Pension

What does it mean?

The ATO website describes a pension as: "A series of regular payments made as an income
stream, this may be provided by a superannuation fund or retirement savings
account (RSA)".

TheBull says...

Since the introduction of the Government's "simple super" regime on 1 July this year, it
is no longer a mandatory requirement for retirees to convert their
superannuation assets to a pension arrangement. This means, in effect, that if
you don't need the regular income a pension provides to pay the bills, you can
leave your cash in accumulation phase indefinitely.

This change has largely been driven by the Government's recognition that many people wish to
keep working, and contributing to their pension pot, past retirement age. The
additional benefit for Government is that people who do so may be less reliant
on social security benefits when they do eventually stop work.

Taxation payments, however, will be higher where an individual leaves their assets in a
super fund. The main difference between the accumulation phase and the pension
phase relates to the tax treatment of the earnings within the fund. In the
accumulation phase, earnings on a super funds are taxed at up to 15 per cent.

Once a fund converts to paying a pension, there is no tax payable on the earnings. If a
member had an account balance of $500,000 and generated 8 per cent ($40,000)
assessable earnings, and assuming half of this is income, and the other half
realised capital gains, then the tax payable would be around $5,000. If the
account had been converted to the pension phase, then the tax would have been
zero.

So any investment earnings within a pension funds are tax free. Additionally, if you
are aged over 60, any pension drawdowns are also tax free.

But once a pension is commenced, it is no longer possible to add extra contributions, so
this will ultimately be the make or break decision for most people at
retirement age.

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Cash Rate

What does it mean?

The cash rate is the interest rate financial institutions pay to borrow or charge to lend funds in the money
market on an overnight basis. The Reserve Bank of Australia uses a narrower
definition of the cash rate as an operational target for the implementation of
monetary policy. The Reserve Bank of Australia's measure of the cash
rate is the interest rate which banks pay or charge to borrow funds from or
lend funds to other banks on an overnight unsecured basis. This measure is also
known as the interbank overnight rate. The Reserve Bank of Australia
calculates and publishes this cash rate each day on the basis of data collected
directly from banks. This measure of the cash rate has been published by the
Reserve Bank of Australia
since June 1998.

TheBull says...

Share market investors also have to keep a close eye on Reserve Bank announcements. Any rate change by the Reserve will
flow through to the money markets immediately via a move in the cash rate but
stocks will also rise or fall as strategists assess whether shares are more
attractive investments than cash and bonds. Analysts will feed rate changes
into their modeling to work how out companies will be affected by borrowing
costs as well as the impact of changed consumer behaviour and discretionary
spending and this can quickly flow through to share prices.

Anyone investing over a five-to-seven year period will see major changes in interest rates and investors need to know
where we are in the interest rate cycle for an indication of where the stock
market is headed. Investors should be reading the Reserve's statements and
announcements for pointers to its thinking on the economy and what action it
might take on rates.

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By thebull.com.au - for more articles like this go to The Bull's website Australia's pre-eminent news and investing site for investors and traders, covering shares,
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