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A relationship has been established around superannuation and mortgage debt that could impact the stability of your retirement.
As prospective Australian retirees approach their preservation ages and retirement, those who are yet to own their own homes may struggle to maintain a comfortable retirement. Retirement plans often work out a prospective financial situation, and assume that an owned home is an already existing asset.
Housing is quickly becoming a critical aspect of retirement, alongside the pension, super and voluntary savings as the main means of ensuring a comfortable retirement for future retirees.
Mortgage debt and the threat of continued payments to pay it off is something that workers must now take into consideration when looking into their retirement, as Australians struggle to pay off their homes. Can it be paid off without the extra income earned from their work?
As more and more Australians retire with healthy superannuation balances, the allure of using that money to pay down a mortgage is strong.
Factors that may be affecting retiree’s mortgage debts could include:
- Higher property prices (now ten times the average wage as compared with three or four times two decades ago).
- A delayed entry into the property market as they save for a deposit, leaving fewer working years to pay off the loan.
- Relatively low-interest rates – currently, every dollar used to pay down a mortgage is saving less than 3% on interest, while in superannuation that same dollar has the potential to return 7 or 8 per cent.
Paying down a mortgage is a growing problem for retirees who are increasingly leaving the workforce with mortgage debt, which is far from the norm among middle-income Australians as recent as a decade ago. Among retirees, homeowners in the years prior to retirement (ages 55-64) had dropped from 72% in 1995 to 42% in 2015-16.
However, those who began their working careers prior to the 1990s face another challenge as they move closer to their preservation age; the superannuation guarantee was only introduced in 1992, which means that many may have accumulated less superannuation than other generations after.
It is understandable that for those approaching retirement, preferencing super over mortgage could seem like a logical move, as the extra funds generated can be diverted back into property on retirement. Using superannuation to pay a mortgage can make some tax sense – in an assets test for the Age Pension, a primary residence is exempt while superannuation is not.
This may become a more common approach for retirees and those looking to retire within the next few years. However, you should consider what the best approach is for your situation, and whether paying off the mortgage with your super is worth it in the long run. Consulting with a professional before taking any action should be your first step in this process.Read more. "
As you grow older, your aim may be to live a long, happy and healthy life. This is hopefully with the mental capacity to make your own financial and lifestyle decisions, and the appropriate superannuation to fund it.
But not everyone is always able to do this as they grow older. In the worst-case scenario, you may find yourself unable to make those choices yourself due to a diminished mental capacity (such as from mental deterioration, illness etc). If you can’t make your financial decisions, this could be bad.
There is often a misconception that people who lose their capacity to make, for example, financial decisions will simply be able to have their partner or spouse step in to make those decisions on their behalf. This is not the case.
Even if you are in a relationship with someone or own property jointly with them, they do not automatically have the power to make those financial decisions for you. This is where estate planning comes into play.
An estate plan records what you want to be done with your assets after your death. It can include documents such as:
- your will
- a testamentary trust (as part of your will)
- superannuation binding nominations
It also covers how you want to be cared for — medically and financially — if you can no longer make your own decisions. This part of your estate plan may be in documents such as:
- any powers of attorney
- a power of guardianship (giving someone the right to choose where you live and to make decisions about your medical care)
- an advance healthcare directive (your needs, values and preferences for your future care)
You may also choose to create an Enduring Power Of Attorney, which is a substitute decision-maker on your behalf. An EPOA is essential for clients who have their own Self-Managed Super Fund (SMSF).
The SMSF regulations require that members of the SMSF are either a trustee of the fund or directors of a company acting as the trustee. If a fund member is incapacitated, the member cannot be a trustee or a Director of a company. If that occurs, the SMSF becomes ‘non-complying’ which means it loses the tax concessions given by the super regulations.
Depending on your state of residence, powers of attorney may have different rights and obligations, particularly with respect to financial matters. Doing research and consulting with us about what your course of action could be if you were to lose your mental capacity for financial decisions could be a great start.Read more. "
The way in which a self-managed super fund is structured could change its legal compliance requirements. If you are in the process of setting up an SMSF, you will need to make a decision about how to structure it appropriately to suit.
An SMSF can be structured as a single-member fund or a multiple-member fund, with the trustees of those funds deemed as either to be individual trustees or a corporate trustee
Examining the circumstances of your members could help to narrow down the structure that will be best suited. You can also work out from the requirements of each structure whether or not a fund structure would be suitable for the needs of your members.
Individual trustees in a single-member fund will have two trustees within the fund. One trustee must be the fund member, but cannot be the other trustee’s employee (unless they are also relatives). An example of a single member trust fund structure could be a family super fund, where the members are trustees for the fund.
Individual trustees in a multiple-member fund structure generally have between two to six members. Each fund member must be a trustee and each trustee must be a fund member. Like the single-member fund, members of this fund structure cannot be the employee of another member (unless they are relatives).
SMSFs that use individual trustees or are looking to use individual trustees in their structure may benefit from the following:
- The fund can be cheaper to establish, as a separate company does not need to be set up to act as a trustee.
- Trustees must follow the rules in the fund’s trust deed, the super laws and the tax laws.
- There are fewer reporting obligations which means it can be easier to administer, however, changing trustees can mean more paperwork and administrative costs. .
- Another trustee must be appointed if your fund only has two trustees and one leaves or dies to continue operating as an SMSF, or it must change to a corporate trustee structure. If the trustees change, you need to notify the ATO within 28 days.
- Fund assets must be held in the name of the fund or the names of the individual trustees, “as trustees for” the fund. If the trustees change, the name in each asset’s ownership document must be changed as well, which can be time-consuming and costly.
SMSFs that are set up using corporate trustees, typically set up a business or company to act as a trustee. The members within these kinds of funds are known as directors and will need to apply for a director identification number as such.
Corporate trustees within a single-member fund structure may have one or two directors, but one of those directors must be the fund member. If there are two directors, the member cannot be the other director’s employer (unless they are relatives).
Corporate trustees within a multiple-member fund structure generally number between two to six members, with each fund member also being a director. A member cannot be the employee of another member (unless they are relatives). An example of a corporate trustee SMSF could be a business acting as the trustee for a super fund, where the members are also directors of the fund.
SMSFs that use corporate trustees or are looking to use corporate trustees in their structure may benefit from the following:
- A company must be set up to act as the corporate trustee, for which ASIC will charge a fee to register them as a corporate trustee and an annual review fee.
- Directors must follow the rules in the fund’s trust deed, the super laws, the tax laws, the company’s constitution and the Corporations Act 2001.
- Company directors, including directors of an SMSF corporate trustee, will need to obtain a director identification number.
- There are some extra reporting obligations to ASIC but it can be easier to administer the ownership of fund assets and to keep fund assets separate from any personal or business assets.
- The corporate trustee does not change if a director leaves or dies, as it can operate with just one director. However, you will need to notify the ATO and ASIC within 28 days if the directors change.
- Fund assets must be held in the name of the fund or the names of the company, “as trustee for” the fund. If the directors change, the corporate trustee does not change so the titles of the fund assets are unchanged.
The setup of an SMSF can be a complicated process. You may benefit from speaking with a professional assisting you in its preparation and establishment. Choose someone who is qualified, registered and licensed, and right for you and your circumstances.Read more. "
One of the benefits of establishing or opting for an SMSF is due to the control they are given over where the money is invested. While this sounds enticing, the downside is that they involve a lot more time and effort as all investment is managed by the members/trustees. They are also often the targets of fraud and scams.
Firstly, SMSFs require a lot of ongoing investment of time:
- Aside from the initial set-up, members need to continually research potential investments.
- It is important to create and follow an investment strategy that will help manage the SMSF – but this will need to be updated regularly depending on the performance of the SMSF.
- The accounting, record keeping and arranging of audits throughout the year and every year also need to be conducted up to par.
- Data shows that SMSF trustees spend an average of 8 hours per month managing their SMSFs. This adds up to more than 100 hours per year and demonstrates that compared to other superannuation methods, is a lot more time occupying.
Secondly, there are set-up and maintenance costs of SMSFs such as tax advice, financial advice, legal advice and hiring an accredited auditor. These costs are difficult to avoid if you want the best out of your SMSF. A statistical review has shown that on average, the operating cost of an SMSF is $6,152. This data is inclusive of deductible and non-deductible expenses such as auditor fees, management and administration expenses etc., but not inclusive of costs such as investment and insurance expenses.
Thirdly, investing in an SMSF requires financial and legal knowledge and skill. Trustees should understand the investment market so that they can build and manage a diversified portfolio.
Further, when creating an investment strategy, it is important to assess the risk and plan ahead for retirement, which can be difficult if one is not equipped with the necessary knowledge. In terms of legal knowledge, complying with tax, super and other relevant regulations requires a basic level of understanding at the very least.
Finally, insurance for fund members also needs to be organised which can be difficult without additional knowledge.
Although SMSFs have the advantage of autonomy when it comes to investing, this comes at a price. Members/trustees need to invest time and money into managing the fund and on top of this, are required to have some financial and legal knowledge to successfully manage the fund.
SMSF Fraud Alert
The ATO is also warning of an increase in Self Managed Super Fund identity fraud and scams targeting the retirement savings of individuals. This is something to be aware of if looking to start an SMSF and maintain it.
These fraudulent perpetrators use stolen identity information or may harvest information from individuals by cold calling the victim and presenting themselves as superannuation experts.
They typically offer superannuation comparisons and/or high-return investment options through the establishment of a fraudulent SMSF. Remain vigilant, and remember that if you are dealing with an advisor for the benefit of your SMSF, you should check to see if the advisor is listed on ASIC’s Professional registers or Moneysmart’s list of unlicensed companies you should not deal with.Read more.
Superannuation Changes To Affect Pensioners (And What You May Still Need To Take Into Account From Last Year’s Budget)"
The Federal Budget was released last Tuesday, announcing key changes to taxation and business. For superannuation, the minimum pension drawdown amount was in the spotlight.
The reduction in the minimum pension drawdown amount for superannuation pension recipients has been extended for another year by the Federal Government, as announced in the Budget for 2022-23.
The minimum pension amount will be only 50% of the general amount (the balance from which the pension is drawn). For example, a 65-year old would usually need to draw down 5% of their opening balance as a pension payment throughout the year.
For the 2022-23 financial year, the minimum amount will be reduced 50% (dropping this to 2.5%). This measure is set to cost the Federal Government around $19.2 million dollars for the 2022-23 years, but you need to be alert and conscientious about it.
Why Is That?
Whilst it is a great outcome to keep as much of your money in your super as is possible (if it’s not required for you to live on), you do need to be conscious that at some point, the remaining balance will be passed onto the next generation, potentially as a part of their inheritance.
When this money does change hands and is given to the next generation if the superannuation balance includes a taxable component, then your children may be subject to as much as 17% tax on the capital value of that balance.
Different tax treatments can apply depending on whether your super is being paid as a lump sum, income stream or mixture of both, and if your beneficiary or beneficiaries are classified as ‘tax dependants’.
A tax dependant includes:
- a current spouse, including defactos
- any children of the deceased who are under the age of 18
- any other financial dependents.
If your beneficiaries were not financially dependent of you, such as a spouse or child under 18 years of age, then they will have to pay tax on the inheritance that you have left for them in your superannuation fund.
However, if you take that money out of your super and it passes to your children as a part of your estate instead, there will be no death duties payable (in this instance, ‘death duties’ refers to inheritance tax that may be payable, which has not been an issue since 1981).
The primary reason for the reduction in the minimum pension payment amount is to protect pensioners from having to sell their assets during a volatile period. However, this is a double-edged sword that needs to be carefully considered and weighed against your circumstances.
You May Need To Start A Discussion
Superannuation can be a tricky area to navigate, especially when you’re trying to do it by yourself.
If you’re approaching retirement, you may have questions about how to prepare for your pension years. These may include
- General retirement adequacy – how much money you’ll actually need to retire on
- How to manage your finances in retirement
- Old age issues that could crop up
- Using your home to fund retirement and insurance (and embracing the grey nomad lifestyle)
- Recent changes to superannuation measures, including the extended timeframe of the minimum pension drawdown,
Consulting with a professional is the best way to ensure that your pension is currently operating at its most effective level, and they can assist you with understanding what you may need to do to get your affairs in preparation for the future.Read more. "
Most people will want to keep as much money in their superannuation account for as long as possible. One of the primary reasons behind this is that the longer the superannuation has a chance to stay within the account, the more returns may be seen (depending on how the investment assets are performing).
Often, people will ask if they actually have to take their money out. The simple answer is no.
You never have to take your own super out if you don’t want to. There are plenty of rules regarding keeping money in super (including the conditions and requirements to withdrawing, meeting preservation ages, etc). There are very few however that force you to take it out, and very rarely will you be forced to withdraw your superannuation if you do not want to.
The only time your super must be paid out is following your death (which, technically, means that you won’t receive that money anyway, it will be your beneficiary/ies who will).
The question though is whether or not you should leave your superannuation in there until you die. It comes down to who is receiving the money from your super.
If the money is being paid out to your spouse, it will be tax-free and there will be no issue with accessing it. You can also keep as much of your superannuation in there for as long as is necessary.
When you are a married couple, you can leave it to each other. However the remaining living spouse will often end up leaving their super to their adult children, and therein lies the catch.
When your super is paid to a child who is over 25 (without a disability), the adult child has to pay 17% tax on any taxable component of their parent’s super. In this situation, taking professional advice to compare the tax consequences of taking your super early (where you pay the tax on the earnings) versus the tax position of leaving it in super and your kids paying 17% on the taxable component instead, may be needed to work out what might be best for your situation.
One of the primary concerns is that those finding themselves in this position, where they have for example $600,000 in super and in their mid-eighties are not paying tax and not regularly seeking advice are the ones whose children end up paying the tax.
It may be that the next generation needs to be involved with their elderly parents’ financial positions to ensure that they are not going to be stung with Australia’s death taxes on superannuation payments.
Remember, this tax is only payable on the taxable component of the superannuation – there are strategies that can be put in place during your sixties that can reduce the taxable component of your super (without taking it out and remaining in your name).
Everyone in their sixties should be taking advice from professionals so that the impact of death benefit taxes are reduced for their adult children when it is mandatory for their parents’ superannuation to be paid out to them.Read more. "
Disasters, be they natural or man-made, can happen to anyone. It could be a car accident, a tree crashing through the roof, or a bushfire hitting your residence. In any case, an event that causes significant harm or impact that affects someone’s everyday life in an adverse way is never pleasant.
Thankfully, as a society, there are laws that provide compensation to people who experience these accidents as a result of someone else’s actions and are significantly impacted. If someone were to be (potentially) disabled for life due to such an incident, there may be a substantial compensation payout.
The idea of this compensation is not only to compensate for economic loss but to also provide a capital amount for the person’s living costs for the rest of their lives. Often that compensation will run to millions of dollars. Sounds like a lot, right?
If you receive compensation for becoming totally and permanently disabled, investing this lump sum should make it last far longer. This action will require careful planning and professional advice. Consulting with a professional on this financial decision may be in your best interest.
One effective strategy that can be used here is to make what is known as a Structured Settlement Contribution to superannuation. You can then use your superannuation to pay you a pension. If done correctly, all the money that your investment earns in super should be tax-free and all of the money that you draw out of super should also be tax-free. Removing tax from the equation when it comes to the money that you can draw out of your super will have a massive impact on your ability to have that money last your lifetime.
However, you need to make sure you comply with all of the rules around making a structured settlement superannuation contribution. These rules include:
- You will usually have to be under 67 at the time of making the contribution
- The contribution needs to be made within 90 days of getting the money
- Two doctors need to certify that you are totally and permanently disabled
- The payment must be compensation for personal injury where someone else was at fault or for workers compensation
- You must notify your super fund that it is a structured settlement contribution
The contribution will also have no impact on your pension transfer balance limit. This means that if you make a structured settlement contribution of $2 million then you will now be able to transfer $3.7 million into a pension instead of the usual $1.7 million.
The payments are usually received after a lengthy legal process and it is probably not something that will be top of mind for the 90 days following receipt of the funds but the decision to contribute the amount to superannuation can have a lasting positive impact on your after tax income.
Consulting with a registered professional about your options regarding contributions, withdrawals and general options can give a better understanding of what you might be in a position to do.Read more. "
Involvement in an SMSF can put certain responsibilities in their trustees hands, and those who overlook important details or find themselves reported to the ATO for failing to fulfil those responsibilities may risk incurring financial, civil or criminal penalties.
As SMSFs often involve multiple members, the risk of non-compliance grows. You might be doing the right thing, but can you say the same thing about your fellow trustees?
That is why the role of the trustee should not be taken lightly as with greater control comes greater responsibility, should the administration of your SMSF go awry.
Make sure your retirement nest egg is protected by avoiding these common mistakes made by SMSF trustees.
Breaching The Sole Purpose Test
SMSFs must be maintained for the sole purpose of providing retirement benefits to your members (or for their dependents if a member dies before retirement). You will fail the test if a member gets any financial benefit through an investment, aside from increasing the return to your fund.
For example, a member’s personal use of a holiday house purchased by the fund, without making rental repayments, would breach the sole purpose test. The rules can become complex, which is why seeking professional advice may be wise. Trustees who breach the sole purpose test will lose their fund’s concessional tax treatment and could be liable for civil and criminal penalties.
Financial Assistance & Member Loans
Trustees can make the error of accessing their SMSF funds at will instead of following strict super laws. You cannot access your SMSF bank account to give financial assistance or loans to members or members’ relatives, improve your cash flow, repay debts or make personal investments. There have also been reports of withdrawals from SMSFs accidentally on mobile banking apps. Avoid ATO sanctions and keep your bank accounts separate to ensure no premature withdrawals are made from your SMSF account.
Failing To Lodge Paperwork On TIme
SMSF trustees must comply with demanding reporting and recordkeeping requirements. Your SMSF will have an annual audit. Failure to produce certain documents or make the deadline date will result in your SMSF being reported to the ATO. It is crucial to keep accurate records of all decisions and transactions should the ATO take an interest in your SMSF. A financial advisor may be helpful to take the stress out of keeping on top of your paperwork.
Not Planning For The Death Of Another Member
The death or illness of a member of your SMSF can have devastating effects on your retirement savings if you are not prepared. Dependency on one member to administer the SMSF can destabilise the fund if they pass away. Ensure that responsibilities are evenly distributed, if necessary, and that there is a clear understanding of the processes of the SMSF.
Go further than taking out life insurance policies and take the following precautions:
- Educate all of the members on the basic rules and strategies of your SMSF
- Employ an accessible financial advisor to answer any questions you may have about it, and to ensure that you remain compliant.
- Allow access to passwords and account numbers for all members
- Regularly review your binding death benefit nominations
- Know the processes of your SMSF, and be aware of the responsibilities of the trustees.
There are plenty of ways to maximise your superannuation contributions prior to your retirement at any time of your life. As the means of funding your nomadic lifestyle, your seachange or your downtime after retiring, you want to make sure your superannuation is equipped to handle it.
The Australian Taxation Office recommends that you should check how you can maximise your super at the bare minimum of 10-15 years before the age that you hope to retire so that you have the time you need to make a difference to your final super balance.
So, if you were thinking of retiring at your preservation age (which is the age that you can access your super), your superannuation should reflect the amount that you want to be able to access to fund that retirement.
While starting earlier does mean it may be easier to accumulate what you need to retire by the time of it occurring, it doesn’t mean that there’s a cutoff date or a deadline to have contributions in for maximised profits.
Here are 3 simple ways that you can make a difference to your superannuation fund which could impact your balance for retirement in the long-term(and the sooner you try them, the better).
Your employer is required by superannuation law to contribute 10% of your taxable income to your super each year. This allows you to build up a steady balance as you work without having to actively contribute yourself.
However, if you have a position that pays well enough and allows you to do so, you may also be able to speak with your employer about arranging for some of your income to be ‘sacrificed’ to your superannuation, and contribute additionally to the balance yourself. These are known as concessional contributions.
So, for example, your employer may pay you $1,500 as your base salary pay. They also make the 10% contribution for your superannuation and pay $100 in tax. That leaves you with $1350. If you elect to salary-sacrifice, you might wish to pay $100 from your before-tax income. This means that instead of being taxed at a $1,500 base salary, you’ll only be taxed from the $1,400.
Track Down & Combine Your Accounts
There have been measures enacted to prevent additional super funds from being created for new employees who don’t elect to nominate a super fund – for those who may have existing multiple super accounts, it’s time to consolidate and combine them.
You can increase the rate that your super grows each year as a result of the compounding effect of additional funds and fewer fees, and ensure that your nest egg is nurtured by a provider that aims to grow. You just need to be sure to check that you don’t lose out on any benefits by transferring or consolidating to your chosen fund.
Tax & Super Can Work Great Together, If You Know How
If you are willing and ready to start saving, your superannuation can become a tax deduction gold mine (if you are eligible for the deductions that you are applying for.
One such deduction is the spousal contribution deduction.
If you make a contribution to your spouse’s super (and they earn less than $37,000 per year) any contributions that you make to their super can provide you with a tax rebate of up to $540. You can also claim back on any contributions that you may have made directly from your bank account to your super until you reach the contributions limit (known as a cap).
Discussing with a specialist or your super provider about the best course of action for you and your needs may be the step that you need to take to ensure the potential growth of your fund.Read more. "
What happens to your super when you die? It might not be a question that has cropped up in many people’s minds, but it is something that you should be concerned about.
Upon the untimely death of someone, their superannuation may be one of the elements of the estate that can be bequeathed and divided between their loved ones (trustees of the estate and beneficiaries.
This is not done through your will though, as it isn’t automatically included unless specific instructions have been given to your super fund. Often this is done through a binding death benefit nomination. These payments are usually paid out in lump sum payments and split between beneficiaries as dictated by the deceased.
However, like any property or asset that can be challenged, the death benefits from superannuation and SMSF can be a legal quandary if the appropriate succession planning measures have not been put into place.
Death benefits are one of the most commonly occurring legal issues that plague the superannuation and SMSF sector for individuals. Many court cases involving death benefits are the result of poor succession planning, as individuals who were not stated to be recipients of the payments miss out on what may be supposed to be theirs.
In the event of an individual’s death, the deceased’s dependent can be paid a death benefit payment as either a super income stream or a lump sum. The non-dependants of the deceased can only be paid in a lump sum. The form of the death benefit payment (and who receives it) will depend on the governing rules of your fund and the relevant requirements of the Superannuation Industry (Supervision) Regulations 1994 (SISR).
If succession planning around who the superannuation is to be left to is in place by the deceased, those who may be classed as dependents and non-dependents can become legally blurred.
In any event, dependents are defined differently depending on what kind of law they are being examined under (superannuation law and taxation law).
Under superannuation law, a death benefits dependant includes:
- The deceased spouse or de facto spouse
- A child of the deceased (any age)
- A person in an interdependency relationship with the deceased (involved in a close relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other).
Under taxation law, a death benefits dependant includes:
- the deceased’s spouse or de facto spouse
- the deceased’s former spouse or de facto spouse
- a child of the deceased under 18 years old
- a person financially dependent on the deceased
- a person in an interdependency relationship with the deceased
Depending on the type of law that the beneficiary is classified under affects how they can interact with the death benefits.
How Do I Make Sure My Beneficiaries Will Receive The Death Benefits That I Want Them To Have?
Death benefit payments need to be nominated by the holder of the superfund, as superannuation is not automatically included in your will. If you fail to make a nomination, your super fund may decide who receives your super money regardless of who is in your will.
That’s why succession planning is important when it comes to death benefits, no matter the situation. Even if you are at your healthiest, you’ll want to be prepared for any eventuality.
To get your succession planning right, here are 5 tips that will help you during the process.
- Locate and/or consolidate your superannuation funds – if you do not consolidate your funds, ensure that there is a binding death benefit nomination (BDBN) in place for each fund.
- Prepare a BDBN – this is a notice given by you as a member of a superannuation fund to the trustee of your super fund, nominating your beneficiaries on your death and how you wish for the death benefits to be paid.
- Seek advice before making changes to your level or type of insurance cover – you may be compelled to disclose medical conditions which may impact your ability to obtain cover or impact the cost of your cover if you remove or change your insurance cover.
- Review your binding death benefit nomination (BDBN) each year during tax time
- Seek advice on a superannuation clause under your will – though superannuation is not an estate asset, the death benefit may be paid to the estate under certain conditions, which you should consult with a super professional about.