Sydney, NSW -- (SBWire) -- 07/09/2009 -- The current falls in share markets around the world have had an impact on everyone, in many different ways. This year, we know many people will look at their super and investment statements and have some concerns and questions about their balance, and the performance of their investments. Here we help you answer some of those questions.
1. Why do falling house prices in Ohio mean falling super balances in Australia?
One question many people have asked over the past 18 months is 'why does my super fall when the share markets fall – I don't even own shares?'
The answer is that many Australians do own shares, usually through super. These shares are all linked to the movement of financial market – so when the Australian share market goes up, it's likely your super balances will also go up. When share markets go down – as they have in the past year - it's likely your super balance will also go down.
Over the past eighteen months, share markets have gone down. The problems started when people in the US and parts of Europe took out low interest rate mortgages to buy new homes, thinking they’d be able to sell them for a profit in a few years. When interest rates started to rise, some home-owners found out they could no longer afford to pay their increasing mortgage payments and either put their house up for sale, or walked away from their home, their mortgage and their bank manager.
As more homes appeared on the market, the value of real estate tumbled. It soon became impossible for banks to sell these houses or recoup the money they lent to mortgage holders. And then the banks got into trouble, and stopped lending money to anyone. The global financial crisis grew from this situation – too many people borrowing too much money, without the ability to maintain their payments.
Companies who would normally rely on banks to fund their operations found that it was harder to borrow from the banks for expansion or support their business. And when companies struggle to support their business, they have to look for new ways to save money – like letting go of staff and cutting wages, or cutting back on production and expansion. This leads to higher unemployment, and when unemployment rises, we know that people start to get nervous, stop spending and start saving. And when people stop spending, companies stop making money, their profits fall and then their share prices follow.
That's pretty much what's happened over the past two years. When the global financial crisis started to unravel, financial markets around the world started to fall, bringing with them the value of shares – and the value of your super.
The good news? What goes down, should go up.
The good news is that although the recent falls have been severe, as professional investors we know that markets and economies all move in cycles growth – from boom periods to events like the global financial crisis. Think about previous recessions and market downturns – 1987, 1990, 2001. Each of these periods have been followed by long periods of sustained growth. Of course, the past performance of share markets isn't an accurate way of predicting what will happen in the future, but we can be reasonably certain that at some stage, markets should again recover.
2. Who manages your super?
Many people don't know how much control they have over their super. In truth, how your super is invested depends on your decisions and the decisions of your fund manager and financial adviser (if you have one) acting on your behalf.
You:
Choose how your super is invested based on the different investment options offered within your super fund.
Investment professionals:
Invest your super across different types of asset classes - like shares, property, cash and bonds - depending on your investment choices.
A financial adviser can also help you choose the right investment options for you, based on your personal circumstances and financial goals.
The value of your super is also influenced by many different factors, including changes in Australian and international share markets, economic conditions and interest rates. You can also get assistance in finding any unclaimed super or lost superannuation so you can optimise the value of your super.
3. How can I make the super rules work for me?
Take advantage of the Government Co-contribution
A few years ago, the Government realised many Australians weren't going to have enough super to live a comfortable standard of living when they retired. To try and help, they introduced the Super Co-Contribution scheme. If you qualify, it's an easy way to give your super balance a boost.
Depending on how much you're earning and subject to meeting certain eligibility criteria, by making extra payments into your super, the Government will kick in some money too.
For every additional $1 of personal after-tax money you deposit into your super account before June 30 this year, the Government could contribute up to $1.50 – up to a maximum of $1,500pa. From July 1, 2009 the maximum Government contribution is reduced to $1.00 (that’s a maximum of $1 from the Government for every after-tax dollar you invest), up to a maximum of $1,000pa. So if you have spare cash, it’s well worth considering depositing extra money into your super as small amounts can make a big difference to your super in the long-term. Here’s how it works:
Before 30 June, if you earn less than $30,342 per year
The Australian Government will contribute $1.50 for every extra dollar of after-tax money you put into your super – up to a maximum of $1,500 a year. That’s a 150% return on your money.
From 1 July, if you earn less than $30,342 per year
The Australian Government will contribute $1.00 for every extra dollar of after-tax money you put into your super – up to a maximum of $1,000 a year. That’s a 100% return on your money.
If you earn more than $30,342 per year
The Government Co-Contribution is gradually reduced, and cuts out once you earn over $60,342 a year.
Don't forget your life insurance
Did you know?
There's a $1.3 billion gap between the life cover Australians have and what they actually need.
There is a one in three chance you will need to be off work for three months due to illness of injury before you turn 652.
Why do I need it?
Most people don't think twice about insuring their car, home and valuables. But if your ability to work is your major source of income, it's just as important to protect you and your family so you're covered in the event something happens to you.
The smarter way to get cover
If you haven't already done so, taking out pre-approved Life Insurance and Totally & Permanent Disability (TPD) insurance through your super account could make a lot of sense. There may be tax advantages in it for you and it's easy to set up.
Rather than use your after-tax earnings to pay your premiums, if you have insurance through your super fund, your premiums are deducted from your super balance. This means you won't notice a difference to your take-home pay. Even better, you and your family will be financially protected should something ever happen to you.
Answering Your Questions About Super and Investing in 2009