All posts by Robert Wright

7 age pension traps to avoid

By Robert Wright /June 03,2022/

After a lifetime of hard work, it’s important you maximise your entitlements in retirement. So you need to structure your finances carefully to make sure you don’t lose your age pension. After all, you’ve earned it. Here are some common traps to be aware of.

Helping loved ones out

It’s only natural to want to help younger family members get a leg up financially. But if you’re nearing or already in retirement, you need to be careful how you go about this, as you could inadvertently affect your age pension entitlements.

If you’re thinking of giving money, the rules are you can gift $10,000 per financial year, and no more than $30,000 over a five-year period.

Any excess amount is counted as an asset, and deemed to earn income, for a full five-year period from the date of the gift.

Buying property

With house prices so high and home ownership getting out of reach for younger Australians, it’s no surprise that many parents want to help their kids get a foot on the property ladder. But with property you need to be extra careful in how you set things up.

Let’s look at an example. A couple aged 55 want to help their daughter buy her first home. Without taking advice they buy a 50% share of a house worth $500,000 so she can obtain a loan.

Fast forward 12 years and the house is now worth $1,000,000, of which their half share is $500,000. Their other financial assets are worth $700,000 so they believed they would be eligible for a part age pension. To their dismay they discover their equity in their daughter’s home has taken them over the assets test cut-off point, meaning they won’t be getting any age pension from the Government.

So what can they do? If they transfer their ownership share to their daughter the capital gains would be as high as $125,000 after the 50 per cent tax discount, on which capital gains tax could be as much as $50,000. And they would have to wait five years to qualify for the pension because Centrelink would treat the $500,000 as a deprived asset. The total value of the capital gains tax and the lost pension could be as much as $150,000!

If they’d been aware of the trap, or taken advice, they could have gone guarantor for their daughter, possibly putting up their own home as part security, and this would have had no effect on their future pension eligibility. Alternately, they could have transferred their ownership to their daughter at least 5 years before they became eligible for the age pension. They still would have had a capital gains tax liability, but at least the 5-year period for counting the gift would have elapsed by the time they applied for the age pension.

Borrowing against the family home to invest

If you’re already, or about to be, on the age pension, purchasing an investment property with the loan secured against your family home (primary residence) can be a trap.

Normally, the debt against an investment asset—for example, an investment property—is deducted from the asset value when working out whether you’re eligible for an age pension. But if the mortgage is secured against another asset like the family home, then the gross amount is counted. So this may affect your age pension as the full value of the investment is counted as an asset.

A way to avoid this could be to secure the asset against the investment instead.

Downsizing the family home

If you’re thinking of selling your family home and buying a smaller place, there’s an added incentive as the Government is allowing downsizer contributions into super for eligible Australians of up to $300,000.

But there could be a Centrelink sting in the tail, as you’re converting an exempt asset (the family home) into a counted asset (money left over) that could affect your eligibility for the age pension.

Let’s look at an example. Ray (70) and Gina (67) receive close to the full age pension, based on their assets and income.

They want to downsize their family home, which they could sell for $2.5 million. They’d prefer to buy an apartment closer to their kids for around $1.5 million.

If they go ahead, they’d have surplus assets of up to $1 million, which will either considerably reduce their age pension, or cut it off altogether.

By consulting their financial adviser, Ray and Gina could decide either to proceed as planned, or perhaps buy a more expensive replacement property and have less surplus capital, with less of an impact on their age pension.

And their adviser could help to invest the surplus capital to generate an income—for example, by making downsizer contributions into super and starting an account-based pension.

There’s plenty to think about if you’re looking at downsizing, so you might want to get some advice.

Leaving a bequest in your will

Many retired couples leave all their assets to each other in their wills if they pass away.

While this is perfectly understandable, it could cause grief to the surviving partner if their age pension is reduced or lost altogether. The asset cut-off points for singles and couples are quite different—$595,750 for a single person and $901,500 for a couple.

Let’s look at an example. Jack and Jenny have assessable assets of $740,000 and are getting around $11,800 a year in age pension payments. Jack dies suddenly and leaves all his assets to Jenny, taking her over the assets test limit for a single person and she loses the pension entirely.

Unfortunately, Jenny can’t get around this by passing the assets on to their children. If you’re a named as a beneficiary in someone’s will, and you gift it away to, say, your children, it’s still counted as part of your assets and subject to the income test for the next five years.

If Jack and Jenny had consulted a financial adviser, one solution could have been to leave specific assets to their children and bypass the surviving spouse altogether.

Starting a super income stream early

If you start a super income stream once you reach preservation age and before you reach age pension age—for example, as part of a transition to retirement strategy—it could affect your entitlements to Centrelink allowances like Jobseeker. So it’s important to get financial advice.

Advice can make all the difference in how you set up your super and pension arrangements in general. If you have a younger partner, one option could be moving assets into super as a non-concessional contribution for the spouse who is underage pension age.

The amount placed in super for the younger spouse is preserved until they meet a condition of release. This may work well if their condition of release is only a few years away but could be a concern if there’s more of an age gap.

Changing account-based pensions

If you’ve been receiving an account-based pension (ABP) for a while, you should be aware of a change made on 1 January 2015 which impacted how much income from the ABP is counted towards the age pension income test.

If you were in an existing ABP you were exempt from the new rules—but only for as long as you continued with the same provider.

So if you change providers you could inadvertently reduce your age pension entitlements.

A financial adviser can help work out the best option for your particular circumstances—the benefits of a new ABP or the higher age pension.

Setting up a family trust

If there’s a family trust or private company involved in your affairs, the rules are even more complex, so you’ll need expert advice before applying for the age pension.

Source: AMP

Roughly 500,000 Australians plan to retire in the next 5 years.

By Robert Wright /June 03,2022/

According to the ABS, some half a million people intend to retire within 5 years.

While many Australians will remain working until they can access their superannuation savings and/or the Age Pension, some 32% of people choose to retire beforehand due to health reasons, retrenchment, or a lack of suitable employment opportunities.

No one can predict the future. Unforeseen circumstances can strike at any time, so it’s best start your retirement plans early while you are young, healthy and earning an income.

A well-structured retirement plan can guide you towards your dream retirement while giving you a sense of security and confidence about the years ahead.

An effective retirement plan will outline how you can make the most of your money and investments today, so that you can afford the retirement lifestyle you imagine in the future.

As retirement planning specialists, we can show you how to make your retirement goals a reality.  Even if you feel you have left it a little too late, it’s never too late to get started.

For further information about how we can tailor an effective retirement plan for you, don’t hesitate to contact us today.

All about Wills and Probate

By Robert Wright /May 25,2022/

Probate is the legal process that occurs when dealing with a loved one’s will after their death. It can be difficult to know what’s involved with the process and the questions to ask.

What is Probate?

Probate is the process that makes sure the instructions in a will can be followed. It involves proving and registering a will in the Supreme Court and, if successful, will result in a ‘grant of probate’.

What’s a grant of probate?

A grant of probate means the will is recognised as legally valid and enables the executor (the person dealing with the estate) to distribute assets to the beneficiaries named in the will. Most financial institutions require a grant of probate before they can release accounts and funds to anyone other than account holders.

What to do if a family member passes

When a family member passes away, if you’re the next of kin then you need to determine whether they made a will. If they haven’t, they are said to have died “intestate”.

In this situation, an application needs to be made to the court for “Letters of Administration” authorising a person to distribute the assets of the deceased family member’s estate, the law will set out how their estate can be distributed, if not, there’s no guarantee that your loved one’s wishes will be honoured.

What’s a will?

A will is a legal document that outlines what happens to a person’s possessions and assets when they die. However, a will isn’t legally binding on its own — there are steps that must be taken to make sure the will is valid, just as there are steps that family members can take if they want to contest the will.

At its most basic a will must be:

• in writing
• signed by the will maker
• witnessed by at least two adults (a beneficiary should not witness a will. If they do, they may lose their entitlements under that will)
• made by someone of testamentary capacity.

Ensuring a will is properly made and signed can be very complex and it is always a good idea to ensure a lawyer is involved.

What’s testamentary capacity?

Testamentary capacity means that someone’s in a fit state of mind to legally understand what they’re doing. If these things are all done, then the will can be used to help divide up the estate.

Life Insurance and probate

Provided you have a named beneficiary with your policy, your life insurance should be easily accessed by your loved ones when the time comes. Life Insurance should be paid directly to the beneficiary and avoid having to be distributed through the deceased’s will.

Having your life insurance beneficiaries up to date can help ensure your loved ones are taken care of financially if something were to happen to you.

What happens once probate or the court process are completed?

Once the court process, or probate, is completed and settled, there is then the process of the administration of an estate by the executor or administrator, after the grant of probate or letters of administration have been provided.

This process of administration is something that needs to happen when a family member passes away. This process starts when probate or letters of administration are granted, and finishes when the assets listed in the will are formally handed over to the executors of the estate and distributed.

An estate can be made up of many things, including:

• Real estate
• Shares
• Loans
• Income or capital allocated by the will maker
• Cash investments
• Personal property

But doesn’t usually include these items:

• Jointly owned assets that are held as joint tenants – e.g. family home (If the owners are tenants in common, the deceased person’s portion can become part of the estate)
• Super pensions or annuities (except when directed by the member to be paid to the estate)
• Life Insurance where the benefit is paid directly to one or more nominated beneficiaries

Here’s what you need to get started with probate:

• The current and original will
• Original death certificate from the relevant state registry
• The probate application
• Income or capital allocated by the will maker; and/or
• Lodgement fee

Probate runs through the court system in each state, and executors or administrators of the estate need to swear to the court that they’ll distribute the will as instructed. It is important to consider getting a lawyer who can help you with the probate process.

What happens if someone contests a will?

If a family member wants to contest a will because they feel that it isn’t fair or feel that something has been left out, they need to do it in the probate stage. If someone challenges the will then the court will hold off on granting probate until the contest is sorted.

As the law in this area is very complex and can be different depending on where you live, when dealing with a will and estate planning it is always recommended to talk to a lawyer to make sure that the whole process is managed correctly, and the deceased’s wishes are most likely to be fulfilled.

They can guide you through the process, ask questions you may not have considered, and recommend arrangements for a range of scenarios. They can help you prepare your own will, or manage the affairs of a family member.

It also ensures you are getting the right advice from a professional. Being prepared can really save you time and headaches down the line.

Source: TAL

New opportunities to grow your Super from 1 July 2022

By Robert Wright /May 25,2022/

Both older and younger Australians, as well as low-income earners, are set to benefit from some upcoming super opportunities.

From 1 July 2022, there will be some changes made to super to make it easier for people to grow their retirement savings. These changes will create opportunities for both older and younger Australians, as well as low-income earners, by removing some of the barriers that currently exist in the super system.

Here’s what’s changing:

• The $450 Super Guarantee (SG) threshold will be removed, meaning that employers will start paying super for low-income earners.
• The SG contribution rate will rise to 10.5% p.a. for all employees.
• People aged 65-74 will no longer have to meet the work test to make voluntary contributions to super.
• The ‘bring-forward’ rule age limit will increase to 75, so more people can make lump sum contributions to super.
• The minimum age for downsizer contributions will reduce from 65 to 60, giving more flexibility to people who are selling their home.
• First home buyers can now save up to $50,000, and any deemed earnings, to use as a home deposit through the First Home Buyer Saver Scheme.

Here are some more details about how each of these changes will work, and how you can take advantage of these opportunities to boost your retirement savings.

Employers will start paying super for low-income earners

SG contributions are the mandated contributions that your employer puts into your super on your behalf. For a lot of people, these are the only super contributions that go into their account.

Until now, employers haven’t had to make these contributions if an employee earns less than $450 in a calendar month. Because of this, if you work casually, or you work part-time across multiple jobs, you may not have received any contributions at all from your employment.

From 1 July 2022, the $450 threshold will be removed. Employers will have to make SG contributions regardless of how much the employee earns (unless they are under 18 and working less than 30 hours per week).

Of all the upcoming super changes, this one has the potential to make the most difference, because it means low-income earners will finally have super contributions going into their account without having to make voluntary contributions themselves. These regular contributions can go a long way towards building up retirement savings.

For example, someone who currently works three jobs, earning $400 per month for each job, will now have $1,512 contributed to their super in 2022-23, which will then accumulate further earnings. Over a 40-year period, this could add up to over $84,000 or even substantially more, depending on how their super is invested. 

SG contribution rate will rise to 10.5% for all employees

The SG contribution rate is currently 10% p.a. of your wages or salary. This rate will increase to 10.5% from 1 July 2022, and it’s scheduled to increase progressively to 12% by July 2025.

Each of these incremental changes is great news for people who are paid SG contributions by their employers, because it means your super balance will grow faster without you having to make any extra contributions.

People aged 65-74 will no longer have to meet the work test to make voluntary contributions to super

People aged 65-74 currently have to satisfy the work test (or qualify for an exemption) to be able to make voluntary contributions to super. This means proving you worked for a minimum of 40 hours, during a period of 30 consecutive days, in the financial year for which you want to make a contribution.

Contribution acceptance:

From 1 July 2022, you won’t have to meet the work test for the super fund to accept any type of contributions you make to your super, or any contributions your employer makes to your super, while you are under age 75.

From age 75 the only type of contribution that can be accepted into your super account are downsizer contributions or compulsory employer superannuation contributions.

Personal deductible contributions:

From 1 July 2022, if you are aged 67 – 74 at the time you make a personal super contribution, you only have to meet the work test, or work test exemption, if you wish to claim a tax deduction for those contributions.

A work test is not required to claim a tax deduction for personal contributions made while you are under age 67.

This change gives older Australians more flexibility to be able to contribute to super and boost your retirement savings, regardless of your employment status, in the years leading up to your 75th birthday.

‘Bring-forward’ rule age limit will increase to 75

The ‘bring-forward’ rule allows you to use up to three years’ worth of your future non-concessional (after-tax) super contribution caps over a shorter period – either all at once or as several larger contributions – without having to pay extra tax.

The non-concessional contributions cap is currently $110,000 per year. So, if you use the bring-forward rule, you may be able to contribute up to $330,000 in a single year as long as you don’t exceed the total cap over the three-year period. This strategy is mostly used by people nearing retirement, who want to contribute as much as possible to super before they stop working, or people who receive an inheritance or other type of windfall.

Currently, you need to be under age 67 at any time in a financial year to use the bring-forward rule. From 1 July 2022, the age limit will increase to 75. This is great news for people who want to put as much money as possible into their super before they retire, without being penalised for it.

Eligibility for the bring-forward rule will depend on your total super balance at the most recent 30 June, and the amount of your personal contributions over the past two financial years.

Minimum age for downsizer contributions will reduce from 65 to 60

The downsizer contribution is a strategy aimed at helping older Australians put all or part of the proceeds of the sale of one qualifying home into super to boost your retirement savings. You can only make this type of contribution, and the maximum amount you can contribute is $300,000. However, by combining it with the bring-forward rule, you could potentially contribute $630,000 to super (or $1.26 million as a couple) in a single year.

Currently, you can only make a downsizer contribution if you’re 65 or older at the time of the contribution. From 1 July 2022, the minimum age reduces to age 60. This will provide more flexibility to people in their early sixties who are planning to sell their family home and want to move some or all of the proceeds into super.

Although the work test has never applied to downsizer contributions, other eligibility rules apply and it’s important to submit a downsizer contribution form to your fund at the time you make this type of contribution.

First home buyers can now save up to $50,000 using the First Home Super Saver Scheme

People saving up for their first home can use the First Home Super Scheme (FHSS) to grow their deposit amount. It takes advantage of the favourable tax treatment of super contributions and earnings to help you save a deposit faster than if you save outside of super.

You can currently use this strategy to release up to $30,000 in eligible voluntary super contributions, along with any deemed earnings, for the purchase of your first home.

From 1 July 2022, the maximum amount of eligible contributions that may be released will increase to $50,000. However, the annual limit of voluntary contributions eligible for the scheme remains at $15,000 per financial year. This means it would take at least four years of maximum contributions to have the maximum $50,000 available for release.

Given the substantial rise in property prices we’ve seen all around Australia over the past year, this change will help first home buyers save a larger deposit using this strategy – albeit over a longer time period.

Source: Colonial First State