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Here you will find the Articles from our Email Campaigns for the Educational Series on Retirement.

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SAVING FOR RETIREMENT ARTICLES

1. How to Turbo Boost Your Retirement

2. Transitioning into Retirement

3. A Tale of Two Retirements

4. Is it time for a Super Review?

5. The what, why and how of contributing to Superannuation

 

 

 

Home Loans ... To fix or not to fix.

Home Loans . . . To fix or not to fix? 

It is said that Aussies will bet on anything – even two flies crawling up a wall. Our bets have become a bit more sophisticated and now it seems the latest "bets" are taken between economic commentators on what the Reserve Bank of Australia (RBA) board will do to the cash rate on the first Tuesday of every month. The betting odds are pretty low so it won't be commentators who will lose too much; it's the mortgage holders who have more skin in this game.

However, while the economists monitor the manoeuvrings of the RBA, the banking regulator, the Australian Prudential Regulation Authority (APRA) has tightened the lending rules major banks must follow. One effect from this decision is increased interest rates to both investors and home owners regardless of the RBA board's announcements.

So is it time to take action?

Well, regardless of whether rates are going up or down, before you act, carefully consider both sides - the advantages and disadvantages of fixing your interest rate. 

Advantages

Although the obvious advantage is that when you fix, repayments will not increase with rising interest rates, this hasn't been the issue over past years. More recently with bank-driven increases this advantage is again becoming reality. You know in advance what your repayments will be for the fixed period, and you can usually choose terms of between one to five years. This helps to remove the guesswork.

Disadvantages

Clearly the biggest disadvantage is what would happen in the doubtful scenario of rates dropping. It has been widely documented that the global economy isn't acting "normally", so unless you have a crystal ball, it's anyone's guess what could happen in the near future. Rates were originally reduced to reinvigorate the overall economy but even the experts couldn't have foreseen that the expected growth wouldn't follow. Instead, the biggest consequence has been skyrocketing house prices. Is all this about to change? 

Another downside of a fixed interest contract is you may not be able to make extra repayments and there is usually a sizeable penalty for paying out your mortgage earlier or breaking your contract. This must be factored in.

The usual economic rules don't seem to be working (and the banking rules have changed), so there is no precedent to rely on with regard to fixing. 

If you're thinking of refinancing, first read your loan documents carefully to make sure it's worth it. 

Life is about choices and nobody should make this decision for you. In the meantime, keep paying your mortgage off regularly and make additional payments when you can.

The What.. The Why.. and The How of Contributing to Super

Despite frequent changes to its governing rules, superannuation remains, for most people, a tax-effective environment in which to save for retirement. 

Here's a quick Q&A on the what, why and how of contributing to superannuation from this point on.

Contributing To Your Super

Why should I contribute to super?

Some super contributions and the investment earnings within super funds are taxed at 15%. As this is lower than the marginal tax rate for people earning more than $18,200 per annum, less tax is paid on the money going into super than if it was paid to you as normal income. The higher your marginal tax rate, the greater the benefit.


What Types Of Contributions Can I Make?

·       Concessional contributions. These are contributions on which you or your employer has claimed a tax deduction. They are taxed at 15% within the super fund. If you earn more than $250,000 pa you will be taxed an additional 15% on the concessional contributions above this threshold. Concessional contributions include:

o   Compulsory employer (Superannuation Guarantee) contributions. Your employer must pay 9.5% on top of your ordinary time earnings to your super fund when you earn more than $450 per month.

o   Salary sacrificed contributions made from your pre-tax income.

o   Personal contributions on which you claim a tax deduction.

Low Income Superannuation Tax Offset (which is actually a refund) on the tax you've paid on contributions. It applies if you earn less than $37,000 per annum and is capped at $500. This is paid to your super fund and prevents your super contributions from being taxed at a higher rate than your normal income.

Cap: $25,000 pa. The unused portion can be carried forward and used in future years if your total super balance is under $500,000.

·       Non-concessional contributions. Contributions on which a tax deduction has not been claimed, including:

o   Personal contributions on which you do not claim a tax deduction, for example those in excess of the concessional cap or you are seeking a government co-contribution.

o   Spouse contributions. These can generate a tax offset of up to $540 if your spouse earns less than $40,000 pa. 

o   Government co-contributions. Worth up to $500, co-contributions are available if your taxable income is less than $53,564 pa and you make a non-concessional contribution.

Caps: $100,000 pa, or $300,000 if a further two years of contributions are brought forward.

Note: you cannot make non-concessional contributions if your total superannuation balance exceeds the general transfer balance cap (the amount that can be transferred to pension phase), currently $1.6 million.

 

Who Can Contribute To Super?

You can make personal contributions to super if:

·       you are under 65 years of age;

·       you are aged between 65 and 75 and were gainfully employed (including self-employed) for at least 40 hours over 30 consecutive days during the financial year.

You can claim a tax deduction for these contributions, but make sure you don't exceed the $25,000 annual cap for concessional contributions from all sources; or the $100,000 cap on non-concessional contributions. 

Spouse and government co-contributions can only be received up to age 70 provided you pass the work test.

You are eligible for mandated employer contributions, including Super Guarantee payments, regardless of your age.


GET IT RIGHT!

A successful super contribution strategy can mean the difference between looking forward to retirement and dreading it. This article is provided as an overview. Super is a complex area and further rules apply in some situations. Getting things wrong can be costly so talk to your qualified financial planner, (we have a some we can recommend)  and get the right advice on the best ways to boost your super.

Is It Time For a Super Review?

Picture this... when you were 21 years old your well-meaning but financially inept uncle put $1,000 into an ordinary bank account for you with instructions to leave it there and "let the bank's interest turn it into a fortune". You followed his directions only to discover 30 years later the balance of your 'fortune' was a paltry $6,023! What went wrong? Well, to put it frankly, you didn't give it any attention.


This is a classic mistake that many Australians make when it comes to their superannuation.


There has been a lot of talk about superannuation in the news lately. How long has it been since you reviewed your superannuation to see if it's on track to meet your retirement needs, regardless of whether your retirement date is two years away, or twenty?


Here are some questions to ask yourself:


Do you know how your super is invested?

Have you ever made any changes to your super to suit your own circumstances? If you've never made a change, you may still be invested in your employer's default option, which may not be appropriate to your current or future needs.


The following example explains when a default option should be reviewed...


Brian (64) and Ingrid (29) work for Some Such Corporation. Their employer pays their superannuation contributions into the company's preferred fund, which has a default investment option with a higher allocation to cash and fixed interest assets. This suits Brian as he has built up a substantial nest egg, doesn't like risk, and plans to retire soon. However, it does not suit Ingrid, who is unlikely to retire for a further 35 years and accepts short-term volatility to achieve higher returns in the long term.


Are you making personal contributions to super?

Making 'salary sacrifice' or non-concessional contributions to superannuation is one of the most effective ways to boost your retirement savings. You may also earn additional tax benefits or government co-contributions. On the other hand, if you are making regular contributions, are you sure that you're staying within the set limits and won't be penalised for contributing too much?


Who will receive your super when you die?

Have you nominated a beneficiary on your account, or want to make a change to your existing arrangement? Some binding nominations are valid for only three years. Is yours still current?


Does your super fund provide any insurance cover?

If it does, remember to check the level for which you are covered. You may find that your existing cover has become inadequate and it's time for a review. Alternatively, if you have insurance outside super, you could look at cancelling that cover, allowing the money saved to be allocated for investment. But don't make any hasty changes until you have sought personal advice.

 

Aside from your own circumstances shifting, superannuation rules change often, so it pays to review your super regularly. You don't want to reach that long-awaited retirement date to find you don't have as much as you had "hoped". Give us a call and we can arrange for you to speak to a licensed financial planner.

 Time for a Super Review

Assumptions for calculation:

$1000 invested over 30 years averaging 6% interest with no additional contributions. Not including fees and charges.


For Your Reference:

MoneySmart Compound Interest Calculator

www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/compound-interest-calculator

A Tale of Two Retirements - which would you choose?

A Tale of Two Retirementswhich would you choose?

Sam and Sally Smith have worked hard all their lives, paid their taxes and, now they have retired, they feel they are entitled to a full age pension.

Jan and Jim Jones have also worked hard and paid their taxes. However, concerned that Australia's aging population and ballooning pension bill will make it increasingly difficult to qualify for an age pension, they have sought to be as financially independent in retirement as possible. With diligent savings and smart use of superannuation they have built a significant nest egg.

While both couples have equally valid views, in one respect Jan and Jim have already been proven correct with changes to the assets test from 1 January 2017 reducing the number of people qualifying for a part pension and some losing it altogether.

What Matters Most?

This leaves would-be pensioners asking themselves: what matters most? Clawing back the tax paid over their working lives, or living the most comfortable lifestyle they can?

Several strategies can help boost the level of age pension, but these usually involve reducing the level of financial assets assessed by Centrelink which can deny pensioners both the income those assets could otherwise generate and capital withdrawals.

The Smiths might, for example spend up big on home improvements, give money away to their family within allowable limits, and take an expensive overseas holiday. Once back home they might then qualify for a full age pension of $36,301 per annum[1]. That's close to the amount ($40,054 pa[2]) that the Association of Superannuation Funds of Australia (ASFA) calculates is sufficient for a "modest retirement" for a 65-year-old couple. That is, "only able to afford fairly basic activities."

Things aren't quite as bleak as that. The income test allows Sam and Sally to earn a combined $8,008 per year[3] and still receive a full pension, but that total of $44,309 pa leaves them quite a way short of being able to afford a "comfortable" lifestyle. ASFA defines this as one that "enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel." For a 65-year-old couple, this is estimated to cost $61,522 pa.

The Self-Funded Alternative

That's more the kind of lifestyle the Joneses have in mind, even if it means not qualifying for any age pension. Freed from the need to watch every dollar and to report any changes in their circumstances to Centrelink, an inheritance, for example, they are also insulated from the impacts of any future changes to the age pension.

Start Early & Plan Well

Unfortunately, many people retiring today don't have a choice and, dependent on the age pension, they will be denied that comfortable retirement. The key is to start retirement planning as early as possible. Pensions and superannuation are complex areas, so it is essential to obtain detailed and personalised advice from a qualified financial adviser. Take control of your future now. If you have any questions we can get you in touch with a qualified Financial Planner.


For Your Information:

The Association of Superannuation Funds of Australia Ltd - ASFA Retirement Standard http://www.superannuation.asn.au/resources/retirement-standard/


[1] As at March 2019.

[2] As at June 2019.

[3] As calculated under deeming rules. The actual cash amount may differ.

Transitioning into Retirement

Transition to Retirement Strategy – down... but not out

 

Thanks to changes to superannuation, Transition to Retirement (TTR) pensions have lost a little of their gloss with earnings on the investments that support the pension being taxed at 15%. This applies from 1 July 2017 to both new and existing pensions.

However, that's about the extent of the bad news. For those over 60, the pension payments remain tax-free and TTR strategies can continue to provide a number of benefits for people nearing retirement. Let's look at some options available to 62-year-old accountant, Brian. He works full time and is on an annual salary of $100,000.

 

Easing Into Retirement

First up, Brian might consider reducing his hours as he prepares for retirement. Dropping from five to three days a week will see his $100,000 annual salary reduce by $40,000 to $60,000. But as his tax bill also falls, from $26,632 to $12,147, his net income only drops by $25,515. Subject to minimum and maximum pension payment rules, and as the pension payments are exempt from tax, Brian only needs to start a TTR pension paying $25,515 each year to maintain his current lifestyle.

 

One Thing To Be Aware Of

Based on Brian's reduced hours his employer's super contributions will decrease by $3,230 after contributions tax of 15% is taken into account. Most simply, Brian could add this amount to his pension payments, and make a non-concessional contribution to his super.

 

Bridging A Gap

TTR pensions can also help bridge the gap if household income takes a hit. What if Brian has no plans to reduce his hours, but illness prevents his partner from working for several months? He could start a TTR to tide them over and help meet mortgage repayments or medical expenses. However, once the crisis has passed the TTR pension will need to continue, as it can't be withdrawn as a lump sum. Alternatively, it can either be converted to a regular account based pension when Brian either turns 65 or permanently retires, or rolled back into the accumulation phase.

 

Boosting Super Savings By Reducing Tax

With his partner restored to health and back at work, and Brian still working full time, what can he do with the now surplus income from the TTR pension? One strategy is to make salary sacrifice contributions to super.

Brian is able to salary sacrifice up to $15,500 of his pre-tax income to superannuation (the difference between the concessional cap of $25,000 less compulsory employer contributions of $9,500). Taken as salary, $5,932 of that $15,500 would go in tax. Make a concessional contribution to super and the tax could be reduced to just $2,325, a difference of $3,607!

If there's still money to spare after the salary sacrifice contribution is made Brian can look at making non-concessional contributions to superannuation where earnings will only be taxed at 15%, significantly less than his marginal tax rate.

Getting It Right

The tax benefits of TTR pensions may have been reduced, but all the other benefits remain in place. If you're approaching retirement, it's worth checking out what a TTR strategy may be able to achieve for you. It's a complex area, so like more information about the options, let us put you in touch with a licensed financial adviser.

How to Turbo Boost Your Retirement

Once your mortgage and other financial commitments are manageable, it is usually time to put the pedal down on your super. Those prime income years, between age 40 and 50 in particular, should be used constructively. However, the task may not always be easy.

Many couples choose to have children later and as a result, parents' financial responsibilities can now often extend well into their 50s, even 60s. Furthermore, the earning opportunities for many people over age 50 often begin to decline.

Other factors can also disrupt retirement savings planning - time out of the workforce to raise a family, periods of unemployment or extended illness are but a few.


IS THERE A LOGICAL SOLUTION?

Usually, the least painful (and most disciplined) option is to use a superannuation salary sacrifice arrangement. For most employed people on high incomes this can represent a useful and straightforward method of bolstering retirement provisions.


IT WORKS LIKE THIS

You agree to forego a specified amount of future salary and in return your employer makes additional future super contributions for an equivalent amount. This means your extra long-term saving starts to accrue faster, pay by pay.

"Sacrificing" salary to super is also a tax-effective form of remuneration because if the arrangement is put together correctly, no personal income or fringe benefits tax is payable on the extra amount of contribution. You do need to keep in mind the impact of superannuation contribution limits however we can provide guidance on this issue.


CONSIDER THIS CASE STUDY...

Michael is 45 and he and his wife Sarah have been working away at their mortgage for some time. Now they are beginning to see light at the end of the tunnel.

Michael's employer has been contributing 10% of his $110,000 remuneration package to superannuation ($11,000 per annum). Michael thinks that he may now be able to afford more, but he is not all that happy with the employer's fund investment options. He discusses the situation with Sarah and their adviser. Together they agree that Michael should set up a new super fund with a different provider and increase his contribution to 15% of salary, with the additional 5% going into the new fund. Michael's adviser calculates that the higher returns on the new fund will more than offset any additional fees Michael pays by having two funds.

From the next fortnightly pay, Michael's pre-tax salary is lower by $211.54 but the amount he actually receives will be lower by only $129.04 (since he will pay $82.50 less personal income tax as well). The $211.54 pre-tax amount was paid directly into Michael's new super account. This means that his total after-tax super contributions for the next year will be $14,025 net instead of $9,350 and he has been able to select a fund that meets his needs.


Salary sacrifice to super is just one way in which you can enhance your retirement provisions. If you would like more information about the options, let us put you in touch with a licensed financial adviser.



This article contains general advice only. You need to consider with your financial planner, your investment objectives, financial situation and your particular needs prior to making any strategy or product decision.