2016 November Newsletter
Saving for Retirement : The Big Picture
Australians are constantly being told they are not saving enough for their retirement. The argument goes that unless you have enough saved in superannuation you will be forced to rely on the Age Pension. But this is not the whole story.
Super is undoubtedly the most tax-effective vehicle for retirement savings, despite constant government tinkering and rule changes. But for a variety of reasons, most households hold assets both inside and outside super.
Younger people may want to access their savings before retirement to put a deposit on a home, pay for their children’s education or travel overseas.
Investors who are nearer retirement may be hedging their bets by keeping a portion of their retirement savings outside super given ongoing uncertainty surrounding the super rules. By holding assets in different investment structures, such as family trusts or insurance bonds, it reduces the risk of regulatory changes to any one structure.
And from 1 July 2017, under the government’s proposed super reforms, there will be a $1.6 million limit on the amount an individual can transfer from the accumulation phase into the tax-free retirement phase of super. So individuals who anticipate saving more than $1.6 million to fund their retirement will be on the lookout for investments outside super.
The three pillars
Australia’s retirement income system is built on three pillars. There is an income safety net in the form of the Age Pension, compulsory super guarantee payments made by employers on behalf of their employees, and personal savings both inside and outside super. It’s this third pillar that is often overlooked in the national debate about retirement savings.
Australians have $2.1 trillion invested in super.i But they have as much again invested outside super - $2.2 trillion according to a recent Rice Warner report on investor preferences.ii And that’s not including the family home or family businesses.
So who’s investing and what are they investing in?
Saving outside super
According to the Rice Warner report, there are big differences in investment patterns outside super, depending on a person’s age and wealth.
Wealthier investors typically have a higher proportion of their non-super savings in direct shares, direct property and international investment assets. Middle-income investors tend to have more of their savings in term deposits.
It probably comes as no surprise that investment property is the largest asset class overall, at 42 per cent of total assets, followed closely by cash and term deposits. Property investment peaks between the ages of 35 and 55, when people start reducing risk ahead of retirement.
Shares represented just 10 per cent of personal investments outside super, although this increases to 19 per cent for the over 75s. It’s possible that older retirees who are living off the income from their investments prefer the higher liquidity and dividend yields on offer from shares compared with rental property.
The way Australians actually save for retirement is of more than passing interest, it has implications for future government policy. In a recent paper, the Grattan Institute said that savings outside super should be taken into account in policy decisions concerning retirement income.iii Controversially, the authors argued the Super Guarantee should be frozen at 9.5 per cent, rather than progressively lifted to 12 per cent as planned. At present, both sides of politics support the move to 12 per cent.
The reliance of Australian households on investment property held outside super also highlights the sensitivity of the recent debate about winding back negative gearing and capital gains tax concessions. This would be a major blow for younger investors trying to build wealth to provide income in retirement.
The debate about the adequacy and fairness of super is unlikely to go away any time soon. But it’s important to remember that while super is still the most tax-effective retirement savings vehicle, it’s only part of a holistic approach to retirement income. If you would like to discuss your retirement savings strategy, don’t hesitate to give us a call.
i As at 30 June 2016, ASFA, https://www.superannuation.asn.au/resources/superannuation-statistics
Aged Care Changes and the Family Home
Decisions around aged care are always difficult and emotional. From the start of next year they are likely to get even more complex, with both the Age Pension and aged care sectors set for another shake-up.
Currently, many people entering aged care choose to keep their former home and rent it out to help with their accommodation payments. This strategy can be attractive, as your former home and any rental income are exempt from assessment for the Age Pension. But from 1 January 2017 this will all change.
Changes to aged care fees
In recent years, the government has begun tightening the rules around the calculation of means-tested fees for residential aged care.
From 1 July 2014, both your assets and income were considered when calculating your aged care fee. However, if you retained your former home and chose to rent it out, the rental income was not counted towards your assessed income if you paid for some of your aged care costs using periodic payments.
On 1 January 2016 this rule changed, so when you entered aged care any rental income you received from your former home was included in your assessed income. Paying for your aged care costs using a periodic payment no longer had an advantage compared to paying via a lump sum.
These changes have seen many new residents of aged care facilities facing higher fees, as the assessable income used to calculate their fee is higher than under the pre-2016 rules.
Although these changes have affected aged care fees for new residents, they had no impact on the treatment of a former home when working out eligibility for the Age Pension. However, that's now set to change.
Former home to be assessable for Age Pension
Currently, your former home is excluded from the Age Pension asset test for two years if you enter aged care. An indefinite exemption is available if your home is rented and you pay your accommodation costs with a periodic payment. In this situation, neither your former home nor the rental income are counted under the Age Pension asset or income tests.
This will change from 1 January 2017, when new amendments to legislation will harmonise the means-tested treatment of a former home for both aged care and the Age Pension.
What this means for new entrants into aged care facilities is that the net rental income from your former home (where you decide to pay your accommodation costs with a daily payment rather than a lump sum), will now be counted towards the Age Pension income test.
Buy or sell your home?
With the new laws the decision about whether to keep your former home and rent it out will become more complicated.
Under the old rules there were benefits in keeping your home, enjoying a boost to your income from any rental payments and making periodic payments. Now the decision won’t be as straightforward.
Retaining your former home may still be worthwhile, but new aged care residents will need to carefully work out whether the benefit from their rental income outweighs the potential loss of some of their Age Pension.
Tougher asset test rules
Just to complicate matters, the new rules are planned to come into force at the same time as separate changes affecting the assets test thresholds used to calculate pension entitlements. Although limits for the Age Pension asset test are increasing from 1 January 2017, the rate at which pensions are reduced once you exceed the threshold is also increasing. Some pensioners have their pension payments reduced or cancelled altogether.
Both changes are likely to have an adverse impact on the Age Pension entitlement of some people entering aged care who wish to retain their former home. So before you make any binding decisions be sure to carefully weigh up all your options.
Aged care is a very complex area, so it’s important to seek professional advice. If you would like to discuss your aged care funding options, please call our office.
Reference : Advant Plus
Finding the Best Cover
When purchasing life and disability insurance there are three different types of policies available for you to consider; group, retail, and direct. Each of these has both their advantages and disadvantages –which to the untrained eye – may not be immediately apparent.
A direct policy is one that you purchase from the insurer without the assistance of a financial adviser. These are the types of policies you often see advertised on television or receive in the mail. Direct policies are generally more basic than retail policies. The amount of cover that can be purchased is lower and policy documentation is shorter. Often these policies can be attained with less onerous underwriting and no medical requirements. As there is very little underwriting involved, the insurer doesn’t have the ability to assess and sort risk. This means premiums can often be higher than a policy distributed via a financial adviser.Be wary of the fine print. Direct policies will often have more exclusions and limited terms and conditions. Terms and conditions look simpler, but this is achieved with tighter definitions and broader exclusions.
A retail policy is one which is distributed by a financial adviser and is otherwise known as an individual policy. Retail policies generally offer the most comprehensive cover available in the market along with the highest possible sums insured. Retail policies may be owned directly by the life insured (yourself), by another person, company, or trust. They can also be owned inside superannuation and include platform super funds, self-managed super funds (SMSFs), or through a separate super fund altogether.
Group Retail policies require a more extensive application process. This means it may take longer to put the policy in place and some medical tests may also be required. The work required upfront when setting these types of policies up will benefit you as a policy holder in two ways. Firstly, you’re paying premiums which reflect your personal risk, rather than that of an averaged-out risk of all policy holders. Secondly, once your cover is in force, you have greater certainty of claim. This is because retail policies will generally cover all sicknesses and injuries once your health history has been assessed and the insurer agrees to your cover. If the insurer is not willing to cover you for certain conditions, they will issue an exclusion upfront. The one point you need to keep in mind is making sure you disclose all relevant information to the insurer on your application. This is referred to as your duty of disclosure and is governed by the Insurance Contracts Act (ICA). The insurer can have the right to alter your policy, avoid any claim, and/or cancel your policy if you haven’t told them about an issue that would have affected their decision when you applied for cover. So it is important to make sure you answer the application honestly!
Group cover is, almost always, owned inside superannuation funds. Group insurance is owned by the trustee of the super fund and will usually provide default levels of automatic cover along with optional additional cover. The default cover may exclude pre-existing conditions or may come with no exclusions. For additional cover, you will need to apply and be underwritten. Cover is generally set on a unit basis. This means each unit of insurance is worth a certain amount of cover and the cost stays the same over time. The downside is that for every year you get older, your insurance cover reduces. As the cover is owned inside super, coverage is restricted to what can be offered under superannuation law. Any insurance owned inside super results in claim proceeds being paid into the super fund. The trustee of the fund then needs to decide if the claim can be released to you under one of a number of conditions of release.
Terms and conditions are set by the insurer in conjunction with the policy owner, the super trustee. The terms and conditions can change at any time. If you have cover under a group scheme, you will be notified of any changes. However, you don’t have a say in whether or not you accept the changes, as they will automatically apply to you as a member of the scheme. This is one of the fundamental differences for group policies. Another point worth noting is that the insurer of a group scheme can change. Super funds will generally tender for insurers every few years to try to get a better deal for their members. In the past decade, group insurance has been quite volatile. Profitability has been up and down. It is important to understand what you are paying for when it comes to protection. While a group policy was once a very cost-effective way to obtain cover, in many cases this price advantage you used to benefit from is no longer there.
Reference: Centrepoint Alliance |Prepare for Life
Please note this information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial advisor, whether the information is appropriate in light of your particular needs and circumstances.
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