Part of our role as financial advisors is to respond to questions and queries we receive from our clients regarding global market factors and how they do (or do not) have the potential to affect us as individuals.
In this episode of 'Hot Topics', Stefan and Tom discuss the most frequently asked questions we received from individuals who - like us - enjoy being up-to-date on factors affecting the global market.
• The Interest Rate
• Silicon Valley Bank
• Credit Suisse
• Changes to Superannuation Rules .
We enjoy staying well informed and using that knowledge to provide our clients with information, answers and peace of mind.
If you would like further discussions on anything financial, please contact us at [email protected]
OR
Click on the link linktr.ee/angeladvisory.aus
#interestrates#superannuation#financialplanning
Tom Gleeson
Morning, everyone. Welcome to another installment of the Real Wealth podcast. I'm Tom Gleeson. Stefan Angelini joins me today. Thanks to come, Stef.
Stefan Angelini
Thanks, Tom. Thanks, Tom.
Tom Gleeson
We're going to try something a little bit different. We just had an idea of might be fun to discuss what we're calling hot topics. Just an overview of what people have been discussing, what people have been interested in. No pun intended, because one of them is interest rates. But what's been happening in March, what people want to talk about and potentially get an update on. That broadly falls into two categories, the first being strategy, which we'll look at in a sec, and then beyond that, what's happening in the market. So you're happy to jump right in?
Stefan Angelini
I'm excited. Well, first off, we'll just kick it off with a bit of a disclaimer. We'll look at today, $3 million Supercap, which everyone's been talking about. We'll look at the $1.9 million transfer balance cap. How much can you have in pension phase or tax free money in super? Then the market, we're going to look at interest rates, Silicon Valley Bank and Credit Suisse, and what's been going on there. Hopefully, a quick little wrap for everyone. Just let you know, this is just general information. If you want any personal advice, please go and consult a licensed financial advisor. Don't take anything we say as strategy or go off and do it. Make sure you're getting advice that's relevant to your situation. Thank you very much. Tom, over to you.
Tom Gleeson
Cool. As you mentioned, we want to start with one that's been discussed a lot. We've had a lot of questions from clients and from friends and friends and friends about the new rules, proposed rules, nothing's in effect yet, about the $3 million cap on superannuation.
Stefan Angelini
Yeah, it's a big topic. Everyone's talking about it.
Tom Gleeson
Which an understandable why.
Stefan Angelini
It's not legislated.
Tom Gleeson
No.
Stefan Angelini
So it's not actually in force, but it has raised a lot of years, and probably will come in force.
Tom Gleeson
It's been talked about for 2025, isn't it?
Stefan Angelini
Yeah.
Tom Gleeson
What's the 2024?
Stefan Angelini
No, 2025.
Tom Gleeson
Yeah.
Stefan Angelini
July 2025.
Tom Gleeson
Yep.
Stefan Angelini
And it'll probably come into force in one way or another. Probably not its current format, though. So as a summary, what they're saying is that for anyone with balances of more than $3 million in super, they want to increase the tax rate on anything above $3 million.
Tom Gleeson
Yeah.
Stefan Angelini
At the moment, the way it works, you got. If you're over, let's just say you're over 65 because that's when you have the biggest amount of money in your super. Anything up to $3 million, you have either account based pension or in the accumulation phase like it currently is. But then anything above that $3 million will be taxed at about 30%.
Tom Gleeson
Yeah. That's an important part that initially trying to get my head around was because it keeps being referred to as a cap. My first thought was you cap at 3 million all your money has to be elsewhere. Your money can more, over 3 million can be in super. It's about the treatment of this 0 to 3 million would be treated in this way. Beyond that will be treated in this way. Is that a fair way of.
Stefan Angelini
That's the easiest way of raising it.
Tom Gleeson
Yeah.
Stefan Angelini
But a lot of people thought, Does that mean I'm going to have to pull money out of my super?
Tom Gleeson
Yeah, again, no.
Stefan Angelini
The issues that will rise if you had to pull money out of your super is it would force people to sell assets.
Tom Gleeson
Yep.
Stefan Angelini
To get assets out.
Tom Gleeson
At a time which is potentially not convenient for them.
Stefan Angelini
Not convenient for them, but when you've got a whole lot of people selling a whole lot of assets, there's a flood onto the market.
Tom Gleeson
Yeah.
Stefan Angelini
Stocks can't fill the cash back.
Tom Gleeson
Yeah.
Stefan Angelini
Banks can't fill the cash to get that out. And you get to sell property and there's going to be a whole flow of property on the market and therefore it's probably going to cause Australia to go into a pretty bad recession. Because all these people are trying to sell and no one's trying to buy.
Tom Gleeson
Yeah.
Stefan Angelini
We're selling the stamp duty implications and costs and brokerage and that kind of stuff.
Tom Gleeson
Yep.
Stefan Angelini
That's one of the reasons that it isn't a pull out strategy. But one of the things that one of the proposals by Jim Chalmers, who's the treasure for Labor, who's in power, what he said is that we're actually going to tax unrealised earnings if your super balance is above 3 million bucks.
Tom Gleeson
This is. Yeah. Okay. What you're talking about what they're proposing now and what we will get are two very potentially different things. We'll get a watered down version of.
Stefan Angelini
Yeah, exactly right. But I guess what I think, I think it's like a negotiation tactic. It's like I'm going to start up here and we're going to put someone to come down here and then we're going to... Our proposal is going to be somewhere in the middle and we'll all be happy, right?
Tom Gleeson
Yeah. So what if back we'll all be miserable?
Stefan Angelini
Yeah oh we will. And so what the current proposal says is, let's say you own a property in your super fund. Okay. Let's say you own a property that's worth a million dollars, and that's grown to $2 million. Okay. Your total balance is 5. You got $3 million of other money. They're going to want that property, even though it's grown by a million dollars. Really, you don't realize the tax on that growth portion until you've sold it.
Tom Gleeson
Yep.
Stefan Angelini
What they're trying to say is that we want to tax you on the growth component that it's had. They unrealize earnings, you realize that earnings when you sell it, when you crystallize that. They're trying to say, No, we want to take the tax now.
Tom Gleeson
Yeah.
Stefan Angelini
Some places do that, some structures do that. That's what they want to do. They're proposing to do. I don't think it's going to come into effect because people are going to say, Why would I own that asset? If that's the case.
Tom Gleeson
When you say some places do it, who does do that?
Stefan Angelini
I think there's some countries that do it.
Tom Gleeson
Oh, right. Sorry.
Stefan Angelini
There's definitely some structures that do it, like investment bonds, for example. They'll do that. They'll tax earnings while you still hold this.
Tom Gleeson
Unrealized earnings? Yeah.
Stefan Angelini
Yeah. Okay. That's why it just be careful. You got to know the intrinsic tax rules of different structures. But that's going to be one thing at the tip of that. But basically, for everyone out there. It's not legislative yet. You got time to act. You're getting close to $3 million cap. If you feel like your super is going to grow a lot over the next few years, so if you're a young high income earner, you got a lot of savings and you're pumping a lot of money into super, and you can see I might have more than $3 million one day. If you've got a partner that doesn't contribute much, it's probably a good catalyst to say, Maybe I want to start doing super splitting or transferring money to my partner's name.
Tom Gleeson
Yep.
Stefan Angelini
Withdrawing money from super and putting it into their name just to even out the balances. You're both approaching that $3 million cap at the same time because it's per person.
Tom Gleeson
Right.
Stefan Angelini
It's not in total.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
So you've got 3 million bucks, me and you are a couple.
Tom Gleeson
Yeah.
Stefan Angelini
Think are now lucky?
Tom Gleeson
You've got 3. You've got me. But yeah, I'll go along with it. We'll see how it goes.
Stefan Angelini
You've got 3, I've got 3.
Tom Gleeson
Yeah.
Stefan Angelini
And then it's all right. But if you've got three and I've got one mil.
Tom Gleeson
We start tipping into yours, leave mine as it is.
Stefan Angelini
Yeah.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
Take it out and put it in. So that's some of the re contribution strategies.
Tom Gleeson
Yep.
Stefan Angelini
But still, not legislative.
Tom Gleeson
Cool.
Stefan Angelini
Let's move on.
Tom Gleeson
Yeah, cool. So that one's been discussed a lot. One that probably hasn't been brought up as much is the proposed change to the transfer balance cap, which currently sits at 1.7%. It's looking toward it's going to go to 1.9%. How? Why? Why isn't it?
Stefan Angelini
Tracking
Tom Gleeson
Tracking at that $100,000 increase per year?
Stefan Angelini
So transfer balance cap only matters for people that are retired or over 65. So when they've triggered a retirement pension or account based pension, at the moment, you could have up to 1.7 million in this retirement pension if you start at this financial year. But if you want to make your superannuation money tax free and start drawing an income from it, then it's your government's account based pension. If you wait until 1 July 2023, they've just announced that that cap will increase to 1.9 million. So you can have the 1.9 million of your super money, tax free, account based pension. So this is really important for people that might be over 60 and retired, over 60 that sees the job, or they're over 65. Now, they might not have that retirement pension just yet. They might be waiting to start it. And therefore, it's worth it just holding off.
Tom Gleeson
To post what is it? First of July?
Stefan Angelini
Yeah. If you're around that cap. That's what a lot of our strategies are based on now is just hold off. It's better just to hold off. Otherwise, your cap is going to be 1.7 mil forever.
Tom Gleeson
All that locks it in.
Stefan Angelini
Yeah. Yeah.
Tom Gleeson
Sorry.
Stefan Angelini
You can't stop it and restart. You go back to the new balance.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
That's why it's quite a big thing. It went up originally 1.6 mil, it's now 1.7 mil. It's going to $1.9 million, and that's from 1 July 2023.
Tom Gleeson
Yeah.
Stefan Angelini
That's been the next big thing that we've been talking to our clients, who are closer to that retirement phase, or in that retirement phase about is just getting access to that increased cap. More of our money is tax free.
Tom Gleeson
That's an interesting one because I don't feel that one is being discussed as much as the changes to the super that we talked about earlier, the $3 million. That has pretty significant consequences.
Stefan Angelini
Yeah.
Tom Gleeson
Long term. So it needs to be brought to people's attention.
Stefan Angelini
But on the effects of smaller cohort of people.
Tom Gleeson
Fair enough, it's a narrower group but.
Stefan Angelini
So less people that care, less it gets talked about.
Tom Gleeson
Yeah. No, fair. Before we leave those two, it occurred to me now that they appear to be at odds with each other, where the $3 million cap is about putting more like taking more tax. And then if you look at the concession of the $1.9 million transfer balance cap. They're less. Going to be paying less in tax because that amount has been raised.
Stefan Angelini
Yeah.
Tom Gleeson
Are they at odds with each other or are they affecting different groups? So they're not conflicting approaches.
Stefan Angelini
So the transfer balance cap is old policy that is basically just ticking along and going with the rules.
Tom Gleeson
Right.
Stefan Angelini
So it's not a government change that's come in, it's just the old policy is the way it is and it needs to increase based on how it was set.
Tom Gleeson
Oh okay.
Stefan Angelini
Whereas the $3 million cap is new policy to try and tax the extra wealthy.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
People have too much money into go with them.
Tom Gleeson
Yeah, cool, fair enough.
Tom Gleeson
So we can move on to from strategy into market. Starting with do you want to start with interest rates? Because that's been discussed probably more than anything.
Stefan Angelini
Yeah. So some in March, some countries raise rates higher than others. I think New Zealand went .5, right. Australia went .25. And now so CBA and ANZ predict only one more rate rise, and NAB and Westpac are predicting another two rate rises in Australia. So what happened is we're going to talk about it in a little bit, but the financial issues or the banking issues around the world, silicon Valley Bank and Credit Suisse, that's caused a bit of stress on global markets. So, for instance, the US was expected to raise their rates by 0.5. They only went .25. But some people were expecting they'd actually wouldn't raise rates because of these finances, because yeah, that's right. But they said, inflation is such a big issue, we don't care about our own economic prosperity, we need to tackle inflation and tackle it hard. So they kept increasing rates. So the big thing is, yes, rates have increased again, it is a big issue for people with debt, especially in Australia. So we have your average four-year you can do a fixed loan of four years. In America, they take out 30-year loans that are fixed.
Tom Gleeson
Yeah.
Stefan Angelini
So if you took out your loan pre COVID, or during the start or during COVID you have a really low interest rate for life. But if you're trying to buy a new property, you're buying with an interest rate of 8%.
Tom Gleeson
Gee.
Stefan Angelini
Yeah. So the American market isn't affected as much by inflation. We are impacted really hard. So that's why you might see Australia slowing down for the rest of the world.
Tom Gleeson
Yeah. Okay.
Stefan Angelini
But, yeah, interest rates will continue to increase and that means if you're in, like, a term deposit, you can probably get a better return in a few months time. But then expectations of interest rates. So I guess economists are predicting it'll stay about where it is until the end of the year and then it'll start to come off next year.
Tom Gleeson
As of the beginning of next calendar year or next financial year?
Stefan Angelini
Calendar year.
Stefan Angelini
Yeah. Okay.
Tom Gleeson
Didn't know that. About like, a 30 year fixed loan. You could budget for the next three decades. Just knowing this is what that's it. Although there's downside, which you mentioned, but yeah, that's interesting.
Stefan Angelini
Yeah.
Tom Gleeson
So we touched on the other market factors, two major ones being Silicon Valley Bank and Credit Suisse. I know a little bit about tracking, a little bit about SVB, but I have not been up to date on Credit Suisse. So can you just give us a bit of an insight into what went on there?
Stefan Angelini
So Silicon Valley Bank is the second largest ever bank fallover. So the first one is the Washington Bank.
Tom Gleeson
Is this 2008 or is this..
Stefan Angelini
2008. Washington bank the reason they fell over because they had a heap of money in Lehman Brothers. Lehman brothers isn't a bank, it was an investment bank. They do mostly investing, they don't take people's money.
Tom Gleeson
Right.
Stefan Angelini
Washington Bank, Silicon Valley Bank took people's money. Silicon Valley Bank went from $80 billion in deposits. So deposits people like you and me putting our savings with them.
Tom Gleeson
Yep.
Stefan Angelini
And that group is like $210 billion in 3 years.
Tom Gleeson
Right.
Stefan Angelini
And they're just like, we just don't know what to do with the money. So they had a few private equity firms say, you need to get your money out of this, and they posted it on their social media. And then because they're involved in the tech industry a lot, people started withdrawing their money. They're lending to the tech industry, they lend to the tech industry, but all the tech industry deposits their money with Silicon Valley.
Tom Gleeson
Okay.
Stefan Angelini
Silicon Valley Bank is like tech hub of the world.
Tom Gleeson
Of course.
Stefan Angelini
So what happened was there was a simple there was a run on the banks, people came in, wanted their money, Silicon Valley Bank couldn't get the money fast enough. And what they had is they had these long term government bonds which are super safe but the only issue is they lose money when they sell it because when they bought the bonds they've gone down in value since they bought them because new bond issuances have been released that are worth more because they pay a higher interest rate.
Tom Gleeson
Right.
Stefan Angelini
So they've got this issue where they're crystallizing losses to pay people out of their deposits. And then what happened is the FDIC so basically, the deposit insurance company the federal deposit insurance company is what it is. They came in and said, we need to protect people's money. We're stopping everything. And they said, we're shutting down your bank. Right.
Tom Gleeson
It wasn't an internal decision, it was made for them.
Stefan Angelini
That's right, yeah. So they're under issues anyway. So parts of Silicon Valley Bank around the world started getting sold off. So HSBC bought the UK arm of Silicon Valley Bank was only small, but they bought it for a pound.
Tom Gleeson
A pound?
Stefan Angelini
Yeah. So they get a database now, but they got to take over everything. They got to take over the loans, deposit holders and everything like that. So just recently, actually, silicon Valley Bank sold to First Republic.
Tom Gleeson
Right.
Stefan Angelini
And First Republic share price jumped by 50% after the purchase was announced.
Tom Gleeson
How many weeks or months ago is this?
Stefan Angelini
End of March, near the last few days of March. So like two days ago from when we all right.
Tom Gleeson
Sorry, I thought this was a precursor to the troubles. This is mid.
Stefan Angelini
No, just like just right just happened. So obviously there's been a lot of transactions in the banking industry. So they're taking the database, they're taking on the risk of the deposit holders, they're getting a lot of security by the government and government bodies to say, we're going to make sure everyone gets paid. But they only insurance for up to $250,000 of people's deposits or savings in the bank, in the Silicon Valley Bank. So that was that issue. And that just caused everyone to start looking at the banking industry, basically with the magnifying glass. Sort of led onto Credit Suisse.
Tom Gleeson
Yes.
Stefan Angelini
Credit Suisse, you know how big they are 30th largest financial institution in the world. Been around since 1800 long, long time. They come out and they posted like a $5 billion loss. And they went to their investors and said, can we borrow some more money and we're going to do some restructuring. When you restructure a business, you need to pay people out. People have been there for 40 years. They need to get paid out. So you need money to do that. They went back to the largest deposit, went back to their investors, and the company that owns the largest stake in them is a bank in Saudi Arabia.
Tom Gleeson
Yep.
Stefan Angelini
And they said, we're not giving you any more money. And everyone's like, something's wrong. But their main reason behind it was, we own 9.8% of your company. If we give you more money, that's going to increase our share ownership to above 10%. There's going to be more regulators in Europe, more regulators in our own country that are going to be looking at us, right, we don't want that. So we're not going to give you more money to own more shares in your company. Fair enough. But this made everyone sort of nervous and their share price dropped by 30% overnight. And then it just created alarm bells around the world. And over a weekend, a bank, another Swiss bank called UBS, which is a powerhouse, came in and bought the bank for $3 billion. This will go down as one of the best purchases in history. 100%. While Credit Suisse is posting a loss, UBS just gone. I'll snap that up for nothing. Really profitable financial, really profitable wealth management arms, really profitable investment banking arms. They've got some systemic issues, but we'll strip all the operating costs out and just run it through our business. But they get the client base and it just goes under UBS now and they're going to be just a massive economic powerhouse.
Stefan Angelini
Some people are saying it was a bit unfair that they got running it and they got it so quickly.
Tom Gleeson
Right.
Stefan Angelini
And as you can see, we speak about sometimes you just got to act with 80% of the information.
Tom Gleeson
Yeah.
Stefan Angelini
And if it's a good deal and you can smell. It's a good deal. Take it. And that's what a lot of people are saying now. So Credit Suisse will be gone by the end of 2023, and it will be absorbed. UBS what they do with their assets or their arms, whether they sell them, keep them, or whatever, we'll see what happens. But that's just a large institution being gobbled up by someone else, and it's made people worry around the world. One of the issues that happened with Credit Suisse actually, was they had these bonds out there. So every now and then, banks, any company come and issue what we call a Tier One bond. And they basically say that we want to borrow money off you. You're not going to take on the equity risk. Instead you're going to take on the, we're gonna, we're going to loan money from you. You're going to sit on our debtors list, basically.
Tom Gleeson
Right.
Stefan Angelini
So in the event that we go bankrupt, we'll pay you out, but we won't pay our shareholders. What happened this instance is when UBS bought them, they bought them at 40% of the value of the stock. And that means people that own the shares lost 60%. The people that own these Tier One bonds lost all their money. They just said, we're not paying you back.
Tom Gleeson
Yeah.
Stefan Angelini
There was a big issue with that, and then it sort of relates to the Australian banking world. We don't have issues like that. Our banks are a lot bigger, safer, a lot more deposit holders. And that's probably where everyone's worried that we're getting questions on anyway. Shouldn't be worried about Australian banks.
Tom Gleeson
Yeah. We don't have that level of so SVB being small mid range in America, although it may.
Stefan Angelini
It was small and it just became big because it went big so fast.
Tom Gleeson
Yeah. And it could be a size comparison to some of our major banks. But we don't have that mid tier that can fall over overnight.
Stefan Angelini
Yeah. The way that our banks now capitalize since 2008, they are a lot safer. A lot safer. So that's been the main worries about people with that Credit Suisse and Silicon Valley Bank is how will banks be around the world? Short answer, they'll be fine. They'll be fine. Most of your money will be fine. But what it's really made people do is that when you got more than 250 grand in the bank, it means that anything above $250,000 isn't actually safe.
Tom Gleeson
Right.
Stefan Angelini
People think it's safe as houses, it's not. Real estate isn't safe, but government bonds where people are now putting their money. So just over the last two weeks since Silicon Valley Bank fell over, there's been $270 billion where people have basically pulled deposits out of banks and put it into government bonds through what we call these money markets. Government bond is probably the safest way you can have your money after the first 250 grand you got in a financial institution savings account.
Tom Gleeson
Right.
Stefan Angelini
So that's what's happened that's been the fallout,
Tom Gleeson
Yeah. Okay. Well, that's basically everything. We've covered off the changes to all the proposed changes to super as well as market. What's affecting the market are all situations are still unfolding. So hopefully in the future we can hit on another Hot Topics, do it again in April. We can cover off what's developed with these and anything new that's come up as well.
Stefan Angelini
Beautiful, man. Well, thanks. And if you want to keep up to date with what we're talking about I try to release a 5 to 7 minute video every day just on the updates of what's happening around the world. So if you want to keep update, listen to that. Otherwise you can tune in with me and Tommy once a month.
Tom Gleeson
Perfect.
Stefan Angelini
Cool.
Tom Gleeson
Thanks very much.
Stefan Angelini
Thanks for listening. Bye.
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