Financial Newsletter Sunshine Coast
Welcome to Unique Financial Partnerships, keeping you up to date with all financial planning, self managed superannuation funds, tax minimisation, life insurance, on the Sunshine Coast and around Australia.
The information in this newsletter is current at the time of printing. Contact us for updates.
How are the benefits of the TTR strategy measured?
The key feature of a TTR strategy is converting your superannuation fund into a pension income stream, even while you are still working. This allows you to increase your salary sacrifice or other tax deductible contributions into superannuation and enjoy a number of tax concessions that will boost your overall benefit. And the strategy can be structured so that your net income (which you may use to meet living expenses) does not have to change.
For example, Maree is 55 and feels like she could keep working for another ten years. She earns $90,000 before tax and has a superannuation fund worth $350,000. Maree has not considered salary sacrificing into superannuation because all of her net salary is used to meet living expenses and to fund an annual overseas holiday to visit her grandchildren.
Based on the above, Maree would pay $23,350 each year in personal income tax (including Medicare levy), while her superannuation fund could pay around $3,150 in tax on its earnings (assuming earnings of 6% after fees and a tax rate of 15%). On face value, Maree does not appear to have any flexibility to improve her taxation arrangements.
Maree - personal |
Maree - superannuation |
||
Gross salary |
$90,000 |
Superannuation balance |
$350,000 |
Tax |
($23,350) |
Earnings - 6% |
$ 21,000 |
Net income |
$66,650 |
Tax on earnings - 15% |
($ 3,150) |
|
|
Balance after 1 year |
$367,850 |
However, since she is 55, Maree could commence a TTR pension with her superannuation, which would immediately reduce the tax on earnings within the fund to nil.
Tax saved on super fund earnings = approx. $3,150 pa
If she elects to receive the minimum income of 4% or $14,000 each year from her pension, Maree could offset this by sacrificing $17,500 of her salary into superannuation. Maree’s personal income tax would drop (by $3,552), although the salary sacrificed contributions would be subject to 15% contributions tax on entry to the fund ($2,625).
Net tax savings on income = $927 pa
Maree - personal |
Maree – superannuation/pension |
||||
Gross salary |
$90,000 |
Superannuation balance |
$ 0 |
Pension fund balance |
$350,000 |
Salary sacrifice |
($17,500) |
Salary sacrifice contributions |
$17,500 |
Pension payment |
($ 14,000) |
Pension |
$14,000 |
Contribution Tax |
($2,625) |
|
|
Tax |
($19,798) |
Earnings – 6% |
$ 446 |
Earnings – 6% |
$ 20,580 |
Net income |
$66,702 |
Tax on earnings - 15% |
($ 67) |
Tax on earnings - 0% |
($ 0) |
|
|
|
Combined balance after 1 year |
$371,844 |
|
In total, Maree’s TTR strategy would save her almost $4,000 each year in tax. Compounded over 10 years, this could provide a boost to her final retirement savings of almost $60,000. And crucially, this has been achieved by simply restructuring her superannuation, not changing her lifestyle.
So if you haven’t yet reached 55, pencil in that date as an important time to review your superannuation strategy. If you are already over 55, now is as good a time as any to consider the benefits of using a TTR strategy to improve your financial situation.
The economics of a slowing economy
After growing strongly for much of this decade, there's ample evidence that Australia's economy is slowing, along with many other developed nations.
In its most recent Statement on Monetary Policy, the Reserve Bank of Australia (RBA) observed a "significant moderation in domestic demand" as a result of tightening financial markets, slowing global growth, falling asset prices and higher fuel costs. These have all contributed to a reduction in spending and general economic activity.
Just how far our economy will slow is a matter of debate. Opinions among economists appear divided, with some predicting that we will gain ongoing strength from our terms of trade with China, and even the RBA noted the counter-veiling influence of global commodity prices on our economic position. On the other hand, there are fears from some sectors that we cannot be completely insulated from the continuing US house prices and credit fallout.
· What does a recession look like?
A popular definition of an economic recession is a situation in which a country suffers negative growth in Gross Domestic Product for two successive quarters. In other words, when the total amount of goods and services produced over a three-month period falls twice in a row.
Australia last experienced a recession (the one we "had to have") back in 1990–91. At that time, interest rates were as high as 17%, and the unemployment rate reached 11%. By comparison, we currently have interest rates at their highest for more than a decade, but still barely more than half what they were in 1990–91, while unemployment is running at a little over 4%.
Further, the International Monetary Fund (IMF) forecasts that Australia will continue growing at around 3% per annum over the next few years, which is slightly below its average for the past decade. Interestingly, China and India are expected to continue their rapid growth at around 10% and 8% per annum respectively.
· Australia's economic policy options
In setting official interest rates, the RBA takes a close look at the state of the economy and aims to keep inflation in its target range of 2–3%. While our booming economy was the cause of successive interest rate increases up until early this year, the RBA has already indicated that an easing of monetary policy (i.e. a drop in interest rates) may soon be needed to provide some economic stimulus.
Elsewhere, government spending (fiscal policy) is another commonly available tool to achieve the right balance in the economy between healthy growth and manageable inflation rates. On this front, successive federal budget surpluses—including the $21 billion in revenue after expenses announced by the new Labor government in May this year—will provide some flexibility for spending to create economic activity if the government deems it necessary.
So, while the expected levels of growth for developing nations—and even Australia—are generally below those experienced in recent times, they are, nonetheless, some way from the level of slowdown that would see these economies contract. Even the US is scheduled to return to its average growth of 3% per annum by 2010/11, should the IMF predictions eventuate.
Sources: www.imf.org - "World Economic Outlook", April 2008 and update July 2008
www.rba.gov.au - Statement on Monetary Policy", August 2008
Trauma Insurance: would your finances recover from a heart attack or stroke?
Around 1 in 3 Australian men and 1 in 4 Australian women are expected to suffer from some form of cancer during their lifetime.
If you were one of them, what value would you place on having access to the best available treatment to help you in beating the disease?
Think about how important it would be to take as much time off work as you needed to recover.
Trauma insurance provides you a payment in the event of being diagnosed with, or suffering, one of a range of conditions such as cancer, heart attack and stroke.
Medical advances have meant that our chances of surviving traumatic events are much better than they were in the past. However, the cost of treatment can sometimes be beyond your normal means. Without trauma cover, you may need to dip into your children’s education fund or your retirement savings, or you might even have to increase your mortgage to pay for expensive treatment.
Importantly, a trauma payment is not dependent on you being unfit to work (unlike income protection, where you need a doctor to certify your ongoing health). The diagnosis of a traumatic condition might mean that you physically could go to work, but would prefer to spend time with your family and reduce your work-related stresses while you recover and consider how your future will be affected.
Trauma insurance can provide the financial support to allow this flexibility with your work arrangements.
As with most types of insurance, there can be significant variations between one trauma policy and another, such as the number of events covered, premium options and ancillary benefits. Seeking professional assistance from your adviser is always worthwhile.
Sources: “Cancer in Australia 2001”, Australasian Association of Cancer Registries (2004)
Thinking outside the box
We all know that life sometimes provides a dilemma that really makes us think about what is most important to us. Take a look at the following example, which was used as part of a job application.
You are driving along in your two-seater sports car on a wild, stormy night. You pass by a bus stop, and you see three people waiting for the bus:
1. An old lady who looks as if she is about to die
2. An old friend who once saved your life
3. The perfect man or woman you have been dreaming about.
You can only take one passenger in your car. Who would you offer a lift to?
The old lady is at death’s door. But this would be the perfect chance to pay back your old friend. On the other hand, you may never be able to find your perfect dream lover again.
The candidate who was hired (out of 200 applicants) had no trouble coming up with his answer.
What would YOU do?
...
...
When you’ve decided, read below to see what the winning applicant said...
...
...
...
...
The successful candidate said, "I would give the car keys to my old friend, and ask him to take the old lady to the hospital. I would stay behind and wait for the bus with the woman of my dreams.”
Sometimes, we are limited by the constraints we put on ourselves. When faced with difficult decisions, remember that thinking outside the box might just lead to an outcome you never thought you could achieve!
Disclaimer
All representations and information contained in Futuro in Focus are made in good faith and are believed to be correct at the time of preparation. Articles are of a general nature and they do not purport to be specific investment advice. Individual needs or other considerations have not been taken into account, thus information contained herein should not be relied upon as a substitute for detailed advice. Futuro Financial Services will receive fees or brokerage from the provision of advice or placement of investments. You may, by contacting our Privacy Officer on 07 3018 0400 or by writing to Futuro Financial Services Privacy Officer GPO Box 942 Brisbane QLD 4001, request not to receive further editions of Futuro in Focus.
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