Vanguard proposes solution for young Australians priced out of traditional avenues to build wealth
Renae Smith
In a move to help young Australians find new avenues to build wealth, Vanguard today released details of a proposal to increase investment through a new tax-incentivised investment vehicle modelled on successful schemes in the UK, Sweden, Japan and other markets.
Australia’s household wealth is concentrated in housing, superannuation, and relatively high levels of cash savings compared to investments. Global experience shows the proposed scheme — called MyInvestment — could help people move excess household cash into productive investments to build financial resilience and deepen the capital pool in Australia.
“Australians are great savers, evident in the large portion of financial assets they hold in cash, but saving large amounts of cash over time can come at the cost of long-term wealth accumulation”, said Renae Smith, Vanguard Australia’s Chief of Personal Investor.
There is clear appetite from Australians for more accessible and tax-efficient investment options. A national survey[1] by SEC Newgate for Vanguard found that 72% of Australians support the Federal Government allowing tax-free investment accounts in Australia.
“The financial landscape in Australia is evolving at a rapid pace, and younger Australians have different financial needs than older generations as housing, which has been a traditional mainstay of Australians’ wealth, is increasingly moving out of reach. As young Australians seek effective and secure ways to build wealth beyond the traditional family home, the need to reimagine investment systems has never been more important,” Ms Smith said.
However, Australians continue to face many barriers when it comes to investing – be that a preference for cash over other financial assets like equities, low financial literacy and consumer confidence, and complexity of products in a landscape where simple guidance and advice is lacking.
“We want to start a conversation about a real opportunity to motivate young Australians to move excess cash – which offers limited returns compared to equities – off the sidelines and invest prudently into capital markets,” Ms Smith said.
Unlike superannuation, funds in a MyInvestment account could be accessed at any time and used for a variety of purposes, such as building wealth, buying a home, paying school fees, or covering unexpected expenses. MyInvestment is meant to be a flexible, tax-concessional way to save and invest.
Recent data from the Parliamentary Budget Office (PBO) shows young Australians of working age, who generally derive their income from labour, will bear a higher tax burden as the tax base narrows. This highlights the need for solutions that address intergenerational fairness and eases the heavy tax burden on young Australians as they embark on their wealth accumulation years[2].
Modelling prepared by NMG Consulting on behalf of Vanguard projects someone who invests $20,000 per year for 10 years were projected to be $40,000[3] better off under this regime versus keeping their money in cash.
Proposed features of MyInvestment accounts include:
- Annual contributions: $20,000 annual contribution limit with investments to be made in listed asset classes including equities, fixed income, and property – ensuring the incentive is targeted to the right cohorts of Australians and invests in safe, stable and liquid assets.
- Tax incentivisation: To motivate more Australians to invest, the capital gains and distributions in the vehicle could be tax concessional after 24 months for investors.
- Age eligibility: To ensure this vehicle is directly supporting younger generations to start investing earlier, these accounts could be age gated for Australians 45 years and under.
- Industry access: The vehicle would be accessible to approved financial institutions who offer suitable investment choices.
