All posts by Robert Wright
How does your pension live on after you die?
By Robert Wright /February 18,2022/
Account-based pensions offer a flexible and tax-effective method of drawing a regular income stream from superannuation. They are an essential part of your overall retirement strategy and are usually used from retirement until death. But what happens to your tax-free account-based pension when you do die?
Superannuation does not automatically form part of your Will unless a Death Benefit Nomination is completed to that effect. In this article we examine the nomination of an individual beneficiary, where the nomination of a member’s estate and a reversionary beneficiary nomination is not in place.
What are your beneficiary’s options?
The short answer is it depends. To receive your account-based pension your nominated beneficiary may have two options:
- Commencing a death benefit pension; or
- Receiving a lump-sum payment.
Both options are subject to additional eligibility criteria. Let’s briefly explore both options with our focus being option 1, commencing a death benefit pension.
Option 1: Commencing a death benefit pension
Features of a death benefit pension
A death benefit pension can basically be considered as allowing your account-based pension to live on after you die, for the benefit of your eligible beneficiary. Features of this pension are much the same as those for an account-based pension. Arguably, the most attractive feature is the tax-free nature in which the assets will reside. Recipients are required to receive a minimum cash pension payment each year which is based on their age and pension balance as at the previous 30 June.
Death benefit pensions can also be rolled into another fund at any time, however, they retain their identity as a death benefit. Therefore, a death benefit pension cannot be combined with other pensions or rolled back to the accumulation phase.
Is your nominated beneficiary eligible?
Generally, only your spouse is eligible. Adult children and your legal personal representative (your estate) would have to receive the benefit as a lump-sum withdrawal, i.e., the assets are removed from the superannuation environment and subject to tax on the taxable component. A dependent child (or children) may also receive a death benefit pension in limited circumstances; if they are under age 18; under age 25 and financially dependent on you; or have a prescribed disability.
Transfer Balance Cap
Another important matter to consider is your eligible beneficiary’s Transfer Balance Cap (TBC). To reiterate, the TBC is a lifetime limit on the total amount of funds that can enter the tax-free pension phase, currently at $1.7 million. Where your beneficiary has already commenced an account-based pension and does not have a sufficient remaining TBC to receive the death benefit pension, they may roll back their existing account-based pension into the accumulation phase to create room for the death benefit pension.
Option 2: Receiving a lump-sum payment
The alternative is to receive the amount as a lump-sum payment. With this option, the funds exit the superannuation environment. The benefits may be cashed as either in-specie or cash depending on your fund’s governing rules.
Conclusion
The death benefit pension option presents an opportunity for your eligible beneficiary to maximise the total amount of funds held within superannuation. While there are limitations on who can exercise this option and matters complicated by TBC, it is still worth considering as the assets will reside in a concessional tax environment.
Source: Bell Potter
5 steps to better financial goals
By Robert Wright /December 02,2021/
Everyone has financial goals. Maybe you want to pay off your mortgage early, stop relying on your credit cards, or go on an amazing overseas holiday (once we’re allowed to travel again). Or you might want to set up good money habits, like investing regularly or look at ways to grow your super. Whatever you want to achieve, it’s possible – as long as you approach your goals with the right mindset.
There’s a lot of science behind what happens to your brain when you set goals. It can trigger new behaviours, increase your motivation and attention, and improve your self-confidence. What’s more, when you set goals that are ambitious, challenging and highly important to you, you’re much more likely to perform in a way that helps you achieve them.
So, in other words, the best way to set yourself up for success is to make sure you choose the right financial goals and support them with a solid plan. Here are five steps that will help you get started.
Step 1: Identify and write down your goals
Goals are meaningless if they’re just vague ideas in your mind. That’s why new year resolutions always fail. Writing them down will help you focus on what you want. To make you even more accountable, share your goals with someone and update them on your progress.
A 2015 study by psychologist Dr Gail Matthews showed that 76% of people who wrote down their goals and shared their progress were able to successfully achieve them, compared to a 42% success rate for people who didn’t write down or involve other people in their goals.
Make a list of all the things you want to achieve financially and then prioritise them in order of their importance to you and your loved ones. You’ll find that two or three goals will stand out – they’re the ones to focus on.
Step 2: Make them specific, measurable and realistic
Now that you’ve decided on your goals, you need to expand on them so you know what you’re working towards. The best goals are specific, measurable and realistic. Set yourself a challenge, but don’t make your goals impossible to achieve.
For example, consider this common financial goal:
I want to pay off my mortgage earlier.
That’s a great goal. But it doesn’t mean much if you don’t put parameters around it. Here’s a better example:
I’m going to pay off my mortgage by December 2028. I will do this by paying an extra $500 each month on top of my minimum payment.
This goal is much more specific, with a set deadline and regular actions you need to perform.
Step 3: Have a plan
Work out the actions you need to take to achieve your goals. Do you need to earn more? Spend less? Refinance your loan so you’re paying lower interest? Cut back on some non-essentials?
Let’s revisit our earlier goal. We know we can achieve it by paying an extra $500 each month. But where is that money coming from, and what will you do with those extra payments? This needs to be part of your plan. For example:
I’m going to pay off my mortgage by December 2028. I will do this by paying an extra $500 each month on top of my minimum payment and keeping that money in a mortgage offset account to reduce the amount of interest I pay. To ensure I have this money available each month, I will work to a monthly budget that minimises any unnecessary spending and I will increase my income by working two hours of overtime each week.
Everyone’s plan will be unique. The key is to make it relevant to your lifestyle to give yourself every chance of success. It’s also a good idea to allow for the occasional slip up in your plan. No-one is perfect.
Step 4: Track your progress
Big, long-term financial goals are great, but it’s easy to become overwhelmed by them. Breaking down bigger goals into smaller steps can help you track your progress and celebrate your success along the way.
If you have a goal with a five-year deadline, break it down into five one-year goals. Or even monthly goals. That way you’ll know how you’re going and whether you need to make any adjustments to your behaviour. Reward yourself when you reach certain milestones – this can help keep you motivated and avoid splurging.
Step 5: Revisit and refine your goals regularly
No matter how determined you are to reach your financial goals, things may get in the way. You may have unexpected major expenses, or your priorities may change. That’s okay. Once you have the right behaviours and mindset of working towards a financial goal, you can adjust the goalposts whenever you need to. The process is far more important than the outcome.
Along with tracking your progress and celebrating your small wins, revisit your larger financial goals regularly, Are they still your top priorities, and does your plan need to be updated? If you have a financial adviser, they can help you with this and let you know if you’re overreaching or if you could be striving for more.
What financial goals do you want to work towards?
Source: Colonial First State
Why should I see a financial planner?
By Robert Wright /December 02,2021/
Financial planning is something more and more people are considering as a service they need to help them get the best from their finances and focus on putting their money towards what matters to them most.
In fact, according to 2020 research, 2.6 million Aussies said they intended to seek help from a financial planner over the next two years.
The uncertainty of the COVID pandemic has definitely played a part in highlighting the value of financial advice. In the same survey of non-advised Australians, almost half (44%) said the COVID-19 situation had increased their likelihood of seeking advice.
It’s often the case that people seek financial advice when there’s a major change in their life like buying a home, growing their family, inheriting money or retiring. But it doesn’t have to take a global crisis like Covid-19 or one of life’s upheavals for you to benefit from working out a financial plan with a qualified expert.
A qualified financial planning professional can make a positive difference to your financial future at any stage in your life.
Working with a financial planner isn’t just about making the most of the money you have now. It’s a chance to make the choices, for your life and finances, that will enable you to enjoy peace of mind and work towards your most important goals, starting from today.
Source: Money & Life
How ‘Buy Now Pay Later’ affects your credit score
By Robert Wright /November 23,2021/
In recent years, ‘buy now pay later’ (BNPL) has become an increasingly popular method for consumers looking to purchase goods via instalments without resorting to credit cards.
These services are often billed as a safer and more convenient way for consumers to manage their spending, and their popularity has led them to become widely available.
But if you miss a payment or misunderstand the particular terms you’re agreeing to, BNPL has the potential to dent your credit score and impact your lending ability down the track.
What is BNPL?
The BNPL market is growing exponentially. Valued at $43 billion, this sector has tripled over the previous two financial years, according to the Reserve Bank of Australia.
BNPL schemes allow consumers to buy goods and services from a retailer by only paying a fraction of the price at the time of the transaction and the rest of the payments in instalments. This convenient payment method offers interest-free payments to consumers and is currently attracting considerable attention. However, if you miss payments, you could be in trouble.
In the 2018-19 financial year, the total revenue from missed payments from all BNPL providers totalled over $43 million, a 38 per cent increase from the previous financial year.
Many people, especially younger consumers, have a general understanding of what a credit score is and that a bad credit score, or rating, can affect their ability to secure loans or lines of credit.
What they may not realise is that almost every transaction they make has the potential to impact their credit score – whether it is paying a utility bill late, carrying a lot of ‘contract debt’ by upgrading your phone every year on a plan, regularly overdrawing your bank account and using overdraft, or having multiple credit cards and only paying the minimum monthly fee.
All of these factors are taken into consideration to give a picture of your spending habits and determine whether you are a desirable candidate to lend money to. So, while it may not seem like a big deal if you pay your electricity bill a few days late, or you’ve signed up to a five year plan to pay off the latest iPhone, or regularly using BNPL services to pay for things, these actions may be chipping away at your credit rating which could cause issues when it comes to seeking a home loan down the track.
Improving your credit score
The first step is to go online and check your credit report. This is generally a free process, and everyone is entitled to one get a credit report once a year. Ensure all your personal details and queries on your credit history are correct. However, beware of any credit repair companies that claim to improve your credit score. This is simply ineffective and a rip-off.
Here are some steps to help you improve your credit score and make yourself a more desirable loan candidate if you expect to be applying for a home loan in the near future.
- Resist the lure of BNPL and other easy spending
To avoid additional scrutiny of your personal spending habits, it may be better to close your BNPL accounts and focus on only purchasing things you can pay for in full. Resist the urge to upgrade your phone unnecessarily so you can pay out your existing plan.
- Limit the amount of credit applications
In the year leading up to your mortgage application, be cautious of applying for credit. It is advised to wait until after your loan has settled to then apply for credit and take advantage of interest-free loans.
- Close any unused credit cards
If you have any unused credit cards, it is advisable to close them to increase your borrowing capacity. When assessing your loan application, a lender will often assume all credit limits are fully drawn and will count the minimum payment as an expense. This may be the difference between getting the loan or not.
- Demonstrate stability in employment and residency
Staying in the same workplace and household for at least six months is key to obtaining a home loan. Banks like to see stability, and moving jobs or houses can compromise getting a loan approved.
Source: Money & Life