DYING is bad for your health, and can also do some unpleasant things to your family’s wealth. While the impact of an unexpected death for young families is obvious, older Australians can also suffer financially on several fronts when their partner dies.
Knowing the rules, and how to work around them, is the key to leaving as much money as possible for loved ones.
More than a dozen major countries have death taxes, but not Australia. However, if you die without a dependant, such as a spouse, much of the money paid out from your superannuation can be slugged with a 17 percent tax. “Most people call it a pseudo-death tax – there’s no other way to describe it really,” said Hewison private wealth managing director Andrew Hewison.
“If you have all your wealth in super with a large taxable component paid out to a non-dependant,
15 percent tax plus the Medicare levy is going to be deducted.”
Mr Hewison said this made super a tricky estate planning tool. However, there are strategies available to some over-60s to withdraw their super then put it back as a nontaxable contribution.
Almost 80 percent of retirees receive a full or part age pension, and with the single rate set at about two-thirds of the couple’s rate, the death of a spouse delivers an instant household income cut.
“The age pension for a single person is $907.60 a fortnight – it’s not a lot of money,” Mr Hewison said.
Another big impact comes from lower means test thresholds for singles compared with couples.
Planning for Prosperity senior adviser Bob Budreika said dying was bad financially for pensioners’ partners.
“The biggest problem is when the spouse dies, the assets test limit goes down,” he said.
Strategies to solve the pension assets test squeeze are limited but may include gifting money to relatives, spending on something such as an overseas holiday, or upgrading your home – the
only asset that’s exempt from Centrelink testing. None seem palatable to many retirees.
Mr Budreika said it was common for one member of a couple to be more actively managing the money, and if they died first there was often trouble for the survivor. “It’s a pretty dangerous position to be in,” he said. “Even though one person may be more passive, at least have a broad overview and understanding.”
Mr Hewison said people of all ages should understand where their family income came from, ensure their wills and wider estate plans were up to date, and seek professional advice where needed.
RETIREES worried about tougher new age pension rules are trying to lower their Centrelink-assessable assets through buying funeral bonds and other strategies.
In a recent article published in news.com.au by Anthony Keane, several Financial experts including David Koch and Planning for Prosperity’s own Bob Budreika were interviewed on the impact of the impending Centre-link entitlements and in particular how these changes will impact pensioners
Jan 1 pension entitlement changes
In summary, from January an estimated 300,000 people will lose part or all of their age pension, while about 170,000 low-asset pensioners will receive a boost, as the government lowers the level of assets you can hold before pensions reduce.
Kochie’s video here provides a quick summary of the impact to pensioners, while the detailed article by Trish Power on SuperGuide provides more detail.
Planning for Prosperity senior financial adviser Bob Budreika believes many retirees are in for a nasty surprise in January when the pension changes hit.
“I think a big part of the population isn’t really aware,” he says. “Retirees who don’t have a financial planner don’t realise what they need to do.”
Don’t blindly reduce assets
However, Bob cautions people from blindly trying to lower their assets for the sake of preventing pension cuts, because the longer term cost of losing the assets may be greater.
“There’s an attitude with some people to do whatever they can to make sure they maximise Centrelink. Some of the decisions they make can be pretty silly,” he says.
“Look at two sides of the equation. Ask yourself “if I do tie up assets in a home renovation, funeral bond or gifting, what is it going to mean for my long-term financial security because that money is effectively gone.”
Centrelink changes to impact retirees
We usually discuss a range of financial issues in our monthly articles. This month we’ve decided to focus on the Centrelink changes as they will affect those retirees in your community or those that will be applying in the near future. Even if you aren’t receiving Centrelink you’ll appreciate the looming problem for many retirees.
Considering the significance of the changes to the Age Pension asset test from next January, we’re surprised that people are not taking action now to investigate solutions for what will be a major cash flow problem for many Centrelink recipients.
From 1 January 2017 the Age Pension asset test limit for a homeowner couple will be reduced from $1,175,000 down to $823,000. Currently a couple with $823,000 of assets outside their home receive a combined pension of $520.15 per fortnight or $13,523.90 per year. From 1 January 2017 this will be reduced to zero!
Single Aged Pensioners most affected
We believe that those most affected will be single Aged Pensioners, as their asset test upper limit will reduce from $788,250 to $547,000. This could mean losing $361.65 per fortnight or $9,402.90 per year in cash flow if their assets are valued at $547,000 on the 1st of January 2017.
The situation is even worse when a spouse dies. The remaining spouse becomes a single Aged Pensioner and the financial impact is even more severe. Assuming that person has the same assets as they did as a couple, they will be completely cut off if their assets are greater than the new maximum single threshold of $547,000 from January 1st.
Changes put pressure on retiree’s investment performance
The changes mean that many pensioners will be far more reliant on their investments to make up for the shortfall. These changes come at a time when interest rates are falling and there’s growing uncertainty with global financial markets. It could be a double whammy for many, especially single Aged Pensioners.
Pensioners will require advice around innovative and effective income solutions. The family home will become possibly their most important asset, especially in times of reduced cash flow and economic uncertainty. Many face reducing their living standard or fearing they live too long and run out of money.
Reverse Mortgage a possible solution?
One possible solution is a Reverse Mortgage, which is designed specifically for retirees where few other options are available. They can be designed to pay regular income, provide capital for those one off expenses, or simply as a facility to draw down on when funds are needed. Best of all, the loan can be set up to not affect Centrelink payments.
After a pleasant end-of-year break we are back into the swing of things. Nobody from our team went away anywhere exotic (…boo) but it was still nice to have a few weeks off.
All good things come to an end
As our existing clients will know by now, we have started 2015 by relocating to a new office in Fullarton.
For those who are wondering – the internal layout that we now occupy will make our working environment more cohesive and give us some much needed room.
We were sad to leave our home of the past 5 years on Kensington Road but unfortunately we had outgrown the space. Thanks to the team at Marinis Financial Group for making our time at number 67 enjoyable and memorable.
Adelaide Hills bushfires
Our condolences go out to those who lost property and livestock in the recent fires in the Adelaide Hills. We all know someone who was affected either directly or indirectly. A big thank you goes out to all the CFS volunteers who selflessly gave up their time during the extremely hot conditions over the Christmas / New Year break.
The rest of the community also deserves a pat on the back. At times like these it’s reassuring to see the good in people and the generosity displayed by the community at large.
Continuous improvement in 2015
As a young business we are always looking to improving how we do things. The vast majority of this work is unseen but we invest considerable time and money on education and consultation with other professionals to ensure we are leaders in our field. This is a gradual process but one that is worthwhile for us as staff – but more importantly, our clients. 2014 was our busiest to date.
We attended both the SPAA and FPA conferences, did multiple trips to the Eyre Peninsula, Yorke Peninsula and Port Pirie and added Jo to our team to give us full-time equivalent admin support. The latter has allowed Bob and I to focus more on seeing clients, rather than back office compliance, which is time consuming and does not add value.
We are already looking ahead in 2015 at some internal changes that will add further enhancements to how we operate. While this is not the forum to go into details, (A -you may not understand, and, B – probably don’t care!) rest assured we are always searching for tools and software that will improve our client engagement and ultimately the advice we give.
We wish everyone a prosperous 2015!
Planning for Prosperity was recently featured in financial planning industry website, Professional Planner. The article discusses the reasons for adopting our business model, internal processes and how this benefits our clients. It contains a bit of industry jargon but the context can be understood.
Last week we spent three days speaking to people at the Yorke Pensinsula Field Days in Paskeville.
This was a great opportunity for us to leave the city and see what new products and services are being offered to the rural community. Each time, the event seems to get bigger and better from a variety of exhibitors.
Our stand promoted our services in the areas of rural succession planning and alternative strategies for purchasing farm land, which opened the door to some interesting discussions with passers-by. It was also provided us with a good opportunity to say hi to some of our existing clients.
Like most forms of advertising, we tend to ignore or not hear the message if we are not in the market for the particular product or service at the time, but amazingly our ears ‘prick up’ when we are. It was interesting to see this happen with the text on our banner displays. We found that many younger farmers were attracted to the words ‘succession planning with peace of mind’, quite possibly because they were in a situation where this needed resolving.
Thankfully, we were blessed with great weather, which at times became a little too warm in the Grant Pavilion.
We hope to see you all again in two years’ time.
In my 20+ years experience in the financial services industry, it’s not uncommon to come across people who’ve not considered all aspects of investing apart from the primary goal of making money. Until recently, you could have almost invested in any area and made money. Even a drover’s dog did well. However, since the global financial crisis in 2008 the tide has turned and capital growth is much more difficult to achieve. I believe that going forward there will be a dramatic change in the attitude towards investing with far less emphasis on growth and more focus on the level of income that the investment produces.
When you think about it, income really is the most important principle of investing and yet it is rarely spoken about or understood by investors and the investment industry. For example, would you make the decision to purchase a rental property or farm land principally because of the capital growth potential? Remember, only the income that can pay the loan and costs. Growth is something that can be taken away whereas income, once it is paid, is yours to keep.
I recently read an article about stock-market returns over the last 100 years and surprisingly, 70% of the total return was derived from the dividend income. I’d suggest that most investors who buy assets like shares and rental properties do so mainly for capital growth. When you think about it, you can eat the income but can’t eat growth (unless you sell).
Bob Budreika Planning for Prosperity
In thinking about our article for this month, I decided to write about a topic that most people prefer to avoid… personal insurance. I started in the financial services industry in 1988 when the focus was on selling financial products like insurance, superannuation and investments. I’m sure that there are plenty of readers who can remember the local insurance agent who was always ready to sell another policy.
Times have changed and today the emphasis of a financial planner is on providing advice and solutions to people’s needs. This is a much more professional and meaningful way of helping people but even so, insurance is not something that is embraced.
I felt compelled to mention this as we have just completed an insurance claim for a business owner who has been diagnosed with cancer. He is fortunate on two counts: his prognosis is good and he will receive $385,000 tax free as well as $13,500 per month of income cover while he recuperates.
Several months ago I also arranged a trauma insurance claim for one of my family members. This was stark reminder of the importance of insurance.
It seems that fire, theft, and even health insurance are perceived as quite different and most times necessary. Few people would risk taking delivery of their new header or other plant without arranging cover. The reason is because the loss is real since there is an understanding of what the impact would be. The physical aspect of the loss of a machine, car, house or stock can be visualised and quantified. This is quite different to a life because the impact is not so easy to determine.
You’ll note that I emphasised the word impact and for good reason. Once you understand the real impact of the loss of a person’s life or their ability to work, then it’s clear what the consequences are. The impact might mean getting outside help to work on the farm or in a business, having to manage debt without the efforts of the key person (lenders still want to be paid), being forced to sell assets at discounted values to realise the money needed, being reliant on family and friends for financial support or finding a way to payout family members who aren’t involved in the business. The list is almost endless and they all affect people in different ways. One thing for sure, the impacts are real and can be incredibly costly both economically and emotionally.
With the skill of a professional financial adviser in helping to identify these impacts and then quantify the level and type of cover that’s most appropriate, the reason and need becomes just as obvious as general insurance. Even the best financial plans can easily be unravelled very quickly without a backup. A sound insurance programme should form the foundation of everyone who has plans and aspirations for themselves and their family.
Bob Budreika Planning for Prosperity
Most people believe interest rates are determined by the Reserve Bank as a result of monthly board meetings. The primary functions of the RBA are to issue currency and conduct monetary policy in order to achieve the nation’s economic objectives. What is not well known is that the Reserve Bank only controls short term rates (cash rates) and has little to no influence on longer term rates such as mortgages.
How are longer term interest rates determined?
In general, long term interest rates are set by the global financial markets and are determined like any other commercial transaction. Lenders will take into consideration the credit risk (including such things as the stability of the Government, national debt level, credit worthiness) and the term of the loan. Since most countries borrow at one time or another, we in Australia must compete to attract funds. Not only does the Commonwealth Government borrow from global sources but also our banks and large institutions. These borrowings are usually issued as bonds (which have a set rate and term to maturity) and are a tradeable asset like property or shares. What is not well known is that the Bond market is far bigger in size than the total value of all share markets in the world. Perhaps this is because the markets are not open to the general public.
Where are we in the interest rate cycle?
The highest official interest rate in recent times was 17.5% in January 1990 and today it is 2.75%. For most of the last 23 years, the general global trend has been down, and compared to the average rate of 5.44%, we are at the low end of the cycle. Most developed countries have experienced much the same trend with Australia’s current rate being one of the highest. This is an interesting phenomenon because interest rates are falling at the time of extraordinary national and personal debt levels.
Why are rates falling in an environment where there is so much global debt?
You would be correct in thinking that if someone had a large debt that they’d find it difficult to increase their borrowings – let alone at an attractive rate. This is exactly what is happening with many nations including USA, Japan, UK and most of the EU countries, who have massive public debt levels. To avoid borrowing from financial markets, theses governments simply issue bonds to raise capital and then buy them back from themselves. This has the effect of forcing interest rates down. To do this they must increase the supply of money which is commonly referred to as ‘printing money.’ This is not a good long term strategy as it distorts a country’s economy and ultimately leads to inflation. This manipulation of rates also causes mistrust in the bond market. For a while this works as it is the easiest way to keep citizens happy but eventually there comes a payback time. Just like someone who lives beyond their means, eventually creating and borrowing money doesn’t work. One of the signs that there are cracks in an economy is when interest rates rise while the economy is stagnant or recessed.
The Labor Government recently announced the details of their federal budget that will come into effect should they be re-elected. While we encourage you to have a look at the whole summary, we thought it would be worthwhile to highlight a couple of the changes to superannuation and how they may affect you, particularly if you are a farmer or small business owner.
Increase of the concessional contribution caps for certain members
The concessional contribution cap has been proposed to be raised from $25,000 to $35,000 for people over 60 from 1 July 2013 and people over 50 from 1 July 2014.
This is a welcomed change, particularly for baby boomer farmers that have the ability to make large deductible contributions into their super each year.
For everyone else, the concessional cap remains at $25,000 although it is expected to increase over time through indexation.
The Coalition has indicated support for this measure which means there is the possibility it could be legislated before the election.
Changes to the tax exemption for earnings on superannuation assets supporting income streams
Currently, all earnings (such as dividends, interest and capital gains) on assets supporting income streams (such as superannuation pensions) are tax-free.
This is in contrast to earnings in the accumulation phase of superannuation which are taxed at 15 per cent.
The Government proposes from 1 July 2014, earnings on assets supporting income streams will be tax-free up to $100,000 per year. Earnings above $100,000 per year will be taxed at a rate of 15 per cent.
Earnings will include interest, dividend and rental income but special rules will apply to capital gains depending on when the asset was acquired. Special arrangements will apply for capital gains on assets purchased before 1 July 2014.
How could this affect me?
For the majority of people who are receiving a pension from their super, this change won’t affect them year to year, as the earnings within the fund need to exceed $100,000. However, those who have lumpy assets in their super, such as property or farm land need to be aware that this could trigger capital gains tax upon the sale of the asset. We are still waiting for the Government to clarify many of the details of this change.
This should not necessarily be a cause for panic as superannuation is still the most tax effective environment to hold an investment. There is no substitute for quality advice in this area
Planning for Prosperity
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This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances. You should read the PDS and consider whether the product/s is right for you. Past performance is not a reliable indicator of future performance.
Strategic Advice Solutions Pty Ltd (ABN 86 619 221 662) t/as Planning for Prosperity is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL and Australian Credit Licence No. 236523