The super bull market
By Paul Rickard
Following gains of 3.0% in November and 4.4% in December, the Australian sharemarket is up another 2.0% in January. In fact, it has added more than 22% since its low a tad over 11 months ago on 10 February. Most commentators say that it is just a case of the Australian market watching the lead from the US markets and playing “follow the leader”, but there could also be a one-time local factor at play.
This is the Government’s changes to the superannuation system, which became law on 15 November.
And because these changes don’t take effect until 1 July, we may not have seen their full impact yet. One thing is for sure - when the super system last underwent major surgery in 2007, the flows into super were massive, and this was one factor that drove the S&P/ASX 200 to reach the dizzy heights of 6828.7 in November 2007. While the scale of the current changes isn’t as dramatic, it will certainly lead to large flows into super - and into the equities market.
The super changes
The big change is the reduction in the non-concessional contributions cap from $180,000 to $100,000 per annum. From 1 July, you will only be able to make up to $100,000 of personal after-tax contributions into super each year, rather than the $180,000 limit that applies in 2016/17.
When combined with the ‘bring forward rule’, which effectively allows people under 65 years of age to make three years’ of contributions in one go, the change in the cap is very material. Currently, a person under 65 can apply this rule and make $540,000 of non-concessional contributions in one go. If they wait till 1 July, they will only be able to contribute $300,000.
For a couple where both parties can access this rule, they can potentially get $1,080,000 into the super system prior to 1 July, but if they miss this deadline, then they will only be able to contribute $600,000.
The opportunity to get a big one-off amount into super is closing fast.
But there is also another change that will encourage some superannuants to make contributions before 1 July. This change has received far less coverage and wasn’t part of the original Government package announced in the May budget.
As part of the implementation of the $1.6m cap on how much money can be transferred into the pension phase of super, the Government has created new rules around who can make a non-concessional contribution. These relate to the person’s total super balance - that is, the amount they have in the super system in both accumulation and pension phases.
From 1 July, if your total super balance is $1.6m or more, you won’t be allowed to make any non-concessional contributions at all. If your super balance is between $1.5m and $1.6m, your limit (under the bring forward rule) will still only be $100,000, and if your total super balance is between $1.4m and $1.5m, your limit will be $200,000. Your super balance will be measured at the preceding 30 June - so for 2017/18, as at 30 June 2016.
Bottom line - people who have a total super balance of $1.4m or more have even more reason to take action before 30 June.
Will these changes impact the sharemarket?
Of course, to make super contributions, the money has to come from somewhere. For some superannuants, this might mean selling existing assets such as shares or property. Capital gains tax implications will need to be considered.
Others might simply draw down on existing savings. It is also not beyond the realms of possibly to suggest that some advisers will recommend that clients draw down on their mortgage offset account or access other low cost finance so they can make contributions. This opportunity won’t be repeated again.
And while SMSF members can potentially consider ín-specie’ transfers, retail and industry fund member, who make up two thirds of the system by value, will be required to find new funds.
Put this all together and the likelihood is that there will be considerable flows of new money into the super system, and as Australian equities are the major investment asset of Australian super funds, some 30% to 40% will find its way into the sharemarket.
Have we already seen the impact of these changes? The $64 question, but going by past experience, it takes some time for complex super changes to filter through and importantly, for clients to act.
Time to act
The clock is ticking down to 30 June. While there are so many factors that can impact equity prices and trying to time markets is incredibly difficult, my hunch is that the impact of these changes hasn’t been felt yet. If I had a choice of making my super contributions in January/February, or leaving it till June, I would get it done sooner rather than later. That said, the most important thing is to make sure you take advantage of this opportunity and make personal contributions to the maximum possible extent by 30 June.
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Published: Thursday, January 12, 2017
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