Article:

How to survive 2020 (financially) and navigate financial markets

20 April 2020

Jessica Olsen, Associate Wealth Adviser, Private Wealth Advisers |

The world is changing rapidly and we are constantly inundated with economic, financial and health related updates. The COVID-19 pandemic has undoubtedly had a material impact on the way we live. People are panic buying and doing virtual workouts from their living room in an effort to take every measure to stay home and flatten the curve.

The health crisis has become an economic crisis as well, with some economists predicting that unemployment will peak at around 10% this year in one of the worst recessions that Australia has ever experienced.  As the last recession in Australia was nearly 30 years ago, many Australians will be too young to have experienced what it means to make it through the expected difficult economic times ahead.

The focus of this article is help you to navigate through the crisis, including building up a cash buffer, taking advantage of Government stimulus measures (if applicable) and managing your investments.

Like all crises, whilst it may be hard, it is important to remain calm. If history teaches us one thing, it is that this too shall pass. 

Stimulus measures

As a result of the pandemic, there have been extensive changes to how businesses operate, employment levels and the way Australians are participating in the economy. Employed and self-employed individuals around Australia may now find themselves in a different set of circumstances, having lost a job or had their hours reduced.

The Federal Government has announced a stimulus package equating to around $215 billion (approximately 11% of GDP), aiming to reduce the economic impact of the virus.

These measures that directly affect individuals are outlined below:

Measure

Date of effect

Action

JobSeeker supplement

A JobSeeker supplement of $550 per fortnight. This is in addition to other income support payments. E.g., a single person with no children receiving JobSeeker payment, would receive up to $1,065 per fortnight inclusive of the supplement.

Payments will commence from 27 April 2020.

The Government is encouraging new applicants to claim online or by phone.

 

As an alternative to registering directly with Centrelink, eligible recipients can log onto their myGov account, which has a button that says 'Intent to claim'. Clicking this sends a user’s personal details directly to Centrelink.

Partner income threshold increase

The partner income threshold has been increased to $80,000 p.a. (from $48,000 p.a.) to make it easier for couples to receive the JobSeeker payment.

The partner income threshold increased on 30 March 2020.

COVID-19 supplement

A one-off COVID-19 supplement of $750 has been made available to eligible income support recipients. This includes Age Pension recipients.

The first payment was available from 12 March 2020 to 13 April 2020.
The second payment is available from 10 July 2020.

Deeming rates for the Age Pension and income support

The upper deeming rate is being reduced to 2.25% and the lower deeming rate will be 0.25%.

Effective from 1 May 2020. Automatically applied to payments – no action required.

In addition, the Federal Government has announced a moratorium on rental evictions, providing further support to people who are struggling to meet rental payments. As different arrangements apply in each state and territory, you should refer to your relevant tenancy authority for details.

You can be proactive

Separate to the stimulus measures, there are a range of other precautions you can take to strengthen your situation, depending on your individual circumstances. These include:

  • Expenditure – Review your household expenditure and assess if you could defer or reduce any expenses. Additionally, if your situation allows for it, it is worthwhile looking to build up a cash buffer equal to at least a few months’ of expenses.
  • Mortgage - During this time, some lenders are offering mortgage relief if your situation warrants it. This could be a good opportunity to build up your cash reserves, although if the money saved is spent on living costs, you will be further behind on your mortgage than if you had kept up your repayments. Additionally, on the back of the Reserve Bank of Australia cutting the official cash rate to 0.25%, it is important to consider if your mortgage rate remains competitive.
  • Personal (life) insurances - Depending on your insurer and policy, you may be eligible for premium relief or a suspension of your cover if you are facing financial hardship. On the other hand, if your household situation has not been materially affected and you do not have personal insurances in place, it is worth considering the impact a loss of income would have on your family if something occurred to either spouse (death, illness or disability) and how you can best protect yourselves against these events through cover.

A special mention for superannuation and self-funded retirees

The Government has allowed access to a temporary early release of up to $20,000 from superannuation as follows:

Measure

Date of effect

Action

Eligibility

Early release of superannuation

 

The temporary early release of superannuation has been made available.

 

$10,000 from superannuation is accessible from 20 April 2020 (for FY 2019-20) and a further $10,000 from 1 July 2020 (for FY 2020-21)

Applications are to be made directly via myGov from mid-April 2020.

You meet one of the following criteria:

  • You are unemployed
  • You are eligible to receive a JobSeeker payment
  • On or after 1 January 2020, you were made redundant, or your working hours were reduced by 20% or more
  • You are a sole trader and your business was suspended or there was a reduction in your turnover of 20% or more.


Whilst this incentive may appear enticing, people should act with caution before implementing this measure and be aware of the longer-term implications.For example, for a 25 year old, $10,000 withdrawn from superannuation now, could’ve equated to $160,000 at age 65 and for a 35 year old, $10,000 could have equated to $80,000 at age 65 (based on a total return of 8% p.a.). With investment markets at a three-year low, another consideration is you would be selling assets at a low point to fund the redemption, depending on how your super is invested.

For self-funded retirees drawing an income stream from an account-based pension (and similar products), the Federal Government has introduced measures to reduce minimum drawdown requirements. Reducing requirements gives retirees flexibility to draw less during times of market volatility to preserve capital. Retirees can reduce their drawings by 50% for this financial year and next, as per below.

Age

Default minimum drawdown rate (%)

Reduced minimum drawdown rates for FY 2020 and FY 2021 (%)

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 over

14%

7%

For retirees drawing higher pension payments than they require, reducing pension payments may be advantageous if this avoids the need to sell assets and/or allows more funds to be retained in the concessionally taxed super environment.

Focus on the long term with your investments

Everyone’s situation is different and a pandemic will impact each of us uniquely. However the fundamentals of successful investing remain unchanged and investors who react to the media hysteria and panic sell will realise losses, whilst those who maintain a disciplined, long-term approach that ignores the noise will ultimately be more successful on their investment journey.

If you are making regular contributions to super (and you have a cash buffer) you should continue with these investments, as the benefit of the market downturn is that you are buying assets a cheaper prices, which will boost your investment performance over the long run.

If you would like to discuss your personal financial situation please get in touch with a BDO Private Wealth adviser.


This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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