Financial News Articles

Reducing risk in retirement

We all think things will turn out better for ‘us’ than ‘them’. Such optimism can serve us well in life, but when it comes to money, balancing bias with facts is a much safer option. 

When it comes to your retirement there are four main risks that can impact your income:

1. Longevity risk

As you don’t know how long you will live, there is a chance that you could outlive your income or that you will have to rely solely on the Age Pension that may be insufficient to cover your basic living costs. 

2. Inflation risk

Even small increases each year to the cost of living can, over time, have a significant impact on how far your money will go. Without the right strategies in place, increases in inflation over time could mean your retirement income will no longer cover your living costs.

3. Market risk

Exposure to investments such as shares and property comes with the risk of market volatility. When investments earn negative returns, your retirement savings are falling in value. It’s important to consider how best to minimise the impact on your savings from market volatility during a 20-30 year plus retirement period.

4. Sequencing risk

Poor returns on investments when your savings are at their peak may significantly impact just how long those savings will last. In retirement, timing is everything. If the order and timing of your investment returns is unfavourable, it could result in your retirement income running out sooner than expected.

So, how can you reduce risks in retirement? One option is a lifetime annuity.

Lifetime annuities give you an additional layer of protection in retirement and can act as a safety net giving you income for life, regardless of how long you live.

Annuities works by complementing your other investments, together with the Age Pension (if you’re eligible). A lifetime annuity provides a foundation that you can depend upon to cover your basic living costs. Whilst they are designed to be held for life, there are withdrawal periods where you may access a lump sum if necessary. 

Everyone’s financial situation is different – so it’s a good idea to seek professional advice. Contact your financial adviser to determine whether an annuity is right for you.

Source: Challenger

 

How first home buyers accessed $415m under the First Home Super Saver Scheme

Did you know, you could take advantage of potential tax benefits inside super to save for your first home? 

It’s been called the Australian Dream by many – owning a home. However, saving for a deposit on one can sometimes be challenging.

For this reason, the government started the First Home Super Saver (FHSS) Scheme on 1 July 2018 to help aspiring homeowners save towards a deposit on their first property.

A number of prospective buyers have taken advantage of the scheme to help reach their goal of home ownership, with the Australian Taxation Office (ATO) revealing $415 million had been accessed under the scheme since it begun^. 

If you’re wondering if the FHSS Scheme could be a path to you owning your first home, read on to find out about potential advantages and how it might work for you. 

1. How does the FHSS Scheme work?

Under the scheme, you can save for your first home by adding additional money to your super account in the form of voluntary contributions.

This includes some types of concessional (before-tax) contributions and some non-concessional (after-tax) contributions. 

If you’re eligible, you can later withdraw this money, including associated earnings, less tax, to put towards a deposit on your first home. 

2. What types of contributions count toward the scheme?

• Salary sacrifice contributions, which you might set up with your employer, on top of any compulsory contributions they might pay you, if you’re eligible.
• Tax-deductible contributions, which are made using after-tax dollars, for instance with the money in your bank account, which you then claim a tax deduction for at tax time.
• Personal contributions, which you make using after-tax dollars, but don’t claim a tax deduction for.

Super contributions that don't count

• Compulsory employer contributions, which your employer may be required to pay you under the Government’s Superannuation Guarantee. 
• Spouse contributions that a partner may be paying into your super for you.

3. Is there a limit on how much can be withdrawn?

You can apply to withdraw eligible voluntary contributions you’ve made since 1 July 2017, up to a maximum of $15,000 per financial year and $50,000 in total per person.

 Partners can also combine their own eligible contributions towards the purchase of the same property.

4. What can the money be used for?

Eligible first home buyers can use money withdrawn under the scheme to put toward residential property, or land, provided a contract to build the home is entered into within the set timeframes. Houseboats and motorhomes are not included.

5. What are the savings benefits?

A key advantage of the scheme is that the earnings on the money you contribute to your super fund are taxed at up to 15%. This may be lower than the tax rate you'd pay on earnings received outside of super, which are generally subject to your personal marginal tax rate.

Check out the table below to see how tax on super compares to individual income tax rates for Australian tax residents for the 2023-24 financial year.

Taxable income           Marginal tax rate     Max tax on earnings inside super
$18,201 - $45,000         19%*                          15% 
$45,001 - $120,000       32.5%*                       15%
$120,001 - $180,000     37%*                          15%
$180,001 and over        45%*                          15%
* Plus up to 2% Medicare levy where applicable.

Another important advantage is that if you make salary sacrifice or tax-deductible contributions to super, those contributions will be taxed at 15% rather than your marginal tax rate, which could result in a significant tax saving, depending on your situation. There are also generally tax concessions when the contributions are withdrawn. 

6. What tax is payable when the money is withdrawn?

When you withdraw amounts that were contributed under a salary sacrifice arrangement or as part of a tax-deductible contribution, you’ll have tax withheld from the money you receive.

This money (including any associated earnings) will be taxed at your marginal tax rate (like your employment income), but with a 30% tax offset, which reduces the tax you pay.

If you’ve made personal contributions under the scheme that you’ve not claimed a tax deduction for, no tax will be payable on these amounts when they are withdrawn from super.

Another thing to keep in mind when it comes to tax on super are general contributions caps, as penalties apply if you go over these limits.

7. What other eligibility criteria applies?

• You must be 18 or older to make a withdrawal under the scheme.
• You can’t have owned property in Australia before.
• You must live in the property for at least six months within the first 12 months after buying.
• You must not have previously made a withdrawal request under the scheme.

 8. What happens when it’s time to withdraw the money?

Here’s what you’ll generally need to do:

• Get a FHSS determination from the ATO to find out how much you can withdraw.
• You can request unlimited determinations, but can only make one withdrawal request.
• Buy a home or enter into a contract to build a home within 12 months of the withdrawal. Extensions may apply.
• If the purchase doesn’t go ahead, within the allowable timeframes, the money may either be put back into super or will incur further tax of up to 20%.

9. Where else can first home buyers find information?

Additional rules may apply, so do your research before making any decisions. You can visit the ATO website for further details on the FHSS Scheme.

You may also want to check your state or territory’s First Home Owner Grant information to see what else you may be eligible for.

Source: ATO First Home Super Saver Scheme data

Source: CFS

Five rules of money management

No matter your income level or financial goals, everyone can benefit from developing strong money management skills. Here are five rules of money management that can help build a solid foundation for financial wellbeing.

Key takeaways:

• Having a savings plan and an appropriate level of insurance cover can help insulate you from financial stress.
• Tracking expenses gives a complete picture of where savings can be made, helping reach your financial goals more quickly.
• Avoid accumulating debt where possible, but where it’s necessary, prioritise paying off debts with the highest interest rates.
• Continuously improve financial literacy by reading books, attending seminars and following reputable financial websites. Knowledge is power!

Just like physical fitness, achieving financial fitness requires discipline, knowledge and effort. But don’t worry, because once you have those skills in your armoury, the path to financial freedom will start to unfurl before your eyes.

No matter your income level or financial goals, everyone can benefit from developing strong money management skills.

Here are five rules of money management that can help you build a solid foundation for your financial wellbeing:

1. Create a budget and save regularly

Establish a budget that outlines your income, expenses and savings goals. Stick to this plan and track your spending to ensure you're living within your means.

Make saving a priority by setting aside a portion of your income each month. Aim to save at least 10 percent (and ideally 20 percent) of your earnings for both short-term emergencies and long-term goals.

That’s not to say you should be overly frugal either. If you are so disciplined with your spending that you leave little or no budget for fun activities, it is unlikely that you will maintain that habit for a prolonged period, so don’t forget to treat yourself and your loved ones.

2. Pay yourself first and minimise debt

When wages are received, try to allocate a portion to savings before paying bills or spending on discretionary items. This helps prioritise your financial future and can become so habitual that you’ll hardly notice the money going, but you can be pleasantly surprised at how quickly your savings grow.

Most of us need to take on debt at some point in our lives, particularly for big ticket items such as a house or a new car, but try to avoid accumulating high-interest debt whenever possible. Try paying off existing debts systematically, starting with those with the highest interest rates. Use credit responsibly and only when necessary.

3. Invest for the future and establish an emergency fund

Consider investing. Some investments include shares, bonds and real estate. Selecting an investment will depend on your financial situation and risk tolerance.

Don’t just focus on short-term outcomes. Long-term goals, such as retirement, should also be given due prominence and consideration in your investment strategy. Seek professional investment advice if required.

Another key aspect to consider when investing for your future is to make sure you’re covered in the event of a major setback.

Ensuring you have adequate insurance coverage for things such as health care, home, motor, life and income safeguards should your finances take a hit when unexpected events occur.

Consider building an emergency fund that covers up to six months' worth of living expenses. This fund can provide a safety net during unexpected financial setbacks, such as a prolonged period of unemployment or illness.

4. Track your expenses and avoid impulse spending

Consider keeping a record of all your expenses to gain insight into your spending habits. Identify areas where you can make adjustments to save money, such as shopping around for better insurance deals, having more home cooked meals rather than expensive takeaways, or holidaying in your own country rather than overseas.

Before making a purchase, consider asking yourself whether it aligns with your financial goals. Implementing a waiting period for significant purchases helps you to avoid impulsive buying.

5. Keep abreast of all things financial and set realistic investment goals

Stay informed about personal finance topics, investment strategies, and money management techniques. Education equals personal empowerment. Continuously improve your financial literacy by reading books, attending seminars and following reputable financial websites. The more you know, the better financial decisions you can make.

Consider defining specific, measurable, attainable, relevant, and time-bound (SMART) financial goals. Break them down into actionable steps to stay motivated and achieve success.

So, take charge of your finances, embrace smart spending habits and enjoy watching your financial dreams transform into a rewarding reality.

Source: MLC

Maximising wealth together: Super contributions for your spouse

Maximising super contributions for your spouse is a smart financial move that can benefit both your partner and your family's long-term financial security. By actively contributing to your spouse's super account, you not only help them build a more substantial retirement nest egg, but also enjoy potential tax benefits in the process. However, it's essential to understand the eligibility criteria, contribution limits, and potential implications on other aspects of your retirement plan and estate planning.

Key takeaways:

• Eligibility criteria around the age of your spouse, level of income and contribution caps.
• The key benefits of spouse contributions, including tax offsets and enhanced financial security.
• The steps involved in making spouse super contributions.

Super plays a pivotal role in securing your financial future. While contributing to your own super fund is essential, there's an often overlooked strategy that can significantly boost your retirement savings: making super contributions for your spouse.

Maximising super contributions for your spouse can lead to significant benefits, including tax advantages and a more comfortable retirement for you both.

Here, we’ll explore the benefits of contributing to your spouse's super account, the eligibility criteria, and some key considerations for you when looking to enhance your retirement savings through spouse super contributions.

Understanding spouse super contributions

Super spouse contributions is simply the process of adding funds to your spouse's super account. This financial strategy can be particularly beneficial for couples who have different income levels or where one partner takes on more responsibility for household and family matters.

By contributing to your spouse's super, you can help them grow their retirement savings, which can ultimately be beneficial to you both.

Eligibility criteria for spouse super contributions

Before diving into the benefits, it's important to understand the eligibility criteria for making spouse super contributions in Australia:

• Spouse's age - Your spouse must be under the age of 75.
• Spouse's income - The receiving spouse's income (including assessable income, reportable fringe benefits and reportable employer super contributions) must be less than $40,000 per year for you to claim the full tax offset of $540. A partial offset may apply if their income is between $30,000 and $40,000.
• Contributions cap - Ensure that your contributions do not exceed your spouse’s non-concessional contributions cap which may be $0 up to $330,000 depending on her total super balance last 30 June. Exceeding this cap can result in a tax liability.

Benefits of spouse super contributions

Now, let's explore the advantages of making super contributions for your spouse:

• Tax benefits - One of the primary advantages of spouse super contributions is the potential for tax benefits. If your spouse's income is below the threshold, you can claim a tax offset of up to 18% of the contributions you make (capped at $540 each financial year), which can help reduce your overall tax liability.
• Boosting retirement savings - By contributing to your spouse's super account, you are actively helping them grow their retirement savings. This can be especially valuable if your spouse has taken time off work to raise children or for any other reason, as it ensures they continue to accumulate superannuation benefits.
• Equalising retirement savings - Spouse super contributions can help bridge the retirement savings gap between partners who have disparate incomes. This ensures that both partners enjoy a comfortable retirement lifestyle, reducing financial stress in later years.
• Long-term financial security - Contributing to your spouse's super account is an investment in your collective financial future. It can provide peace of mind knowing that you both have substantial retirement savings to rely on when you stop working.

Key considerations for spouse super contributions

While spouse super contributions offer several benefits, there are some important considerations to keep in mind:

• Contribution limits - Be mindful of the annual contribution caps to avoid unnecessary tax penalties. As of the 2023-24 financial year, the annual cap is $110,000. However, depending upon your spouse’s total super balance last 30 June, this may be $0 up to $330,000.
• Age restrictions - Spouse contributions are not allowed if your spouse is over 75 years old.
• Super fund choice - Consider your spouse's super fund’s fees, investment options and insurance cover to make an informed choice.
• Impact on other benefits - Making significant contributions to your spouse's super may potentially impact their eligibility for government benefits like the Age Pension. Consider consulting a financial adviser to find the right balance.
• Tax implications - While you may receive a tax offset for spouse contributions, it's essential to understand how these contributions affect your overall tax situation. A tax professional can provide you with personalised advice.

How to make spouse super contributions

Making spouse super contributions is a fairly straightforward process. Here are the steps to get started:

• Check eligibility - Ensure that your spouse meets the eligibility criteria, as outlined above.
• Select contribution amount - Determine how much you want to contribute to your spouse's super account, keeping in mind your spouse’s contribution caps.
• Contact the super fund - Get in touch with your spouse's superannuation fund and inquire about their process for receiving contributions from a spouse.
• Make the contribution - Once you have the necessary information from the super fund, make the contribution either through a bank transfer, electronic funds transfer, or other payment methods accepted by the fund. You could also set up payments at regular intervals, rather than a lump sum, if you’d prefer.
• Keep records - Maintain accurate records of the contributions made, including the dates and amounts. This documentation will be required for tax purposes.
• Claim the tax offset - When lodging your tax return, enter the total amount of spouse contributions you made to claim the spouse super contributions tax offset, if eligible.

Source: MLC