Succession Planning for Farmers

Succession Planning for Farmers

Succession planning can be difficult at the best of times without dealing with the added pressures farmers have recently faced with droughts, fires and floods.

And that’s why it is even more important to plan early and get it right when you are on the land. You are not just dealing with a business, but invariably also with a home.

Some 99 per cent of the 134,000 farms in Australia are family owned with the average age of farmers being 52.i It is believed that farmers are five times more likely than other Australians to be working beyond the age of 65. There are a variety of reasons for this, from a reluctance to relinquish control, to a lack of family willing to take over the reins and financial necessity.

Given the physicality of farming, it would seem to make a lot more sense to start thinking about succession planning well before that stage.

Often such planning is put into the too hard basket because there are so many variables to consider. But this will not solve the problem, so it’s better to get good advice and get it early.

Start talking

The first thing you need to do is open the doors of communication. Arrange a time to talk with your family to discuss:

  • Who wants to inherit and work on the farm and who wants to leave the property
  • Whether they agree each child should be treated equally or accept that the one inheriting the farm should receive preferential treatment
  • How everybody feels about splitting the property between siblings, or
  • The way forward if none of your children wants to stay on the land.

These are all considerations that need to be addressed and revisited over time to ensure they meet with everybody’s wishes.

If just one of the children wants to remain on the property, will they need to find the finance to pay out the other siblings? If so, then the next decision is how that finance will be found.

Perhaps the answer is to transfer the property before you die. If that is the case, then where will you live in retirement and what will be your source of income once you retire? Again, you need to examine the options. Perhaps you may receive an ongoing income from the property, or maybe find income from other investments. Importantly, you also need to revisit these options over time to ensure they still work for you.

One danger of not having a succession plan and working well beyond your best years, is that you can run the farm into the ground and make it a far less attractive property to sell.

Structure your plans

There are so many questions to ask and what is right for one family, may not be right for another.

But once you determine how you want to move forward, you then need to examine the best structures to put in place to make the process as efficient as possible. Some of the key advice you may need is on tax, trusts and land ownership and the intersection of all three.

Tax is particularly important as you want to avoid or at least minimise capital gains tax (CGT).

If you are 55 years of age or more and retiring and have owned your property for at least 15 years, then you may qualify for the small business 15-year CGT exemption on your entire capital gains. Other concessions may apply if you don’t qualify the 15-year exemption.

For couples where the family farm is held in their own name, perhaps you might want to consider a joint tenancy agreement as it leads to automatic transfer of ownership if one dies.

Or you might consider putting the farm into a family trust or perhaps holding it as an asset in your self-managed super fund. There are so many what-ifs to consider when it comes to rural properties. If you want to discuss how to move forward on your estate and succession planning and what will work best for you, then give us a call.

i https://www2.deloitte.com/au/en/pages/consumer-business/articles/succession-family-farm.html

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


How to budget successfully in 4 easy steps

How to budget successfully in 4 easy steps

In the wake of the Federal Budget and with the financial year end looming, now is a good time to review your personal balance sheet. If it’s not as healthy as you would like, perhaps it’s time to do a little budget repair of your own.

Just as governments need to set policy objectives and budget for future spending commitments, households need to feel confident they can meet their current and future financial commitments.

So no matter how much you earn, it’s always a good strategy to check that your spending doesn’t exceed your income. It’s also important to think about how much you need to save today to pay for all the things you want to achieve in the future.

Before we look more closely at your personal finances, it’s worth understanding how you may be affected by the big picture.

Cost of living pressures

The big economic issues for everyone right now, from the federal government and the Reserve Bank to businesses and households, are inflation and interest rates.

While economists talk about inflation, individuals experience this as an increase in their cost of living. Inflation increased by 3.5% in the year to December, with the price of fuel and the cost of buying a new home the biggest contributors. Prices of food, transport, health and insurance are also rising.i

Rising prices also put pressure on the Reserve Bank to lift interest rates to dampen demand. Lenders respond by increasing interest rates on mortgages and other loan products. While the Reserve Bank has indicated it is unlikely to lift rates before late 2022, homeowners and investors need to be prepared for an inevitable increase in mortgage repayments.

While higher prices are not a major concern if your income is growing faster than inflation, annual wages growth is lagging inflation at just 2.3 per cent.ii In other words, unless you’re lucky enough to secure a big wage rise your finances could be going backwards in real (after inflation) terms.

Given these challenges, what can you do to get ahead?

Start at the beginning

Money may not buy you happiness, but having enough to afford the life you want to lead certainly helps. So how much is enough?

A recent survey by Finder found 25 per cent of Australians wouldn’t feel affluent unless they earned at least $500,000 a year.iii Not only is this almost nine times the average income of around $60,000, many of today’s rich listers started out with far less.iv

There’s nothing wrong with dreaming big but you are more likely to achieve your goals by being realistic and to start with, making the most of what you already have.

Before you can build wealth, you need to understand what’s coming in, where your money’s going and where you could make savings, by following these four steps:

    • 1. Add up your annual income from wages, investments and government benefits.

2. Add up your spending on essential living expenses including mortgage or rent, groceries, utilities, transport and insurances; and discretionary spending on the fun stuff like clothes, dining out, entertainment and holidays. If you don’t have receipts, try tracking your spending over three months or so using one of the many free online budgeting apps.

3. Subtract your total spending in step 2 from your total income in step 1. If you spend more than you earn or barely break even, then look for areas where you could save. Things like cutting back on takeaways, impulse spending online, and streaming services you rarely use. Ring your mortgage lender to negotiate a better interest rate and when insurances come up for renewal, shop around.

4. Draw up a budget to track your spending and put a savings plan in place to achieve your goals. Even a simple plan will help with discipline and make regular saving automatic.

Putting it all together

Some of the most popular budget strategies take a bucket approach, with separate money buckets for needs, wants and savings.v Most aim to set aside around 20 per cent of your income as savings and paying yourself first by setting up regular debits to a savings account. If you have debts or don’t have an emergency fund, then these should be attended to before you direct savings to investments or other goals.

To be successful, a budget needs to be one you can stick to, tailored to your personal goals and financial situation. If you would like us to help plan your personal budget strategy, get in touch.

i https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release

ii https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release

iii https://www.finder.com.au/average-aussie-needs-330000-to-feel-rich

iv https://www.abc.net.au/news/2021-06-20/are-you-middle-income-see-how-you-compare/100226488

v https://www.finder.com.au/best-budgeting-strategies

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Transitioning to retirement gradually

Transitioning to retirement gradually

As the nation drifts back to work after the summer break, it’s often a time to start putting your New Year’s resolutions into practice. For some, an extended holiday may have convinced you that you are ready for more of the good life and that it’s time to retire.

In the past, that would have meant leaving work for good. These days, retirement is far more fluid.

You might simply want to wind back your working hours. Or you may want to leave your full-time job but keep your career ticking over with part-time or consulting work. Others may dream of leaving the nine to five to run a B&B or buy a hobby farm.

Changing retirement patterns

There are already signs that people’s retirement plans are changing.

In 2019, the average retirement age for current retirees was 55 (59 for men and 52 for womeni), but the age that people currently aged 45 intend to retire has increased to 64 for women and 65 for men.ii

There are many reasons for this gap between intentions and reality. Only 46 per cent of recent retirees said they left their last job because they reached retirement age or were eligible to access their super. Many retired due to illness, injury or disability, while others were retrenched or unable to find work.iii

Retired women were also more likely than men to retire to care for others. But for people who can choose the timing of their retirement, there can be good reasons for delay.

Reasons for delaying retirement

As the Age Pension age increases gradually from 65 to 67, anyone who expects to rely on a full or part pension needs to work a little longer than previous generations.

We’re also living longer. A man aged 65 today can expect to live another 20 years on average while a woman can expect to live another 22 years.iv So, the longer we can keep working the further our retirement savings will stretch.

And then there’s COVID. If you lost your job or your hours were reduced during the pandemic, you may need to work a little longer to rebuild your savings. Even if you kept your job, you couldn’t go anywhere so you may have postponed your retirement plans. But now the COVID fog is lifting, retirement may be back on the agenda.

Whatever shape your dream retirement takes, you will need to work out how much it will cost and if you have sufficient savings.

Sourcing your retirement income

If you plan to retire this year, you will need to be 66 and six months and pass assets and income tests to apply for the Age Pension. But you don’t have to wait that long to access your super.

Generally, you can tap into your super once you reach your preservation age (between age 55 and 60 depending on the year you were born) and meet a condition of release such as retirement. From age 65 you can withdraw your super even if you continue working full time.

But super can also help you transition into retirement, without giving up work entirely.

Transition to retirement

If you’re unsure whether you will enjoy retirement or find enough to do to fill your days, it can make sense to ease into it by cutting back your working hours. One way of making this work financially is to start a transition to retirement (TTR) pension with some of your super.

Most super funds offer TTR pensions, or you can start one from your self-managed super fund (SMSF). But there are some rules:

  • You must have reached your preservation age
  • Money can only be withdrawn as an income stream, not a lump sum
  • There is a minimum annual withdrawal
  • The maximum annual withdrawal is 10 per cent of your TTR account balance
  • Income is tax-free if you are aged 60 or older; if you’re 55-59 you may pay tax on the TTR income, but you receive a tax offset of 15 per cent.

One of the benefits of this strategy is that while you continue working you will receive Super Guarantee payments from your employer. A downside is that you will potentially have less super in total when you finally retire.

Retirement is no longer a fixed date in time, with far more flexibility to mix work and play as you make the transition. If you would like to discuss your retirement options and how to finance them, give us a call.

i, iii https://www.abs.gov.au/statistics/labour/employment-and-unemployment/retirement-and-retirement-intentions-australia/latest-release

ii https://newsroom.kpmg.com.au/will-retire-data-tells-story/

iv https://www.aihw.gov.au/reports/life-expectancy-death/deaths-in-australia/contents/life-expectancy

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Is your life insurance still right for your current needs?

Is your life insurance still right for your current needs?

The pandemic has changed the way so many of us live, with jobs, travel and lifestyle all transformed during COVID. Now, as we start emerging on the other side, it may be a good idea to check whether these changes have impacted on your life insurance needs.

In some cases, you may require more cover and in others perhaps less. This is not just down to COVID. Changes to your insurance needs at any given time are a constant throughout your life.

Insurance through the ages

What you need as a single 20-something building your career is generally quite different from your requirements in your 40s when you may be juggling a young family and a mortgage. Then as you approach retirement and beyond, perhaps with your mortgage paid off, your needs change yet again.

On top of these life cycle changes, what may have seemed appropriate before COVID may no longer work. Perhaps you are working fewer hours and as a result have a lower income. Or perhaps you have opted to take early retirement.

Certainly, insurance companies have been mindful of people struggling to pay premiums during the pandemic and have generally honoured payouts on income protection cover if they occurred within that timeframe.

Whatever your circumstances, now is a good time to consider whether your current policies work for you.

What’s covered?

Life insurance is the umbrella term for four main types of cover - death, total and permanent disability (TPD), income protection and trauma.

Death cover is self-explanatory. It pays a lump sum to your nominated beneficiaries when you die. It is often packaged with TPD which covers things like living expenses, repayment of debt and medical costs if you are no longer able to work. If your TPD is held through your super fund, generally this will only be paid if you cannot work in “any” occupation; if it is held outside super, you may be covered if you can no longer work in your “own” occupation.

Income protection cover will pay part of your lost income for a pre-determined time if you get sick or are injured and need time off work. It is particularly useful if you are self-employed or a small business owner as you don’t have access to sick leave.

Trauma cover meanwhile provides a lump sum amount if you are diagnosed with a major illness or serious injury such as cancer, a heart condition, stroke or head injury. Such payments can be a big help with paying medical bills.

Check your super

Death and TPD insurance can often be purchased through your super fund. If, however, you took advantage of the early release of super allowed during COVID in 2020, it could be that you no longer have sufficient savings in your fund to cover the premium payments. Or, if you’ve been out of work due to COVID and not made any contributions to your super for 16 months, your account may have been deemed inactive under super law and closed.

It’s important to note that if you lost your job due to COVID, then any automatic cover in your super with your previous employer may have stopped. If you have a new employer, the cost may have increased. Also keep in mind that income protection insurance doesn’t cover you if you have lost your job due to a business closure or other COVID-related event.

Protect your mental health

One area that has received more attention during COVID is mental health. Not all insurance policies provide cover for mental health without exclusions or additional premiums. Nevertheless, according to the Financial Services Council, insurers paid out $1.47 billion in mental health claims in 2020.i

If your circumstances have changed, then it may be worth examining whether your life insurance cover still suits your needs and whether there are ways you can save money through lower premiums. For instance, you might reduce the amount you are insured for or remove some of the benefits.

If you would like to discuss your life insurance needs and whether your existing cover is still appropriate give us a call.

i https://www.abc.net.au/news/2021-02-08/insurance-coverage-mental-health-after-covid-19/13122144

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


3 Ways to Achieve Your Financial Goals in 2022

3 Ways to Achieve Your Financial Goals in 2022

In the wake of the pandemic, many Australians are reassessing their approach to money. Regardless, with the Christmas / New Year break less almost on us, we all have a chance to take a bit of time to reflect on the last year and set some financial goals.

This year more than most, many of us may feel that our personal and financial priorities have shifted depending on our experience of the pandemic.

So now that vaccination levels are rising, borders are reopening and we can all plan with a little more certainty, why not take this opportunity for a financial reset in 2022.

Regrets, we have a few

While many people’s lives were turned upside down by lockdowns, not everyone suffered financially.

If you kept your job or were able to access COVID disaster payments, you may have saved money. Holiday plans were scrapped and restaurants, theatres and leisure activities were shut down.

In a recent survey of 2,000 Australians by the Australian Financial Planning Association of Australia (FPA), 11 per cent said their financial position had strengthened over the past 12 months while a further 46 per cent said nothing much had changed. But 17 per cent said their position had worsened and nearly one in four reported being stressed by their financial position.i

Worryingly, the survey found one in five Australians didn’t have enough savings to get through the crisis and 23 per cent felt stressed about their finances. Their biggest regrets were not saving enough, spending too much on take-aways and non-essential items and not paying off debt quickly.

While many of us learned some painful lessons during the pandemic, that may be an opportunity to reset our priorities and do better in future.

Lessons learned

The enforced lockdowns made us value simple things like the importance of family and community. But uncertainty about the economy, jobs and our personal finances also encouraged many of us to reassess our approach to money.

According to the FPA survey, 45 per cent of Australians say the pandemic has made them more frugal. Large numbers also say they have increased savings (44 per cent), paid down debt (41 per cent) and created a budget (39 per cent).

Smaller but still significant numbers responded to the pandemic by topping up their super, investing more outside super or increasing health insurance.

The big question now is, can we stick to these good habits and build on them in the year ahead.

Goal setting

When it comes to goals for the next 12 months, the FPA survey found people were split between hitting a savings goal (52 per cent) and going on holiday (44 per cent) as their top priority. Paying off the mortgage and reducing credit card debt were also popular.

Given the recent strong performance of shares and residential property, starting an investment plan is also high on the list of priorities. This is especially so among younger people who are using new digital platforms to take greater control of their investments, in and out of super.ii

As restrictions ease and the economy recovers, hopefully we can all manage to have a bit more fun next year but get our finances in good shape at the same time.

To get the balance right, it’s important to give your personal and financial goals the attention they deserve and draw up a plan to help you achieve them.

3 tips to help reach your goals

A financial plan doesn’t have to rely on complex financial products or strategies. In fact, getting the simple things right is often best.

  • Build a cash buffer to tide you over in an emergency. This was one of the biggest lessons of the pandemic. It’s generally recommended that you have around three months’ living expenses at call. This might be in a savings account or in a mortgage redraw facility.
  • Manage your cash flow. Even high-income earners can fall into the trap of spending more than they earn. So, take a financial snapshot, noting your monthly income from all sources and the balances on your savings accounts. Then subtract your monthly expenses, including debt repayments. If there’s a shortfall, look for cost savings.
  • Draw up a financial plan. We are here to help you set short and long-term goals, develop strategies to achieve them and provide support to keep you on track.
    If you would like us to help you kick some goals in 2022, don’t hesitate to get in touch.

i All statistics in this article (unless otherwise stated) are from the FPA Money & Life Tracker Freedom Edition 2021: A snapshot of how 2,000 Australians have fared since COVID-19, https://fpa.com.au/wp-content/uploads/2021/10/2021_FPA_Money_and_Life_Tracker_Freedom_Edition.pdf

ii https://www.morningstar.com.au/smsf/article/millennials-are-making-the-switch-to-smsfs/216142

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Understanding Aged Care Payment Options

Understanding Aged Care Payment Options

When the time comes to investigate residential aged care for yourself, or a loved one, the search for a facility and how to pay for it can seem daunting. The system is complex, and decisions are often made in the midst of a health crisis. This brief guide explains fee structures and payment options.

Factors such as location to family and friends, reputation for care or general appeal are just as important as the sometimes-high price of a room and other fees in residential aged care.

Even so, costs can’t be ignored.i

Accommodation charges

The first thing to be aware of when researching your residential aged care options is that there are separate costs for the accommodation and the care provided by the facility.

The accommodation payment essentially covers your right to occupy a room. You can pay this accommodation fee as a lump sum called the Refundable Accommodation Deposit (RAD), or a daily rate similar to rent, or combination of both.

The daily rate is known as the Daily Accommodation Payment or DAP, and is effectively a daily interest rate set by the government. The current daily rate is 4.04 per cent. If the RAD is $550,000 then the equivalent DAP is $60.87 a day ($550,000 x 4.04%, divided by 365 days).

A resident can pay as much or as little towards the RAD as they choose, but any outstanding amount is charged as a DAP.

The RAD is fully refundable to the estate, unless it is used to pay any of the aged care costs such as the DAP.

Daily fees

As well as an accommodation cost there are daily resident fees that cover living and care costs. There is a basic daily fee which everyone pays and is set at 85 per cent of the basic single Age Pension. The current rate is $52.71 a day and covers the essentials such as food, laundry, utilities and basic care.

Then there is a means tested care fee which is determined by Services Australia or Veteran’s Affairs. This figure can range from $0 to about $256 a day depending on a person’s income and assets. The figure has an indexed annual and a lifetime cap – currently set at $28,339 a year or $68,013 over a lifetime.

Some facilities offer extra services, where a compulsory extra services fee is paid. It has nothing to do with care but may include extras like special outings, a choice of meals, wine with meals and daily newspaper delivery. It can range from $20-$100 a day.

A means assessment determines if you need to pay the means-tested care fee and if the government will contribute to your accommodation costs. Everyone who moves into an aged care home is quoted a room price before moving in. The means assessment then determines if you will have to pay the agreed room price, or RAD, or contribute towards it.

How means testing works

A means-tested amount above a certain threshold is used to determine whether you pay the quoted RAD and how much the government will contribute towards the means-tested care fee.

A person on the full Age Pension and with property and assets below about $37,155 would have all their costs met by the government, except the $52.71 a day basic daily fee.

A person on the full Age Pension with a home and a protected person, such as their spouse, living in it and assets between $37,155 and $173,075 may be asked to contribute towards their accommodation and care.

To be classified a low means resident there would be assessable assets below $173,075.20 (indexed). It is also subject to an income test.

A low means resident may pay a Daily Accommodation Contribution (DAC) instead of a DAP which can then be converted to a Refundable Accommodation Contribution (RAC). They may also pay a small means-tested care fee.

Payment strategies

The fees you may pay for residential care and how you pay them requires careful consideration. For example, selling assets such as the former home to pay for your residential care can affect your aged care fees and Age Pension entitlements.

If you would like to discuss aged care payment options and how to ensure you find the right residential care at a cost you or your loved one can afford, give us a call.

i All costs quoted in this article are available on https://www.myagedcare.gov.au/aged-care-home-costs-and-fees

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Future proofing your career with professional development

Future proofing your career with professional development

“The only thing that is constant is change” – so said the ancient Greek philosopher Heraclitus and it continues to ring true today.

Industries are changing, continuing to evolve in response to challenges (such as the COVID-19 pandemic), technological disruptors and customer expectations. As a result, there is a greater need for the workforce to continue to adapt and develop. We need to be agile to stay on top of these changes, continue developing and learning, which will work towards future proofing our careers.

While some industries have formal professional development programs, there are many ways to foster your own development for those who don’t have formal pathways. Here is how you can take the lead to future proof your career.

Enrol in a course

Some workplaces offer both in-person and online courses, for example LinkedIn Learning, so take advantage of what’s on offer. You can also seek out professional courses relevant to your industry to upskill, keeping you abreast of the changing environment – not to mention that further education is a great additional to your CV as it showcases your engagement within the industry and your proactive approach to your career.

Attend webinars or seminars

While COVID restrictions have halted many in-person seminars, there are plenty of online webinars you can attend, some which are specifically on the topic of future proofing your career. While there are a number of free webinars you can attend, others may be offered by organisations to their members. Paid membership to these organisations be they industry groups, or groups centred around a common goal, can be a worthwhile investment assisting with not only educational sessions but networking opportunities.

Not only are webinars accessible from your office or living room, they tend to be more budget-friendly than seminars. However, seminars offer face-to-face learning and networking opportunities, so they are great to utilise where possible.

Pick up a book or listen to podcasts

It doesn’t get easier than picking up a book to arm yourself with new knowledge. There is a wealth of information out there, some which will be general advice discussing trends and management styles, others that will be tailored to your industry.

If you don’t have much time to read, opt for an audio book to listen to in the car or during exercise. Podcasts are also excellent ways of getting helpful information in a format that is convenient and can be tapped in and out of. As they are regularly created, you’re likely to get more up-to-date information this way.

Enlist the help of a mentor

It’s clear that a mentor can help you stay on top of your industry or explore new opportunities by providing support and guidance. A 2019 survey showed that while 76% of people thought mentors are important, only 37% actually have one.i

The study also found that 61% of mentor-mentee relationships developed naturally, with 25% happening after someone offered to mentor, and 14% when someone asked for a mentor. This means that there’s likely to already be someone in your life who could be your mentor. Think about who is dynamic in facing industry changes and don’t be shy to ask if they’re open to mentoring you.

Join peer groups

An extension of having a mentor, peer groups provide you with the support of others who are also dedicated to professional and personal growth. If you are someone who thrives on peer support, it will be invaluable to be part of a group of people rather than going it alone.

You can give each other feedback, check in on each other’s goals and share helpful experiences and resources such as great books or webinars. This is also a fantastic way to make real-life connections – you might even meet someone who helps you land a new job or open doors to a new industry. Online tools such as Meetup can help you find a group near you and keep an eye on industry meetups as well.

Life is full of change, but rather than feeling overwhelmed, embrace it. By furthering your education, you’ll future proof your career and feel more empowered tackling the changes you face.

i https://online.olivet.edu/research-statistics-on-professional-mentors

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Is super insurance cover worth it

Is super insurance cover worth it? Pay close attention to the terms

Is super insurance cover worth it

Is super insurance cover worth it? Pay close attention to the terms

Buying insurance through super has some advantages, but you need to make sure you are getting the right cover for your individual needs. In some cases, you may be paying for nothing.

Most super funds offer life and total and permanent disability (TPD) insurance to fund members and, in some cases, income protection cover.

But since the introduction of the Protecting your Super reforms in 2019, this cover is no longer automatic.

If you have less than $6000 in your account or it has been inactive, then the insurance component will have been cancelled unless you advised the fund otherwise. An account may be deemed inactive if, for example, it has not received a contribution for more than 16 months.

In addition, insurance cover is no longer offered to new fund members aged under 25.

Is it right for you?

If you do have insurance in your super account, then it’s a good idea to check the cover is right for you. This is particularly the case now that the stapling measure has been introduced as part of the recent Your Future, Your Super legislation.

From November 1, unless you choose a new fund when you change jobs, the first fund you joined will be ‘stapled’ to you throughout your working life. This is where problems can arise; while the fund stays the same, so will the insurance cover.

Say you move from a low-risk job where the insurance offered in your super was more than adequate to a high-risk job such as in construction or mining. Would your insurance now cover you if you were no longer able to work? And if it did, would the cover be sufficient? It may well be that your new occupation is not even covered.

Most TPD policies within super are for “any” occupation rather than “own” occupation. This three-letter definition can make a world of difference. If you still have the capacity to work in some other occupation, then it is likely your insurance will not pay out.i

Many benefits

Despite this, there are still quite a few benefits to having insurance cover in your super. Firstly, the premiums are generally lower because the fund buys the insurance cover in bulk. In addition, your premium payments are effectively lower as they come out of your pre-tax rather than your post-tax income.

What’s more, you are not having to put your hand in your pocket to pay the premiums as the money automatically comes out of your super. Of course, the flipside is you will have less money working to build your retirement savings.

So, when it comes to taking out insurance, going through your super has lots of positives.

But the downside is that the default level payout may be lower than you might need. You should check if this is the case and maybe consider making additional premium payments to give yourself and your family more appropriate cover. Be aware though that opting for a higher payout could mean you have to undergo a medical.

Also, life insurance cover in super actually reduces over time to the point where your cover reaches zero by the time you are 70. And for TPD cover it ceases at 65.ii

Regular checks

Wherever you get insurance cover, it’s important to remember that its purpose is generally to cover any outstanding debt and ongoing financial obligations should you pass away or become unable to work.

For this reason, it is important to regularly check your insurance within your super to ensure it is sufficient to maintain your lifestyle.

If it falls short, then you might also consider taking out a policy outside super.

While income protection is sometimes available through your super, it may be necessary to look outside. Such policies pay you a regular income for a specified period if you are unable to work through an illness or injury, and premiums are tax-deductible outside super.

When you are leading a busy life with lots of claims on your income, insurance may be seen as an unnecessary expense. But when it comes to the crunch, it can play a valuable role in you and your family’s life when you need it most.

Please call us to discuss your insurance needs and whether your existing cover, both inside super and outside, is sufficient.

i https://moneysmart.gov.au/how-life-insurance-works/total-and-permanent-disability-tpd-insurance

ii https://thenewdaily.com.au/finance/dollars-and-sense/2021/08/02/insurance-life-tpd-superannuation/

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Changes afoot: time to review your income protection cover?

Changes afoot: time to review your income protection cover?

Major changes to income protection and salary continuance insurance schemes are set to take place here in Australia, in October 2021. As such, it’s important to review your cover and needs before insurers start altering their offerings.

If you’ve had one of these policies for any length of time, you’ve probably seen your premiums increase. That’s because insurers have been struggling to cover large losses on these productsi.

Given ongoing competition and generous features in some products, the Australian Prudential Regulation Authority (APRA) has introduced new rules to ensure income protection cover remains sustainable and affordable for customers.

What is income protection?

Income protection cover protects your most valuable asset – your ability to earn an income. It acts as a replacement income if you are injured or disabled and will help support your family and current lifestyle while you recover.

What’s more, your premiums are generally tax-deductible, so they can potentially help reduce your tax bill.

Major changes to income protection

Reform of income protection policies started back on 1 April 2020, when insurers were no longer permitted to offer customers Agreed Value income protection policies. Agreed value income protection provided more certainty about the amount you would be paid if you claimed and was based on your best 12 months earnings over a three-year period.

Following this initial change, APRA is implementing further changes from 1 October 2021 that will make new income protection policies much less generous. The reforms mean insurers will be offering new policies that base insurance payments on your annual income at the time you make a claim (or the previous 12 months), not on an agreed earnings amount.ii

For people with a fluctuating income, insurance payments will be based on your average annual earnings over a period appropriate for your occupation and will reflect future earnings lost due to the disability.

To further reduce costs, new policies will no longer offer supplementary benefits like specified injury benefits.

Limits on income payments

Other changes include a requirement for the maximum income replacement payment for the first six months to be capped at 90 per cent of earnings, reducing to 70 per cent after six months.ii If your insured income amount excludes superannuation, the Superannuation Guarantee can be paid in addition to the 90 per cent cap.

One of the most significant changes is that the terms and conditions of an existing income protection policy will no longer be guaranteed until age 65. Policies will no longer be offered for longer than five years, so your policy and its terms will be reviewed every five years.

You won’t need to undergo medical review, but any changes to your occupation, financial circumstances or taking up a dangerous pastime will need to be updated in the policy. Even if your circumstances remain the same, you will still be required to review the policy.

If your policy has a long benefit period, you are also likely to face a tighter definition of disability, rather than the previous definition of simply being unable to perform your ‘normal job’. APRA is keen to ensure claimants who are able to return to some form of paid employment do so, rather than remaining at home and receiving a payment.

Impact on existing and new policies

So what does this mean for you?

If you currently have an income protection policy outside your super, you will not be immediately affected by these changes, but it would be wise to check your policy is still appropriate for your circumstances.

Given the extent of the changes to income protection cover, if you have let your insurance lapse or don’t currently have income protection, it could make sense to consider signing up before 1 October 2021 to take advantage of the more generous current arrangements.

Income protection is often overlooked because of a perception that it’s too costly or not essential, but like all insurance, the cost of not being insured can be far greater. This type of cover offers valuable benefits that should be a key component in your wealth creation - and preservation - strategy.

If you would like help reviewing or selecting appropriate income protection cover, call our office today.

i https://www.apra.gov.au/news-and-publications/apra-resumes-work-to-enhance-sustainability-of-individual-disability-income

ii https://www.apra.gov.au/final-individual-disability-income-insurance-sustainability-measures

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


What are the pros and cons of an SMSF?

What are the pros and cons of an SMSF?

Many Australians like the idea of managing and investing their own super. It can make a lot of sense too, but it's definitely not for everyone. We take a look at the arguments for and against setting up your own Self Managed Super Fund (SMSF).

Taking control of your super

People choose to run their own SMSF for many reasons. From a desire for flexible investment choices through to dissatisfaction with their existing super fund, tax and estate planning concerns.

According to a recent SMSF Association survey, many people’s desire for control over their personal retirement income goals and the ability to take control of their financial future are key motivators in the decision to run an SMSF.

For small business owners, the ability to invest in assets related to their business – such as their business premises – is also very appealing.

All these reasons are valid and may make it worth considering an SMSF for your retirement savings.

Benefits of your own super fund

Key benefits are having control over your investment plan and selection of the assets in which your retirement savings are invested.

As an SMSF trustee, you are responsible for developing your fund’s investment strategy, so you get to choose which investment approach to use to grow your money.

There may also be cost savings compared to using a traditional, large super fund.

An SMSF can also give you more flexibility when it comes to tax management and estate planning.

SMSFs can be time consuming

On the other hand, running an SMSF can require significant amounts of time to complete and lodge the necessary paperwork and to meet the strict compliance requirements for super funds.

We can help take a lot of the hard work out of running an SMSF for you and ensure you comply with all the rules. Failing to comply can result in significant penalties.

Although many people enjoy being accountable for their own retirement and tailoring their investments, achieving strong returns requires investment knowledge and skills, plus sufficient time to actively research and manage your investments.

It’s also worth keeping in mind the ATO is the main regulator for SMSFs, so you will have the tax man looking over shoulder.

Are SMSFs cost competitive?

There is no hard and fast rule about the amount of super you need in order for your SMSF to be cost competitive with a large public super fund. Generally, an SMSF is less cost effective if your fund has low member balances.

Smaller balance SMSFs are also less able to achieve sufficient diversification with their assets compared with larger funds, making it harder to spread your investment risk.

Aside from the establishment costs, running your own SMSF incurs annual costs such as the annual ATO supervisory levy, auditing and legal fees, any administrative tasks and any investment-related expenses.

SMSFs can be cheaper

Despite these costs, running your own SMSF can actually be cheaper than using an APRA-regulated super fund to save for retirement.

The SMSF Association’s Cost of Operating SMSFs 2020 report found an SMSF can be cost-competitive with industry and retail super funds when it has an asset balance of $200,000 or more, even for a fund paying for a full administration service. An SMSF with accumulation accounts and a total asset balance of $200,000 using this type of service generally has annual running costs ranging from $1,518 to $3,078.

SMSFs are even more attractive for large asset balances. In fact, the study found an SMSF with a total asset balance of $500,000 or more is generally the cheapest alternative when it comes to a super fund.

For people interested in running their own SMSF but with a balance of only $100,000 to $200,000, you will need to keep an eye on your administration costs and consider what you may be able to manage yourself.

SMSFs with less than $100,000 are not cost-competitive.

If you are interested in controlling your retirement savings, make an appointment to talk to us about us about whether and SMSF is right for you and how we can assist.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.