Sugar hit: Federal Budget analysis
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The Government has finally delivered the 2020 Budget, five months later in the year than usual. Delayed by the first COVID shutdown, it was worth waiting for.
There are some real sweeteners in there for older Australians; people planning their retirement or people already living in retirement.
Short-term gain, long-term pain
But first, let’s deal with the economics. The Government’s strategy is clear. They’re fighting back against the COVID shutdown with a business and consumer led economic recovery.
It will probably work too.
There are some heroic numbers behind the forward estimates, but they seem to be backed-up by the International Monetary Fund (IMF). Since the Budget was delivered, the IMF has revised its economic forecasts for Australia.
Things don’t look as bleak as they did six months ago. The IMF expects Australia’s economy to shrink 4.2 per cent this year before growing 3 per cent in 2021. In April the IMF thought Australia’s economy would contract 6.7 per cent during 2020.
There are over $200 billion worth of stimulus measures in the Budget, mostly focused on tax cuts to get people spending and employment subsidies to get people working.
But keep in mind that this $200 billion of spending is just the tip of the iceberg. We have already spent around $300 billion in the past six months on fighting the economic crisis.
That short-term spending will create a debt-burden for years, maybe decades to come. Even the Government concedes that Australian gross debt will exceed $1 trillion by 2022 and will continue to grow each year in the 5-year forward estimates.
Good news for interest rates
Long-term concerns aside, the Budget stimulus will almost certainly spark the economy into action and take the pressure off the Reserve Bank to continue cutting interest rates.
We think that there are unlikely to be any further interest rate cuts. That’s good news for retirees who are finding it impossible to live purely off the income from their retirement investments. Low interest rates mean that they’re being forced to sell down their retirement assets for money to live on. They need to be strategic about these sell-downs, so that they don’t crystallise any losses.
A 30% return on investment
In more good news, the promised tax cuts also provide an opportunity for pre-retirees to fast-track their retirement plans. People earning more than $37,000 a year will enjoy tax cuts backdated to 1 July this year. Those earning $120,000 a year will benefit most; to the tune of $2,745 after tax in a year.
Pre-retirees can double down on the tax savings. If a pre-retiree earning $120,000 chooses to salary sacrifice their tax saving, it would mean redirecting around $4,200 of pre-tax income to super. This would boost their super savings by over $3,500 per year. That’s an immediate return of about 30% and it could make a meaningful difference to your retirement.
A better super system
But it’s the structural changes to the super system that will likely benefit retirees most. The changes will increase competition between funds, improve transparency and ultimately lead to a more efficient and simpler super system.
Currently there is a lot of inefficiency and waste in the super industry. The fact that new super accounts are often automatically created when you change jobs has resulted in about 4.5 million people having unintended multiple accounts. That’s costing them about $450 million in unnecessary fees, which amounts to about $50,000 each of lost investment earnings.
This Budget will put an end to that. From next year, when you change jobs your new employer will ask you where your super is and pay into it.
And it will be easier than ever to identify whether you’re in a dud super fund. A new annual benchmarking test will mean there’s nowhere for your super fund to hide.
If you’d like to learn more about this year’s Budget give us a call. Because when you engage with us, it’s not a matter of ‘if’ you’ll make the most of the opportunities, but ‘when’.
Michael Bowman and James McMaster are co-founders of When Financial Solutions. This article is general and does not consider your personal circumstances. If you would like advice specific to you please give us a call.