Supporting your kids, without sacrificing your own retirement
By Robert Wright /July 30,2021/
In the past, wealth was often passed on through an inheritance. But with our longer lifespans, and the higher cost of living (especially housing), the desire to help our kids while we’re alive and well is increasing.
If your children are young, you may have twenty or thirty years to save and invest on their behalf, while also saving for your own retirement. If this is the case, it pays to put a strategy in place early on.
For those nearing retirement age, or already retired, you may have a large lump sum you’d like to gift to one or more of your kids. Giving money is a wonderful thing to do, but it’s not always simple. It can have tax implications, and may affect your income support payments from Centrelink. On the other hand, gifting may enable you to increase your government pension payments or benefits, if done right.
So how can you help your children without compromising your own financial security and comfort in retirement?
Ensure you’re on track for a comfortable retirement
Before you give away your wealth, it’s important to remember that you need to fund your own retirement for many years.
Australians are living longer than ever, with more years spent in retirement. If you were to retire at age 60, and live to 90, that’s one whole third of your lifetime spent in retirement.
As well as wanting to enjoy your retirement through travel or leisure activities, older age often comes with more medical and health expenses.
So it’s really important to make sure you have enough funds saved and invested to get you through. This might sound selfish, but in reality, it means you won’t become a financial burden on your children later in life.
How much will you need to retire, and, how much can you afford to give away now? It’s always best to seek professional financial advice to ensure you have enough put away to see you through. A financial planner will be able to give you tailored advice about the impact of your giving on your retirement plans.
What am I giving money for?
Next, consider what it is you’d like to help your son or daughter with. Are the funds for a property deposit? To pay for a wedding? Education expenses? This might offer some clue as to the right amount of support.
Following on from this, consider how many children you need to help. If you gift funds to one child, do you need to match that for others when the time comes? If you have several children, but some are doing better than others, do you need to help them all equally?
Balancing the family dynamics around money is important, as it can be a sensitive issue. The last thing you want to do is cause a rift in the family over some perceived inequality. If you do have several children you need to help, keep this in mind, as it will limit how much help you can offer each child.
Giving an incentive
Often the best way to support children financially is to match their own contribution. Rather than purchasing something outright, offer to base your assistance on their own savings. This also means they have a vested interest in the item, which means they’re likely to treat it more carefully.
How should I give money?
If you receive the Age Pension or other benefits from Centrelink, there is a limit to how much you can give away. The gifting rules allow you to give $10,000 over one financial year, or $30,000 over five years. You’ll need to let Centrelink know when you’re planning to give a gift of this type.
If you’re considering giving your children a substantial amount of money, it’s worth taking the advice of Dr Brett Davies at Legal Consolidated. He recommends always giving funds as a loan ‘payable on demand’, not as a gift. Creating a written loan agreement helps keep the money in your family, even if things don’t go to plan.
Consider this. You gift your daughter $400,000 to buy a house. Five years later, she divorces from her husband and the house is the only asset of the marriage. The Family Court awards half of the value of the house to the husband, including $200,000 of your donated funds.
If you instead had a valid loan agreement in place, the loan must be paid out before the assets are distributed. Hence, the $400,000 comes back to you, to do with as you please.
Always seek professional legal advice when drawing up a loan agreement to ensure that it’s compliant with the law, properly worded and correctly executed.
Get professional advice
If you’re nearing retirement and looking to give up work, downsize your home and/or gift funds to your children, it’s important to seek financial advice.
A financial planning professional will be able to give you tailored advice about the impact of your planned giving. They can also help you work out a strategy for meeting multiple goals, such as giving to several children while funding your own comfortable retirement.
Source: Money & Life
How to help your children with buying property
By Robert Wright /July 16,2021/
With property prices rising at a record rate in many cities across Australia, the ‘bank of mum and dad’ is playing a bigger role than ever as many parents feel pressure to assist their children in buying a home.
For many Australians, home ownership is not just seen as the great Australian dream, but it also represents financial security and an important step in adulthood.
However, rapidly escalating prices, particularly in highly-desirable capital cities such as Sydney and Melbourne, has put that first step on to the property ladder out of reach for many young people. This in turn has led to many children turning to their parents for assistance.
According to the AFR, parental contributions are averaging more than $89,000, an increase of nearly 20 per cent in the past 12 months. In fact, the ‘bank of mum and dad’ has about $34 billion in loans, making it the nation’s ninth-largest residential mortgage lender.
For parents who want to help their children into home ownership, there are a number of strategies and pathways to consider.
Contributing to a deposit
Most lenders recommend prospective home buyers have 20% of their loan available as a deposit, and contributing to this deposit is often what first comes to mind when parents think of how they can help their children, as scraping together a deposit is generally considered the most difficult step in buying a first home.
If you are contributing a cash amount, make sure you have clear discussions with your children about any expectations related to your contribution – for instance, if you are making the contribution in lieu of leaving them money in your will, make this very clear and don’t hesitate to put it in writing, especially if you are doing this for one child but not others.
Acting as guarantor
A guarantor home loan is when someone, in this case a parent, offers up part of their home equity as security to top up the buyer’s cash deposit.
It means the buyer only needs a small deposit or sometimes none at all, and avoids paying costly lender’s mortgage insurance (LMI).
It’s crucial that you only agree to act as guarantor if you have full confidence in your child’s ability to make their loan repayments. If they default, you will be liable and your own home may be at risk.
Providing a loan
Whether through an official loan provider or a private agreement between parent and child, you may be in a position to loan your children the money they need to buy a home or for their deposit.
Keep in mind that this assumes they will be able to make their official home repayments as well as paying back the initial loan, and it is important to have honest discussions that clarify how they will manage this, and a timeframe for repayment.
Always put your well-being first
It may sound selfish and like it goes against what we’re told as parents, but it is crucial that older Australians put their own financial security first.
If you are simply not in a position to assist your child, do not feel pressured to put your financial wellbeing at risk in order to help them, especially if you have doubts about their ability to manage the repayments and responsibility of a home loan.
In this case, have a frank discussion with them about your will and what you will be able to provide for them after you have passed. You can also direct them to seek professional financial advice from your adviser which may help them understand how they can work within their own financial limits to move towards home ownership without your assistance.
Source: Money & Life
Should you give your teenager a credit card?
By Robert Wright /July 20,2020/
We live in a culture of smartphones, WIFI, home delivery, online shopping and online gaming, where most needs and wants can be met almost instantly. With so much temptation to spend, it’s vital to teach your kids the money skills to help them enjoy financial wellbeing as adults. But should you give your teenager a credit card?
Pre-paid, debit or credit?
You might like to start with a pre-paid card or a debit card, so there’s a limit on what they can spend. Set the rules on what it can be used for and how much they can spend. If they manage the process well, and if you’re confident that they’re responsible enough, you could give them a credit card (which would be a supplementary card connected to your own, as children under 18 cannot have their own card).
Before you give your teen a credit card, take the time to have a conversation about credit card fees, interest rates, and how spending irresponsibly can give you a bad credit rating, which is bad news for their future. Be clear that they will be responsible for all expenditure on the card – if they can’t afford it with cash, they shouldn’t put it on the credit card.
Rules, limits and know-how
Giving a teenager a credit card may seem risky or even irresponsible, but it can be a great teaching tool if the right conversations, rules and limits are put in place.
Before you give your teen a card, be sure to speak to them about how it works, how to be responsible with it and how to avoid financial trouble, including:
- How interest works – it’s important that they understand that a credit card is like a loan and if they don’t pay it back on time, they’ll be charged interest.
- Paying it off in full every month – show your teen a credit card statement and explain that if they only pay the minimum amount, they’ll still be charged interest.
- Paying on time – show them where they can find the due date for payments and help them to set up reminders to pay on time every month to avoid interest.
- Avoid overspending – teach your teen to keep track of their spending, and to never spend more than they earn. Use the credit card’s app to keep a tally on spending.
- Start with a credit limit lower than they earn – it’s a good idea to start with a credit limit that is not more than what they earn in a month. For example, setting a low limit for a teen may be $500 maximum so they can consistently pay it off at the end of each month.
Understanding ‘buy now, pay later’ services
The growing popularity of ‘buy now, pay later’ services such as Afterpay, Openpay and zipPay means it pays to help your teen understand how they work, and what the risks are.
These services allow shoppers to buy a product, take it home and pay for it in instalments via an online ‘buy now, pay later’ account, which deducts your preferred debit or credit card. Added to that, while the buy now, pay later provider might not charge interest on your purchase, you may still have to pay interest to your credit card provider if you don’t pay the full amount owing on your credit card by the due date.
Leading by example
While knowing the ins and outs of debt is important, one of the most powerful ways to help your kids develop healthy money habits is to lead by example. Our ideas about money are formed in our childhood, so if your kids see you living with healthy financial habits, they’re more likely to form those habits themselves.
Digital payments and online banking explained
By Robert Wright /June 01,2020/
Face-to-face encounters have become less frequent in so many areas of our lives – and banking and shopping are no different. So, now’s an ideal time for older Australians to start integrating more digital transactions into their everyday banking. Using these methods for the first time can be intimidating, so we’ve answered some of the key questions you might have about digital transactions and online finance.
What are contactless payments?
In the wake of the COVID-19 (Coronavirus) health crisis, many shops and businesses have moved away from cash and are accepting payment by credit or debit card only. If you go into a store to buy something, you’ll likely be asked to use the ‘contactless’ payment method. This is simply a payment that’s processed in real time by holding your debit or credit card near the card reader without the need to swipe or insert it.
Also known as Tap & Go, this method allows you to make a purchase of up to $200 (temporarily increased from the $100 pre-COVID-19 limit) by simply hovering your card above the machine – you won’t need to enter a PIN.
If your transaction is in excess of $200, you’ll need to enter a PIN. Use one hand as a barrier over the keypad to prevent anyone else seeing your pin entry.
It’s also worth mentioning that some merchants may pass on the costs they incur to use these processing systems. If you are charged, the surcharge varies between merchants. You may find you’ll have to pay a small percentage for credit and debit purchases; however, merchants will generally let you know before the transaction.
How do I pay bills online?
Generally, a bill that you’d normally pay in person or at the post office can be paid online through online banking, using the secure and safe electronic payment system of BPAY, a widely used bill payment service.
Each bill you receive has its own unique BPAY information, which is located at the bottom of the bill. To pay a bill using BPAY:
- you’ll need to log in to your own online banking system
- go to the section where you pay someone or transfer money
- select BPAY as the payment method, and
- enter the information you find on your bill.
What details do I need to give when I’m shopping online?
While older Australians are still the most likely age category to prefer paying with cash, habits are changing we’ve seen a steady and significant move to payment methods other than cash in the over-65 age group.
When you purchase something online, you’ll be asked to enter your details, including your name, address and contact details for the delivery. You’ll also be asked for the debit or credit card number that appears on the front, as well as the CVC or CVV number, which is the three-digit number printed on the back of your card or four-digit number on the front of the card above the main numbers. This is an important anti-fraud measure to ensure that only you, the card holder, can make purchases online.
As a convenient feature on your computer or mobile phone, you may be prompted with a pop-up message to save your debit and credit card details for quicker checkouts when online shopping in future. If you don’t feel comfortable storing them digitally on your computer or mobile phone, you can reject or opt out of the pop-up request.
I’ve heard that online banking and shopping can be unsafe. How can I reduce this risk?
It’s true that if you’re online, there can be a risk of online fraud and ‘phishing’. Phishing is the sending of fraudulent messages through channels such as email, social media and text messages that are designed to steal your confidential information. However, there are several steps you can take to increase the safety of your finances and details online.
- Never give out your personal information or details via email, text message or over the phone, unless you have called your financial institution directly.
- Never enter sensitive details into a website you’ve arrived at by clicking on a link, including any links you’ve received in an email or text message. In particular, you should always go directly to the website of a financial institution or online banking system, rather than via a link.
- Familiarise yourself with scams that are circulating so you can stay informed. A regular update of these appears on the Stay Smart Online website.
Looking out for fraud during COVID-19
The COVID-19 outbreak provides a further smokescreen for fraudsters. Pretending to be legitimate businesses, from charities to your local supermarket, they hope to exploit confusion and the absence of face-to-face contact to gain your money and information.
If you suspect suspicious activity online or have been contacted via email or phone by someone who you think could be running a scam, it’s important that you contact your financial institution immediately to discuss the details.