Finally, a superannuation change that’s a benefit

From 1st July this year and for the first time ever, most working Australians now have the opportunity to make personal contributions into their super account and claim those contributions as a tax deduction.  By having the ability to now make a personal tax deductible contribution into super, employees no longer have to rely on an employer salary sacrifice arrangement to make additional concessional (pre-tax) contributions.  Nor does the decision to make such a contribution have to be made before the employee earns the salary, as is the case with employer salary sacrifice arrangements.

Most people now have the option to do it themselves or to supplement an existing salary sacrifice arrangement if they want to.  Although some superannuation members may be ineligible (i.e. those in untaxed funds and defined benefit funds), most age-eligible income earners can now control their own salary sacrifice into superannuation independently of an employer, and receive a tax deduction for doing so.

Ultimately, the tax treatment in both cases is the same.   Any difference between the amount of tax withheld by an employer and the amount of income tax an employee ultimately pays after making a personal deductible contribution can be reconciled in the employee’s tax return.  Alternatively, employees can also apply for a variation to PAYG withholding tax on wages and salaries to take into account the tax deductible personal contributions they intend to make.

This change is designed to encourage more people to make extra contributions over and above the 9.5% Superannuation Guarantee minimum and thereby make the most of their $25,000 concessional (pre-tax) contribution cap.

It is a good solution for people whose employers don’t allow salary sacrifice; and it also provides flexibility to those who do, and those who aren’t sure in advance whether or not they will have money available during the year for an additional pre-tax contribution.

It is also good news for part-time employees who are also self-employed because the ‘10% or less employee income’ restriction has now been abolished, so the amount of employment income earned by a self-employed person has become irrelevant.

It also benefits someone under the age of 65, whether working or not, who receives gross (untaxed) income from the sale of an investment.  A personal deductible contribution can be made into super bearing in mind the $25,000 concessional cap.  The personal tax deduction claimed will help lessen the effect of any capital gain.

To claim a tax deduction for a personal contribution, a valid ‘notice of intention to claim a deduction’ must be submitted to the relevant super fund on the correct form and, in turn an acknowledgement in writing must be received back from the fund.   At that point, the contribution will be treated by the super fund as a concessional contribution and taxed at 15% and reported to the Tax Office accordingly.  The notice of intention must be provided before the employee submits their tax return and no later than 30 June of the following tax year. The notice should also be provided before a payment from the super account is requested (including a cash withdrawal, rollover or transfer to a pension).

It is important to note that, to the extent that a tax deduction for a personal contribution is claimed, the employee won’t be eligible for the government’s co-contribution. But depending on personal circumstances, it is possible to have the best of both worlds.  For example, if a personal contribution of $5,000 is made into the relevant super fund and a tax deduction for $4,000 only is claimed, the other $1,000 will be treated as a voluntary non-concessional (after-tax) contribution and the contribution will be eligible for the co-contribution payment provided that the age, work and income tests are all met.

Whilst the government has not been kind in reducing the contribution caps this financial year, it has also removed some salary sacrifice roadblocks and opened the way with a tax incentive for all workers to contribute more pre-tax dollars into super.

GENERAL ADVICE ONLY

The purpose of this article is to keep you informed of new developments.  It should not be interpreted in any way as personal advice.  Before taking any action you should seek out personal advice based on your individual situation and personal goals.  You are welcome to call me direct on 0408 756 531.

5 essentials for a good retirement

It is Never too Late to Make a Difference

If you hope to self-fund your retirement and your superannuation is all you have, then you need to accumulate an amount of at least $500,000 and a lot more than that if possible.  For homeowners, your super is likely to be the second only in value to your home.  For non-home owners it could well become the highest value asset you own.

Saving even half a million dollars seems like an impossible task.  But it is not necessarily, because you don’t have to save it all.  You only have to save enough capital, and save it quickly enough and early enough to allow sufficient time for the law of compounding returns to kick in and do an ever-increasing amount of the work for you.

You may not realise it but your superannuation is invested in managed funds.  It is also a compulsory, long term, regular savings plan operating in the lowest tax environment we have in Australia. It is fueled by the regular contributions that your employer makes on your behalf but there is another force at work behind the scenes. That is, a never-ending investment process.  Growth returns and reinvested distributions (similar to dividend income) earned by your investment also cause your superannuation balance to increase.  So your money makes money even though you may not be watching it.

Obstacles that get in the way of this money making process include:

  • Breaks in employment i.e. no contributions
  • Economic downturns (e.g. the GFC)
  • High product fees and adviser fees

But by far the biggest obstacle to this money making process is owner neglect.  There are ways of cushioning the adverse effects of an economic downturn, overcoming unemployment and reducing high fees.  But neglecting your super for 30 years is guaranteed to lose you a fortune.

Let’s look at two fictitious examples.

 

EXAMPLE 1 – NEGLECT 

Let’s say you are suddenly and magically aged 50 and on a salary of about $70,000.  Your earliest access to your super is 10 years away.  You have a total superannuation balance of $50,000, split between two funds.  Your current employer contributes $1,400 each quarter (after 15% tax) to a fund which has $30,000 in it.  Your other fund has $20,000 in it and now it is lonely and neglected since you changed jobs.  Let’s assume the investment return in the neglected fund roughly equals the fees and other costs, so it doesn’t grow and it doesn’t go backwards.  The fund to which your employer is now contributing on your behalf achieves a net annual return of 6% after all fees.  After 10 years, your balance in this fund would grow to about $131,500 while the fund you neglect remains at $20,000.  (I am being kind here because there is every chance that fees would eat into it).  In this example, your total super at age 60 would be about $151,500.

Your first mistake was not consolidating your two funds into one.  As a result, you have just blown the opportunity to earn a further $16,000.   Why? Because the quarterly contributions of $1,400 were added to a fund with $30,000 in it instead to a fund with $50,000 in it.  The law of compounding returns works a lot better on a higher balance, not just regular contributions.  In your neglected fund you had neither working for you.   The investment return that was actually working hard for you sadly had only 60% of your super to work with.

This example highlights the cost of owner neglect.  It is not only neglect of scattered superannuation that hurts you financially.  There is also widespread neglect when it comes to high fees, default investments, mismatched risk, poor growth & earnings, decreasing insurance benefits, static premiums, and no thought to possible beneficiaries.  In most cases, all are accepted and none are ever questioned, regardless of the fact that every single one of these items is within your power to control and change to your advantage.

So when you are saving and investing, whether in superannuation or not, the seven (7) basic elements you need for the Law of Compounding Returns to work well for you, are:

1) A bigger balance is always better

2) Add more of your own money to it regularly

3) Injecting a lump sum will suddenly accelerate earnings

4) Allow it to run for a longer time, provided that the investment is going well

5) Every bit of investment return counts but you should be comfortable with the associated risk

6) Keep fees or costs as low as possible to achieve the desired result

7) Also think about who receives all this money if you pass away

 

EXAMPLE 2- LET’S DO A SUPER MAKEOVER

Now let’s assume the same starting circumstances (i.e. 50 years of age with $50,000 in super) but instead of ignoring your super and simply letting it drift along for 10 years, you finally see the light and decide to give it a makeover.

Firstly, you consolidate your entire $50,000 into one fund.  You do some research and find that no two super funds are the same and if you look around, you can do very well for yourself.  You also realise that the two funds you have aren’t suitable because one has high fees and the other is not portable.  So decide on a personal super that is portable, meaning you can take it to every future employer.  The fund has a good name; is simple to access and operate online; it has enough investment options for you to choose from; and it has a relatively low fee structure.   Your employer is fine with the change because you do have the right to choose your own fund.

Secondly, you decide on an investment mix with a level of risk you feel very comfortable with.  As a result of this and and lower fees, you find that your total annual rate of return (after fees) has now increased to 7.0%.  My point here is that 1% can make a big difference over many years and it doesn’t have to be achieved by taking on unwanted investment risk.  You also realise that you have access to quality insurance cover that actually increases (with indexation) as you get older instead of decreasing to almost nothing at a time when you are most likely to need it.  Like all insurance in super, the premiums are automatically deducted from your super account.

Thirdly, because you now know about the law of compounding returns, you realise that your 7% rate of return will make a greater difference on a larger balance, so you decide to increase the total balance of your fund to $100,000 to by adding a $50,000 lump sum as a non-concessional contribution.  This simply means you add your own money.  This could be from your savings, an inheritance or money from a property you sold.

Fourthly, because you only have one chance at making this 10-year period count towards your retirement, you also decide to salary sacrifice more of your gross salary into super.  You ask your employer to contribute more for you.  Although it will decrease your take-home pay, it will increase your retirement savings and lower your income tax.  You will be paying more tax at 15% and less at your top marginal rate (32.5% in this example).  So let’s assume that the quarterly contributions now made by your employer on your behalf increase from $1,400 to $1,700.

Lastly, you have thought about who should receive your money in the event you pass away, and you complete a valid Nomination of Beneficiary form and send it to the fund Trustee.  You are not sure whether it should be binding or non-binding so you ask a financial adviser.

In this example, the result over the same 10-year period is a whopping $299,000.  That is double the $151,500 you would have resulted in the neglect example.  You had to change a few things to do it but you should feeling a lot better about facing retirement  And there is more.  Because you now realise that time invested is your friend, you decide to carry this strategy on for a further 5 years to age 65.  Your balance grows to around $464,000.  So how happy are you feeling now?

My examples are built on financial mathematics and general advice, and show you how it is possible to get near that $500,000 mark if you try.

So why is $500,000 my magic minimum target amount?  Ok let’s say you retire at age 65 and decide to draw a pension income stream from your super.  To receive it as a tax-exempt pension including no tax on investment earnings, you must draw a minimum amount each year equivalent to 5% of the 1 July opening balance of your fund each year.  This minimum rises by 1% at 75 and a further 1% at 80.  If you draw at least this minimum amount at age 65, 5% of your super disappears in that year.

However, it is still invested.  That is why it is called an account-based pension.  You draw until the money runs out.  So as you can see, preserving your capital invested is a big deal.  So it stands to reason if you make at least a 5% return on your money during the year, your super balance stays much the same.

I know that $25,000 (i.e. 5% of $500,000) isn’t a fortune, but with no debt, you can start to avoid starvation.  If you can get a higher return on your money, such as 6% or 7% a year, then you can take a higher tax free pension draw (e.g. $30,000 & $35,000 respectively) without eating into you capital.  Even if you only make 5% investment return and you draw 8% ($40,000) per year, your invested balance is dropping, but slowly and in a controlled way.  Do you see what I’m getting at?

I won’t name names here but there are quite a few well known super funds that achieved 7% and a bit more last year in their balanced investment (mid-range risk) options; and their fee structure is quite low.  I’m just saying … it is never too late to make a difference!

Cheers

Gary

 

 

Are you Short of Super?

If you are in your forties, you are already into the second half of your working life.  Sooner or later, you will ask yourself if you have enough money to retire.  The answer will probably be no.

According to ASFA, the mean average superannuation balance in the 2013-14 year for the 45-49 year age group was $119,500 (males) and $67,805 (females).  If you are in this age group, you’re in the first generation of workers who have been in the compulsory Superannuation Guarantee (SG) system for all the past 25 years since it started in 1992.  That’s the good news.  Now for the bad news.  You only have another 10-15 years before you are staring retirement in the face; and if your super isn’t a lot more than the averages above, you are seriously underfunded for retirement.

So here’s how the compulsory super system works.  Employers are currently required to put away 9.5% of your gross wages into a superannuation fund for your benefit.  So the first obvious point to note is that the system does not benefit everyone.  It only benefits employed people because the compulsory obligation only rests with employers.

So to make the most out of the system (i.e. maximise your savings by the time you reach retirement) you probably should be male.  I mean no disrespect to females but so many are clearly disadvantaged in the world of superannuation. Ideally, you need to be continuously employed on a full time basis for the entire 45 years of your working life on a very good salary.   It would also help to work the entire 45 years for an employer (e.g. certain sections of the public service) who contributes more into your super than just the minimum 9.5%.

Everybody else is at a distinct disadvantage and will worse off at retirement.  The system isn’t as kind to part time and casual workers, simply because they generally aren’t at work as much.  The system doesn’t place the same obligation on self-employed business people (i.e. who trade in their own name) to many tend to ignore it.  It most unkind to disabled, sick and injured people; and females raising children because they are largely absent from the workforce.

So if your superannuation is likely to be your only source of money saved in your name when you reach retirement then you have some work to do.  Although superannuation isn’t the only way to save for retirement, it is the most tax effective way.  If you are over 60, legally retired, and in so-called pension phase by drawing an income stream from your superannuation, you should be in a completely tax-free environment.  That is why people in the know try so hard to get as much money as possible into their super prior to retirement, and why the government tries ever harder to restrict them.

So the first step is to start with these 5 home truths:

  • Your super is actually your money; it is just not available to you at the moment
  • To retire on super alone, you will probably need an amount as much as, if not more than the value of your house
  • You do have control, so you can add to it, make changes to it or even change funds
  • Your employer is only obliged to deduct super for you and put it somewhere, that’s all
  • It is your money so it is YOU who is expected to MANAGE it

Ten to fifteen years is enough time to make a significant difference to your super but you should act now.  Now that you have a reason to hurl yourself into action, call me and I will show you how to give your super a 6-Part Makeover.

Cheers

Gary

 

 

 

 

Your Super is in Your Hands

Your superannuation is often not about the fund you have. It is more about how you set it up and how you use it.

The first critical requirement is that you realise that it is your money and start taking care of it.

Unfortunately, most people ignore their superannuation. And if you are like the majority of employees starting a new job, you flick past it when starting a job as just another form to sign.  The fact is that you don’t have to go with whatever super fund option your new employer offers. With a few exceptions, you can choose any fund you want, and at any time.

So regardless of the fund you are in, the most important things you should check in your super are:

  • The investment options are basically the engine room of your super savings. The better you can do here, the more money you will make. So see what is available. Most people accept the default option which is usually a balanced fund. That may not be consistent with your attitude to risk. You can ask any financial adviser experienced in super and investment to help you here.
  • You may have insurance in your fund that you didn’t ask for, but you certainly pay for. This is an opportunity to review how much insurance you need in your particular circumstances. In my experience, this type of insurance in super generally doesn’t cover home loan and personal debt.  Also check whether it is fixed cover where the premium rises each year or fixed premium where your cover decreases each year. Fixed premium insurance might be cheap but the level of cover won’t be there in the longer term when you are most likely to need it.
  • Nominate beneficiaries to receive your super (including your life insurance) if you die prematurely.  Be aware that there are only a very small number of nomination choices which include immediate family members and financial dependents at time of death, but exclude siblings and parents.
  • Fees are important but they generally only become burdensome when your fund is not working for you.  Industry funds providers make a fuss about about fees because price is their selling point; but even if you have an industry fund there is a lot you can do to make it work for you before you would consider changing funds.  So before you worry about fees, do your part to make your current fund work for you.  Having said that, there are a few older retail funds out there that charge way more than the current (much more competitive) market.  So if you have a personal superannuation fund arranged by an adviser that is more than 5 years old, check the ongoing fees you are paying, particularly if you never see the adviser.

You can see that superannuation is not only a long-term savings vehicle, but also a useful family planning opportunity just in case something out of left field happens to you. Not only that, but your super is the one source of money that will be there in the case of dire medical or financial emergency on the journey to retirement. So don’t ignore it. Look after it and it will look after you.

I am local in Brisbane westen suburbs and available for a coffee anytime in business hours if you want to ask questions.
Cheers
Gary

Three (3) Benefits of Super That Most Business Owners Don’t Know

If you are the owner of a small business, you might not be paying too much attention to your own superannuation because your business is your ultimate retirement asset, right?

Every year you make a profit you increase your balance sheet and the value of your business grows over time.  As a business owner myself, that is my aim too.   And on this point, the Government also agrees.  The Small Business Capital gains Tax (CGT) Concessions have been around for years.  They are designed to allow you to convert your business sales proceeds either to an other business or to superannuation with a big Capital Gains Tax break.

However, I want you to also consider the benefits for business owners of also maintaining traditional superannuation as there are three (3) benefits you probably haven’t thought about.

  1. Your business can only become your retirement asset if it makes it that far.  If your business hits trouble and folds, there will be no retirement asset to worry about.  On the other hand, a traditional superannuation fund can be used as a means of accumulating personal savings while times are good and importantly, this money is generally quarantined from creditors and insolvency proceedings if things do turn bad.
  2. Similarly, if you the owner don’t make it through to retirement because of accident or serious illness, your business probably won’t make it either. There is often a high co-dependency between the health of a small business and the health of its owner.  Just as the business must stay healthy, so must the owner, otherwise there will be no retirement and no retirement asset.  On the other hand, traditional superannuation can offer significant benefits if you don’t make it through to retirement in a healthy state or, if you don’t make it at all.  If you die before you retire, your superannuation becomes a benefit for your immediate family.  If you can never work again because of accident or illness, a traditional super fund then becomes an early source of much needed cash regardless of the fate of your business.  Of course, it is your call how much benefit you accumulate; and don’t forget that insurance can also provide a significant boost to your cash payout.
  3. There is a tax incentive to contribute to your own superannuation.  A deduction is generally available for business related contributions.  Even as a sole trader you have the option to make personal tax deductible contributions.  Contributing to your own super as a business owner and claiming a deduction for it has the effect of reducing your tax liability and increasing the net earnings you get to keep; i.e. part paid to you and part contributed to your super fund
Cheers
Gary
M: 0408 756 531
E: gary@garyweigh.com
Seven Questions to Ask Yourself before Jumping into an SMSF

Your Super – the Inside Story

Superannuation is the government’s legislated system of saving for retirement.  Its main advantage is the concession of reduced taxation and because it is compulsory for employed people, it’s a type of forced savings.  The disadvantage is that it is complicated for the layperson; and in fact a good many financial advisers avoid detailed superannuation advice because there are just so many rules.

If you are working as an employee then you are going to have compulsory superannuation put away for you.  If you are self-employed as a sole trader or in a partnership, it is optional.   So while super is a tax-effective way to save, each successive federal government wants to tinker with it which usually means some reduction or other in allowable concessions, either in areas of putting in or taking it out.  This has the effect of making other retirement options increasingly more attractive, including reliance on the Age pension.

There are many choices when it comes to super funds.  The government says you have a choice of which super fund your employer puts your money into.  That is true for some.  There are many people who don’t have that choice.  In my experience however, the majority of people tend to go with whatever their employer has in place because the time and effort required to research a suitable alternative is all too hard.  If you want to know if you have the right to choose your super fund or not, ask your employer.

Apart from Self-managed super (which I will talk about in another post), and large corporate super funds, superannuation for most people in the business (non-government) sector is broadly split between industry funds and retail funds.  The former (industry funds) are often associated with trade unions, although not all, and the latter (retail funds) are generally made up of personal super arranged by financial planners with an individual and small corporate funds arranged by financial planners with small  medium business employers.

Whilst there are so many different funds in the Australian super scene with a wide range of features and offerings, they are all subject to the same rules.  So in some respects, it’s not so much the fund you have, as what you do with it.  Neglect is the number one worst thing you can do to your super.

So regardless of which fund you have, check these four (4) things:

How much is it costing you?   – Generally speaking, industry funds are cheaper than retail funds and the reason is, you get what to pay for.  But if you take no notice of your super then you may not mind.  However if you have had your personal super arranged by a financial planner in the past, you might be interested in this next point.  While you might be vaguely aware that that the government banned commissions from super in mid 2013, you may not realise that the grandfathering rules mean that if your retail super fund was put into place prior to that time, you could still be paying adviser commissions.  Not only that, there are some older retail funds that are ridiculously expensive regardless of adviser commissions.   The retail super market has become a lot more competitive now, and its much more online friendly, so it’s worth having a look at your statement and asking your adviser for a review.

Are your investments suitable for you?   – The issue here is whether your investments would keep you awake at night (if you knew what they were).  For example, if you are a naturally conservative person when it comes to risk taking then you may want your super investments to be much the same.  If you are a risk taker then you might want your super investments to be at the growth or high growth and of the investment spectrum.  The point is that your investments should be driven by your attitude to risk.  It’s up to you so it might be worth getting yourself tested for risk appetite with an adviser and check which end of the risk spectrum your super investments are.

What insurance benefits do you have?  – There are some good reasons why you should be aware of this.  Most Australians are under-insured and the only insurance benefits they have are in super – the type that just appears because you took the job.  So it is worth having look at what you have and consider whether you need any more.  Also the insurance benefits are there for a reason.  That is, to protect your retirement savings between now and retirement.  So if you are off work for a while, there may be some temporary disability benefits that can help you.  If it turns out that you can never return to work, any permanent disability insurance you have will be a blessing.  Of course any death cover you have will help your family a lot if you die before you retire.  The other important issue is that the insurance you automatically get in your super may be the only insurance you can ever get due to the current condition of your health.  So knowing it’s there might stop you forgetting about it, or inadvertently cancelling it by changing super funds.  So that brings me to another point; if you are thinking about consolidating a few super funds into one, please do not forget about the valuable insurance benefits they may contain.  Get advice before doing it.

Have you nominated a beneficiary? – Ok this is about what happens to your super when you die.  Even if you do prepare a will, it won’t include your super unless you specifically fill in a ‘Nomination of Beneficiary’ form and send it to your super fund, directing your super into your estate.  Of course, you can nominate your dependents (e.g. spouse and kids) directly as beneficiaries but be aware that you can’t nominate mum, dad, brothers, sisters, aunties and uncles.  This makes it difficult if you are single and effectively leaves you with one choice.  And don’t forget about life insurance that you might have in your super.  if you die, it becomes a factor in money left to your beneficiaries.

I hope that helps answer a few superannuation questions.  My purpose in writing this article is to make you a little more aware of your super, and to encourage you not to neglect your super. It’s your money.  Also need to tell you that nothing in this article should be interpreted as advice.  I encourage everyone to seek advice relevant to your personal situation from a licensed financial adviser.