by Financial Foundations on 02/07/2019

Making The Most Of Falling Interest Rates

HOW SUPER IS YOUR LIFE INSURANCE?

Posted on September 10, 2019

The Reserve Bank’s decision to cut official interest rates is good news for anyone with a mortgage or hoping to buy their first home, but presents a challenge for savers. Whatever your personal situation, the question now is how to make the most of falling rates.

In case you missed it, on June 4 the Reserve Bank cut the official cash rate by 25 basis points from 1.5 per cent to 1.25 per cent, the lowest on record. Many economists predict further cuts, with some suggesting rates could fall to as little as 0.5 per cent this year or next.

Just how low rates go will depend on the broader economy. Growth in the three months to March was up just 0.4 per cent, or 1.8 per cent over the year. The Reserve Bank is also concerned about sluggish wage growth, unemployment stuck at around 5 per cent and inflation of 1.3 per cent well below its target 2-3 per cent range.

But rather than wait to see how low rates will go, there are things you can do now to take advantage of lower rates or minimise their impact, depending on your personal circumstances.

GRAB A BETTER HOME LOAN DEAL

Many banks moved quickly to cut home loan interest rates in the days following the Reserve Bank’s move, although not all of them passed on the full amount.

According to rate comparison site Finder, the average standard variable rate offered by the big four banks is now between 5.11 and 5.18 per cent. On the average home loan size of just under $400,000 that could save $60 a month or up to $21,000 over 30 years.ⁱ

The big four also cut their discount rates to between 3.54 and 3.78 per cent, while some smaller lenders are offering rates as low as 3.19 per cent. The lowest 1-year fixed rate is below 3 per cent.ⁱ

While house prices and interest rates continue to fall, the stars could finally be aligning for Australians wanting to buy their first home.

The Australian Regulation Prudential Authority (APRA) plans to relax the minimum 7 per cent interest rate banks are required to use when assessing borrowers’ ability to service a home loan. This could see more first home buyers qualify for a loan or potentially secure a bigger loan than they would otherwise have been able to afford.

Also, the Morrison government proposes low deposit financing for eligible first home buyers who save a deposit of as little as 5 per cent up to 20 per cent to purchase property.

For people with existing home loans, it’s time to check whether you are getting a good deal from your lender. If not, ring them to negotiate a lower rate and be prepared to shop around if they won’t budge.

If you do secure a rate cut, consider making the same monthly loan repayments to repay your mortgage faster. Or you could use the cash you free up to pay down debts with higher interest charges, such as credit cards.

THE OUTLOOK FOR SAVERS

Lower interest rates can be more challenging for savers. That includes anyone with a savings account as well as retirees who depend on the income from term deposits to help with living expenses.

Term deposit rates were already on the way down before the Reserve Bank’s rate cut and are likely to head south of 2 per cent. The average interest rate for $10,000 invested in a 1-year term deposit was 2.15 per cent in May and 1.9 per cent across all terms.ⁱⁱ

Banks have also been cutting base and/or bonus rates on their online savings accounts. The best rates are generally on accounts with an ongoing bonus rate of interest if the account is linked to an everyday transaction account.

The best online rates on offer are currently around 3 per cent for the first four months, before dropping to a base rate around half that, so shop around and read the terms and conditions. To earn a bonus rate of interest, some require a minimum monthly deposit, others no withdrawals.

THE HUNT FOR YIELD

Investors looking for income are not restricted to bank deposits. If you have a longer time horizon, growth assets such as shares and property can provide regular income. That includes pre-retirees and recent retirees who need their money to last for upwards of 20 years or more.

If you can ride out the short-term fluctuations in share and property prices, the income they provide in the form of dividends (shares) and rent (property) tend to be more stable and reliable.

The national average rental yield on Australian residential property is sitting at around 4.1 per cent.ⁱⁱⁱ Coincidentally, Australian shares currently provide an average dividend yield of 4 per cent (7 per cent after franking) but many quality companies pay more.^iv

For example, the big four banks currently offer dividend yields of between 5.2 and 6.8 per cent. After franking credits are included, the yields grow to 7.5 and 9.7 per cent respectively. As you can see, in a low rate environment it can pay more to invest in the banks than to deposit your savings with them.

Whether you plan to borrow or pump up your income, falling interest rates can offer opportunities and challenges. If you would like to discuss the impact of lower rates on your investment strategy, give us a call.

i Finder, 10 June 2019, https://www.finder.com.au/press-release-savings-loss-following-rate-cut
ii RBA May 2019, https://rba.gov.au/statistics/tables/#interest-rates
iii CoreLogic, 1 June 2019, https://www.corelogic.com.au/sites/default/files/2019-06/CoreLogic%20home%20value%20index%20JUNE%20FINAL.pdf
iv AFR share online market tables, 24 June 2019

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Keeping Up With The Joneses

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KEEPING UP WITH THE JONESES

Posted on June 21, 2019

IS IT HOLDING YOU BACK?

These days, the phenomenon of keeping up with the Joneses is more pervasive than ever. The constant bombardment of images from advertisers, as well as our friends and family via social media is making Australians feel pressured to maintain a certain lifestyle, often to the detriment of their long-term financial goals. In fact, new research reveals that over a third of Australians feel burdened by the pressure to keep up appearances.ⁱ

NOTHING NEW

Wanting what your neighbour has is not a new phenomenon. The New York World was publishing a comic strip titled Keeping Up with the Joneses way back in 1913. But the expansion of mass consumerism through the twentieth century only exacerbated the problem as certain material objects were branded as status symbols. These days the issue presents a little differently, with experiences rather than things tending to be our main objects of desire. We all know how envious we can get of that certain friend, who always seems to be traveling to exotic locations and dining out at the hottest new places.

THE CONSEQUENCES

Australians are paying a hefty cost to keep up appearances. Many Australians are favouring the perception of prosperity in the present over long-term wealth accumulation. A recent report indicates we are passing up on private health insurance and delaying dental visits just to maintain our lifestyle.ⁱ 38% are even choosing to forgo home ownership meaning many Aussies are without a major asset.ⁱⁱ

SO HOW DO WE GET BACK ON TRACK?

A lot of it comes down to knowing where you’re going. Ask yourself where you want to be in a year, and what you want your life to look like in ten. This will help you get specific about your goals. Detail is key. It’s a lot easier to say no to that new gadget all your mates have when you know exactly where you’re heading.

Once you’ve decided on your goals, it’s time to review your budget. Start by comparing your monthly income with your average monthly expenses. Look at each item line and ask yourself, do I really need this? This will help you evaluate what you are willing to forgo to achieve your vision for the future. Don’t be too harsh on yourself though, we all need a few treats to get through the daily grind. It’s also handy to remember that your circumstances are likely to change as time goes on, so make sure you schedule in periodic reviews.

THE IMPORTANCE OF A COACH

Now it’s all well and good for us to tell you to clarify your goals and develop a budget, but we know the reality of good financial health is a little more complex. Just like you might hire a PT to get you in shape, it’s helpful to have a coach who can help you make the right financial decisions based on your circumstances. As a financial adviser, our job is simple: to keep you on track, assess your goals and balance your present needs with your future vision. And with tax time around the corner, there’s never been a better time for review.

It’s only human to compare yourself to others. But if you practice gratitude for what you already have and maintain a clear idea of where you’re going, saying no to those little unnecessary expenses can be that bit easier.

Remember, we’re here to help. And who knows, in twenty years, it may be the Joneses who are trying to keep up with you!

i https://www.mpamagazine.com.au/sections/features/keeping-up-appearances-may-cost-australians-their-financial-goals-262028.aspx
ii https://www.news.com.au/finance/money/costs/australians-are-trying-to-keep-up-appearances-but-its-slowing-down-their-ability-to-save-for-a-home/news-story/02814a8d9c3908906c04bde721cc5533

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by Financial Foundations on 17/06/2019

Paving The Way For A Smooth EOFY

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PAVING THE WAY FOR A SMOOTH EOFY

Posted on June 17, 2019

As the end of the financial year draws closer, thoughts turn to tax. No doubt you can think of more enjoyable ways to spend your time than preparing for your annual tax return. So how can you streamline the process while ensuring you take advantage of all the claims that are possible?

First, you need to collect all your records of both your income and your expenditure throughout the year.

This includes:

All your income whether it’s from your employer, your super or your pension
All your bank statements including interest earned and charges paid
Dividends and distributions from your investments
Records of investment sales and purchases for capital gains/loss purposes
Income from rental properties and associated expenses
Foreign income
Your private health insurance policy details.

Nowadays, there may also be income to report from your participation in the shared economy such as money earned from Uber or AirBnB.

Ideally all this documentation should be to hand. If it’s not, then seriously consider using an app to record all these transactions on a regular basis so when June comes around, you won’t spend hours hunting out all the documentation. The Australian Taxation Office, for instance, has a myDeductions app for individuals and sole traders.

Another way to help monitor your expenses is to establish a separate credit card or bank account for your work-related expenses so that they are easily identifiable.

WHAT CAN YOU CLAIM?

Once you have your documents to hand then you need to consider what you can claim as work-related expenses. But do make sure you only claim what you are entitled to, because the ATO has work-related expenses in its sites this year.

Basically there are three key criteria:

You must have spent the money yourself without having it reimbursed
The money must be directly related to earning income
You must have a record to prove it.

If your expenses meet these criteria, then there are a host of expenses you may be able to claim. These include vehicle and travel expenses; clothing, laundry and dry cleaning; gifts and donations; home office expenses; self-education; bank interest and account fees; and tools and equipment.

As an investment property owner, you can claim items such as land tax, rates, body corporate charges, insurance, repairs and maintenance, agent’s commission, gardening, pest control, costs associated with drawing up leases and advertising for new tenants.

If you have income protection insurance outside super, then tax time is a perfect opportunity to review your cover and maybe prepay your next 12 months of premiums. That way you can claim those premiums as a deduction in the current year and reduce your tax liability. Other types of life insurance are generally not tax deductible outside of super.

CHECK YOUR SUPER

Superannuation is another area for attention. If you have not reached your concessional contributions cap of $25,000 (which includes your employer’s contributions and salary sacrifice amounts) then consider putting the shortfall into your super. Any personal concessional contributions you make can be claimed as a tax deduction. But don’t wait until the 11th hour as your contribution may not be processed by the fund until after June 30. You will need to notify your fund of your intent to claim a deduction and there are applicable timing requirements for this notice.

Taking advantage of the government’s co-contribution can also be worthwhile for those who are eligible. If you earn less than $37,697 in 2018-19 and contribute $1,000 to your super as a personal contribution for which you don’t claim a tax deduction, the government will match it with a $500 co-contribution. That’s an effective 50 per cent return on your investment.ⁱ The co-contribution reduces progressively to nil once your income reaches $52,697. You must meet the eligibility criteria to qualify.

CHANGES FOR INACTIVE SUPER ACCOUNTS

It is also worth noting that come July 1 your super fund will cancel your life insurance policy if no contributions or rollovers have been made to your account in the last 16 months. If you want to maintain insurance cover with such a fund, you need to contact your fund or make a contribution or rollover into that fund to keep your account active. Alternatively, you could speak to us about purchasing cover outside super.ⁱⁱ

If you would like some help making tax time less taxing this year, speak to your tax agent or give us a call.

i https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-co-contribution/?anchor=Eligibilityforthesupercocontribution#Eligibilityforthesupercocontribution
ii https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/insurance-through-super

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by Financial Foundations on 07/06/2019

Winter 2019

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WINTER 2019

Posted on June 7, 2019

The end of the election uncertainty and the investor-friendly policies of the Coalition produced a relief rally on financial markets. The Australian dollar bounced back above US69c on Monday after falling to three-year lows the day before the election, while local shares surged to an 11-year high on Monday before losing some of their gains the following day.

The Australian dollar more broadly has suffered from a flight to safety as trade tensions between the US and China escalate, pushing the US dollar higher. Global bond yields and share prices have also fallen in May.

In Australia, the Reserve Bank has trimmed its economic growth forecast for 2019 from 3.0 per cent to 2.75 per cent where it is expected to stay until at least June 2021, despite rising iron ore prices. This is against the background of a lift in the unemployment rate from 5.1 per cent to 5.2 per cent in April and a slide in business sentiment. The NAB business conditions index fell from 7.2 points to 3.1 points in April while the business confidence index remains below zero. New vehicle sales, a bellwether for consumer confidence, fell to their weakest level in 9 years in April, down 8.9 per cent over the year.

Now that the federal election is out of the way, all eyes will be on the Reserve Bank and whether it decides to cut the cash rate from its current level of 1.5 per cent to stimulate the economy.

ELECTION 2019: A VOTE FOR CONTINUITY IN AN UNCERTAIN WORLD

The Liberal/National Party Coalition has been returned to government, as Australians chose continuity over change and cautious economic management over Labor’s ambitious reform agenda.

The Coalition is promising sweeping tax cuts for individuals and continuity for investors with no big changes to existing investment or superannuation policies.

One of the first items of business for Prime Minister Scott Morrison will be to reconvene Parliament to pass legislation on a low and middle-income tax offset.

INDIVIDUALS TO PAY LESS TAX

Providing the legislation is passed quickly, from 1 July Australians earning less than $37,000 will receive a tax offset of up to $255 (effectively a cash rebate) with their tax returns. If you earn between $48,000 and $90,000 you will get the maximum amount of $1080. The offset then scales down to zero for those earning $126,000 or more.i

Further planned tax cuts could depend on the Coalition winning the next federal election.

From July 2022, the Coalition plans to raise the top threshold of the 19 per cent income tax bracket to $45,000. Then from July 2024, it plans to reduce the 32.5 per cent tax bracket to 30 per cent and do away with the 37 per cent rate entirely.

If adopted, these proposals will result in a flat 30 per cent tax rate for anyone earning between $45,000 and $200,000.

SUPPORT FOR FIRST HOME BUYERS

In a proposal that could also help stimulate the flagging residential property market, the Coalition has promised help for first home buyers trying to get a foot on the property ladder.

From January 2020, the proposed first Home Loan Deposit Scheme would allow eligible first home buyers with income of up to $125,000 (or $200,000 for a couple) to buy a home with a deposit as low as five per cent without incurring lenders mortgage insurance.ii

HELP FOR SMALL BUSINESS

Small business has not been forgotten. As announced in the recent Budget, the popular instant asset write-off will be increased and extended to businesses with turnover of up to $50 million (previously $10 million).

Eligible businesses will be able to write off assets up to the value of $30,000 (previously $25,000) against their taxable income.

INVESTMENT TAX CONCESSIONS TO STAY

Investors can breathe easy now that controversial changes to dividend franking credits and negative gearing proposed by Labor will not go ahead.

Individuals, including those with a self-managed super fund, will continue to be entitled to a cash refund of franking credits attached to their share dividends if the franking credits exceed their tax liability.

Property investors have also earned a reprieve, with no changes to negative gearing rules.

SUPER CHANGES AT THE MARGINS

Australians hoping to boost their super in the run up to retirement will continue to enjoy existing tax concessions.

You will still be able to make catch-up concessional (pre-tax) contributions if you meet certain conditions. From the 2019-20 financial year, individuals who have not used their full $25,000 annual concessional contributions cap will be able to carry forward the shortfall for up to five years and claim a personal tax deduction. To be eligible, your total super balance must be below $500,000 on June 30 the previous financial year.iii

The non-concessional (after tax) contributions cap will remain at $100,000 a year for people with a total super balance below $1.6 million. Those under 65 can still bring forward up to three years’ contributions (or up to $300,000) with a proposal to increase the age limit to 67 from 1 July 2020.iv

The Coalition also plans to allow older Australians to make voluntary contributions until age 67 without meeting the work test. Subject to legislation, this measure would also begin on 1 July 2020.

LOOKING AHEAD

With the election out of the way, Australians can get back to the business of planning their finances with more certainty.

The initial response from financial markets was positive, with the Aussie dollar and local shares both up on the first day of trading after the election. However, the jury is still out on whether the Government’s tax cuts and spending promises will be enough to boost economic momentum.

If you would like to discuss your overall financial plan in the light of the election result, please give us a call.

i https://budget.gov.au/2019-20/content/tax.htm
ii https://www.liberal.org.au/latest-news/2019/05/12/helping-australians-buy-their-first-home
iii https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-contributions—too-much-can-mean-extra-tax/?page=2#Concessional_contributions
iv https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-contributions—too-much-can-mean-extra-tax/?page=3#Non_concessional_contributions

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by Financial Foundations on 08/05/2019

How Much Super Is Enough?

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HOW MUCH SUPER IS ENOUGH?

Posted on may 8, 2019

Most of us dream of the day we can stop working and start ticking off our bucket list. Whether you dream of cruising Alaska, watching the sun rise over Uluru, improving your golf handicap or spending time with the grandkids, superannuation is likely to be a major source of your retirement income.

The more money you squirrel away in super during your working years, the rosier your retirement options will be. The question is, how much is enough?

The super retirement balance you need to aim for will depend on a number of factors including the age you retire, how long you live, the lifestyle you wish to maintain, future health and aged care costs and whether you receive a full or part Age Pension.

You also need to factor in whether you own your own home outright and your relationship status because two is generally cheaper than one.

ESTIMATING YOUR NEEDS

Financial commentators often suggest you will need around two thirds (67 per cent) of your pre-retirement salary to enjoy a similar standard of living in retirement.ⁱ Lower income households may need more because they typically spend more of their income on necessities before and after retirement.

The latest ASFA Retirement Standard estimates that a couple retiring today needs a retirement super balance of $640,000 to provide a comfortable standard of living. As the table below shows, this would provide an annual income of $60,977.ⁱⁱ

Singles need a lump sum of $545,000 to provide a comfortable income of $43,317 a year. These figures assume people own their home and include any entitlements to a full or part Age Pension.

Source: ASFA Retirement Standard December quarter 2018

Of course, everyone’s idea of comfort is different. Annual overseas trips or expensive hobbies may require higher savings. Frugal homebodies may get by with less, while those with health issues may require more.

HOW DO I COMPARE?

The mean balance at retirement (age 60-64) shows most people retiring today fall well short of the amount needed for a ‘comfortable’ retirement.ⁱⁱⁱ

Since these figures were taken most people will have increased their balance, but the gap between men and women persists at all ages. Women are more likely to take time out of the workforce, earn less than their male counterparts and work part-time. Divorce also tends to put a bigger dent in women’s retirement savings. By the time women reach their 60s they have 42 per cent less super than men on average and are more likely than younger women to have no super at all.

Source: ABS, ASFA

HOW CAN I BOOST MY SUPER?

If your super is not tracking as well as you would like, there are ways to give it a kick along.

When your budget allows, or you receive a windfall, consider putting a little extra in super. Even better, set up a direct debit or salary sacrifice arrangement.

You may be able to make a tax-deductible contribution up to the $25,000 annual concessional cap but be aware that this cap includes employer contributions and salary sacrifice.
You may also be able to contribute up to $100,000 a year after tax, or $300,000 in any three-year period. You can’t claim it as a tax deduction, but earnings will be taxed at the maximum super rate of 15 per cent rather than your marginal rate and you can withdraw the money tax-free from age 60. Your age and the amount you have in super can restrict the amount of contribution caps.
If you earn less than $37,000, your other half can contribute to your super and claim a tax offset of up to $540. The offset phases out once you earn $40,000 or more. This tax offset is open to married, de facto and same sex couples.
If you are a mid to low income earner and make an after-tax contribution to your super account, the government will chip in up to $500. To receive the maximum contribution, you need to earn less than $37,697 and contribute at least $1,000 during the financial year. The government co-contribution reduces the more you earn and phases out once you earn $52,697.
Speak with your employer about directing some of your pre-tax salary into super. ‘Salary sacrifice’ contributions are taxed at a maximum of 15 per cent (30 per cent if you earn over $250,000). But stay within your concessional contributions cap of $25,000 a year, which includes employer contributions.
If you are 65 or older you may be able to make a downsizer contribution to your super of up to $300,000 from the proceeds of selling your home. Couples could contribute up to $600,000. This is not a concessional or non-concessional contribution and does not count towards your contribution caps. The property must have been owned for at least 10 years and used as the main residence for some or all the time. It can only be used once, it’s not tax deductible and may impact your Centrelink entitlements.

To work out the difference extra contributions could make to your retirement nest egg, try out the MoneySmart retirement planner calculator.

As the end of the financial year approaches and with the federal election looming, this is a great time to utilise your annual contribution caps and get a tax deduction for voluntary concessional contributions. If you would like to talk about your retirement income strategy, give us a call.

i Moneysmart, Last updates 27 Aug 2018, https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-contributions/how-much-is-enough
ii ASFA Retirement Standard, 1 December 2018, https://www.superannuation.asn.au/resources/retirement-standard
iii Superannuation Statistics, March 2019, ASFA, https://www.superannuation.asn.au/ArticleDocuments/269/SuperStats-Mar2019.pdf.aspx?Embed=Y

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Camberwell VIC 3124

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by Financial Foundations on 17/04/2019

Free Initial Consultation

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FREE INITIAL CONSULTATION?

Posted on April 17, 2019

So what is on offer to the friends, family members, business or work colleagues of our loyal clients?

Referral’s from our valued clients will be entitled to a FREE initial consultation with one of our expert Financial Advisers!

WHAT DOES THE FREE CONSULTATION ENTAIL?

Answer any questions and concerns you may have
Discuss your goals and objectives and what you would like to achieve in the short, medium and long term
Go through a financial fact find to understand you and your situation better
Comment around your current financial situation and provide general advice
Test your risk profile to see how risk adverse you are
Discuss ways that we may be able to assist you in the short, medium and long term.

SOME OF THE AREAS WE MAY BE ABLE TO ASSIST YOU IN ARE:

Wealth creation – Establishing a regular savings regime to build wealth over time.
Insurance – Ensuring you and your family are covered financially in case of an unfortunate event.
Retirement planning – How you can prepare for retirement, what strategies should be implemented before you exit the workforce. If you were to retire now, how much pension would you receive.
Superannuation Review – To ensure your superannuation is invested according to your attitude to risk. Ensure you are paying only one sets of fees (consolidation of supers), and to ensure your super is managed appropriately.
Aged care – Assistance with fees, options and strategies to ensure you are left in the best possible position.
Pensions – How much pension will/can you receive in retirement, what are your options in drawing a pension from super, how much pension will you receive from super and from the Government.
Salary packaging – setting up salary sacrificing, how much can you salary sacrifice each year. What other salary packages are available to you.
Tax planning– Assisting in ways to minimise the tax you pay.

Only if you wish to engage in our services, we will then provide you with a Statement of Advice document, which provides specific recommendations for your circumstances.