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Archives for December 2016

Are Your Retirement Plans Safe?

Picture this. You’ve recently retired, and you’re reasonably confident you’ll have enough savings to fund the comfortable lifestyle you’d always hoped for.

Then you receive a phone call with some bad news – your daughter has been diagnosed with a serious health condition, cancer. More than half of all death in Australia is due to cancer.

With the bills piling up, and your daughter set to be out of the workforce for an indefinite period, you invite her to move back into the family home. You ask whether she has life insurance to help finance her ongoing living needs, only to find out she’d never gotten around to it.

It’s a natural instinct for a parent to do whatever it takes to help their children when they need you. And luckily for the baby boomer generation, and your children, many of you have the financial resources to help out.

But what if ‘helping out’ meant you had to stay in the workforce longer, or cut back on your retirement lifestyle to help fund your child’s mortgage, medical expenses or living costs?

Or what if you had to provide for your grandchildren? What would that mean for your own financial situation – both now and in the future?

These scenarios may sound extreme, but consider the following statistics:

  • One in five families will be impacted by the death of a parent, a serious accident or illness that renders a parent unable to work.
  • Two-thirds of families with kids at home couldn’t meet their expenses beyond 12 months of the main breadwinner having passed away.
  • 95% of families do not have adequate levels of insurance.

Do your children have it covered?

Generations X and Y are comfortable with the idea of using debt to achieve their goals. And to get into the housing market, they often have to take on considerable mortgages, which can take a decent bite out of their income.

Of course, all of this is sustainable when they’re working full-time. But if your children don’t have adequate protection for their income, their debts, and their dependents, they could be vulnerable to serious illness or injury. Their own families (if they have one) can also be considerably exposed if they die. Raising children is expensive. It estimated to cost $537,000 to raise two children from birth to age 21. This does not allow for private education.

When you consider the maximum disability support pension available from Centrelink is only $877 per fortnight ($22,802 p.a.), an extended period out of the workforce could leave a big hole in their budget. That’s if they’re eligible for any government assistance at all. Qualification is based on the extent of their physical condition and is means-tested.

Talking to your children about life insurance

Many adult children will discuss their major financial decisions with their parents. Major events like getting married, buying a house, or even changing jobs are good opportunities to talk to your children about life insurance.

One of the good things about taking out life insurance from a younger age is that premiums are often very affordable.

For example, a 30-year-old female clerical worker can take out $500,000 life insurance (with Total and Permanent Disability cover), plus $4,000 a month income protection, for around $3 a day (Source: TAL Life Limited ABN 70 050 109 450 AFSL 237848).

This cover will provide some financial relief in the event of serious sickness or injury. It will also make available a lump sum on death that may be used to pay off debts, medical bills or help the family meet ongoing living costs.

The best way to help your children get the right level of protection for themselves (and you!) is to encourage them to discuss their life insurance circumstances with a financial adviser or specialist risk adviser.

Are you interested in getting your life insurance reviewed or do you need to talk to someone about what life insurance is right for you? Contact us today for your free initial consultation, one of our friendly advisers would be delighted to speak with you.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs.

 

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‘Transition To Retirement’: What You Need To Know

Previously, individuals could not access their superannuation until they had reached their preservation age and a condition of release had been satisfied (which was usually retirement from the work force).

Regulations were introduced in 2005 to give effect to the “Transition to Retirement” (TTR) measure which allows individuals to gain access to their superannuation benefits after reaching preservation age while still working and before a condition of release has been met.

Your preservation age is not the same as your pension age. Your preservation age is the age at which you can access your super and depends on when you were born. You can use this table to work out your preservation age.

Image result for preservation age table

The TTR measure allows individuals to commence a retirement income stream (i.e. account based pension) while still working. The retirement income stream commenced is non-commutable, which means that the balance cannot be accessed until a condition of release is satisfied. There is a minimum 4% or maximum 10% yearly pension income limit of the account balance, as at 1 July each year.

Commencing a TTR pension can be very tax effective as income and capital gains are tax free and the pension payments are concessionally taxed for those under age 60. Pension payments become tax free for those over age 60.

A popular strategy used by those who have reached their preservation age and intend to keep working has been to use a TTR pension to in fact increase their overall super nest egg whilst still maintaining their cash flow requirements.

This strategy involves:

  • Arranging with your employer to sacrifice part of your pre-tax salary directly into your super fund,
  • Convert most of your super into a TTR pension account, and
  • Using the regular payments from the TTR to replace the income you sacrificed into super.

By taking these steps, it’s possible to accumulate more money for your retirement, due to a range of potential benefits. For example:

  • Salary sacrifice super contributions are generally taxed at up to 15%, rather than at marginal rates of up to 49%,
  • Investment earnings in a TTR are tax-free, whereas earnings in a super fund are generally taxed at a maximum rate of 15%, and
  • The taxable income payments from the TTR pension will attract a 15% pension offset between preservation age and 60.

See how it works below:

ttr2-josh

Assumptions:

TTR3 Josh.png

SPOILER ALERT! In the 2016 Federal Budget, the government proposed that from 1 July 2017, earnings from a TTR pension will no longer be tax-free. The earnings will be taxed at up to 15%, the same as if they were in accumulation phase. Whilst this proposed measure does take some of the gloss off the TTR strategy it is still a worthwhile strategy, but in more limited circumstances.

If you’re considering taking advantage of the TTR pension/salary sacrifice strategy, or considering reviewing an existing strategy, then we recommend you seek advice on the merits of such a strategy for your personal circumstances, especially the implications post-30 June 2017.

Are you interested in getting your TTR pension/salary sacrifice strategy reviewed or started? Contact us for your free initial consultation today, one of our friendly advisers would be delighted to speak with you.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s Individual objectives, financial situation or needs.  Before acting on anything in this article you should consider if it is appropriate for you, having regard to your objectives, financial situation and needs.

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3 Key Changes for the 2016 / 2017 Federal Budget

Changes to superannuation legislation was a key focus of the 2016 / 2017 Federal Budget.  The purpose of this article is to help explain some of the key changes and how they may apply to you.

  1. Changes to concessional contributions

Concessional contributions are contributions made into superannuation for which a tax deduction is claimed; such as superannuation guarantee contributions (SGC) or salary sacrifice contributions.

From 1 July 2017, the concessional contributions cap will be reduced to $25,000 pa (indexed) for everyone, regardless of age.

On the positive side, individuals who have total superannuation savings of less than $500,000 who do not fully utilise the cap each year can carry forward the unused cap on a rolling five-year basis starting from 1 July 2018.

The cap is currently $30,000 per annum under age 50 and $35,000 for 50 and over.

  1. Reduction of the non-concessional contributions (NCC) cap

Non-concessional contributions are made from after-tax money and are contributions for which no tax deduction has been claimed.

A cap of $100,000 per person will apply. If the individual is under age 65 the 3-year bring forward rule can be utilised, thus contributing up to $300,000.

For the 2016-17 financial year the existing limit of $180,000 per annum, or $540,000 3-year limit, can still be used. In order to access the full $540,000 limit, however, the individual must fully utilise this amount this financial year otherwise transitional bring forward rules will apply. If an individual has not fully used their bring forward limit before 1 July 2017, the remaining bring forward amount will be reassessed to reflect the new annual caps.

If the individual’s super balance is $1.6 million or greater then no further non-concessional contributions can be made. This restriction only applies to non-concessional contributions.

Previously individuals could make non-concessional contributions of up to $180,000 pa into their superannuation, with the ability of bringing forward two years’ allowances (i.e. $540,000 worth of contributions in total) if the individual is under age 65.

  1. Introduction of a pension transfer cap of $1.6 million

A $1.6 million transfer balance cap on the total amount of super an individual can transfer into retirement accounts will apply. The cap will apply to current retirees and individuals yet to enter retirement.

Retirees with balances above $1.6m will be required to reduce their balance to the cap by the effective date by transferring any excess back to accumulation or withdrawing the excess from super. If not transferred, an excess tax will be applied at 15% initially and 30% for subsequent breaches of the cap.

The cap will index in increments of $100,000 in line with CPI.

There was previously no limit on the amount individuals could accumulate in pension phase.

A summary of all the reforms and when each measure will take effect from is provided in the table below.

super-1

Are you confused about these Superannuation budget changes? For your free initial consultation contact us today, one of our friendly advisers would be delighted to speak with you.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s Individual objectives, financial situation or needs.  Before acting on anything in this article you should consider if it is appropriate for you, having regard to your objectives, financial situation and needs.

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