Mortgage vs super

With interest rates on the rise and investment returns increasingly volatile, Australians with cash to spare may be wondering how to make the most of it. If you have a mortgage, should you make extra repayments or would you be better off in the long run boosting your super?

The answer is, it depends. Your personal circumstances, interest rates, tax and the investment outlook all need to be taken into consideration.

What to consider

Some of the things you need to weigh up before committing your hard-earned cash include:

Your age and years to retirement

The closer you are to retirement and the smaller your mortgage, the more sense it makes to prioritise super. Younger people with a big mortgage, dependent children, and decades until they can access their super have more incentive to pay down housing debt, perhaps building up investments outside super they can access if necessary.

Your mortgage interest rate

This will depend on whether you have a fixed or variable rate, but both are on the rise. As a guide, the average variable mortgage interest rate is currently around 4.5 per cent so any money directed to your mortgage earns an effective return of 4.5 per cent.i

When interest rates were at historic lows, you could earn better returns from super and other investments; but with interest rates rising, the pendulum is swinging back towards repaying the mortgage. The earlier in the term of your loan you make extra repayments, the bigger the savings over the life of the loan. The question then is the amount you can save on your mortgage compared to your potential earnings if you invest in super.

Super fund returns

In the 10 years to 30 June 2022, super funds returned 8.1 per cent a year on average but fell 3.3 per cent in the final 12 months.ii In the short-term, financial markets can be volatile but the longer your investment horizon, the more time there is to ride out market fluctuations. As your money is locked away until you retire, the combination of time, compound interest and concessional tax rates make super an attractive investment for retirement savings.

Tax

Super is a concessionally taxed retirement savings vehicle, with tax on investment earnings of 15 per cent compared with tax at your marginal rate on investments outside super.

Contributions are taxed at 15 per cent going in, but this is likely to be less than your marginal tax rate if you salary sacrifice into super from your pre-tax income. You may even be able to claim a tax deduction for personal contributions you make up to your annual cap. Once you turn 60 and retire, income from super is generally tax free. By comparison, mortgage interest payments are not tax-deductible.

Personal sense of security

For many people there is an enormous sense of relief and security that comes with having a home fully paid for and being debt-free heading into retirement. As mortgage interest payments are not tax deductible for the family home (as opposed to investment properties), younger borrowers are often encouraged to pay off their mortgage as quickly as possible. But for those close to retirement, it may make sense to put extra savings into super and use their super to repay any outstanding mortgage debt after they retire.

These days, more people are entering retirement with mortgage debt. So whatever your age, your decision will also depend on the size of your outstanding home loan and your super balance. If your mortgage is a major burden, or you have other outstanding debts, then debt repayment is likely a priority.

All things considered

As you can see, working out how to get the most out of your savings is rarely simple and the calculations will be different for everyone. The best course of action will ultimately depend on your personal and financial goals.

Buying a home and saving for retirement are both long-term financial commitments that require regular review. If you would like to discuss your overall investment strategy, give us a call.


https://www.finder.com.au/the-average-home-loan-interest-rate

ii https://www.chantwest.com.au/resources/super-members-spared-the-worst-in-a-rough-year-for-markets

Salary sacrifice to cut tax and boost your super

This time of year, people’s thoughts start turning to their tax return, but it can also be a good time to set things up so you don’t pay more tax than required next financial year.

Simply talking to your employer about setting up an arrangement to “sacrifice” some of your pre-tax salary could potentially lower your tax bill – and boost your retirement nest-egg.

Reducing your tax bill

A salary sacrifice arrangement simply involves coming to an agreement with your employer to pay for everyday items or services you would normally pay for out of your after-tax salary directly from your before-tax salary. This might include things like childcare, health insurance or super. The benefit is that this reduces the level of income the ATO uses to calculate your tax bill.

If you set up a salary sacrifice arrangement with your employer, it’s important to understand that while your taxable income is lower, the benefits are still listed on your annual payment summary. For some people, this reduces the tax offsets, child support payments or other government benefits they receive, limiting the value of salary sacrifice.

Salary sacrificing options

The items or services you can pay for using salary sacrifice depends on your employer.

Some employers let their employees salary sacrifice for expenses such as cars, health insurance, school fees and home phones. Others are not prepared to do this, as they may end up paying Fringe Benefits Tax (FBT) on the benefits you receive.

Employers are usually more willing to allow you to package FBT-exempt work-related items such as portable electronic devices, computer software, protective clothing or tools of trade, as these generally don’t result in FBT bills.

Boost your super account

One of the most popular forms of salary sacrifice is redirecting some of your pre-tax salary into your super fund. Most companies are willing to provide this option as it not only helps you build retirement savings, but it can also earn them a tax deduction.

When you salary sacrifice into your super, your contributions are taxed at 15 per cent when your super fund receives the money. For most people this is a lower tax rate than if they received the money as normal income.

A further bonus with salary sacrificing into super is you only pay 15 per cent on any investment earnings you receive inside super, instead of your marginal tax rate for investments held outside super.

Find out what’s on offer

If you’re interested in a salary sacrifice arrangement, it’s a good idea to discuss the subject with your employer or HR team to find out the company’s policy.

It’s also a good idea to talk to us, as the value of these arrangements needs to be weighed up carefully against your reduced take-home pay and the potential loss of government benefits.

These arrangements should be put in writing before you earn the income you are sacrificing, so you need to talk to your employer prior to the start of the new financial year if your salary will change from 1 July.

Tips for employers

Allowing your employees to salary sacrifice can help them reduce their tax bill and it boosts engagement with your business. Another overlooked benefit is if your employee salary sacrifices into their super, you can claim a tax deduction for their contributions, as they are considered employer contributions.

To do this, you need to ensure you create an ‘effective’ salary sacrifice arrangement meeting the ATO’s guidelines. Otherwise the benefits your employee receives are considered part of their taxable income.

Effective arrangements require a clear agreement stating the terms and conditions and they must be documented in writing to avoid any uncertainty or future disputes.

Sacrifice arrangements can only apply to wage and salary payments for work yet to be performed, not past earnings. Salary and wages, leave entitlements, bonuses or commissions accrued prior to the arrangement cannot be used.

A simple way to avoid problems is to document your employees’ salary sacrifice arrangements before the start of a new financial year – or whenever there is a change to their salary – so it covers future earnings.

You need to keep detailed records of these arrangements for five years and list all sacrifice amounts on the employee’s annual payment summary.

If you would like help working out if a salary sacrifice arrangement makes sense for you, call our office today on 03 5120 1400 or click here to send your enquiry.

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

There’s more than one way to Boost your retirement income

After spending their working life building retirement savings, many retirees are often reluctant to eat into their “nest egg” too quickly. This is understandable, given that we are living longer than previous generations 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. This was one of the key messages from the Government’s recent Retirement Income Review, which found 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 on 03 5120 1400 and speak to a Financial Adviser.

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

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

How much super is enough?

Most of us dream of the day we can stop working and start ticking off our bucket list. Whether you dream of cruising Alaska, watching the sun rise over Uluru, improving your golf handicap or spending time with the grandkids, superannuation is likely to be a major source of your retirement income. 

The more money you squirrel away in super during your working years, the rosier your retirement options will be. The question is, how much is enough? 

Estimating your needs

Financial commentators often suggest you will need around two thirds (67 per cent) of your pre-retirement salary to enjoy a similar standard of living in retirement.i Lower income households may need more because they typically spend more of their income on necessities before and after retirement. 

The latest ASFA Retirement Standard estimates that a couple retiring today needs a retirement super balance of $640,000 to provide a comfortable standard of living. This would provide an annual income of $60,977.ii

Singles need a lump sum of $545,000 to provide a comfortable income of $43,317 a year. These figures assume people own their home and include any entitlements to a full or part Age Pension. 

How do I compare?

According to the latest figures, the mean super balance for all workers is $111,853 for men and $68,499 for women. The mean balance at retirement (age 60-64) shows most people retiring today fall well short of the amount needed for a “comfortable” retirement. ii

The gap between men and women persists at all ages. By the time women reach their 60s they have 42 per cent less super than men on average and are more likely than younger women to have no super at all. 

How can I boost my super?

If your super is not tracking as well as you would like, there are ways to give it a kick along. When your budget allows, or you receive a windfall, consider putting a little extra in super. Even better, set up a direct debit or salary sacrifice arrangement. 

  • You may be able to make a tax-deductible contribution up to the $25,000 annual concessional cap but be aware that this cap includes employer contributions and salary sacrifice. 
  • You may also be able to contribute up to $100,000 a year after tax, or $300,000 in any three-year period. You can’t claim it as a tax deduction, but earnings will be taxed at the maximum super rate of 15 per cent rather than your marginal rate and you can withdraw the money tax-free from age 60. Your age and the amount you have in super can restrict the amount of contribution caps. 
  • If you earn less than $37,000, your other half can contribute to your super and claim a tax offset of up to $540. The offset phases out once you earn $40,000 or more. 
  • If you are a mid to low income earner and make an after-tax contribution to your super account, the government will chip in up to $500. To receive the maximum, you need to earn less than $37,697 and contribute at least $1,000 during the financial year. The government co-contribution reduces the more you earn and phases out once you earn $52,697. 
  • Speak with your employer about directing some of your pre-tax salary into super. “Salary sacrifice” contributions are taxed at a maximum of 15 per cent (30 per cent if you earn over $250,000). But stay within your concessional contributions cap of $25,000 a year, which includes employer contributions.

To work out the difference extra contributions could make to your retirement nest egg, try out the “MoneySmart retirement planner calculator.

If you would like to talk about your retirement income strategy, contact one of our advisers on 03 5120 1400.

i Moneysmart, Last updates 27 Aug 2018, https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-contributions/how-much-is-enough 

ii ASFA Retirement Standard, 1 December 2018, https://www.superannuation.asn.au/resources/retirement-standard 

iii Superannuation Statistics, March 2019, ASFA, https://www.superannuation.asn.au/ArticleDocuments/269/SuperStats-Mar2019.pdf.aspx?Embed=Y

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

5 SIGNS of a well run business

Every small business owner wants their business to thrive, but it can be tough to keep the money coming in the door while staying on top of all the necessary paperwork.

One way to ensure success is to understand the behaviours that separate a well-managed business from one that’s just muddling through.

Surprising as it may sound, the ATO is keen to help small business owners prosper and to share its insights on running a successful business.

Getting the basics right

Since it’s charged with keeping an eye on almost four million Aussie small businesses, the tax regulator is well placed to know what works and what doesn’t when it comes to keeping the doors open.

According to the ATO, when a small business is operating well, it tends to get the basics right. That means keeping good records and having in place effective tools so you can easily reconcile your business’s income and expenses.

Here are five simple steps you can take to ensure your business is running smoothly:

1. Keep informed

The ATO finds business owners who are operating effectively take the time to understand their tax and super obligations and to keep on top of any changes affecting their business’s processes.

2. Know your cash flow

Small businesses that are well managed use a cash flow projection or budget tool, as this is the main reason small businesses fail. If you don’t have clear insights into your cash flow position and are not carefully managing the business’s income and expenses, it can be a recipe for trouble.

The cash flow projection or budget tool can be an off-the-shelf product, or talk to us about how we can work with you to use the ATO’s new “Cash Flow Coaching Kit” to improve your management of this area.

3. Declare all income

Well-run businesses declare all their income – including any cash income – in their income tax return. Although it?s the ATO?s job to collect tax, it argues small businesses not declaring all their income are heading for trouble down the track.

4. Split your expenses

It’s important to carefully apportion (or split) your business expenses between private and business use.

5. Keep up to date

The final marker of a well-run business is that all its details are up to date – particularly with the ATO. That means keeping your ABN details, contact information and bank details current and easy to find.

Although many of these indicators are straightforward, it’s surprising how many small businesses don’t take these simple actions.

Behaviours to avoid

Just as there are habits that mark a well-run business, there are behaviours common to operations heading for trouble.

Businesses that omit income by depositing it into private accounts or mortgages, or that don’t declare cash sales or record director’s fees correctly, are not on top of things.

The same goes for failing to account correctly for private use of business assets or funds. If you are claiming an excessive business portion of an expense with both personal and business use, it’s a sign of poor management. As is claiming private expenses as a business expense, or not having the necessary records to substantiate your claims.

Making errors because you don’t understand your tax responsibilities is also a sign that things are not being well-run.

Bring in the professionals

With so many rules and regulations, it’s not surprising that business owners may occasionally overlook some of their obligations. There is an easy solution though.

Well-run small businesses seek professional advice when they need it. We can work with you to improve your business overall, not just to meet your tax obligations.

In fact, the ATO’s 2017-18 research and audit work with around “120,000” small businesses indicated that those who have regular contact with a tax professional are more likely to report correctly.

ATO deputy commissioner, Deborah Jenkins recently gave her top three tips for effectively managing your business: maintain good business records, keep an eye on your competition using the ATO’s Small Business Benchmarks and take care of your mental health because running a small business can be very stressful.

If you think your business could do with a financial tune-up, give us a call today and speak to an adviser on 03 5120 1400.

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Building wealth through diversity

What a difference a year makes. In recent months, Australian shares hit a record high, the Aussie dollar dipped to levels not seen since the GFC and interest rates were cut to historic lows. 

Towards the end of 2018, shares were in the doldrums and while experts agreed the Aussie dollar would go lower most tipped the next move in interest rates would be up. 

All of which goes to show that when it comes to predicting financial markets, the only sure thing is uncertainty. There’s no avoiding market risk, but it does need to be managed if you want to build enough wealth to live comfortably in retirement and achieve other life goals along the way. 

Thankfully, there is a way to reduce the impact of market volatility on your overall investment portfolio. Hint: it’s not by putting all your money in the bank. 

Mix it up

The best way to reduce the risk of one bad investment or a downturn in one market decimating your returns is to hold a mix of investments. This is what is referred to as diversification or not putting all your eggs in one basket. 

To smooth your returns from year to year and avoid the risks of short-term market volatility, you need a mix of investments from different asset classes. 

The difficulty of predicting the market in the short-term was certainly in evidence in the year to June 2019. 

Investors who panicked at the end of 2018 and sold their shares would have missed out on the unexpected rebound in global shares. 

A year of surprises

Australian shares returned 11 per cent in the year to June 30. Global shares returned 11.9 per cent while US shares returned 16.3 per cent, partly reflecting the fall in the Aussie dollar from US74c to US70c.i

The worst performing asset class in the year to 30 June was Australian residential property, down 6.9 per cent.ii But while the housing market downturn was constantly in the news, good news in other sectors of the property market went largely unnoticed. 

The best performing asset class by far in the year to June was Australian listed property, up 19.3 per cent. 

The gap in performance between direct residential property and listed property highlight another important aspect of diversification. You also need to diversify within asset classes. 

Look beyond your backyard

Where property is concerned, that means investing across a range of property types and geographic locations. By diversifying your property investments, you reduce the risk of short-term price fluctuations in one location which can result in a big loss if you are forced to sell at the bottom of the market. 

The same holds true for shares. Many Australians have a share portfolio dominated by the big banks and miners, attracted by their fully franked dividends. 

The danger is that investors with a portfolio heavily weighted towards local stocks are not only exposed to a downturn in the bank and resources sectors but also the opportunity cost of not being invested in some of the world’s most dynamic companies. 

Time is your friend

Over the last 30 years the top performing asset class was US shares with an average annual return of 10.3 per cent. Australian shares (9.4 per cent) and listed property (9.2 per cent) were not far behind.iii 

And then there was cash. In a time of record low interest rates cash in the bank returned 2 per cent in the year to June 30, barely ahead of inflation of 1.6 per cent. The return was better over 30 years (5.6 per cent), but still well behind the pack. 

While it’s important to have enough cash on hand for daily living expenses and emergencies, it won’t build long-term wealth. 

There’s no telling what the best performing investments will be in the next 12 months, as past performance is not an indicator of future performance. What we can be confident about is that a portfolio containing a mix of investments across and within asset classes will stand the test of time. 

If you would like to discuss your overall investment strategy, please give us a call on 03 5120 1400 and speak to one of our advisers.

i https://static.vgcontent.info/crp/intl/auw/docs/resources/2019_index_chart.pdf?20190730%7C193023?

ii https://www.corelogic.com.au/sites/default/files/2019-07/CoreLogic%20home%20value%20index%20JULY%202019%20FINAL.pdf

iii https://www.vanguardinvestments.com.au/au/portal/articles/insights/mediacentre/stay-the-course.jsp

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

How super is your life insurance?

For most people, life insurance provides a safety net against unexpected events. This is particularly the case if you have a mortgage, debts or family who are dependent on you earning an income.

In many cases, life insurance has been automatically offered through superannuation. Although 85 per cent of people hold life insurance this way, a recent survey found one third of them don’t even realise.i

Now some super members may have lost their insurance cover and may not be aware of it.

Millions could lose cover

Concern that super balances were being eroded through insurance premiums and fees has led the government to introduce Protecting your Superannuation legislation.

As a result, from July 1 this year your insurance cover is to be cancelled, if your fund has been inactive for more than 16 months.ii

Letters were sent towards the end of the financial year to those with inactive funds, advising you to contact your fund to make a contribution or risk losing your life cover. If you didn’t respond, your life insurance policy may have been cancelled.

It’s estimated that up to 3 million super members may have been affected.iii And while you can buy a new life insurance policy, you may not be able to reactivate your previous one unless your fund offered an extension of the deadline to reactivate cover. If not, you may have to face a medical examination and/or pay higher premiums in order to take out a new policy.

Younger members to opt-in

It is also proposed (although not yet legislated) that new superannuation fund members who are aged under 25 will no longer be given automatic life insurance cover as they have in the past. Instead, they would be given the opportunity to opt in to cover.

The argument in favour of this move is that young people with no responsibilities, have nothing to insure. But once you buy a home, get married or become a parent, the need for life insurance becomes paramount.

As you get older, once the family has flown the nest and you have paid off all your debts, the need for life insurance may reduce. However, with a blended family, a life insurance policy in super can prove a good financial strategy to ensure the right beneficiaries receive your money. That’s because superannuation “death benefits” don’t form part of your Will but are paid out separately to your nominated beneficiaries.

SMSFs may also be caught out

Up until now, some self-managed super fund members have deliberately kept a public offer super fund active to take advantage of the cheaper insurance. But as stated above, if that public offer fund is inactive and an election to maintain cover has not been made, then cover may be lost.

The beauty of having life insurance in super is that the premiums are generally cheaper because you are charged at a group rate. In addition, it won’t affect your cashflow as premiums come out of your super. Of course, that is the point of this legislation. The monies available for investment to build your balance for retirement may be eroded through those very premiums.

Another precautionary note is that it may be harder to access a payout through super if you need to make a claim. If you haven’t correctly nominated a beneficiary in your super, then it is the trustees who decide who receives the payout. And because the insurer makes the payment via the fund, this can also take longer.iv

What happens next?

As part of the Protecting your Super changes, inactive funds with balances less than $6000 will see the monies transferred to the Australian Taxation Office. The ATO will then endeavour to amalgamate this money with an active superannuation fund of yours or hold the money for you until it is claimed.

If this happens, investment returns on the money held by the ATO may be significantly less than if you invested through your super.v

Don’t wait until you need to make a claim to discover you don’t have any insurance cover after all. If you have any questions about the changes or your insurance needs in general, give us a call on 03 5120 1400.

https://www.superannuation.asn.au/media/media-releases/2019/joint-media-release-10-june-2019

ii https://firststatesuper.com.au/member/super/manage-super/protect-your-super

iii https://www.superannuation.asn.au/media/media-releases/2019/joint-media-release-10-june-2019

iv https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/insurance-through-super

https://www.ato.gov.au/Individuals/Super/Growing-your-super/Keeping-track-of-your-super/ATO-held-super/

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Where is the best place to stash your cash?

If like many Australians you’re looking for ways to put some cash away for a rainy day, a holiday or to earn extra income, the job has just become a bit harder. It’s also become more urgent if you are expecting a handy tax return. 

In early July, the Reserve Bank cut rates to 1 per cent. Soon after, the Morrison Government got its tax package passed. As a result, those on incomes from $25,000-$120,000 got an immediate tax cut of up to $1080. 

So, whether you are looking to make the most of your tax cut or other savings, here are some suggestions. 

1.Throw it on the mortgage

For those who have a mortgage, tipping in a bit extra, especially in the early years, can save you substantial amounts. It can also shave years off the life of the loan, meaning you’ll enjoy the priceless peace of mind that comes with paying off your home sooner. 

Banks charge more for the money you’ve borrowed from them than the interest they pay on money you deposit with them. So, it may not make much sense to put money in a savings account paying 1.5 per cent interest when you’re paying 3.5 per cent interest on your home loan. 

Say you have a $400,000 loan at 4 per cent with 20 years to run. Using ASIC’s MoneySmart mortgage calculator, by increasing your monthly payments by just $50, you could save $6,146 in interest and shave 7 months off the term of the loan.i 

2. Up your super contributions

It’s hard to go past super as a tax-effective investment option if you are happy to lock your money away until you retire. 

Over the last seven years, while interest rates and inflation have been low, growth funds (where most Australians have their savings) achieved returns of 9.3 per cent a year after tax and fees, on average. ii 

You can make tax-deductible contributions of up to $25,000 a year into super, this includes your employer’s payments, salary sacrifice and any voluntary contributions you make. Once your money is in super it’s taxed at concessional rates. New rules also allow you to “carry forward” unused concessional contributions from previous years. Conditions apply so call us to see if you are eligible. 

Most Australians pay little attention to super until they are approaching retirement. That means they fail to harness the power of compounding interest to the extent they could have. If you’re a decade or two away from leaving the workforce with cash to spare, it’s difficult to find a better pay-off than the one you’ll (eventually) receive from channelling savings into super. 

3. Invest in shares

For longer-term savings, it’s tough to beat the returns generated by a share portfolio. Over 30 years to 2018, which included many ups and downs including the GFC, the average annual return from Australian shares was 9.8 per cent.iii Last financial year the total return from capital gains and dividends was 11 per cent.iv 

Whether you are just starting out or wanting to expand an existing portfolio, we can help you align your investments with your goals. 

If you would like to direct some extra cash into shares, there are now even “micro-investment” apps such as Raiz and Spaceship Voyager, which you can access via your mobile phone. 

4. Put it in the bank

Australia’s current inflation rate is 1.3 per cent. If your bank is paying you less than 1.3 per cent you are losing money. 

If you have a so-called high interest savings account paying you a standard variable rate of between 1.5-2 per cent, you’re getting a near negligible return.v Also be aware of high introductory rates that revert to the standard base rate once the honeymoon ends. 

Term deposits are currently paying around 2-2.25 per cent which is a bit better but not much.vi 

Despite these low rates, it’s wise to have some money parked in a savings account or in your mortgage offset or redraw account so that it’s available in case of an unforeseen expense. 

If you would like to discuss your savings and investment goals and how to achieve them, give us a call. 

https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/mortgage-calculator#!how-can-i-repay-my-loan-sooner 

ii https://www.chantwest.com.au/resources/super-funds-on-the-brink-of-a-record-breaking-run 

iii https://static.vgcontent.info/crp/intl/auw/docs/resources/2018-index-chart-brochure.pdf?20180806%7C220825 (p4) 

iv ‘Year in Review’, CommSec Economic Insights, 1 July 2019 

https://www.finder.com.au/savings-accounts/high-interest-savings-accounts?futm_medium=cpc&futm_source=google_ppc~1659806132~61996044697~kwd-1281462095~saving%20accounts%20interest%20rates~e~c~g~1t2~~EAIaIQobChMIqpag-O-a4wIVjw4rCh18wwQrEAAYAiAAEgIMwPD_BwE&gclid=EAIaIQobChMIqpag-O-a4wIVjw4rCh18wwQrEAAYAiAAEgIMwPD_BwE 

vi https://www.finder.com.au/term-deposits

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