September Newsletter

From Steve

While I do wonder if my tired old body is up to it, I have entered my second “Obstacle Course Racing” event. This is due to be completed this week. Notice that I say ‘completed’, and not ‘competed in’.

I did the Spartan Super a month or so ago, and it was a bit of fun, particularly being chest deep in freezing water on the shortest day of the year.

Anyway, this week it is “The Stampede”, and I am looking forward to giving that a go, on the proviso that my knees and hamstrings hold out. I’ll give you an update next month.

Steve

Superannuation

The Jargon that makes it so hard to Understand

Most of us have heard that superannuation will one day be one of, if bot the biggest assets that we own. It is for this reason that it is so important to ‘take control’ of your super.

However, for most people it is still confusing, and as a result, it is left in the ‘too hard basket’ and something to worry about later.

One of the biggest issues to overcome is the 'jargon' and technical terms that are used. It seems that these are almost used on purpose to make it difficult to understand.

So, here’s a few explained.

SG: Stands for Superannuation Guarantee.

It is the amount that all employers must pay in to their staff members’ super fund. It is currently 9.25%, and is expected to rise to 12% by 2019.

Salary Sacrifice: Any ‘before tax’ money that you out into your fund. It is separate to the compulsory SG, and it is not the same as ‘salary packaging’.

Contribution Caps: This is the maximum amount that can be contributed to super. The maximum this year is $25,000 of before tax money (for people under 60) and $150,000 of after tax money.

Balance

Finding the right fit between lifestyle and financial goals

If you were to work 80 hours per week, spend nothing and save everything you had left, then assuming you made reasonable investment decisions, you would be likely to have a large bundle of money available to you when you retire. Of course, if you did work 80 hours a week, you might not have time to spend any money any way.

At the same time, if you spend everything, and even spend a bit more than you get, then the SG contributions to super are unlikely to be enough to sustain you in retirement.

The best answer of course, is that what’s best for you depends on your individual circumstances.

However, our spending does have financial consequences, and, in short, these are a lack of funds put toward debt, protecting your income during your working life, and providing an income beyond your working life.

To talk further about working through these issues, give us a call to see what works best for you.  

Thanks

I'd like to finish off by thanking Clint and Danni for referring their friends to us for advice. Referrals are the life blood of our business, and we'll do our best to look after them.

 

 

A short discussion about Contribution Splitting

There is a saying that everything old is new again. I guess that means I'll be 'new again' any day now. That however, is not the reason for this post.

 

A few years ago, there were things called "Reasonable Benefits Limits" or RBL's. These RBL's were the maximum amount of  concessionally taxed super you could access, before paying higher levels of tax. There was a 'lump sum' RBL, and a 'Pension' RBL. For a couple, where one partner made more money than the other over their lifetime, they could reach and exceed their RBL's, while the other partner, was way, way under. The ability to split your contributions, and thereby 'even out' some taxes, was introduced. Contribution Splitting.

 

 

(No, not those splits. They're painful)

 

However, a few years ago, RBL's went by the wayside. The way super was taxed was changed, and RBL's (and contribution splitting apparently), went by the wayside. However, for some people, in some circumstances, superannuation contribution splitting can still lead to strong strategic outcomes.

What contributions can be split?

There are a number of types of contributions that can be split, but the two most common types that may be split are:

·         employer contributions

·         personal deductible contributions

 

How much can be split?

Contributions to taxed superannuation funds that are able to be split are referred to as taxed splitable contributions.

The maximum amount of taxed splitable contributions is the lesser of:

·         85 per cent of the concessional contributions for a financial year, and

·         the concessional contributions cap for the financial year.

 

Benefits of superannuation contribution splitting

Superannuation contribution splitting can result in a number of advantages for a couple, including:

·        where the receiving spouse has little or no superannuation savings of their own, superannuation contribution splitting offers the couple the ability to access two low-rate cap thresholds on lump-sum withdrawals from the taxable component. Where lump-sum withdrawals are made on or after preservation age (55), but prior to age 60, this can effectively double the tax free amount that is able to be withdrawn by the couple as a lump sum to $350,000

·        where contributions are split to a spouse who is under Age/Service Pension age, this may increase pension entitlements as superannuation assets of the younger spouse are not assessed when in accumulation phase while they are under Age/Service Pension age, and

·        a contribution split to an older spouse may allow superannuation benefits to be accessed earlier under a condition of release.

 

Unfortunately, only accumulation funds can offer members the ability to split their contributions. Members of Defined Benefit schemes don’t have this ability. Also, not all funds do offer this benefit to members.

It I important to note that there are eligibility requirements for the receiving spouse of a splitting request, as well as legislation around contribution limits. While there are benefits to the strategy, as always, there are potential traps.

Finally, contribution splitting is of no value (or even interest most likely) to a single person, regardless of their age.  However, for many people, in certain circumstances, it is a very handy tool in the professional planners toolbox.

 

She'll be right - Part 1

Every quarter, the Association of Superannuation Funds Australia (ASFA) update their Westpac ASFA Retirement Standard. The standard benchmarks the annual budget needed by Australians to fund either a 'comfortable' or a 'modest' standard of living in the post work years.

That obviously leads us to what ASFA mean by 'comfortable' and 'moderate'. Moderate is defined as better than the Age Pension, but still only able to afford basic activities. Comfortable is defined as enabling a healthy retiree to be involved in a range of leisure activities, and to be able to purchase a range of things, including household goods, a reasonable car, electronic equipment and domestic, and occasional international holiday travel. So comfortable is not 'luxury', and moderate is probably well below what most Australians would realistically want for themselves.

Don't be fooled by the idea that you will be happy spending significantly less in retirement. Just think quickly...is there not extra hobbies and activities that you would like to do in retirement that you don't do now? Maybe some travel? And what activities that you do now will you be 'happy' to give up?

The figures released by ASFA for the March Quarter 2010 show that for a couple to lead a comfortable retirement, they will need $53, 565 per annum. And remember, this is for a 'reasonable' car, and occasional overseas travel.

The next step here is to 'carry forward' this amount of money, and work out what will be needed when you go to retire. Roughly, if you are 40, and inflation continues at an average of 3%, then you will need about $110,000 per annum to meet these living standards. And to do that, and ensure that your money will last longer than you do, you will need a capital sum of around $2,000,000. And again, this funds a 'comfortable' $53,000 lifestyle in todays value. If you want a better lifestyle, you'll need more capital.

So where does 'she'll be right' come in. ASFA statistics show that the mean balance in super for men in Autralia is $87,600 and for women is $52,300 (more on this imbalance in She'll be right - Part 3). That is a long way short of the $2,000,000 mentioned above.

Further, ASFA figures indicate that the primary source of income for 66% of retirees aged 45+ is Government Pensions, which provide for less than a moderate standard of living. 7% have zero or negative income.

Summing up then, 'most people' would want for themselves a comfortable lifestyle, but have not funded this, and are not funding this, with the result being that nearly three quarters of retirees can expect, at best, a retirement that is less than modest.

If you are lucky, then your retirement might still be a few years off, but 'she might not be looking so right' after all.