Discuss about the Retirement Investment Plan.
The country, Australia, follows the operation on a non-contributory basis regarding the retirement investment plan for its citizens. The entire pension is system is financed by general tax revenues. The general age criteria, for which a citizen is said to be eligible to avail the benefits of the retirement investment plan is marked as 65 for both men and women. In 1992, when Australia made a contribution to the superannuation funds, the country made the plan compulsory. Every employee who is older than 17 and younger than the age of 70 is bound to make a contribution towards superannuation funds for retirement investment plan (Merton, 2014). Present report revolves discussion regarding retirement plan, i.e. the two available option defined benefit plan and investment option plan. A detailed assessment of both the assessment has been provided so that appropriate decision could be made between both the available options.
Defined contribution comprises a defined set of norms that are required to be followed while contributing to the superannuation funds. Apart from the salaried citizens, there is also a provision set for the citizens who wish to invest for personal pensions (Henretta, 2018.). However, they operate under the same norms, as per the superannuation funds. In this plan, the employees are allowed by the country’s government to invest as per their will. It gives total liberty for voluntary investment. The country offers a varied range of superannuation funds under the retirement investment plan with a wide amount of fortunes and losses. These could be industry-wide funds or retail funds. These are offered to both public and employers. In 2006, the country government introduced the Future Fund Act to benefit the unfunded sector that remains underprivileged in the retirement investment plan in Australia (Muratore and Earl, 2015).
The defined contribution and benefit plan under superannuation funds in the retirement investment plan for Australia has constantly been evolving since its advent. The benefits that are available under the defined benefit plan solely depend upon the amount of contribution an individual is willing to make and the time since which the employee is working with the company (Yogo, 2016.). The best part that is usually considered in the defined plan is, the individual does not need to worry about the inflation factors, taxation or the age till which he would stay alive. Instead, such factors become a matter of concern to the employers.
This is why there had been a remarkable shift worldwide, towards this plan. The plan seems a lot advantageous to a majority of people.
Gained control: Yogo (2016), assessed that the plan offers a high degree of control over an individual’s investments. Since the person needs to invest any particular amount s/he wishes to voluntarily, there is no limitation or minimum criteria.
Ensures long stay: The employer is the sole authority in regards to the pension plans for his employees; it makes the workforce to stay in the company for a longer duration of time (Barkoczy, 2015). The employers can also come up with new schemes and policies, ensuring the same human capital in the organization for a long span of time.
No limitation for inflation or taxation: The employees need to stay in that particular company for long and invest in the plan as per their (Topa, Lunceford and Boyatzis, 2017) . This investment of the employees is not affected by the common country situations of inflation or taxation. This has made it one of the most preferred plans in Australia.
However, there are certain drawbacks and limitations that are observed in the defined plan that tends to make it a less preferred choice for some people.
Non-concessional caps: This is one of the major drawbacks of the defined plans in Australia. It states that any contributions that are above the non-concessional caps limit will be taxed at a rate of 47% at the time of taxation. Until and unless the contributor elects the refund, s/he will be paying the tax, twice.
Notional contributions: Any consequences of going over the designed cap are said to be very disadvantageous. The plan which the individual has availed is evaluated and reported by the employer. These are hence reported to the Australian Tax Office. This amount is calculated towards the concessional contribution caps which later on set a limit. Any contribution made above this incurs a loss.
An investment choice plan gives a detailed analysis of which plan should an individual opt for. An individual might choose to invest in any plan from a wide range of options that are given (Green, 2018). There is a list of diversified investment options that are offered to the investor. It has been categorized to Pre-mixed options and Sector options
The pre-mixed options allow for a low maintenance investment plans. When an individual wishes to manage the investments on his own behalf, this particular plan is offered. There is a wide range of investment risk and retirement goals offered under this. On the other hand, sector options, are said to be less diversified (Muratore and Earl, 2015). In order to create a diversified portfolio, these are tending to be combined with several other investment options.
Advantages of the investment choice plan include a number of citations that mostly attract the investors towards it.
Varied investment options: The plan gives a detailed guide for the investor to choose which the apt option is. It keeps in mind the taxation procedures, the inflation scenarios, the GDP rate of a country, etc. and gives an entire document to decide with evidence.
Diversified plans: The different sort of investors is kept in mind while offering the diversified range of options under the investment choice plan. Some might prefer to choose a low maintenance plan while others might want to have an entire plate decorated with several options.
On the contrary, the plan generates some limitations as well.
Creating dilemmas: The diversified range of options in the investment plans might create confusion in the investor’s mind. Muratore and Earl (2015) asserted that while investing, the investor must be free from any kind of dilemma or second thoughts. But having lots of options in hand may create obstacles. It is necessary that same should have clear future financial objectives so that one could make an appropriate decision relating to the option to be chosen for investment.
Risk profile: There is a huge risk factor associated with the investment. While investing, the individual must be willing to accept all risks in the near future (Bodie, 2013). The risk profile is analyzed, and hence the investor is assisted. Many times, people do not go ahead with investment because of the risk degrees attached to the plans. Further, the fact cannot be denied that enhanced right percentile might lead to increase in the rate of returns. Thus risk variant can be referred as one of the main deciding factors in order to conclude the decision relating to investment option or defined plan.
It could be assessed that the country has a three-pillar plan for retirement investments. Out of the three, the first pillar is all about basic benefits. It is financed by tax revenues. The second pillar is provided by superannuation funds. This pillar is referred as the backbone of the entire retirement pension system in Australia (Brigham and Ehrhardt, 2013). It is said to be funded by individual pension accounts that are delivered by funds. The third pillar for the plan is dependent on the amount that individuals are willing to spend in the funds for future retrieval. This amount is contributed towards their superannuation funds or Retirement Savings Accounts, abbreviated as RSAs.
Inflation is one of the deadliest concerns in terms of investments and affects the kinds of assets in several ways. The retirees are generally living on fixed incomes. The sort of securities an investor holds are highly affected by inflation and time value of money. A company’s returns account to become overstated. It packs a bigger wallop to retirement investments. In words of Burton and Shah (2017), while investing, an individual must keep in mind that: the assets you are investing in today must be highly capable of increasing their values tomorrow even during inflation but decline it over value. It is highly capable of consuming the savings at a much faster rate; hence the retirement fund power must withstand to last longer in all the circumstances. A generalized budget must be planned for situations like inflation and time value of moeny. Since it affects the prices of the commodities at a much faster rate, the investor must always be prepared with a budget in contrast to his investments.
Every dollar that we use in taxation is a dollar that cannot be used towards the future. The tax can be collected annually or periodically. A tax which is recorded annually tends to generate a compounding effect. Clark, Lusardi and Mitchell (2015), asserted that the value of the investment hence decreases. It tends to include the tax on interest, dividends, and capital gains tax. In return, the value of your investment experiences a decrease. Logically, every single investment account comes with multiple tax implications. Any better understanding regarding taxation procedures, help the investors avoid excess taxation and ensure heavy returns.
The Australian government has come up with a wide range of reforms to protect the right of pensioners. There is a mix of personal savings which is offered in Australia. Many countries have several systems in place to give people an income after they have stopped working. They include public or private pensions, employer pension funds and personal savings. Any contributions that are made in traditional IRA, help in decreasing or moreover, minimizing the tax amounts incurring on the investment accounts. The income which is released from the taxation accounts is generally said to be taxable. Therefore, it fails to generate good revenue later on. Any withdrawal which is made from the retirement investment accounts also tends to incur tax amounts. One can save yourself from ugly taxation impacts by assessing your assets effectively. The retirement savings need to last, so besides tax rates, consider your portfolio’s investment time horizon and asset allocation. There should be high exposure to various types of investment plans. Sometimes, you should learn to delay taking the benefits of your investment plan (Erdem, 2017). You must always analyze the situation in the nation first both economically and practically. Social Security is another income source that can push you into a higher tax bracket, particularly when those benefits are combined with required withdrawals from retirement savings. Allocate most of your fixed-income portfolio to an IRA so that any income you generate is withdrawn when you take distributions and only taxed once.
Conclusion
In order to set a wide horizon for opportunities, most people who are about to enter their retirement phase, do not wish to go for the Retirement Investment Plans. They do not desire to lay much emphasis on any personal planning. The above study reveals the fact that a majority of people who are working currently in tertiary sector, do not want to involve themselves in any planning post-retirement since they want all the gates to opportunities to be wide open even after the retirement. It is important to be upfront about the prospects of government-sponsored retirement, in terms of pension-related plans. Present study shows that both the investment options have their own benefits and costs thus individual should make decision by considering all necessary factors. Further, it could be concluded that the concept of superannuation in the country has brilliantly managed to drag it ahead of many other nations. The monitory contributions are not only of employees but of the company as well, and in some fortunate cases, by the government too. Thus selection of plan should be strategic by considering future needs and future economic condition of the country.
References
Barkoczy, S., 2015. Australia’s industry innovation and competitiveness agenda and the proposed new rules for taxing benefits under employee share schemes. Austl. Tax F., 30, P.37.
Muratore, A.M. and Earl, J.K., 2015. Improving retirement outcomes: the role of resources, pre-retirement planning and transition characteristics. Ageing & Society, 35(10), Pp.2100-2140.
Henretta, J.C., 2018. The life-course perspective on work and retirement. In Lives in Time and Place and Invitation to the Life Course (Pp. 85-105). Routledge.
Merton, R.C., 2014. The crisis in retirement planning. Harvard Business Review, 92(7/8), Pp.43-50.
Yogo, M., 2016. Portfolio choice in retirement: Health risk and the demand for annuities, housing, and risky assets. Journal of monetary economics, 80, Pp.17-34.
Topa, G., Lunceford, G. and Boyatzis, R.E.D., 2017. Financial planning for retirement: A psychosocial perspective. Frontiers in psychology, 8, P.2338.
Green, D., 2018. Retirement Planning: Focus on Life, Not Just the Money. Women in Higher Education, 27(5), Pp.9-9.
Muratore, A.M. and Earl, J.K., 2015. Improving retirement outcomes: the role of resources, pre-retirement planning and transition characteristics. Ageing & Society, 35(10), Pp.2100-2140.
Bodie, Z., 2013. Investments. McGraw-Hill.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Burton, F.E.T. and Shah, S.N., 2017. Efficient Market Hypothesis. CMT Level I 2017: An Introduction to Technical Analysis.
Clark, R., Lusardi, A. and Mitchell, O.S., 2015. Financial knowledge and 401 (k) investment performance: a case study. Journal of Pension Economics & Finance, Pp.1-24.
Erdem, O., 2017. Efficient market hypothesis.
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