Salary sacrifice vs personal contributions to super
The upshot is that, if you are an employee, there are now two ways in which you can optimise the tax-effectiveness of your additional super contributions:
- opt for a salary sacrifice arrangement, whereby your employer makes additional superannuation contributions beyond the compulsory superannuation guarantee (SG) amount from your pre-tax earnings and reduces your salary accordingly; or
- make a personal contribution and claim a tax deduction when you submit your tax return.
Generally, higher income earners gain the greatest benefit from either of these strategies. Lower income earners may be better off not claiming the tax deduction and receiving a government co-contribution if eligible.
Which option?
For starters, employers don’t have to offer salary sacrifice. If they don’t, claiming a tax deduction is the only option.
Another thing to look out for: if salary sacrifice is available, will your employer still make SG payments on your pre-sacrifice salary? Legally, employers only need to pay SG on the actual salary amount, so for every $1,000 of salary sacrifice you would lose $95 in SG contributions. In this situation, you will most likely be better off claiming a tax deduction.
Fortunately most employers do the right thing and don’t reduce their SG contributions. The federal government has also announced plans to ensure salary sacrifice does not result in a reduction in SG payments. If this happens, it will pretty much level out the playing field between salary sacrifice and tax-deductible personal contributions, but some subtle distinctions remain.
Let’s look at Jenny and Brian. They both earn $120,000 a year, and want to contribute an extra $12,000 pa ($1,000 per month) to superannuation as concessional (pre-tax) contributions. Jenny opts for salary sacrifice and will receive SG contributions based on her pre-sacrifice salary. Brian decides to make his own contributions and later claim them as a tax deduction.
Both will see their overall annual income tax bill drop by $4,680. After allowing for 15% tax on the super contributions, they are both better off by $2,880 for the year.
The key difference is that Jenny will enjoy her tax benefit each payday. Brian needs to wait until the end of the financial year and submit his tax return before he can receive any benefit from his choice.
On the other hand, Brian’s regular pay will be more than Jenny’s as his gross income remains at $120,000 pa compared to her $108,000. This gives him more flexibility. For example, he can wait to make his entire contribution just prior to the end of the financial year – if he hasn’t been tempted to spend it in the meantime. However, if he makes regular contributions to his super fund, his net disposable income each month will be lower than Jenny’s. Only when he receives any tax refund might they be back on equal terms.
Beware the rules
While the greatest benefit of extending tax deductibility on personal contributions goes to employees who are unable to access salary sacrifice, it’s still a positive move that provides everyone with flexibility and choice. However, whether you opt for salary sacrifice or claiming a tax deduction, there are rules to be followed. Talk to your financial planner about the best superannuation contribution strategy for you.
Please contact us on 03 9836 8399 if you would like to discuss further.
Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee takes any responsibility for their action or any service they provide.
Why currency matters to Aussie investors
There is nothing like an overseas holiday to remind you of the power of currency movements to either help or hinder your financial position.
A recent sojourn to Europe reaped a modest benefit from the strengthening Australian dollar although it did nothing to dull the pain of the transaction fees on the credit cards.
Australian investors probably have more at risk in the currency stakes than most other investors in developed markets.
That flows from the small size of our local sharemarket – less than 3 per cent of the market capitalisation of global sharemarkets – which means to get international diversification Australian investors have to invest offshore. Contrast that to US investors where so many of their major companies are global players which means a lot international diversification comes built into the domestic US sharemarket.
Then comes the fact that the Australian dollar is one of the most volatile currencies by trading volume.
The reality is that the impact of short-term swings in the currency can dwarf underlying investment returns. For instance, the broad US equity market clocked an admirable return of 5.79 per cent, denominated in US dollars, in the first quarter of this year. But due to the Aussie dollar rallying from USD $0.72 to USD $0.76, the return figure denominated in Australian dollars would have been flat at 0.41 per cent.
Clearly, currency can have a material impact on investment outcomes particularly when we have seen the Australian dollar hit $1.10 in US dollar terms not that long ago (remember the so-called ‘parity parties’?) only to see it slide back to around USD $0.70, and now hovering around USD $0.80.
So how should investors think about currency within their portfolio?
It can be tempting given all the market forecasts and prognostications to think of currency as a source of extra return. That can be an incredibly challenging decision to make as some of the smartest, best resourced hedge fund managers in the world will attest.
Better to think of currency in the context of managing investment risk rather than return chasing.
Currency cycles can take years to play out notwithstanding some of the short-term market movements.
Your asset allocation and your risk tolerance will be key considerations when thinking about what level of currency hedging is appropriate. For example fixed income or bond portfolios as a general rule will always be hedged simply because the currency movement will swamp the underlying return.
When it comes to equities the hedging decision is more complex and really comes down to your risk appetite/tolerance. The more conservative investor you are – a retiree for example – the more likely that hedging away some if not all the currency risk will make sense.
You can choose between the two ends of the currency exposure spectrum – from fully hedged to unhedged – or somewhere in between.
But if the idea of currency movements causing your portfolio losses feels like a risk you simply do not want to take then you can opt to hedge away the currency impacts.
However, that does come with costs and tax considerations – for example gains on currency hedging are distributed as income rather than capital gains.
The complexity around how much or little to hedge the currency risk within your portfolio means it is an area where getting professional advice can be valuable both in deciding the right approach and how to implement it.
The key issue is understanding the currency risk within your portfolio and having the discipline to decide how it will be managed.
Please call us on03 9836 8399 if you would like to discuss.
Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
Source:
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2017 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.
Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Investors acting their age
Young investors can fall into the trap of being too conservative for their own good, forfeiting compounding long-term returns from growth assets.
This can lead to the question: How do we tend to invest at different ages?
Of course, a higher percentage of Australians hold much of their investment savings in the default diversified portfolios of the big super funds – often with extra savings invested outside super.
And the way that investments held outside the big super funds’ default portfolios are allocated in different asset classes provides a useful insight into personal investment preferences by age.
Independent consultants Rice Warner includes a look at investor preferences by age and wealth in its Personal Investments Market Projections 2016 report.
This report broadly defines the personal non-super investments market to include all investment assets held by investors in their own names or through trusts and companies. It does not include family homes and personal effects.
Rice Warner’ discussion of asset allocation of personal non-super assets by age begins with investors aged 15-24. Parents and grandparents often have made investments on their behalf; and this appears to show up in their asset allocations.
Half of the personal investment assets of investors aged 15-24 are in cash and term deposits – second only to investors aged over 75 – and 27 per cent is allocated to life products, investment platforms and managed funds.
Interestingly, 22 per cent of the personal, non-super assets of these investors under 24 are in direct property. Young people generally would not have the money to invest in property by themselves; this percentage suggests plenty of parental help. And they have almost no investments in direct equities.
A point worth noting is that the personal, non-super investment patterns of these young investors seem to setup a broad path for their investing at older ages– yet with some key variations in asset allocations with age.
Consider these for asset allocations of personal, non-super investments at different ages shown in the Rice Warner report:
- Cash and term deposits: aged 15-24 (50 per cent of their assets), aged 25-34 (46 per cent), aged 35-44 (37 per cent), aged 45-54 (38 per cent), aged 55-64 (43 per cent), aged 65-74 (46 per cent) and aged 75-plus (52 per cent).
- Direct investment property: aged 15-24 (22 per cent of their assets), aged 25-34 (47 per cent), aged 35-44 (50 per cent), aged 45-54 (47 per cent), aged 55-64 (43 per cent), aged 65-74 (38 per cent) and aged 75-plus (17 per cent).
- Life products, investment platforms and managed funds: aged 15-24 (27 per cent of their assets), aged 25-34 (3 per cent), aged 35-44 (7 per cent), aged 45-54 (7 per cent), aged 55-64 (6 per cent), aged 65-74 (7 per cent) and aged 75-plus (14 per cent).
- Equities: aged 15-24 (1 per cent of their assets), aged 25-34 (5 per cent), aged 35-44 (6 per cent), aged 45-54 (9 per cent), aged 55-64 (8 per cent), aged 65-74 (9 per cent) and aged 75-plus (16 per cent).
Keep in mind that some investors may decide to have well-diversified portfolios for their savings in large super funds and self-managed super funds while taking a different approach for their personal, non-super holdings.
For instance, many investors choose to hold direct property in their own names and perhaps with some cash, fixed-interest, selected direct shares and managed funds.
The appropriate course for the asset allocation of personal, non-super investments will depending much on personal circumstances, including professional advice received.
It can be a pitfall for an investor to look at their personal, non-super portfolio or their super portfolio in isolation when considering the appropriateness of their asset allocations. Consider taking professional advice on this point if you haven’t already.
Some investment habits – good and bad – tend to be set at a young age. It is vital to get on the right path at the beginning of your investing life.
Please call us on 03 9836 8399 if you would like to discuss.
Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
Source:
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2017 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.
Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Should you downsize?
By the time you are considering retirement, it is likely that you will have substantial equity in your home. You may even own your house outright. Selling the family home is one way to free up cash for retirement. The money you receive can be invested in shares, term deposits, managed funds or superannuation.
The impact on social security when you downsize
Your age pension entitlement depends on the value of your assets (the assets test) and the income you receive (the income test). Selling your home may have an impact on the amount of social security benefits you receive.
Your home and the 2 hectares surrounding it are not counted under the assets test. If you sell your home, the proceeds will be exempt for up to 12 months, as long as you are planning to use the money to buy another home. However, the proceeds will be deemed under the income test.
Case study: Lee Lin sells the family home
Lee Lin is 67 and divorced. She decides to sell the family home after her children move out because it is too big. She expected to sell her old home for $800,000, buy a cheaper apartment for $500,000 and have $300,000 left to invest.
Before she puts her house on the market, she goes to Centrelink and asked how the sale will affect her Age pension. The Financial Information Service officer tells her that the $300,000 will be counted towards the assets test for her Age pension. Lee decides she is still better off downsizing, even though it will reduce her pension.
Alternatives to downsizing your home
Selling the home where your children were raised and leaving behind neighbours and friends can be difficult and stressful. Add to that, the challenges of relocating to a new area, moving into a smaller space and making new friends. Suddenly, staying put might seem like a good idea.
Here are some alternatives to selling your home:
- Think about converting your home to dual occupancy so you can live in one half and rent or sell the other half
- Rent out some rooms (this has tax implications and may affect your age pension so seek financial advice before you proceed)
- Consider a reverse mortgage if you need extra cash and have equity in your home
If you intend to stay in your house for the long term, you may want to renovate your home so that it’s safe and easier to move around as you get older. My aged care website has information on getting help to stay in your own home so you can maintain your independence for longer.
What to do after you downsize
After you’ve sold your house, you may have money to invest in other income-producing assets. There are lots of options available so seek financial advice on the best mix of investment products for your needs.
Downsizing into super
In the May 2017 budget, the Government announced that from 1 July 2018, if you are aged 65 or over and sell your principal residence, that you have owned for at least 10 years, you will be able to make a non-concessional contribution to super of up to $300,000 from the proceeds. Couples will be able to contribute $300,000 each.
The contribution will not count towards the non-concessional contribution cap, the $1.6 million balance test, and you will not need to meet the existing maximum age or work test rules. See the ATO website for more information.
Selling the family home is not an easy or simple decision. Before you do anything, consult a financial adviser on the tax and social security implications, and speak to family and friends.
Please call us on 03 9836 8399 if you would like to discuss.
Source:
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at www.moneysmart.gov.au
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. Past performance is not a reliable guide to future returns.
Important
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.
Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
If you think you’d never fall for a scam, read this…
This isn’t necessarily because your demographic is particularly gullible. Rather, it’s because you’re more likely to control higher levels of wealth, perhaps as the trustee of a self-managed super fund (SMSF); you’re accustomed to making financial decisions; and you’re actively looking for attractive investment opportunities. What scammer wouldn’t want to target you?
Scams take many forms but when it comes to superannuation, two stand out:
- fraudulent investment schemes, and
- schemes offering early access to superannuation.
Either way, the result can be a major financial loss and dreams destroyed.
Golden opportunity
One clear warning of a scam is an unsolicited approach. Someone contacts you, usually by phone or email, offering an investment that is ‘both safe and delivering high returns’. This person will often know a lot about you, reciting accurate personal details they claim you provided in a questionnaire you completed earlier. Their story is supported by an apparently authentic website and, enticed by the attractive returns and smooth sales talk, you make an initial investment. At the beginning you receive statements showing your investment is growing steadily prompting you to add further funds. Then things go silent. Their phone number is disconnected, emails bounce and the website disappears, along with any hope of recovering your funds. Your stomach lurches. A cold sweat saturates you. You’ve been scammed.
Wonderful as modern technology is, it makes it easier for fraudsters to appear legitimate and transfer money in an instant. They close down one operation and set up another with ease. It doesn’t help that we give away much of our personal information, and what isn’t available for free can often be purchased by criminals.
Early access
The other major scam that lures many who need money quickly is the promise of early access to superannuation. This is how it works.
Bob’s superannuation is just sitting there, the solution to his financial problems if only he could access it.
He searches the internet for options and an advertisement promising early access to super pops up. This puts Bob in touch with a ‘specialist’ who helps him set up a SMSF, telling him that as the fund trustee he will be able to get hold of his super money. Bob signs the paperwork to set up the fund and rollover his super, but the money doesn’t turn up where it should. Eventually Bob discovers that his retirement savings were transferred to a bank account controlled by the scammer then moved overseas.
Not only has he lost the lot, Bob now faces a big tax bill for accessing his super prematurely. The scammers didn’t tell him that early access to super is only available:
- in cases of incapacity,
- to pay for medical treatment if seriously ill,
- if in severe financial hardship and can’t meet immediate living expenses, or
- if terminally ill.
Protection is the best cure
A few simple precautions can help protect your super (and other savings) from scammers.
- Hang up on unsolicited phone calls and delete suspicious emails.
- Take care when sharing personal information.
- Visit scamwatch.gov.au for updates on scams that are doing the rounds.
- If you suspect a scam report it to Scamwatch, even if you haven’t lost any money.
- Seek advice from a licensed adviser. Legitimate advisers and investment managers appear on ASIC’s list of Australian Financial Service Licence holders.
- And beware of dating and romance schemes. They are more common than fraudulent investment schemes, result in bigger financial losses, and are targeted at the same demographic!
Please contact us on 03 9836 8399 if you would like to discuss.
Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee takes any responsibility for their action or any service they provide.
Making sure you have the right cover
The concept of Total and Permanent Disability (TPD) cover is simple. If you are ill or injured and unlikely to be able to work again, you get paid out under the policy. The difficulty has always been to define what is meant by “unlikely to be able to work again”.
Advances in medical science and technology have meant that people who suffer horrific injuries might be rehabilitated and able to return to work, when some years ago a similar condition would have left them permanently disabled. For instance, by-pass surgery once ended a working career; nowadays normal life can soon be resumed.
Different policies have different definitions and it is an area where insurance companies are developing new features. Typical definitions that may be used are as follows.
The any occupation definition
One definition of TPD is based on your ability to do your own job (or a similar one where you are qualified through your existing education, training and experience or possible retraining).
Example
A painter who suffers a back injury and cannot climb ladders or stand for long periods may be classed as permanently disabled if he has no other employment skills. A teacher who suffers stress-related illnesses when faced by a classroom of children may not meet that classification if she can work outside the classroom as a tutor, examiner or writer of educational material.
The own occupation definition
A second definition is based on your ability to do just your own job. The premiums for this type of cover will be more expensive.
Example
A surgeon who damages his hands may be classed as permanently disabled because he cannot perform surgical operations, but he will still be able to work as a doctor or lecturer though on lower earnings.
Homemaker definition
The definitions above are only suitable for employed people but another definition is based on the ability to live independently. You would be classed as permanently disabled if you could not dress, eat, bathe, maintain personal hygiene or move around your home unaided. This means that a spouse who works in the home and raises children could also be insured – what would it cost to do the shopping, childcare, transport and other activities if your spouse could not do it?
How does TPD cover fit into a risk management plan?
Constructing a plan to protect you and your family against disaster can use a number of different types of policies. Income protection can provide up to 75% of your income if you are unable to do your own work due to illness or injury – but can you service your debts from this income? Trauma cover will pay a lump sum if you are diagnosed with a defined illness – but the premiums can be relatively expensive.
Putting in place the right mix of insurance cover to suit your needs is no easy task, but it is something that we deal with every day.
Please contact us on 03 9836 8399 if you would like to discuss.
Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee takes any responsibility for their action or any service they provide.
Super drawdowns: addressing a retirement myth
An enduring myth is that a large proportion of Australian retirees rapidly spend their super savings and then rely on the age pension for all of their retirement income.
According to this myth, retirees have a strong preference for taking their super as a lump sum rather than a pension, or withdraw unsustainably large pensions each year for as long as their savings last.
It appears that the myth is based, in part, on a misinterpretation of government statistics of how fund members receive their super benefits upon retirement.
Another possible trigger for the myth is that there is no upper limit on the percent of superannuation pension assets that can be taken annually as a pension – although there is an age-based minimum.
Yet recent research suggests that retirees are typically concerned about outliving their savings and are cautious in their super drawdowns.
A recently-published research paper, How Australia Saves – a collaboration between Vanguard and Sunsuper – provides data that should further dispel the myth about free-spending retirees.
The research draws on the transactions and investment experiences of Sunsuper members, including the relatively small proportion who are currently in retirement.
Key findings regarding how Sunsuper members receive their retirement benefits include:
- The median annual pension drawdown in 2015-16 was 6 per cent of a member’s pension assets.
- Members who withdrew most or all of their super when eligible for retirement typically had extremely low balances. (The median drawdown of such members in 2015-16 was $10,000, representing 86 per cent of their super balances.)
The small percentage of Sunsuper members now receiving a retirement pension reflects its young member base; the median age being 36.
However, another 210,000 members are currently estimated to move into the retirement and pension phase over the next decade or so.
If you would like to discuss anything in this article, please call us on 9836 8399.
Source:
Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2017 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.
Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Clarity on charity
Not all charities are the same – some are not charities at all. So, how do you ensure that your money finds its way into the right hands… and if it is indeed tax deductible? It pays to do a little research first.
There’s no shortage of charities competing for donations, and for many people the charity chosen is emotionally driven. For example, the cause may be something they feel strongly about, or a way of commemorating a loved one.
Whatever the cause, it’s essential that donated funds are used appropriately and that donors are comfortable with the charity’s operations.
The way the charity utilises donations is largely outside of your control, but there are a few questions you can ask before entrusting your money to them.
1. Is it a legitimate charity?
Sometimes a charity name might seem familiar but if you have any doubts you can cross-check its location details and registration status on the federal government’s Australian Charities and Not-for-profit Commissions register at www.acnc.gov.au.
Beware of relying on a general internet search for verification as anyone can set up a website or social media page.
If you have been approached personally, always ask for identification which displays:
- the full name of the organisation
- an Australian Business Number (ABN)
- a physical business address
2. Are all donations tax deductible?
Donations of two dollars or more are tax deductible only if the charity has been endorsed by the Australian Taxation Office (ATO) as a deductible gift recipient (DGR) organisation.
The best way to be certain is to visit the Australian Business Register (ABR). See www.abn.business.gov.au and conduct a search on the charity’s name or ABN.
3. How do you make a complaint?
Complaints about charities must be made to the relevant state or territory regulator. To find the correct regulator, visit the ATO’s website www.ato.gov.au and search for “fundraising”.
It’s not just about money
It’s often assumed that individual donations are the only way to assist a charity but there are many other ways you can help out. You could:
- Leave a bequest in your will – contact the charity to discuss your intentions.
- Donate your time – many charities are short on professional expertise. What skills do you have?
- Arrange a workplace fundraiser – see the ATO’s web-page www.ato.gov.au and search for “workplace giving programs”.
People support charities because it’s good to help a worthy cause. However, it’s easy to feel betrayed if funds are squandered or the charity is suspect.
With just a little research you can put your mind at ease and know that your donation is going to those who need it most. For more information contact us on 9836 8399.
Sources:
ASIC’s MoneySmart website www.moneysmart.gov.au Managing my money – Donating
Australian Charities & Not-for-profit Commission www.acnc.gov.au
Australian Business Register www.abn.business.gov.au
Australian Tax Office – www.ato.gov.au Gifts and Fundraising
Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee takes any responsibility for their action or any service they provide.
What do you get with funeral insurance?
Funeral insurance may give you peace of mind but over time the premiums may cost you more than the funeral itself. Here are a few things to consider before signing up for funeral insurance.
What is funeral insurance?
Funeral insurance is a policy that will give your family a lump sum payment to help pay for funeral and associated expenses when you die.
How does funeral insurance work?
You pay monthly or fortnightly premiums (ongoing payments) for a fixed amount of cover. Usually you can choose between $5,000 to $15,000 cover which will be paid to your beneficiary when you die.
With funeral insurance, you are not saving for funeral costs but buying insurance to meet those costs at some future date.
Unlike taking out insurance for a car accident which is an unknown event, we all know that we will die sometime. Because you don’t know when you are going to die, you need to think about whether you can afford to pay premiums for funeral insurance for the next 10, 20 or more years.
Funeral insurance premiums increase over time
Not only will you need to keep making payments over the years, but premiums are usually ‘stepped’ which means they increase with age and grow over time.
Funeral insurance premiums tend to rise steeply for people over 50 and this can cause people to cancel their policy in the first few years, losing the benefit of premiums already paid.
If the premium payments become unaffordable and you stop paying them, your policy is likely to be cancelled. You will not get back the money that you have paid towards your policy. Different insurers have different rules, so read the PDS carefully before you sign up.
Read ASIC’s media release on their 2015 funeral insurance report that shows how sharply premiums rise for people over 50 and the types of funeral policies that have high cancellation rates.
What to consider before you buy funeral insurance
Before you buy funeral insurance you need to check if it is worth the money:
- Weighing up costs and other options – Will you be paying more for the insurance than the funeral will actually cost? Have you considered other options you might have for paying for a funeral?
- Keeping up with premium increases – When your premiums increase, will you be able to keep paying them?
Think long term and remember, if you can’t keep up with the payments you are likely to lose all the money you have paid towards the insurance.
How fast will your insurance premium rise?
Your insurance premiums will go up over time. The PDS will tell you if your cover will increase by the Consumer Price Index (CPI) or by a predetermined amount – which means your premium will rise to cover the larger amount of cover.
If you don’t want your cover to increase you can usually opt out of this, but you must contact your funeral insurance provider. Always check the PDS for these details.
Case study: Alice gets funeral insurance
Alice was 58 and still working when she took out funeral insurance costing $20 per fortnight. She wanted funeral cover so her family did not have to worry about paying for her funeral.
By the time Alice was 71, her premium had doubled and cost her more than $40 per fortnight. It had gone up every year as she aged and to cover inflation.
She struggled to pay the higher premium on her much lower, post-retirement income. She also knew it would continue to go up each year.
Alice added up all the premiums she had paid over the last 13 years and worked out that they had cost her more than $10,000.
What is ‘Expenses only’ funeral insurance
‘Expenses only’ funeral insurance means your family only get a payout for the actual cost of your funeral. Like other funeral insurance, you still make regular payments that will increase over time.
These types of funeral plans:
- Only cover funeral expenses – You may need to prove the funeral costs with receipt.
- Can be sold door-to-door – Don’t sign up on the spot if someone is selling you this product at your door. Take the brochures and have a think about it.
- Offer you less protection – Laws that protect consumers and their money when buying funeral insurance may not apply to ‘expenses only’ plans.
- Offer you less coverage – Exclusions may apply.
Should you buy funeral insurance?
There are pros and cons to buying funeral insurance. Here are some key facts to help you decide if it’s right for you.
Pros
- Immediate cover with exclusions – You can get cover from day one but most policies only cover accidental death in the first year or two.
- Helps people who struggle to save – It may suit you if you aren’t sure if you can save for funeral costs.
Cons
- Increasing premiums – Premiums generally go up over time. This means what starts out as a cheap way to pay funeral costs can become very expensive, especially if you are living on a fixed income.
- No refund on premiums you’ve paid – If you can’t afford to keep up the premiums or want to cancel your policy, you probably won’t get back the premiums you have paid.
- Your premiums could cost you more than your funeral – If you live another 5 to 10 years you may end up paying more in premiums than the cost of the funeral. Visit the My Longevity website to work out your life expectancy.
- Exclusions apply in the first few years – As most insurers only cover accidental death in the first 2 years, if you die from a terminal illness in this time you may not be covered. Check the policy’s terms and conditions.
- You don’t get the money right away – Sometimes it can take a while for your family to receive the insurance payout to cover funeral costs.
Other ways to cover funeral costs
If you want to make things easier for your family by paying for your funeral in advance, there are other ways to do this. You could think about getting a pre-paid funeral, a funeral bond, using your superannuation or even saving up for your funeral in a separate high interest savings account. See paying for your funeral for more information on all your options.
If you decide funeral insurance is right for you, shop around and get a few funeral insurance quotes. Then you’ll be able to get the best value for money as policies differ between insurers. Make sure you feel comfortable paying the rising premiums over time.
For more information about Aged Care please contact us on 9836 8399.
Source:
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at www.moneysmart.gov.au
Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.
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Why grey mortgage debt is rising
A mix of low interest rates, high housing prices and waves of baby boomers nearing or already in retirement is increasing Australia’s levels of grey mortgage debt.
Greater longevity would also have made some of us more comfortable about carrying debt into older ages than in the past.
Ideally, we would enter retirement with our home mortgages paid off and completely free of any other kind of debt. In theory at least, this may enable us to use our retirement savings to fully or partly finance our retirement.
Yet many retirees reach common retirement ages with outstanding mortgages and other debts. This leads to the inevitable question: How is the debt to be repaid?
A wide-reaching research paper*, Inquiry into housing policies, labour force participation and economic growth, published in June by the Australian Housing and Urban Research Institute at Curtin and RMIT universities, reinforces past findings that Australia’s grey mortgage debt is growing.
The project’s findings regarding the mortgage debt of older Australians include:
- Growing numbers of householders are taking higher levels of mortgage debt, relative to their household incomes, and paying that debt down later in life.
- Mortgage stress caused by borrowing more to pay soaring house prices is prompting more homebuyers to extend their working lives.
- Retirement nest eggs such as super may be “raided” to pay off mortgages.
- The take-up of more debt by highly-leveraged households exposes borrowers and the overall economy to “significant risk” if housing prices fall or if interest rates rise.
- Home owners are increasing using flexible mortgage products to unlock housing equity “at all stages of the life cycle”.
What to do about grey debt is clearly becoming a more critical personal finance issue.
Often indebted retirees will, of course consider using at least part of their super to fully pay off or reduce their loans. And some will direct part of their super pensions to make repayments.
Other debt-reduction possibilities for grey debtors include remaining in the workforce for longer than perhaps intended, as discussed by the Australian Housing and Urban Research Institute, or “downsizing” to a less-expensive home.
However, in practice, an attempt at downsizing to repayment debt may not produce the anticipated money – particularly after taking stamp duty and real estate agents’ fees into account. And working past common retirement ages may not be achievable – an appropriate job may not be available or health considerations may act as a barrier.
It may be worthwhile seeking advice from a financial planner before taking a new mortgage or drawing down on a home equity loan if it is unlikely that the debt can be repaid by your intended retirement age.
Perhaps you need advice about how to deal with an existing longstanding mortgage as your retirement nears. Don’t overlook debt repayment in your financial planning for retirement.If you would like to discuss anything in this article, please call us on 03 9836 8399.
*The Inquiry into housing policies, labour force participation and economic growth Inquiry into housing policies, labour force participation and economic growth Inquiry into housing policies, labour force participation and economic growth report by Rachel Ong (Curtin University), Gavin Wood (RMIT University), Stephen Whelan (University of Sydney), Melek Cigdem (RMIT), Kadir Atalay (University of Sydney) and Jago Dodson (RMIT).
Source:
Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2017 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.
Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.