General Information about Financial Advice

How much is my super really worth?

/in /by

What is your super worth? Are you tempted to check your account balance on a regular basis?

This information is now available 24/7. We can log into our super fund account at any time and find out our account balance at the end of the previous business day.

Having said that, not all super funds are the same, and there lies a problem.

For the purpose of this article, we need to distinguish between two main types of super funds; retail super funds, and industry superannuation funds.

Retail superannuation funds are often products offered by large financial institutions including banks, while industry funds are often described as being not-for-profit, or profit-for-members funds.

Retail superannuation funds will generally be “marked to market”.

This means the value of the fund’s assets, and therefore the balance of each member’s account, are valued daily. The balance you see when you log into your account is what you would have received if you withdraw your funds at the end of the previous day. Where a superannuation fund invests in listed assets (shares, property trusts, fixed interest securities and cash) valuing the assets each day is relatively easy.

However, if a superannuation funds invests in a significant portion of assets that are not listed on an active secondary market, like a stock exchange, valuing assets on a daily basis becomes more challenging. In fact, some super funds with significant portfolios of unlisted assets, including direct property, may only value their assets once a year. This helps to smooth out account balance volatility.

When our super is held in a retail superannuation fund, the daily fluctuations in our account balance might appear concerning. After all, the fund is revaluing its billions of dollars of assets every day and a small increase or fall in (say) the US Dow Jones index can have a flow on effect to the Australian stock exchange. This in turn, translates to a positive or negative movement in our account balance.

One of the risks that occurs when our super fund invests in marketable securities like shares, fixed interest, and listed and unlisted property is that we experience this volatility. If our super fund values a significant portion of its assets less regularly, we will not see the same volatility.

However, if your super balance today is (say) $300,000, but a couple of months ago it was $330,000, does this mean you have lost $30,000? No, unless you have crystalised your loss if you sell or switch out of a particular asset or asset class.

One of the real risks to our superannuation savings is that we sell assets when the prices fall, rather than riding out the storm.

While some superannuation funds may appear, at least on the surface, to be less volatile than other superannuation funds, it is of absolute importance to ensure you are comparing like with like. If one fund is valuing its investments on a daily basis but another fund is valuing their investments less frequently, the second fund may appear to be less volatile. However, you need to look beyond the headline performance and consider other aspects including what types of investments the funds hold, the fees they charge, how frequently they value their assets, and how the funds perform over a one, two, five and ten year period.

Perhaps we should resist the temptation to check our account balance every day, or even every week unless we are actively managing our own portfolio (which most people don’t).

Imagine if we asked our real estate agent to value our home every day. While we may loosely keep track of real estate prices in our local area, we are generally only concerned about the “real” value when it comes time to selling.

If at the end of the day, the volatility of your super is causing concern and sleepless nights, perhaps it is time to review your overall investment objectives and consider moving to a more conservative investment mix.

If you need specific advice tailored to your own circumstances, we always recommend you consider seeking advice from a licensed financial planner.

 

Source: Peter Kelly | Centrepoint Alliance

Sometimes it is more than just the money

/in /by

This week I was asked about a person in their early 60s who has retired from the work force.

Briefly, they have roughly $500,000 in super and still have an outstanding mortgage of just over $300,000 on their home.

The question was – should they use their super to pay off their outstanding home loan or should they retain their home loan, with its modest interest rate so as to have the potential to earn a higher return on their super?

From a purely financial perspective, if the return on the invested funds is greater, after tax and charges, than the interest they are paying on their mortgage, then it’s better to retain the mortgage and use the money to generate investment returns, which can be used to service the debt. Provided the return on the investment over the longer term is greater than the interest on the loan, they will be ahead.

However, what if the person mentioned is stressed by the outstanding debt on their home, particularly as they have retired? After all, they still need to find the money to make their home loan repayments each month, and there is no guarantee that interest rates will remain where they are, or the return on their super will continue at its current rate.

If the debt is causing stress or anxiety, there is a strong argument to pay off the loan, even though they will no longer have the funds available for investment. In this situation, it is not so much a financial question, but rather, one that addresses the individual’s mental and physical health and well-being.

To fully provide appropriate advice that is truly in the best interests of the person asking the question, we need to go further.

We need to gain a clear understanding of a few things including, but not limited to:

1. What are the person’s assets and liabilities?
What do they own? What is it worth? How much do they owe others – in addition to their home loan do they have car loans, personal loans, and credit cards?

2. How much income do they need?
Do they have an up-to-date budget that identifies their current expenditure?

3. Where is their current income coming from?
Are they drawing down on their super, receiving government income support benefits such as Jobseeker or a disability support pension? Will they qualify for the age pension in the future, or do they have income from other sources such as trusts and other investments? Is their income likely to change in the future?

4. As this person lives in a major capital city their home is likely to be quite valuable.
Are they willing to consider accessing some of the equity in their home to generate additional income?
While they have the option of a reverse mortgage or other form of equity release product, a simpler approach may be to sell their home and downsize. However, people are often emotionally attached to their home and what may seem to be a reasonable and rational decision may not be all that easy to get across the line.

5. What are their longer-term goals?
What do they see a typical day in their retirement looking like?
Where will they live? How will they spend their time? What type of car will they drive? Where will they dine, and travel to?

6. How is their health?
Are they in good health or do they have ongoing health concerns that may impact on their longevity?

7. Do they plan to leave a legacy?
Are they happy to run down their savings over their retirement years or do they plan to preserve their capital so they can pass it on to future generations?

When planning for retirement, the financial aspects will play a key role. However, it is not just about the money.

Retirement planning is about living a life that is fulfilling and rewarding from a physical, mental, spiritual, and financial perspective.

Remember however, making financial decisions and planning for key life events such as retirement require time and careful consideration. With that in mind, seeking advice from an appropriately qualified financial planner is highly recommended.

 

Source: Peter Kelly | Centrepoint Alliance

Maximising retirement savings

/in /by

For most people, superannuation is the “go-to” preferred structure for retirement savings. It is convenient, tax-advantaged and most superannuation funds offer a wide range of investment options enabling their members to structure their savings in a manner they find most comfortable.

However, superannuation has its limitations.

Today, I will deal with one.

Before 1 July 2020, to be able to make a voluntary contribution to super beyond their 65th birthday, a person had to have met a “work test”.

This work test is met when a person is employed or genuinely self-employed for a period of at least 40 hours, worked within a period of 30 consecutive days, in the financial year in which they intend to contribute. Once a person turns 75, even though they may continue to be gainfully employed – as an increasing number are these days – they are unable to make voluntary contributions.

From 1 July 2020, the age limit at which personal contributions can be made without meeting the work test was increased from 65 to 67. This measure was designed, at least in part, to mirror the progressively increasing qualifying age for the age pension.

The age limit for making contributions to super also affects a person’s ability to access the “three-year bring forward rule”.

The three-year bring forward rule applies to personal (non-tax deductible) contributions a person makes to super. These are referred to as non-concessional contributions.

The current annual limit or “cap” on non-concessional contributions is $100,000 per year.

However, provided a person’s total superannuation balance (the total of all money a person has in super at the end of the previous financial year) is less than $1.4m, they can bring forward their non-concessional contributions for the current and next two financial years and make non-concessional contributions of up to $300,000 in a single year. (A person is unable to make any non-concessional contributions if their total superannuation balance exceeds $1.6m).

When a person makes a non-concessional contribution of more than $100,000 in one financial year, they are said to have “triggered” their three-year cap. This means that the maximum they can then contribute over the course of the next two financial years is $300,000, less the amount contributed in the first year.

For example, if a person makes a non-concessional contribution of $170,000 in 2020-21, they have triggered their three-year bring forward cap. The maximum that can then be contributed in 2021-22 and 2022-23 is $130,000 in total.

On the other hand, if they contributed $300,000 in 2020-21, they are unable to make any additional non-concessional contributions until 1 July 2023.

To be able to take advantage of the three-year bring forward rule, a person must be aged 64 or younger at the start of the financial year in which they intend to contribute.

At present, a person may make contributions to super up until they turn 67 without having to meet a work test. However, if a person wishes to maximise their non-concessional contributions by using the three-year bring forward rule, they must have been 64 or younger at the beginning of the financial year.

When seeking to maximise retirement savings through super, timing is critically important.

 

Source: Peter Kelly | Centrepoint Alliance

Retirement – do not look back with anger!

/in /by

Nearly every Saturday at 11.30am, Donna (my partner), Scout (my dog) and I visit my mum in the aged care facility where she now resides.

Prior to COVID-19, visiting mum meant we were able to take her for out for coffee or to the shops, which she enjoyed immensely.

During this time of COVID-19, taking mum out has become difficult and not an experience that she likes or understands. The aged care facility asks that she wear a mask when she is out, and on her return to the facility, her contact with the other residents is restricted for a period of time.

My mum has dementia, and unfortunately she does not understand what is happening or why her movements are being restricted.  She becomes depressed, angry, and bitter with her life, which is understandable.

Do I think this will happen to me as I grow old? Will I become angry with the world as my health declines? Bitter and depressed because I have not done or remember doing all the items on my bucket list?

To be honest, I do not know. It maybe something I have no control over, but I can try to take all the steps I can to ensure it does not happen.

I am sure we all know people in the later stages of life who find that their health is now restricting their options. They find that they no longer have the energy or the physical ability that they had in their 50s, 60s and even their 70s. For some people, this can become a time of bitterness and despair, as they believe they have not lived their life to its’ full potential.

The decline of a person’s health as they age is very difficult to stop. You can take steps before it begins, by eating right, not smoking, possible drinking less and being active, to help slow the process; but the reality is that as you reach your 80s and into your 90s, for the majority of people their physical abilities and their strength will diminish.

So, what can you do to ensure that when this does happen that your life in your 80s and 90s is not filled with feelings of bitterness and regret? How do you build a plan so you aren’t constantly thinking, “if only I had acted earlier and understood what retirement and this stage of your life was all about”

The stage of your life after your working life requires a plan, and no, I am not talking about a financial plan. In your retirement you need to have a “purpose” and a plan to achieve this “purpose”. This “purpose” will be different for every person, depending on your finances and interests but you need to have at least one.

It does not matter whether it is travel – becoming a grey nomad, living overseas for a period of time (all which are restricted at the moment) – doing volunteer work, or learning a new skill, people should not leave their working lives behind until they understand what they are going to do in the next stage of life.

Having a “purpose” and plan is important as it provides the stimulation required to keep you healthy both physically and mentally.

It is important to be realistic in your planning, understand how many dollars you require to pay your weekly bills and then ensure you have enough left over to achieve your purpose and dream in retirement.

This stage in your life is just as important as all the other stages of your life. It is a period of time that could cover more than thirty years. It is a long time to live with regrets of what you didn’t do, or should have done, because there was no thought or plan put into this period.

I am sure that your grandchildren (if you have them) would much rather listen to someone with tales of a wonderful and adventurous life over a person who is continually complaining about the things they did not do.

Develop a plan. Understand what you want to achieve in retirement and talk to someone about how you are able to achieve the financial goals required to ensure your dreams come true.

 

Source:  Mark Teale | Centrepoint Alliance

Commonwealth Seniors Health Card – Do I qualify?

/in /by

The Commonwealth Seniors Health Card (CSHC) is a concession card issued to a person who is old enough, but not entitled, to receive either an Age Pension or a Veterans Affairs service pension.  Card holders are entitled to concessions in relation to their health care and the purchase of prescription medication.  Also, depending on location, card holders may also be able to access state or local government concessions as well.

The CSHC, unlike the pension, is not subject to an assets test. In other words, the value of the assets you have invested or own will not stop you from qualifying for the CSHC. However, the CSHC is subject to an income test.

The income test considers both your adjusted taxable income and, if you do have an account-based pension, the assessed deemed income based on the pension balance.

To pass the income test, the combination of your adjusted taxable income and any deemed income assessed on an account-based pension needs to be less than:

  • Single $55,808 p.a.
  • Couple $89,290 p.a. (combined)
  • Couples living separately due to illness $111,616 p.a. (combined)

These thresholds are adjusted on 20 September each year.

The adjusted taxable income is based on your taxable income (evidenced by your notification of assessment from your last tax return).  This taxable income amount is adjusted by any investment losses plus any reportable superannuation contributions, employer fringe benefits or foreign income.

If the notification of assessment references your final year of employment or the last year that your business was operating, you are able to provide an estimate of your income; providing, of course, you are no longer working or operating your business.

Added to this adjusted taxable income is the deemed income on any account-based pension that you may have.  As an example, if the value of your account-based pension was $1.5 million dollars, for a single person the first $53,000 of the balance would be assessed as earning 0.25% and the remaining $1,447,000 would be assessed as earning 2.25% meaning the total deemed income on the pension would be $32,690.  It is important to note that the actual income being drawn from the account-based pension has no bearing on the income that is assessed.

Therefore, provided your adjusted taxable income or the estimate of your income is less than $23,118 for that year, you would be entitled to a CSHC.

I should point out that if one member of a couple reaches the appropriate age and does apply for a CSHC, the partner’s adjusted taxable income is still taken to account, even if they do not yet quality for their own CSHC. The total combined income as a couple would need to be less than $89,290.

Over the last twelve months, the deeming percentage rates have reduced substantially and I believe there may be people of qualifying age with large account-based pensions who may now be eligible for a CSHC. For example, a couple both of qualifying age with no other investments or income other than their account-based pension income stream would each be entitled to a CSHC even if they had a combined balance of $4 million.

For a healthy person, the CSHC may not seem to offer many concessions, but the difference in prescription prices compared to those who do not have a CSHC can be substantial.

If you are unsure if you are entitled to a CSHC, speak to someone who can look at your circumstances and advise you of your correct entitlement.

 

 

Source:  Mark Teale | Centrepoint Alliance