards.

Cash assets are traditionally seen as being more capital secure than growth investments (such as shares) but in a very low interest rate environment there are risks of erosion in the real value of cash based investments (i.e. where returns are less than the inflation rate).

Trustees of a SMSF would be wise to review their existing investment strategy, particularly in regard to target asset sector allocations (fixed interest, equities, property, etc.). Any changes to an investment strategy should take into account relevant considerations such as; a member’s age, immediate plans for their SMSF, whether the fund is in accumulation or pension phase, risk appetite of the members, the need for diversification of investments and liquidity requirements. Trustees should considering seeking professional advice to assist in this process where appropriate.

Bob Locke – CA SMSF Specialist – CEO of Practical Systems Super

The information and examples provided in this article are general in nature and do not take into account personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, the reader should consider its appropriateness in relation to their personal situation and seek advice from an appropriately qualified and licensed professional.

Bob Locke examines the federal budget from his perspective.

2019/20 Federal Budget Overview

Bob Locke, founder of Practical Systems Super, examines the 2019 Federal Budget. 

Over my 35 years of working as an accountant and taxation expert, I have watched the increasing complexity in the administration and compliance of SMSFs in the face of ever-changing government regulation.

On the back of an improved fiscal position, the budget was clearly designed for an election year with no surprises or “hits” and where most people will benefit from tax cuts.

The slated tax reductions will increase consumer disposable income. In the context of the current lower than average consumer confidence, you could expect some of this to be saved (rather then spent) and some of these savings could flow into superannuation.

It’s good to see that the budget position is finally heading back into surplus but paying down the existing debt is going to require a sustained discipline on the part of current and future governments.

The 2019/20 Budget and superannuation

There were very few measures in this year’s budget relation to superannuation.

I think this is a good thing and very wise given the massive changes made over the last few years (i.e. changes to contribution caps, introduction of the Transfer Balance Cap and Totals Super Balance cap, etc.).

Any changes to superannuation arrangements tend to impact negatively on general confidence in superannuation – negative changes especially, but also positive changes can influence the general perception that “governments are always changing the rules and I can never be sure how my superannuation savings will be affected in the future”.

In my experience, younger people in particular are often skeptical about making additional contributions to super as constant changes undermine their confidence in a system where the government is supposed to be supporting and encouraging provision for their retirement.

To find out more about how the budget will impact on your SMSF call the office on 1800 951 855.