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Should I Take My Super as a Lump Sum or Not

By admin /April 24,2015/

You’ve spent your working life accumulating super. So when the time comes, are you better off taking a lump sum, regular income or both? Let’s weigh up the alternatives so you can start to consider what may be best for you.

Taking a lump sum

If your super has been managed on your behalf during your working years it can be tempting to take the lot when you can. But make sure you weigh up the upsides and downsides before deciding:

  • Think long termA lump sum in your hands means you can spend it as you wish. For example, paying off the mortgage may be a good financial decision. But if it will mean you have no super left, what will you live on? It’s easy to spend a lump sum quickly so think ahead because in retirement a bad decision can be financially impossible to recover from. Work out how you can support yourself when you’re no longer working.
  • Will the tax office take a chunk?When it comes to taking a lump sum, look into tax rules—if you’re under age 60 you may create a tax liability, which would eat into the money you’ll need for retirement.
  • Are you confident making your own investment decisions?Sound investment plans may help you avoid relying on the government pension down the track. Evaluate your investment knowledge and the effort you’re prepared to put in―do you feel confident in your ability to invest your money to achieve the returns you need or will you need help?

Keeping your money in super

Sure, keeping your money in super can be one of the most tax-effective options. But there are other considerations as well, as you’ll see below.

    • Make the most of tax benefitsBy starting a pension in superannuation your money is not exposed to the tax rules that apply to money held outside super:
      • No tax is applied to your investment earnings in your super pension.
      • No tax is applied to your income drawn from age 60.
      • Tax offsets of 15% are applied to the tax payable* on your pension you draw if you’re aged 55-59, which means in the lead-up to turning 60, 15% of your taxable income is effectively tax-free.

 

  • Investment control and earningsYou can generally choose from a range of pre-set investment options in super. But an investment manager makes the day-to-day investment decisions, so overall you have less control. Your balance will increase if earnings are added to your account. Although investment earnings and your balance can fluctuate depending on investment markets―there’s no guarantee your super will last as long as you do.
  • Access your moneyYou can take a portion or your entire super balance as a lump sum, or draw out a regular income―it’s up to you. Each year you have to withdraw minimum amounts depending on your age―eg. you’d need to take out at least 4% each year up to age 65 and then 5% until you turn 75. And just remember, if you choose to withdraw all your money out of your super account, you may not be able to put it back in, as there are rules and limits on how much you can put back in (particularly if you are over age 65).

Best of both worlds

There’s a lot to weigh up when deciding how you’ll use your super. On one hand a lump sum can give you flexibility and control. But so can drawing out an income. Deciding between the two can be challenging, but you don’t have to choose one over the other.

There is a lot to consider, so it’s probably a good idea to meet with your financial adviser to determine what’ll work best for you. Find out how changing your approach as you get older could help you benefit from tax rules.

*The taxable portion of your account-based pension will be taxed at your marginal tax rate.

Source: AMP

Super vs. Mortgage. Can you guess the winner?

By admin /April 24,2015/

The pros and cons of using your spare income to either pay more off your mortgage or increase your super need to be weighed up. The direction you take depends on a few factors such as your age, how much you earn, your level of debt and your income tax rate.

Typically, if you are in your twenties for instance, you may not want to save for a retirement that is 40 years or more away. A better strategy might be to invest in a home where you can build some equity before you start considering a retirement strategy.

However, the older you get, the more you might want to invest in your superannuation and begin the transition to retirement financially.

Things to consider if you take the mortgage route:

  • Paying no tax on growth in the value of your family home.
  • Access to redraw facilities if you need a quick flow of cash.
  • Equity which you can borrow against.
  • Reliance on the property market as a long-term strategy.
  • Changes to interest rates.

Things to consider if you contribute more to your super

  • Boosting retirement income.
  • Tax-effective as tax on investment returns is capped at 15%.
  • Tax-effective when you salary sacrifice.
  • Potential benefits of Federal Government co-contributions if you earn less than $46,920.
  • Inability to access funds if you are under retirement age.

Questions to ask yourself

If you are at the time in life where you feel it’s better to add more to your super, here are some questions to consider:

How much do you owe on your mortgage?

Sit down and do your sums to figure out how much money is going into repayments, and how long it will take you to pay off your mortgage.

How is your mortgage set up?

Do you have an interest-only strategy at the moment and how long is the life of your loan? It might be worthwhile considering if this needs to be changed.

Switching to an interest only loan may also give you more cash-flow that can be invested into your super.

Is there cash looking for a better home?

You may have more money floating around than you think and some can go into growing your super balance.

Do you have the capacity to salary sacrifice?

Your employer may allow you to salary sacrifice some of your income which will be taxed at a maximum rate of 15%, saving you a tidy sum in tax if your income is currently being taxed at a higher rate.

Assess your personal situation to identify how much cash you’ve got and whether it could be better placed to give you more money in your retirement.

Source: Colonial and Capstone Financial Planning

Tips for Teaching Kids the Value of Digital Money

By admin /March 23,2015/

One in three parents agree digital purchases make it harder to teach kids the value of money. Here are our tips for overcoming this. It can be hard for kids to understand what they can’t see. And as there’s no visible exchange of cash for goods in digital purchases, teaching them the value of digital money can be challenging. Delving into the topic, we recently conducted some research which found that more than a third of kids (35%) don’t know how digital purchases are paid for. Our research also uncovered the most common myths kids believe about digital money, including:

  • 40% of five year olds think you can use a card to get free money from the ATM;
  • 61% of six year olds think you don’t have to pay money to watch movies on your parents’ tablet or smartphone; and
  • 33% of five year olds think there’s someone behind the wall who gives your parents money when they put their card in the ATM.

So, it’s clear we need to adapt our money lessons to incorporate digital spending. From experience, I’ve found the most effective way of doing this is to involve kids in the digital purchasing process. Sit them down when you’re buying If you’re buying your child a game on your smartphone, instead of making the purchase yourself, sit them down and explain how much it costs. If the game costs $5 and your child receives $10 pocket money each week, explain that it’s worth half their pocket money, and potentially deduct the amount from their allowance or piggy bank. This way they can see that digital money has value, like cash and coins. Use day-to-day examples If your child often accompanies you to the ATM, explain that the money you’re withdrawing is from mom and dad’s savings and is of real value. Small lessons like these will help build their understanding of digital money over time. Other lessons that Aussie parents have used to help improve their child’s understanding of digital money include:

  • Showing them the value of an item in an online store (25% of parents);
  • Opening a savings account with them (17% of parents); and
  • Giving them a prepaid card so they can make digital purchases (16% of parents).

Teaching children the value of digital money is key to their overall financial literacy. It’s also important to continue with traditional methods, such as School Banking programs, which teach lifelong money management skills. Traditional and digital money lessons should work in tandem and complement each other. Source: Commonwealth Bank