Are we there yet?

Allowing for future age pension entitlement the Association of Superannuation Funds of Australia (ASFA) calculates that a couple will need savings of $640,000 at retirement to maintain a ‘comfortable lifestyle’ .) ASFA equates ‘comfortable’ to an annual income of $60,264.)

How are we tracking as a nation? 

In 2015-2016, 50% of men aged 60-64 had super balances of less than $110,000. For women the figure was a more alarming $36,000 – not even enough to provide a single person with a ‘modest’ lifestyle. (ASFA estimates that to upgrade from a ‘pension only’ to a ‘modest’ lifestyle would require a retirement nest egg of $70,000.)

Last minute lift

If your super is looking a little on the thin side there are a few ways to give it a boost before retirement.

• Make the most of your concessional contributions cap. Ask your employer if you can increase your employer contributions under a ‘salary sacrifice’ arrangement. Alternatively, you can claim a tax deduction for personal contributions you make. Total concessional contributions must not exceed $25,000 per year, although from July 2018 you may be able to carry forward any unused portion of this cap for up to five years.

• Investigate the benefits of a ‘transition to retirement’ (TTR) income stream. This can be combined with a re-contribution strategy that, depending on your marginal tax rate, can give your retirement savings a significant boost.

• Review your investment strategy. A common view is that as we near retirement our investments should be shifted to the conservative end of the risk and return spectrum. However, in an age of low returns and longer life expectancies, some growth assets may be required to provide the returns that will be necessary to support a long and comfortable retirement.

• Make non-concessional contributions. If you have substantial funds outside of super it may be worthwhile transferring them into the concessionally taxed super environment. You can contribute up to $100,000 per year, or $300,000 within a three-year period. A work test applies if you are over 65.

• The 60s is often a time for home downsizing. This can free up some cash to help with retirement. The ‘downsizer contribution’ allows a couple to jointly contribute up to $600,000 to superannuation without it counting towards their non-concessional contributions caps.

Bye-bye tax, hello aged pension?

One reward, just for turning 60, is that any withdrawals from your super account will be tax-free. This applies to both lump sum withdrawals and income stream payments. Depending on the preservation status of your funds you may need to meet a condition of release to access your superannuation.

Based on your date of birth, somewhere between age 65 and 67 you’ll reach age pension age. The age pension is subject to both an assets test and an income test and some advanced planning can boost your eligibility for the pension. For example, the family home is exempt from the assets test. Releasing cash by downsizing may reduce your eligibility for the age pension.

Get it right

This important decade is when you will make the key decisions that will determine your quality of life in retirement. Those decisions are both numerous and complex.

Quality, knowledgeable advice is critical, and wherever you are on your path to retirement, now is always the best time to talk to your licensed financial adviser.

Call Leenane Templeton and book in to see one of our adviser to discuss your current status and future outlook.  Call (02) 4926 2300 or contact us. 

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The Royal Commission

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that concluded in early 2019 discovered a number of lax lending practices by some of Australia’s biggest lenders. Of particular concern was that some banks failed to verify the living expenses of home loan applicants. In many cases this lead to people receiving loans that they were unable to repay. The Royal Commission also revealed that one of the bank regulators, ASIC, did little to punish misconduct, so there was little incentive for banks to comply with their legal obligations.

In response to the Royal Commission ASIC promised greater scrutiny of lending practices and lenders began to ask for a lot more information when assessing home loan applications. They now require detailed proof of both income and expenditure at a level that many people may find intrusive.

Bigger deposits

The decline in home prices in Australia’s major cities mean that buyers don’t need to borrow as much for a given property, which should make it easier to get a loan. However, falling prices create a greater risk for the banks, and one way to reduce this risk is to require a higher deposit, extending the time it takes to save that deposit.

Stringent stress testing

Even before the Royal Commission the prudential bank regulator, APRA, introduced a requirement that banks check on their borrowers’ ability to service their loans if there is a significant increase in interest rates. While it might be possible to borrow at an interest rate of less than 4% per annum (pa), the banks need to check that the loan is still affordable at an interest rate of more than 7% pa, thus reducing the amount that can be borrowed.

Being prepared

The main response to this more difficult lending environment is simple, but that doesn’t make it pleasant. Unless you are able to increase your income, you’ll need to save more. Inevitably, that means spending less:

• Apps such as TrackMySPEND from MoneySmart can help you track your spending and make it easier to work to a budget.
• Keep detailed records of saving and spending. You will be asked for them come loan application time.
• Start early. You are more likely to be successful in your home loan quest if you can show a consistent history of saving and responsible spending spanning years rather than months.
• Shop around. By all means start with your regular bank, but also check out what the non-bank lenders and mortgage brokers can offer.

Need to speak with a financial advisor? Call the Leenane Templeton Wealth Management team to chat about your current financial situation and needs. Contact Us Today.

The post Why it just got harder to get a home loan appeared first on Newcastle Financial Planners & Financial Advisors.

Why do it?

A prime reason to rentvest is to get a foot in the door of the housing market. While 67% of Australian homes are owner-occupied, that figure is well under 50% for under-35s.

It has become popular for young adults to stay in the family home, contributing a bit of board to Mum and Dad while paying off an investment property with the help of a tenant. It can provide for a quicker entry into property investment or home ownership than would otherwise be possible.

Increasingly, ‘rentvestors’ are renting homes in attractive suburbs in which they can’t afford to buy, while investing in a less attractive, but potentially higher growth location. Driving this trend is the difference in rental yields. As a percentage of property values, rents tend to be lower in desirable areas, down as low as 2%, than the yields of over 6% available in more affordable suburbs.

In the reverse situation, some people opt to rent cheaply while buying a higher-value property, often with the expectation the investment property will enjoy a higher rate of capital growth.

And then there are those who want to or need to regularly move house but still seek the comfort that owning a property can provide.

Making it work

Attractive as the lifestyle benefits may be, rentvesting also needs to work financially. At the minimum you need to be able to pay your rent and cover any net expenses on your investment property.

Over the long term you also want to end up in a better financial position through rentvesting than would otherwise be the case, so it’s important to understand the property market and form an opinion on where prices are headed.

There are also a number of tax issues, both positive and negative, to bear in mind:

• You can claim a tax deduction against your earned income if the outgoings on your investment property (interest payments, council rates, insurance, agent fees, etc.) exceed the rental income, i.e. if the property is negatively geared.
• Rental income in excess of expenses is taxable at your marginal tax rate.
• Rent on the property you live in needs to be paid from after-tax income.
• Any profit on the sale of a rental property is subject to capital gains tax, whereas the profit on a principle residence is tax-free.

Is it right for you?

Like the idea of taking in the sea views from your rented home while a tenant is paying off the mortgage on your investment gem in a suburb set to boom? It’s definitely worth exploring. Just make sure you understand the concept from all angles. Your financial adviser may not provide advice on direct property investment, but he or she can act as a sounding board to help you ensure you have everything covered.

For more information, contact one of our advisors at Leenane Templeton on (02) 4926 2300 or email success@leenanetemplton.com.au.

Source: Australian Tax Office website www.ato.gov.au Residential rental properties.

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This isn’t necessarily because your demographic is particularly gullible. Rather, it’s because you’re more likely to control higher levels of wealth, perhaps as the trustee of a self-managed super fund (SMSF); you’re accustomed to making financial decisions; and you’re actively looking for attractive investment opportunities. What scammer wouldn’t want to target you?

Scams take many forms but when it comes to superannuation, two stand out:

1. fraudulent investment schemes, and
2. schemes offering early access to superannuation.

Either way, the result can be a major financial loss and dreams destroyed.

Golden opportunity

One clear warning of a scam is an unsolicited approach. Someone contacts you, usually by phone or email, offering an investment that is ‘both safe and delivering high returns’. This person will often know a lot about you, reciting accurate personal details they claim you provided in a questionnaire you completed earlier. Their story is supported by an apparently authentic website and, enticed by the attractive returns and smooth sales talk, you make an initial investment. At the beginning you receive statements showing your investment is growing steadily prompting you to add further funds. Then things go silent. Their phone number is disconnected, emails bounce and the website disappears, along with any hope of recovering your funds. Your stomach lurches. A cold sweat saturates you. You’ve been scammed.

Wonderful as modern technology is, it makes it easier for fraudsters to appear legitimate and transfer money in an instant. They close down one operation and set up another with ease. It doesn’t help that we give away much of our personal information, and what isn’t available for free can often be purchased by criminals.

Early access

The other major scam that lures many who need money quickly is the promise of early access to superannuation. This is how it works.

Bob’s superannuation is just sitting there, the solution to his financial problems if only he could access it.

He searches the internet for options and an advertisement promising early access to super pops up. This puts Bob in touch with a ‘specialist’ who helps him set up a SMSF, telling him that as the fund trustee he will be able to get hold of his super money. Bob signs the paperwork to set up the fund and rollover his super, but the money doesn’t turn up where it should. Eventually Bob discovers that his retirement savings were transferred to a bank account controlled by the scammer then moved overseas.

Not only has he lost the lot, Bob now faces a big tax bill for accessing his super prematurely. The scammers didn’t tell him that early access to super is only available:

• in cases of incapacity,
• to pay for medical treatment if seriously ill,
• if in severe financial hardship and can’t meet immediate living expenses, or
• if terminally ill.

Protection is the best cure

A few simple precautions can help protect your super (and other savings) from scammers.

• Hang up on unsolicited phone calls and delete suspicious emails.
• Take care when sharing personal information.
• Visit scamwatch.gov.au for updates on scams that are doing the rounds.
• If you suspect a scam report it to Scamwatch, even if you haven’t lost any money.
• Seek advice from a licensed adviser. Legitimate advisers and investment managers appear on ASIC’s list of Australian Financial Service Licence holders.
• And beware of dating and romance schemes. They are more common than fraudulent investment schemes, result in bigger financial losses, and are targeted at the same demographic!

For more information, contact Leenane Templeton on (02) 4926 2300 or email success@leenanetempleton.com.au.

Source: ASIC’s website www.moneysmart.gov.au – Financial advisers register

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There are many reasons you might purchase a home later in life: perhaps you’re starting fresh post-divorce, or you own a home and have decided to buy a second property to help out your kidults.

Regardless, it comes down to the same thing: knowing what you’re getting into and being ready.

Buying later presents opportunities that younger house-hunters overlook as proximity to schools and playgrounds isn’t so important.

On the flipside, if later-life home-ownership figures in your future, you should be working with your financial adviser now – and here’s why.

Time

Our population is living and working longer. We can save more towards a home with longer to pay it off. But really, do you want to be stuck with mortgage repayments chewing through your income – after retirement?

What if you purchase just before retirement? Servicing a loan is relatively easy while gainfully employed, particularly with record low interest rates. Bad news is they won’t stay low forever. Rising interest combined with reducing income can quickly turn the dream into a financial nightmare.

Job security

According to the Australian Institute of Health and Welfare (AIHW), in the period 1984 – 2014, labour force participation of Australians aged 55 – 64 grew from 41% to 64%. Good news. The Australian Bureau of Statistics (ABS) for the period 2002 – 2010, reports “declining levels of full-time employment” among the same age group indicating greater numbers of older Australians working fewer hours.

Not so good. With fewer full-time job opportunities for those aged over 55, if you’re still considering a pre-retirement mortgage, be aware of:

Compromises

If your retirement goals include travel, hobbies or even a weekly round of golf, servicing a mortgage may overburden your budget, forcing you to cut back your spending and lifestyle.

Regardless of home ownership, the Australian Centre for Financial Studies (ACFI) reports that 20% of retirees’ average household expenditure exceeded income, leaving no alternative but to draw on savings or liquidate assets just to live.

Now, throw a mortgage into the mix …

Ongoing maintenance

Be realistic about your budget and your shopping list. Consider what mod-cons you genuinely need. And size does count! If, down the track, you can’t physically maintain your home, could you afford gardeners, cleaners, etc, while repaying a mortgage?

Superannuation

Ah, that warm glow lighting our path to retirement. You could use your super to buy a house but what will you live on? The age pension? Will that fund your desired lifestyle?

To quote the ABS, “… key factors will be people’s plans as they get older, including when and how they intend to retire and what factors will influence their decisions.”

We don’t always agree with government reports, but in this it’s spot-on.

Our longer life expectancy means retirement planning is more important than ever. Talking with your financial adviser as early as possible will help you set up a strategy for living – to retirement and beyond!

For more information about purchasing a property or retirement strategy, please call Leenane Templeton on (02) 4926 2300 or email success@leenanetempleton.com.au

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Concentration risk is the increase in investment risk that comes about from not sufficiently diversifying your portfolio. In other words, too much money is concentrated in too few assets, sectors or geographical markets.

This can happen:

• Intentionally, because you have a strong belief that a particular share or sector, such as resources, banks or property, is likely to outperform in the future.
• Unintentionally, through asset performance. One or two shares deliver spectacular gains, making the entire portfolio more sensitive to moves in just a couple of assets. Or maybe shares as a whole enjoy a period of strong growth. Even though you hold a large number of different shares, the increased exposure to one asset class increases the risk to your portfolio.
• Accidentally, through poor asset selection. Nine out of the ten top companies that make up the MSCI World Index also appear on the top ten list of the main US index, the S&P 500. Investing in two funds, one that tracks the world market and one that tracks the US market won’t deliver the level of diversification you might expect.

Managing your risk

The solution to concentration risk is our old friend, diversification.

• Appreciate the importance of asset allocation, the art of spreading your money across the main asset classes of shares, property, fixed interest and cash. Ensure your asset allocation matches your tolerance to investment risk.
• Diversify within each asset class. Holding the big four banks is not a diversified share portfolio. If property is your thing, buying four one-bedroom apartments in the same building, or even in the same area, creates a huge concentration risk.
• Rebalance your portfolio to keep it broadly in line with your ideal asset allocation. This may create a tax liability, but often it’s better to pay some tax than to carry too high a level of concentration risk.
• Understand each investment and its role in your portfolio. Does share fund A hold similar shares as share fund B? Do they both have the same strategy?
• Get a professional opinion. Even if you are confident in making your own investment decisions it’s wise to run them by a licensed adviser.

It’s surprisingly common for investors to develop an emotional attachment to particular shares or properties they own. Concentration risk can also increase over time due to lack of attention. Your financial planner will assess your portfolio for hidden concentration risk and help you achieve a better balance of investments.

For more information about managing your investments, contact our office on (02) 4926 2300 or email success@leenanetempleton.com.au

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The 10 percent rule is history! This rule prevented employees making additional tax deductible contributions into superannuation, even though their additional contributions were within the concessional (tax deductible) contributions cap.

Outline of new measures

From 1 July 2017, you may make personal deductible personal contributions into superannuation, provided that you do not exceed your concessional contribution cap. This means that any unused concessional contribution cap amounts can fund insurance arrangements in a tax effective way.

For example, consider the situation where your employer makes a $15,000 contribution into your super during the income year ended 30 June 2018. You now have the capacity to make an additional deductible personal contribution of $10,000 in the 2018 income year. If your insurance premium is $5,000 per annum, you can make a tax deductible personal contribution of $5,000 to a superannuation fund, and have the superannuation fund pay the requisite premium.

How does this benefit you?

(i) Substantial out of pocket cost reduction

Funding insurance through superannuation in this way can substantially reduce the cost of insurance.  Unfortunately, the cost of insurance outside superannuation is generally not deductible for tax purposes. If we structure an insurance arrangement in super funded by deductible personal contributions, we can achieve a substantially different out of pocket cost outcome for you. For example, if you earn $90,000 per annum in 2017/2018, you will have a marginal tax rate of 39 percent. In order to fund an annual insurance premium of $5,000, you must earn $8,197 before tax. Using the insurance in superannuation route, you can reduce the out of pocket cost of this insurance to $5,000 per annum. The out of pocket cost reduction is based on your marginal tax rates. The higher the marginal tax rate, the greater the reduction.

(ii) No erosion of retirement savings

A major criticism is that insurance in superannuation erodes retirement savings. This is certainly true when we are using superannuation balances to fund life insurance costs. However, in this instance there is no erosion of retirement savings. The $15,000 employer contribution made on your behalf is not eroded by this arrangement.

(iii) No contributions tax

Everyone gets confused over the imposition of the 15 per cent contributions tax. The good news is that the above arrangement does not carry a 15 per cent impost.

Your personal concessional contribution is included in the assessable income of the recipient superannuation fund, but there is an offsetting tax deduction within the superannuation fund for the premium paid on life cover. This means that the contributions tax cost is reduced to zero via this tax deduction. Your insurance arrangements in super therefore do not carry any costs in addition to the premium paid.

One word of warning

Beware the notice formalities

Personal contributions into superannuation are presumed to be non-deductible (“non-concessional”) contributions, unless you provide the superannuation fund trustee with a notice of intention to claim a tax deduction. If a notice is not provided, and other associated formalities are not completed within the prescribed time periods, no deduction may be claimed for the contribution in question. This means that you need to observe these provisions meticulously and diligently to ensure that you do not lose this valued tax deduction.

Way forward

The insurance in superannuation landscape has changed dramatically with effect from 1 July 2017.  Speak to your financial planner to ensure your life insurance arrangements give you the best possible outcomes.

For more information please speak with our financial advisors at Leenane Templeton Wealth Management.   Call (02) 4926 2300

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For taxation purposes, there are three major types of expenditure property investors should be aware of, all of which are subject to different taxation treatments.

• Expenses that cannot be claimed (e.g. utilities charges, and acquisition and disposal costs).
• Expenses for which immediate deductions can be claimed (e.g. rates, insurance, legal expenses and repairs).
• Expenses for which deduction claims can be made over a number of income years (e.g. borrowing expenses such as stamp duty, title search fees and capital works).

When considering the deductibility of renovations, such as replacing a bathroom, the effective life of the existing structure must also be factored in. Houses are generally depreciated over a period of 40 years (at 2.5% per year), but the residual value of the existing structure is also taken into account.

Example

Tony owns a rental property built 20 years ago, and needs to replace the now obsolete bathroom at a cost of $20,000. The original value of the bathroom was assumed to be $8,000, with the result being depreciation of $4,000 (being 2.5% times 20 years times $8,000), and a residual value of $4,000. As a result, Tony will be able to claim a tax deduction for the $4,000 residual value, plus 2.5% of the renovation cost ($375), for a total deduction of $4,375 this income year.

Timely and quality maintenance of investment properties can provide significant benefits through the improvement of rental yields. However, for taxation purposes, the treatment of these expenses can vary, so it is worth discussing with your accountant or adviser before you commit to expenses.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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During market crashes or downturns we often hear of share markets ‘losing’ billions of dollars. But what happens to all that money and where does it go? In fact, the answer is that it is purely a book figure – a ‘paper loss’. There is no magical drain other than the metaphorical one to explain this economic concept.

To put it ‘simply’ – imagine a real estate agent estimated the value of your home as $450,000. Next week a second agent estimates it would sell for $400,000. Have you lost $50,000? No, even though no money has changed hands, you may feel poorer. This is the difference between value (what someone may be prepared to pay) and the price at which a sale actually happened.

It’s the same with the share market. When there are more buyers than sellers, the price of a share increases and holders of that share feel richer. Conversely, when there are more sellers than buyers, share prices fall. The holder of devalued shares has not actually lost any money – unless they sell the shares and realise the loss.

Share speculators get burnt by rapid changes in value because they want to realise short-term profits. Investors hold on to the shares in quality companies through the price fluctuations because they believe in the future of the business and the flow of future dividends. We hope that better explains where the money goes!

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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When you are building up your superannuation, you can salary sacrifice and pay no more than 15% tax on your income. The earnings on your growing super are taxed at not more than 15%, rather than up to 49%, and capital gains are taxed at 10% rather than up to 23.5%.

Let’s imagine you decided to invest $10,000 a year for the next ten years. The table shows the comparison between salary sacrificing into super and investing it personally at different tax rates.

If you are on the top tax rate, you will have 89% more saved after ten years. And it gets better over time – after 20 years you would have 122% more! There will be no limits on how much you can have in superannuation and no penalty tax rates.

Once you retire after age 60 you can draw on your super either as a pension or by taking lump sums and it will be tax-free. If you leave it to accumulate, the fund will pay tax as described above. If you convert your super to a pension all income and capital gains are tax-free. You have the freedom in how you manage your retirement savings.

Can it really be this good?

There will be times when superannuation may not be the best solution. For instance, your money is locked away until retirement and there are limits on borrowing to invest.

Superannuation rules limit how much can be contributed tax-effectively to super:

After-tax (undeducted) contributions

• Limited to $180,000 (indexed) per person per year.

Pre-tax contributions

• Limited to $30,000 per year for those aged under 49; and $35,000 per year for people 49 and over.

Over the long term, these rules may actually make super simpler, but in the meantime, it is a good idea to get assistance in stepping through the current maze of rules.

Note: Tax rates include 2% Medicare Levy and 2% Temporary Budget Repair Levy for taxable incomes over $180,000 p.a.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

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