06
Apr 2020

SPECIAL HUDSON REPORT III - COVID 19 – GOVERNMENT STIMULUS PACKAGE

SPECIAL HUDSON REPORT III - COVID 19 – GOVERNMENT STIMULUS PACKAGE

GOVERNMENT STIMULUS PACKAGE III

The Federal Government has now gone "all in" with a "whatever it takes" attitude to fighting the economic calamity that accompanies the medical crisis that is the COVID-19 pandemic.

The support so far:

The Reserve Bank of Australia (RBA) is supporting the financial system with rate cuts and liquidity injections.

The government has now announced three stimulus packages.

The first was to support welfare recipients via cash handouts and apprentices and to provide extra medical funding at a cost of $18.8 billion.

The second was to protect the most vulnerable amongst them pensioners and small businesses (see my previous report here) at cost of $66 billion.

The Third stimulus is the big one at a whopping cost of $130 billion over six months.

With RBA support all up the cost comes in a $320 billion - so far!

STIMULUS Package III

The government has stepped into the breach to avoid an economic catastrophe for the country with mass unemployment and a feared break down of society.

This sounds dramatic because it is. Australia has never seen anything like this before and the government will not die wondering what it could have done to save an economy that has had to be shut down due to the spread of the pandemic.

JOB Keeper

The government has announced that it will support employers to retain an estimated 6 million jobs in the private economy by a direct subsidy of $1,500 per fortnight for every eligible employee as of 1 March.

Companies will qualify if there turnover as of 1 March has declined by 30% from a previous period for smaller business or 50% for large business - threatening the jobs of their employees.

This covers a huge portion of the economy

By subsidising these jobs to the tune of $3,000 per month the hope is that this will give employers the breathing space they need to keep those employees and not force them onto the unemployment lines.

It will allow a big swathe of the economy to go into "hibernation" for up to six months to allow the economy to start up again - hopefully - after the virus has run its course.

It is high stakes but seems a good strategy.  It is targeted at a level that will see those who have already lost their jobs in the most hard hit industries of retail, hospitality, tourism - whether permanent casual or sole traders - to stay linked with their former or current employers and ride out the crisis.

Employers will nominate their staff and be paid the subsidy by the ATO to ensure the staff are retained.  It is clever and strategic and has been welcomed by all sides – business, unions and employees

Let’s hope it works.

HUDSON is here to help

As we have done for 28 years we are here to provide professional and effective advice for our many members.

The nature of how we provide our services to you, our loyal members, mean that your trusted qualified and experienced adviser is only a call away.  If you are concerned about the current situation or need to speak with your advisers about any of the above matters or simply want a review of your overall situation including your finances and insurances simply telephone 1800 804 296 and book in a call.

This is historically an unprecedented event for Australia and the world.

Tragically there will be untimely deaths from this event.

There will be economic fallout and the government and the RBA is doing all it can to assist in this difficult time.

We will get through this in the next 3 to 12 months but with much uncertainty on the ultimate timetable and outcomes both medically and economically.

Our best advice at this stage is to stay safe, prepare for disruption, and take advice from your Hudson Adviser before you act on any investment decisions.

 

Phillip McGann

General Manager

 

Source: https://treasury.gov.au/

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06
Apr 2020

ATTENTION RETIREES AND IMPENDING RETIREES

ATTENTION RETIREES AND IMPENDING RETIREES

Written by Hudson Adviser Ivan Fletcher

It can be an anxious time watching falling asset values when they are a significant (potentially only) source of retirement income. Whilst it absolutely true that now is not the time to be making radical changes to your portfolio, but that does not mean "Do Nothing". There are several strategies to consider in managing through such turbulent times.

1. BUCKET STRATEGY  

For those that utilise Hudson Superannuation and Pension services, you will likely be familiar with the "Bucket Strategy Approach" whereby up to 3 years of your income needs are specifically proportioned into Short Term defensive assets (cash and fixed interest). It was only a month ago that the focus by most people was on how poor the return was on cash and fixed interest, suddenly 0.5% return (positive) is not so bad.


It is in circumstances such as these that the real value of the Bucket Strategy comes into play.
Whilst share values experience wild volatility, the impact on Short Term investments (Bucket 1) is minimal (as there is minimal to nil share exposure among these investments ). The longer Term bucket (Bucket 3) which is predominantly shares is impacted heavily, but these investments are the long term part of the portfolio and should not be required for at least 6 years to contribute to your income allowing plenty of time for the collective global economy to recover.

Contact your adviser if you would like more information on this strategy.

2. REDUCED LIFESTYLE COSTS

In our new 'isolated' lifestyle we all (not just retirees) have the opportunity to cut back on non-essential expenses (except maybe Netflix and Stan).  It is really forced upon us. It could be a very beneficial exercise to go through your bank accounts for the last 3 to 6 months and identify expenditure that you can no longer incur (travel, dining out, sports and social activities, dinner parties). From there you can then deny your self the corresponding income (example reduce your pension drawings accordingly).

3. REDUCED ACCOUNT BASED (ALLOCATED) PENSION MINIMUMS

The Australian Government has temporarily reduced superannuation minimum drawdown rates for account-based pensions and similar products by 50 percent for the 2019/20 and 2020/21 financial years. The following table illustrates the temporary reduction to the minimum pension drawdowns.

Age

Default minimum drawdown rates

Reduced rates by 50% for the 2019/20 and 2020/21 financial years

Under 65

4%

2%

65-74

5%

2.5%

75-79

6%

3%

80-84

7%

3.5%

85-89

9%

4.5%

90-94

11%

5.5%

95 or more

14%

7%


This flexibility offered by the government supports both Strategies 1 and 2 above and will allow your Short Term defensive assets to last even longer.

Alternative Strategies For  Account Based (Allocated) Pensions


 
a) Minimalist Approach (Reduce to New minimum)

Anyone who is on regular pension payments (fortnightly, monthly or quarterly) will now by default have already received this reduced new minimum,  so therefore you do have the option of ceasing pension payments completely for the rest of this financial year and then commencing next financial year on the reduced minimum (per above). For Fortnightly payments this can commence from 22 April, and for monthly payments from 25 April.  This strategy maybe suitable if you have large liquid holdings outside of super or sufficient alternative income sources (eg Defined Benefit pensions or rental income, part time work, centrelink pension, etc)

An alternative is to half your current drawings if ou are on the minimum effective now with the intention of continuing at the new minimum into the new financial year. In this scenario your pension amount will recompute for the first payment in July.

b) Revised Dollar Amount

You could reduce your regular pension payments to a specified lower amount to match your budget. Instead of continuing with the current minimum (eg: 5%), you could nominate a specific and exact Dollar amount to match you revised Budget (Strategy 2) example $1,600 per Fortnight. 

This strategy is suited if your Allocated Pension income is your predominant source of income and you are a strong budgeter. You can fine tune it to your exact needs and when the new financial year starts, your pension amount should not change (as it is no longer based on a percentage based calculation) and provide more time for your longer term investments to recover.

4. CENTRELINK UPDATES

Currently on Full Pension

For anybody who is already on the maximum Age or Disability Pension payment the only change is the government bonuses recently announced and identified in previous Hudson articles.

Currently on Part Pension

Anybody who is on partial Support payments for Age/ Disability Pension and is impacted by the ASSETS TEST (rather than the Income test) may secure an increase in payments to compensate for the loss in asset values. Any increase in Centrelink payments can then be used to further reduce your Allocated Pension drawings (Strategy 3).

For any loss in asset value you could see an increase in your pension payments equivalent to a 7.8% return depending upon where you sit between the minimum and maximum thresholds.

Eg Couple (who own their own home)

Total Assessable Assets drop from $600,000 to $500,000.
The Centrelink increase maximum would be $100,000 x 7.8% = $7,800 = $150 per FN Each.

Eg Single (who owns his/her own home)

Total Assets drop from $400,000 to $300,000.
The Centrelink increase maximum would be $100,000 x 7.8% = $7,800 = $300 per FN.

Note - Every case will be different and will depend on how close you are to the maximum Asset thresholds and also the application of the Income Test (which may be the predominant Test for some people with significant other sources of income).

Beware of Timing Delays / Differences

  • Centrelink generally seek half yearly updates from Allocated Pension accounts in February and August. However there is usually a delay in this information flowing through to calculations. These updates are just starting to flow through now.
  • This means that any Assets assessment recently performed and updated on your accounts could be on asset values before the large drop in share valuations through the month of March on the back of the Corona virus outbreak. (In other words if you receive a March assessment it is likely based on February Asset values)
  • Likewise if you supply reduced asset values and your pension payment goes down (instead of up), it could be that they received an auto update from your Pension provider around the same time or just after your update. IF this is the case use your mygov login to look up your “Income Statement” and check your asset values (and last date updated) and then provide updated asset values if they are significantly reduced compared to Centrelink records.

What To Do?

You can provide an update on your current asset balances to Centrelink via the mygov website

The reduction in your Asset Test may then result in increased Centrelink payments if you are not already on the maximum pension amount.  Don't expect this to happen overnight and if you hear nothing after several weeks you may need to follow this up with a phone call.

How Often Can I update Centrelink?

The truth is I don’t know the answer to this. The system would likely not cope with a new asset value update every week or so and you would likely draw unwanted attention to yourself.  However doing one update now that your assets have significantly reduced is reasonable, especially given their automated update process has coincidentally just happened around the time of the market peak.

IN SUMMARY

There are several levers you can pull that will assist in managing through the current crisis and the collective combination of these strategies have the potential to provide a significant positive impact on the longevity of your own retirement assets. Whilst it absolutely true that now is not the time to be making radical changes to your portfolio, but that does not mean "Do Nothing".

Your Hudson advisers are now working from Home office but otherwise it is business as usual. This is the perfect time to review your personal circumstances.


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03
Apr 2020

Share Market Update March 2020

Share Market Update March 2020

Written by Hudson Adviser Kris Wrenn

The Month of March

Well, what a month to report on! As the Covid-19 crisis rages on, the result for the month of March has of course been an absolute shocker. Broken down by various regions we have seen the following:

Australia (All Ords) -              Down 21.5%

The US (Dow) -              Down 13.7%

Europe (S&P Europe 350) -              Down 14.5%

The World (ACWI) -              Down 13.4%

12 Month Figures

So March hasn’t been great on the domestic front, but it is worth noting that Australia had enjoyed a stronger run than most prior to the recent falls and if we extend our gaze across the last 12 months the above becomes the following:

Australia (All Ords) -              Down 18.9%

The US (Dow) -              Down 16.5%

Europe (S&P Europe 350) -              Down 16.9%

The World (ACWI) -              Down 12.2%

When you consider that this does not include dividends (which are higher in Australia), it means a fairly similar result across the major indices, albeit a suggestion that the more developed countries have suffered worse than the overall world average.

Going back further


Source – Investing.com

The above graph shows the All Ords accumulation index, i.e. including dividends paid. It shows that the fall over the last 6 weeks has effectively wiped away returns for the last three years. It is exactly why new investors are recommended to maintain a 7 year investment timeframe. The long term investor who has remained in the market for 7 years has still achieved a 33% total return over the last 7 years. The 10 year investor has returned 64%.

The Aussie $

It’s been overlooked by some but the $AUS has had a tumultuous time of its own over the last few months. It currently sits at 61.2c against the $US, where it was over 65c just a month ago, and over 70c just 3 months ago. The fall is largely due to falling demand for iron ore and coal. It actually fell below the 60c mark but the stimulus measures announced by the Government have seen it stabilise.

It’s created an interesting situation for Australians investing in global share funds, in that returns have been significantly better than they would have been, but only if the fund was not hedged against currency movement. Looking at the MSCI ex-Australia index, which is the worlds largest 1,500 companies excluding the Australian companies, over the last year we have seen the unhedged version outperform its hedged counterpart by over 10%.

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03
Apr 2020

Preserving Super Balances in Troubled Times

Preserving Super Balances in Troubled Times

Writtten by Hudson Adviser Michal Park

It’s no secret that superannuation has taken a major hit over the last month. Three ways in which individuals can try to stem the bleeding and preserve their balances are as follows:

  1. In a move that seems to add insult to injury, the government has recently announced an early super access scheme for COVID-19 related hardship – that is, $20,000 tax free over the next two financial years. Sounds good in theory – and will be a potential life saver for individuals where Centrelink benefits are insufficient to cover expenses – but in practice it’s a different story.  Unless you are drawing the $10,000 per annum from cash or other equally defensive asset classes, the funds will come from growth exposure which will realise losses unable to ever be recouped when the market eventually does rebound.

An advocacy group for industry super funds has modelled the effect of withdrawing $20,000 funds from super:

  • 20-year-olds who took out $20,000 are predicted to lose $120,000 by retirement as a result.
  • 30-year-olds would lose $100,000 by pulling out the full $20,000,
  • 40-year-olds would lose about $63,000 on average.

Whilst these projections certainly show the potential impact on retirement benefits down the track, many individuals will have no choice but to access their super to survive.  I would hope that individuals are investigating all other avenues in order to access financial help and accessing super as a last resort

  1. Deeming rates have finally been reduced to be brought more into line with the current cash rate climate. This means, as your superannuation has declined in value, your eligibility for pension increases under the income test. From 1 May 2020, the new deeming rates are 0.25% for the lower limit and 2.25% for the upper limit.  This could result in greater government pension with a reduced need to pull funds from super.
  1. For those individual’s who are in pension phase and drawing from the superannuation balances, the government has proposed that minimum drawdown limits be halved for this and next financial year. Just like in the depths of the GFC, this allows a reduced withdrawal when the markets are down for those individuals drawing from growth assets.  Most Hudson members in pension phase would be adopting a bucket strategy and would therefore have enough in cash and defensive assets to draw upon precisely for times like these. The proposal is as follows:

Again, halving the minimum drawdown pension requirement will not be an option for some individuals, but if you are able to meet expenses by reducing your pension payment, you will be rewarded as the market recovers.  And let’s face it, the upside may be that our expenses very well reduce whilst we are all isolating at home!

Source: https://www.ifa.com.au/news/27761-industry-super-body-urges-against-early-access

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03
Apr 2020

Housing Affordability

Housing Affordability

Written by Terry Taylor of Specific Property

The residential real estate market in Melbourne has had an astounding start to 2020 and has produced some of the highest clearance rates since 2017.

The first few of months 2020 have shown that buyers don’t intend to sit on the sidelines and why would they. With interest rates at historic lows and possibly further rate reductions to come, the cost of owning your own home has become significantly more achievable for most.

Victorian auction clearance rates recently tipped over 80 percent, compared to 55 percent this time last year. A massive change in market conditions and sentiment. Understandably, there is a level of excitement amongst buyers and sellers alike in this dynamic marketplace.

Most sellers were buyers once.

Of course, every seller wants prices to rise, but clearly some buyers are unhappy with price increases.But weren't most sellers buyers once? Doesn't every buyer want their property to rise in value after they have bought the property? We believe so.

Nevertheless, because prices are rising again the media has rolled out its old tune like clockwork - the old chestnut of housing affordability. There was a media report last week that suggested that in certain areas of Melbourne it was cheaper to buy a property than to rent one. This is likely to be the case in most capital city markets in Australia right now. So how can anyone suggest that housing affordability is even an issue?

The answer to that question is not that difficult to understand. In these times of general affluence, the aspiration of many buyers is to live where their parents reside, or certainly nearby.

Many buyers and in particular first home buyers are over 30 years old. The suburbs where many want to buy were unlikely to be as trendy and expensive 30 years ago. Massive population growth especially in Melbourne and Sydney and to a smaller extent in Brisbane has seen the development of the cities push further out from the city centres and property prices closer to the city centres rise substantially.

Larger cities anywhere in the world have inner city property prices at levels unaffordable for most new entrants to the market. It is the aspiration to live in one of these areas and in the type of property that the purchaser clearly desires that is the problem with housing affordability.

So what is the answer?

As the recent media report suggested, it is cheaper to buy than rent some properties in Melbourne. If you want to live in central Melbourne at an affordable price then an apartment is likely to suit you. And those types of properties are affordable, at least for most couples on average incomes.

If you want your own block of land and have a three or four bedroom home with two living areas and a two car garage, couples on average incomes can also afford those properties. It is just that those properties will be further out of town.  Most likely in new estates that circle Melbourne. Unless you are extremely wealthy the purchase of a property for your home has always been about compromise.

It has always been about compromise...

The reality is that individual homes on their own blocks of land in inner Melbourne will not be affordable for most people.  Unless you have family wealth, or you have a high income, these types of properties are aspirational. Something to work towards later in life, and not a first home.

Choosing the right type of property and their locations requires a lot of thought and research. When buying any property, especially your first home, some compromise is usually required.

It is not as difficult as you think so what should you do first?

Before you start looking, speak to us.

We will help you to take the emotion out of the decision making process. Our guidance will help you to avoid buying just because the kitchen and bathrooms look nice.  It is important to slow down and consider more carefully the aspect, ventilation, natural light of a property and the existing or upcoming infrastructure upgrades of an area.

As experienced agents in property selection we will help.

It will not cost you one cent more to buy a brand new property through Specific Property.  If you choose to buy an established property, then we will act for you as a buyer's advocate.  The fee for this service is minimal compared to the investment you’re making. 

We know most people will benefit from our experience, care and attention. We will walk you through the process to buy. If you are not ready yet, we will help you to understand what you need to do so that you will have confidence to move forward when the right property becomes available. This is not a race and we will not hurry you.

Remember that every property that is bought will eventually be sold and only then will you really know if you have maximised the potential returns.

At Specific Property we will help your purchase decision become clearer and easier.

So where should you start?

Contact us to have a chat. Come in and visit us at our office, or we can arrange to come to you.  There is no obligation and at the very least we will help you to prepare for what is one of the most important financial decisions you will ever make.

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