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.


Achieving financial harmony with loved ones

Love and money: achieving financial harmony

Regardless of whether your finances were impacted the pandemic, if you're in a relationship, your own attitude and your partner's towards finances may have shifted over the last year. Given money's potential to be such a source of conflict in relationships, now is a good time to take stock. It's in both your best interests to ensure you're in sync and on track to maintain or achieve financial harmony.

It's fair to say, COVID-19 has had a far-reaching impact on many aspects of our lives. Fortunately, the Australian economy is proving remarkably resilient. But, personal finances have been affected in different ways by lockdowns and government initiatives.

Check in and see where you stand financially

The first step is knowing where you stand financially. This involves looking through your shared and individual accounts and being open with each other about your saving and spending habits.

This is unlikely to make for a romantic date night given the potential for uncomfortable conversations, which is why one in three Australians admit having kept a financial secret from their partner.i However, by being transparent with your partner, you’ll be working through issues before they snowball into a source of greater financial and relationship stress.

Discuss or re-evaluate your goals

We can all lose track of our end goals, especially when life becomes unpredictable and we need to shift focus. So that you don’t move too far away from your financial goals, re-evaluate your priorities. These may have changed in the past year – maybe you’ve had to halt those travel plans or realised you no longer need or can’t afford that new car.

As you and your partner are two individuals, you might not always be aligned in terms of your approaches to saving and spending. We all have different deeply entrenched views and beliefs around money and it’s one area that you may never completely see eye to eye on. That also goes for goals – we all have our own dreams and ambitions. Maybe one of you sees a need to renovate the bathroom, while the other thinks the money would be better spent on a holiday. Discuss the goals you both have and be prepared for compromise to find a plan that suits the family as a whole.

Re-evaluate your priorities and how you spend

Priorities and spending habits can change over time and more recently, in response to a changed world. In 2020, 56% of Australian households surveyed believed their financial situation was vulnerable or worse due to the pandemic.ii You may have less disposable income and needed to tap into savings or your superannuation or access credit as a result.

It’s important to acknowledge if your financial position has changed, reassess your priorities and make any necessary adjustments. This may involve taking a look at your spending and saving habits and making changes so that your dollars go towards supporting what’s most important to your family. Again, it’s important to discuss this with your partner and work through it together.

Develop a budget

Budgeting is an obvious step, but you’ll need to ensure that the budget works for both of you and supports your shared goals. There are great budgeting apps you can use, but what you’ll both need to bring to the table is a commitment to sticking with the agreed upon budget. Discuss your household needs, such as mortgage or rent payments, utilities, etc, as well as your individual needs and what your shared goals are.

Try to agree on a system that keeps you both accountable. It can be as formal as filling out a spreadsheet every week, or perhaps having a monthly family meeting around how things are tracking and if there’s any room for improvement.

Money talk in relationships can be tricky as it’s often a loaded and emotive topic that can bring up other issues. This is why an adviser can help with these conversations, facilitating discussions in a safe and neutral environment and providing expert advice, tailored to your situation.

Please reach out if we can be of assistance.

i https://www.moneymag.com.au/talk-money-relationships

ii https://www.bt.com.au/insights/perspectives/2020/australian-consumer-spending-changes.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.


Declutter and tidy up your finances this Autumn

Declutter and tidy up your finances thiis Autumn

Like trees losing their leaves in autumn, why not take a leaf out of their book and choose this time of year to shed some of your own financial baggage.

Taking stock of your accounts and holdings and eliminating what you no longer need will simplify your life and could save you quite a bit in the process.

Here are a few things to put on your check list....

In the style of Marie Kondo, the Japanese organising whizz who has inspired millions to clean out their cupboards, decluttering your finances can bring many benefits.

While you work through all your contracts, investments and commitments, you will no doubt discover many that no longer fit your lifestyle or are simply costing you in unnecessary fees.

And if that is the case, then it is likely that such commitments will not be sparking any joy. And joy is the key criteria Kondo uses to determine whether you hold on to something or let it go.

So how does decluttering work with your finances and where do you start?

Where are you?

The first step is probably to assess where you are right now. That means working out your income and your expenses.

There are many ways to monitor your spending including online apps and the good old-fashioned pen-and-paper method.

Make sure you capture all your expenditure as some can be hidden these days with buy now pay later, credit card and online shopping purchases.

The next step is to organise your expenditure in order of necessity. At the top of the list would be housing, then utilities, transport, food, health and education. After that, you move on to those discretionary items such as clothes, hairdressing and entertainment.

Work through the list determining what you can keep, what you can discard and what you can adapt to your changed needs. Remember, if it doesn’t spark joy then you should probably get rid of it.

Weed out excess accounts

Now you need to look at the methods you use when spending. Decluttering can include cancelling multiple credit cards and consolidating your purchases into the one card. This has a twofold impact: firstly, you will be able to control your spending better; and secondly, it may well cut your costs by shedding multiple fees.

Another area where multiple accounts can take their toll is super. Consider consolidating your accounts into one. Not only can this make it easier to keep track of, but it will save money on duplicate fees and insurance. If you think you may have long forgotten super accounts, search for them on the Australian Tax Office’s lost super website. Since July 2019, super providers must transfer inactive accounts to the tax office.

Once you have reviewed your superannuation, the next step is to check that your investments match your risk profile and your retirement plans. If they aren’t aligned, then it’s likely they will not spark much joy in the future when you start drawing down your retirement savings.

If you have many years before retirement and can tolerate some risk, you may consider being reasonably aggressive in your investment choice as you will have sufficient time to ride investment cycles. You can gradually reduce risk in the years leading up to and following retirement.

Sort through your insurances

Another area to check is insurance. While insurance, whether in or out of super, may not spark much joy, you will be over the moon should you ever need to make a claim and have the right cover in place.

When it comes to insurance, make sure your cover reflects your life stage. For instance, if you have recently bought a home or had a child, you may need to increase your life insurance cover to protect your family. Or if your mortgage is paid off and the kids have left home, you might decide to reduce your cover.

Prune your investments

If you also have investments outside your super, they too might benefit from some decluttering. As the end of the financial year approaches, now is a good time to look at your portfolio, sell underperforming assets and generally rebalance your investments.

Many people who have applied Marie Kondo’s decluttering rules to their possessions talk about the feeling of freedom and release it engenders. It may well be that applying the same logic to your finances gets you one step closer to financial freedom.

If you would like to review or make changes to your finances, why not call us to discuss.

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.


Need to boost retirement income? There's more than one way to do it...

There's more than one way to boost your retirement income

Retirees are often reluctant to eat into their “nest egg” too quickly. This is understandable, given we're living longer than ever and may need to pay for aged care and health costs later in life. But this cautious approach also means many retirees are living more frugally than they need to according to the Government's recent Retirement Income Review.

One of its key findings was that most people die with the bulk of the wealth they had at retirement intact.i.

One of the benefits of advice is that we can help you plan your retirement income so you know how much you can afford to spend today, secure in the knowledge that your future needs are covered.

Minimum super pension withdrawals

Under superannuation legislation, once you retire and transfer your super into a pension account, you must withdraw a minimum amount each year. This amount increases from 4 per cent of your account balance for retirees aged under 65 to 14 per cent for those aged 95 and over. (These rates have been halved temporarily for the 2020 and 2021 financial years due to COVID-19.)

One of the common misconceptions about our retirement system, according to the Retirement Income Review, is that these minimum drawdowns are what the Government recommends. Instead, they are there to ensure retirees use their super to fund their retirement, rather than as a store of tax-advantaged wealth to pass down the generations.

In practice, super is unlikely to be your only source of retirement income.

The three pillars

Most retirees live on a combination of Age Pension topped up with income from super and other investments – the so-called three pillars of our retirement system. Yet despite compulsory super being around for almost 30 years, over 70 per cent of people aged 66 and over still receive a full or part-Age Pension.

While the Retirement Income Review found most of today’s retirees have adequate retirement income, it argued they could do better. Not by saving more, but by using what they have more efficiently.

Withdrawing more of your super nest egg is one way of improving retirement outcomes, but for those who could still do with extra income the answer could lie in your nest.

Unlocking housing wealth

Australian retirees are some of the wealthiest in the world, with median household wealth of around $1.4 million. Yet close to $1 million of this wealth is tied up in the family home.

That’s a lot of money to leave to the kids, especially when many retirees end up living in homes that are too large while they struggle to afford the retirement lifestyle they had hoped for.

For these reasons there is growing interest in ways that allow retirees to tap into their home equity. Of course, not everyone will want or need to take advantage of these options. But if you are looking for ways to use your home to generate retirement income, but don’t relish the thought of welcoming Airbnb guests, here are some options:

Downsizer contributions to your super. If you are aged 65 or older and sell your home, perhaps to buy something smaller, you may be able to put up to $300,000 of the proceeds into super (up to $600,000 for couples).

The Pension Loans Scheme (PLS). Offered by the government via Centrelink, the PLS allows older Australians to receive tax-free fortnightly income by taking out a loan against the equity in their home. The loan plus interest (currently 4.5 per cent per year) is repaid when you sell or after your death.

Reverse Mortgages (also called equity release or home equity schemes). Similar to the PLS but offered by commercial providers. Unlike the PLS, drawdowns can be taken as a lump sum, income stream or line of credit but this flexibility comes at the cost of higher interest rates.

The big picture

While super is important, for most people it’s not the only source of retirement income.

If you would like to discuss your retirement income needs and how to make the most of your assets, give us a call.

i Retirement Income Review, https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-complete-report.pdf

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.


Income protection and life insurance cover falling short: how safe is your family's future?

Income protection and life insurance cover falling short: how safe is your family's future?

Are you confident the life insurance or total and permanent Disability cover attached to your super will support your family if things go wrong? If so, it may be worth checking how well you're actually covered.

Life insurance is all about ensuring your family can maintain their lifestyle if you were to die or become seriously ill. Even people who do have some level of protection, might discover a significant shortfall if they had to depend on their current life insurance policies.

That’s because 70 per cent of Australians who have life insurance hold relatively low default levels of cover through superannuation.

Default cover may not be enough

The most common types of default life insurance cover in super are:

• Life cover (also called death cover) which pays a lump sum or income stream to your dependents if you die or have a terminal illness.

• Total and permanent disability (TPD) cover which pays you a benefit if you are disabled and unlikely to work again.

If you have basic default cover and are part of what is considered an “average” household with no children, then it’s likely you only have enough to meet about 65-70 per cent of your total needs. The figure is much lower for families with children. Indeed, a recent study by Rice Warner estimates that while current levels of insurance cover 92 per cent of death needs, they only account for a paltry 29 per cent of TPD needs.i

Such a shortfall means that you and/or your family would not be able to maintain your current lifestyle.

A fall in cover

The Rice Warner study found the amount people actually insured for death cover has fallen 17 per cent and 19 per cent for TPD in the two years from June 2018 to June 2020. This was driven by a drop in group insurance within super which has fallen 27 per cent for death cover and 29 per cent for TPD cover.

This was largely a result of the introduction of the Protecting Your Super legislation. If you are young or your super account is inactive then you may no longer have insurance cover automatically included in your super. You’ll now need to advise your fund should you require cover.

It may make sense not to have high levels of cover, or even insurance at all, when you are young with no dependents and few liabilities – no mortgage, no debt and maybe few commitments. But if you work in a high-risk occupation such as the mining or construction industries, or have dependents, then having no cover could prove costly.

Another reason for the fall in life insurance cover has been the advent of COVID-19. With many people looking for cost-cutting measures to help them through tough times, insurance is sometimes viewed as dispensable. But this could be false economy as this may be exactly the time when you need cover the most.

There is also the belief that life insurance is expensive which is certainly not the case should you ever need to make a claim.ii

An appropriate level of cover for you

It is estimated that an average 30-year-old needs $561,000 in death cover and $874,000 in TPD cover. As you and your family get older, your insurance needs diminish but they are still substantial. So a 50-year-old needs approximately $207,000 in death cover and $499,000 in TPD.

These figures are just for basic cover so may not meet your personal lifestyle. When working out an appropriate level of cover, you need to consider your mortgage, your utility bills, the children’s education, your daily living expenses, your car and your general lifestyle.

It’s also important to consider your stage of life. Clearly the impact of lost income through death or incapacity is much greater when your mortgage is still high, your children are younger, and you haven’t had time to build up savings.

While having some life insurance may be better than nothing, having sufficient cover is the only way to fully protect your family. So why not call us to find out if your current life and TPD cover is enough for you and your family to continue to enjoy your standard of living come what may?

Now more than ever, in these uncertain times, you may find that you too are significantly underinsured and need to make changes.

i https://www.ricewarner.com/new-research-shows-a-larger-underinsurance-gap/
(All figures in this article are sourced from this Rice Warner report.)

ii https://www.acuitymag.com/finance/confusion-around-life-insurance-leaves-australians-vulnerable-nobleoak

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.


Facing redundancy? What to do and how to make the most of it

Facing redundancy? What to do and how to make the most of it.

Hopefully it will never happen to you. But with the eonomic fallout from COVID still being felt, it pays not to take employment for granted.

Should you suddenly find yourself facing redundancy, here are a few things to consider.

If you are offered redundancy, how can you turn a potentially bad situation into a new opportunity?

In the first instance, make sure that you negotiate a good redundancy settlement. By law you are entitled to a certain amount depending on your years of service with the company.i You may or may not come under an award, but the Fair Work ombudsman has a calculator so you can work out your entitlement.

You may even be able to negotiate an increased payment (a golden handshake) in order to keep confidential any specialist knowledge that you may have.

Your redundancy payment may include long service leave, holiday pay and sick leave, so it can be a sizeable amount and that creates opportunity.

How is it taxed?

But first, how much will you end up with after tax? There is a tax-free element for redundancy payments, calculated as a base amount (currently $10,989) plus a service amount ($5,496) multiplied by the numbers of years of service. So, if you have 10 years’ service, your tax-free amount is $65,949.ii

Any redundancy payment above this amount is your Employment Termination Payment (ETP) and subject to tax. If you are below your preservation age (the age at which you can access your super) you would pay 30 per cent plus the Medicare levy on this sum or 15 per cent plus Medicare if you are older than your preservation age. In both cases this tax rate applies up to $210,000 with the balance subject to 45 per cent tax plus Medicare regardless of your age.iii

So what should you do with this money? A large sum can present many opportunities although much will depend on your present circumstances such as how close you are to retirement and what your financial commitments are.

If you are hoping to find another job, assume this could take at least six months, so make sure you have sufficient funds.

Now is the time to take stock of your household budget and look at ways to reduce your overheads to control your immediate demands. For instance, you may look at selling your second car.

But don’t rush to cancel everything. Indeed, your income protection policy, for instance, could still play an important role. Before you act, ask your insurer if they would consider waiving the premiums for a few months. Just because you have lost your job, does not mean you will not be covered if something should preclude you from working in another job. You may well find you are still covered even if you are not currently employed.

Look to the future

Depending on your circumstances, you could consider using some of your redundancy payout to improve your overall financial situation. You could reduce your mortgage and other debts, or perhaps to make an investment or fund a business opportunity.

If you are approaching retirement age, then you might consider putting some of your redundancy pay into super. While this may still be a good idea if you are younger, remember you could be unemployed for longer than six months and you wouldn’t want your money locked in super until you reach preservation age.

If you are still expecting to have a few more years in the workforce, then take the time to seek professional help on your next move and think outside the square. So, rather than just find a similar position to the one you have lost in the same industry, look at widening your horizons. A professional career advisor can help. In many cases, employers provide such assistance as part of a redundancy package.

While redundancy can be confronting, if you think of it as a catalyst for change then you may find it’s one of the best things that has happened to you.

Call us to discuss how to make the most of your redundancy payment.

i https://www.fairwork.gov.au/ending-employment/redundancy/redundancy-pay-and-entitlements

ii https://www.ato.gov.au/business/your-workers/in-detail/taxation-of-termination-payments/?page=4

iii https://www.etax.com.au/employment-termination-payment/

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.


Would I be better off with an SMSF?

Would I be better off with an SMSF?

Self Managed Super Funds (SMSFs for short) can save you a ton of money — or cost too much — depending on your circumstances. Part of their attraction is the extra flexibility they offer in investing your super - e.g. in real estate.

This quick and easy guide explains exactly who they're best suited for. If you've ever wondered, it will help you decide whether it might be worth your while exploring the possibilities of Self Managing your own Super.

As well as control, investment choice is a key reason for having an SMSF. As an example, these are the only type of super fund that allow you to invest in direct property, including your small business premises.

Other reasons people give are dissatisfaction with their existing fund, more flexibility to manage tax and greater flexibility in estate planning.

What type of person has an SMSF?

If you think SMSFs are only for wealthy older folk, think again.

The average age of people establishing an SMSF is currently between 35 and 44. They’re also dedicated. The majority of SMSF trustees say they spend 1 to 5 hours a month monitoring their fund.i,ii

But an SMSF is not for everyone. There has been ongoing debate about how much you need in your fund to make it cost-effective and whether the returns are competitive with mainstream super funds.

So is an SMSF right for you? Here are some things to consider.

The cost of control

Running an SMSF comes with the responsibility to comply with superannuation regulations, which costs time and money.

There are set-up costs and ongoing administration and investment costs. These vary enormously depending on whether you do a lot of the administration and investment yourself or outsource to professionals.

A recent survey by Rice Warner of more than 100,000 SMSFs found that annual compliance costs ranged from $1,189 to $2,738. These are underlying costs that can’t be avoided, such as the annual ASIC fee, ATO supervisory levy, audit fee, financial statement and tax return.iii

If trustees decide they don’t want any involvement in the administration of their fund, the cost of full administration ranges from $1,514 to $3,359.

There is an even wider range of ongoing investment fees, depending on the type of investments you hold. Fees tend to be highest for funds with investment property because of the higher management, accounting and auditing costs.

By comparison, the same report estimated annual fees for industry funds range from $445 to $6,861 for one member and $505 to $7,055 for two members. Fees for retail funds were similar. Fees for SMSFs are the same whether the fund has one or two members.

Size matters

As a general principle, the higher your SMSF account balance, the more cost-effective it is to run.

According to the Rice Warner survey:

• Funds with $200,000 or more in assets are cost-competitive with both industry and retail super funds, even if they fully outsource their administration.

• Funds with a balance of $100,000 to $200,000 may be competitive if they use one of the cheaper service providers or do some of the administration themselves.

• Funds with $500,000 or more are generally the cheapest alternative.
Returns also tend to be better for funds with more than $500,000 in assets.

Even though SMSFs with a balance of under $100,000 are more expensive than industry or retail funds, they may be appropriate if you expect your balance to grow to a competitive size fairly soon.

Increased responsibility

While SMSFs offer more control, that doesn’t mean you can do as you like. Every member of your fund has legal responsibility for ensuring it complies with all the relevant rules and regulations, even if you outsource some functions.

SMSFs are regulated by the ATO which monitors the sector with an eagle eye and hands out penalties for rule breakers. And there are lots of rules.

The most important rule is the sole purpose test, which dictates that you must run your fund with the sole purpose of providing retirement benefits for members. Fund assets must be kept separate from your personal assets and you can’t just dip into your retirement savings early when you’re short of cash.

Don’t overlook insurance

If you considering rolling the balance of an existing super fund into an SMSF, it could mean losing your life insurance cover. To ensure you are not left with inadequate insurance you may need to arrange new policies.

If you would like to discuss your superannuation options and whether an SMSF may be suitable for you, don’t hesitate to call.

i https://www.smsfassociation.com/media-release/survey-sheds-new-insights-on-why-individuals-set-up-smsfs?at_context=50383

ii https://www.smsfassociation.com/media-release/survey-sheds-new-insights-on-why-individuals-set-up-smsfs?at_context=50383

iii https://www.ricewarner.com/wp-content/uploads/2020/11/Cost-of-Operating-SMSFs-2020_23.11.20.pdf

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.


Saving tax and interest to boost super

Boosting Your Super Balance by Saving Tax and Interest

Saving tax and interest to boost super

Boosting Your Super Balance by Saving Tax and Interest

Read how a couple close to retirement age was able to add an extra $225K to their Super fund over five years – without having to economise, or make any cutbacks whatsoever. In fact, they were able to spend $1K more per year while growing their wealth.

Sound incredible? We assure you it’s possible with the right kind of financial planning.

Overview

Joanne and Simon, both aged 62, were a married couple nearing retirement when they came to House of Wealth for financial planning assistance. They were looking forward to leisure and freedom in their retirement, but were worried their Super balance wasn’t enough to retire.

House of Wealth helped Joanne and Simon achieve their goals with these services:

  • Restructuring finances
  • Tax planning
  • Income improvement
  • Centrelink advice
  • Retirement planning
  • Investment advice

They were planning to retire in five years, at the age of 67. They had a combined Super balance of $555K. They also had a commercial investment property worth $465K, netting an annual rental income of $4K, with a mortgage of $230K.

Simon’s taxable income was $73K a year, and his tax payable was $16K. Joanne’s taxable income was $42K a year, and her tax payable was $5K.

Joanne and Simon’s Financial Goals

When they engaged House of Wealth as their financial planner, the couple’s financial goals were to:

  • Review their current investment strategies.
  • Minimize income tax payable on their current income.
  • Ensure they would be able to draw down $50K of annual tax-free income after retirement.
  • Be able to Access some Centrelink benefits, especially the Senior Concession Health Card

What the House of Wealth Financial Planner Advised

After talking to Joanne and Simon and making a full assessment of their finances, House of Wealth advised the couple to establish a Self-Managed Super Fund (SMSF) for more flexible management of their Super. We had the couple combine their Super balances into one SMSF for easier management and lower fees.

We also advised them to:

  • Transfer the investment property into the Self Managed Super Fund. This would enable them to save 19.5% of income tax on rental income. With the rental income going directly into the Self Managed Super Fund, it would become tax-free.
  • Draw down a lump sum from their Super to pay off the mortgage on the investment property. This move would save approximately $15.5K in future interest payments.
  • Add an extra $10K per year to the Super fund in Simon’s name. This way, Simon could reduce income tax.
  • Adjust their investment portfolio considering that they would retire in five years.

The Results

Joanne and Simon were able to save $15K in tax, interest, and management expenses each year during the five years left until their retirement.

Despite the extra Super contribution, the couple was pleasantly surprised to discover they had $1000 more in cash to spend each year. This enabled them to enjoy some extra luxuries while knowing their savings were growing.

Each year, Joanne and Simon’s Super balance increased by an extra $45K – on top of their previous Super contributions.

When they retired at the age of 67, the couple’s combined Super balance amounted to over $1M, and they were easily able to generate an annual tax-free income of $50K.

Today, Joanne and Simon are a happily retired couple. They enjoy good health and financial freedom as they live out their dreams.

Wondering if there’s a way you can reduce tax or interest payments and have more money to put into your Super fund? To learn more about your options, book a Free Financial Health Check with House of Wealth today. Click here to pick a time and date.

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.


Soaring to success in 2021

Soaring to success in 2021

The start of a new year is a great time to reassess where you are in life, your career or business - decide what you want to achieve and put some strategies in place to work towards achieving even your most ambitious goals.

The start of this new year is a little unusual as for many of us, 2020 was a challenging year. The hopes and dreams we had for 2020 may not, in many cases, have come to fruition as planned, whether they were related to your business, your career or personal in nature, were put on the back burner. So let’s look at how to ensure that 2021 is the year to get things back on track and achieve what you are aiming for.

Let’s start with the fundamentals, it’s impossible to get to where you are going, if you don’t know the destination and challenging to make the journey without a road map of how to get there.

Identify your goals

This involves some soul searching. What do you want for yourself personally and professionally? What are your priorities? Do you want to climb the corporate ladder and set your sights on that senior management position, or spend more time with loved ones? Have you got an idea for a new business or are you wanting to take your existing business to the next level?

Make sure you are specific about what you want and don’t be afraid to aim high. Studies show that specific and challenging goals lead to higher performance than “do your best” type of goals.i

Once you’ve identified your goals - jot them down. People who write down their goals, have been found to be 33 percent more successful in achieving them.ii There is something very powerful about the written word.

An incremental approach

Once you’ve got an idea of what you want, it’s time to devise some strategies to achieve them. It’s important to dream big but sometimes big dreams can seem intimidating. The way to make a big task less intimidating is to break it into smaller tasks and approach it incrementally. What do you need to do to set yourself up for that management role? Do you need to go back to study? Start taking on more responsibilities at work?

Set up your plan with things you need to do which will act like a series of stepping stones leading to your destination.

Allocate time and resources

The next part of your strategy is to think about what you need to have in place to support each incremental step in your plan. Do you need to set aside time on a daily basis, each week or every month? Do you need financial support or a loan? How will you access that support?

You don’t have to go it alone - think about whether you can get some external assistance in the form of a mentor or just someone you can use as a sounding board. If you are running a business there may be government support packages you can access or external consultants you can engage to help you on your way.

Staying the course

It takes discipline to stay on target when there are so many distractions along the way. Make sure that your strategy has some review points at particular times or when you have completed the tasks you have set yourself so that you can celebrate your wins and recalibrate the plan if necessary.

If 2020 showed us anything, it was that the best laid plans can and will change and be subject to circumstances beyond our control, so it’s important to have some contingencies in place. Even more importantly, be agile in your approach so that you can adjust and refine the plan as needed.

Having a strategy and a methodology to implement your strategy will give you the best chance of reaching your goals in 2021 and beyond. Add in a dash of determination and self-belief and you’ll be flying high on your way to the success you’ve dreamed of.

i https://psycnet.apa.org/record/1981-27276-001

ii https://scholar.dominican.edu/cgi/viewcontent.cgi?article=1265&context=news-releases

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.