Written by Hudson Adviser Phillip McGann
Do you qualify as eligible for an Australian Age Pension – based on age and residency criteria whether you get a full, part or even NIL payment ?
Do you own real estate in Australia ?
Do you require additional regular income over and above your current Age pension payment to live the lifestyle you are seeking in retirement?
If you have answered yes to all these questions (and a few others such as not being bankrupt and having adequate property insurance ) you may well be eligible for the government provided Pension Loans Scheme to fill in the gaps of your retirement income.
Even self funded retirees who are eligible for the age pension but qualify for a “NIL payment” can apply for the PLS.
The PLS is in effect a government backed reverse mortgage secured by your property.
It has been around for decades but last year the government tweaked the eligibility rules and this opened up the scheme to potentially ten of thousands of Australian Retirees.
The interest rate charged is currently 4.5% and the payment cannot be accessed as a lump sum but only as additional payments over and above you age pension payments (even if you payment is NIL)
The maximum amount you can access in payment is a combined total of 150% of the maximum age pension entitlement paid fortnightly.
So if you currently receive the maximum age pension of $35,573 per annum or $1368.20 pf for you and your partner, you would be entitled to draw up another $694 pf for a combined total of $2,052 pf.
This is 150% of the maximum age pension .
The maximum loan amount you can go up to is worked through via a formula that takes into account the age of the youngest recipient and the value of the property in question.
You can also limit the amount of the properties equity you wish to put up as collateral.
The amount accrues interest and the debt increases. No regular payments are required to be made but you can do so if you desire. Ultimately the debt is payable when the property is sold – usually upon your death.
There is a maximum loan amount that is determined by a formula that takes into account your age and the value of the real estate put up as collateral.
The maximum loan amount can rise over time as you age and the value of the property rises. And the PLS payments are not counted in the income test for the age pension.
The Pension Loan Scheme is not for everyone but it is likely to prove attractive to many as word of it spreads, as it provides options for additional income in retirement using your home as collateral for a (relatively) low interest rate.
If you would like to discuss this and any other retirement income matters further with your adviser call 1800 80 296 to book in a call.Read in full + comments 0 Comments
Written by Hudson Adviser Ivan Fletcher
Under social security legislation, amounts set aside for funeral expenses are generally exempt under the income and assets tests up to certain limits. However, in some cases clients may have a combination of these products, which may impact how they are assessed.
The three main ways that you can pre-pay funeral expenses are:
- pre-paid funeral
- Purchase a burial plot
- funeral bonds
A funeral bond is an investment offered by a friendly society or life insurance company that provides benefits upon the death of the nominated person and cannot be accessed earlier.
The investment is released in the event of your death to cover the costs.
Under social security legislation, funeral bond(s) are an exempt investment where the total amount invested is up to $13,250 (as at 1 July 2019). Each member of a couple may invest $13,250, resulting in an exempt investment for the couple of $26,500.
A prepaid funeral is where a person makes an advance payment for funeral services for themselves or their partner. For centrelink purposes pre-paid funerals are an exempt investment, regardless of the amount paid (ie The limit of $13,250 does not apply to pre-paid funerals).
A prepaid funeral may involve assigning a funeral bond to the funeral director as payment. Under this arrangement, the client is the owner of a prepaid funeral, not a funeral bond, therefore the $13,250 limit does not apply.
A burial plot is a specific spot or right to a place at a general location, such as an area of a cemetery. Burial plots are exempt investments, regardless of the amount invested. Clients do not need to advise Centrelink that they own a burial plot.
Pre-paid funerals and burial plots provide asset exemption but require detailed and specific future planning whereas funeral bonds allow you to set aside some funding without doing the preplanning (subject to the limit of $13,250 per person).
You can take a combination of all 3 (prepaid funeral, burial plot, funeral bond), however once a funeral bond is involved in the mix, limitations apply on how much can be exempt from CL means testing.
WHAT IF YOU HAVE A COMBINATION OF FUNERAL INVESTMENTS?
In some cases, you may have a combination of a prepaid funeral, burial plot and/or funeral bond. Under the Centrelink rules, where a client has both a prepaid funeral and a funeral bond, the funeral bond will not qualify for an asset exemption. However, in all cases, a burial plot and/or prepaid funeral are exempt.
The following table summarises the Centrelink treatment of different combinations of funeral investments:
Burial plot and prepaid funeral
Burial plot and funeral bond (below allowable limit of $13,250 for 2019/20)
Burial plot, prepaid funeral and funeral bond
Prepaid funeral and funeral bond
The following Government link provides some detail on application of these options :
Resources - colonial first state – first techRead in full + comments 0 Comments
Written by Hudson Adviser Michal Park
With interest rates at historically low levels – and arguably set to stay very low for a very long time - there has never been a better time to borrow money for investment purposes. And with banks easing lending restrictions, it has never been cheaper to get a loan or easier to service a loan.
In addition, there has never been a better time to invest surplus funds rather than simply focusing on debt reduction.
If you have a home loan with a 3.50% interest rate, making repayments to your loan will provide you with a tax free return equal to your interest rate - so a 3.50% return. If your marginal tax rate is 32.50%, that 3.50% saving is essentially equivalent to a 5.20% return from shares. Given that the stockmarket has returned, on average, in excess of 9.00% per annum over the last 30 years, it’s clear that the current climate is very conducive to a better outcome for surplus funds than simply debt reduction.
If you borrow funds to invest, the residential interest rate is likely to be higher at around levels of 4.50%. Still, to break even, you would need returns from investments to be at least 6.70% (not taking into account the tax deductibility of the interest expense). Again, with returns from shares exceeding that quite convincingly over the long term, it is definitely a strategy worth considering.Things to note:
- Borrowing via means other than using equity in your principle residence will mean you pay higher interest rates. For example, borrowing using a margin loan will cost approximately 6.26% per annum (Commsec adviser services current variable rate). The outcome here is that it is lineball as to whether using a margin loan to invest will provide superior returns – however, the option may be to look at a more aggressive suite of investments to try and achieve greater returns than the average.
- The key difference between using surplus funds for debt reduction versus investment purposes is that the former is a guaranteed rate of return, whereas the latter is not. This means it carries more risk to invest due to volatility of returns.
- Additional considerations can be seen in the table below:
More advantageous to invest when mortgage interest rates are low
Compare expected return from investments with mortgage (see example above)
Is the interest rate tax deduction (ie principle place of residence of investment)?
The after tax return from investment will vary according to franking credits, overall tax position etc.
If you have less than three to five years available to invest, then debt reduction is less risky
Long term investors will have a better chance of earning greater returns than simply debt reduction
If employment is uncertain, debt reduction is more suitable.
If employment is stable, investment becomes less of a capital risk
Debt reduction provides a guaranteed return for conservative investors
Investment will provide better long term returns for investors with a balanced to aggressive risk tolerance
Tom Stevenson, Investment director of Fidelity International believes that shares are the asset class of choice in 2020. “The… reason to favour shares this year is that the decreasing effectiveness of monetary stimulus means that governments wishing to support their economies (all of them) will need to shift their focus to fiscal expansion. More public spending, with the likelihood of higher inflation as a consequence, is much better for shares than bonds so expect a lot of the money that has left equities for fixed income investments to head back the other way”.
Is 2020 the year you take action?
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1. First things first, you need to lay out exactly what you want to achieve this year. Remember to make them realistic. Otherwise you may begin to realise you won’t quite reach them and ultimately lose heart and give up. Your resolutions may include:
• Paying off or reducing a debt to a certain level.
• Starting some form of savings account or managed share portfolio/managed fund.
• Buying a new car or having holiday.
3. Now think ADMIN. You may begin by organising the filing cabinet and sorting documents into the relevant financial year etc. (I certainly need to do this one). If you find bills and receipts from ten years ago get them through the shredder! Structure things so that you can easily insert paperwork where it needs to go. This will make you more inclined to file things away and stay on top of things.
4. Time to start getting more involved. Review your:
a. General Insurances … Home, Car, Medical. Jump online and go to a price comparison site to compare premiums.
b. Personal Insurances. Life, TPD, Income Protection, Trauma. Are the benefit levels appropriate? Are the premiums competitive? Book in with Hudson if you want to review these.
c. Credit Cards. Can the interest rate be improved? Could you refinance the home to get rid of them? Is it worth considering an interest free balance transfer?
d. Home and investment property loans. If you do not currently speak to Hudson about your property loans, then you should. We are large-scale mortgage brokers and can generally negotiate lower rates than if you approach a bank directly.
e. Superannuation. Are your contact details up to date? Is it invested appropriately? Is it performing how you expect? Have you named a beneficiary? Your Hudson adviser is well qualified to review your Super if you would like to book in and speak with us.
f. Will. Is it up to date and reflects exactly what you want to happen in the event of your death?
Don’t be too put out if you don’t quite achieve your goals. A recent study in the US showed that 45% of people make New Years resolutions while only 8% actually deliver on them. Hey, there’s always next year!
Make sure you have an up to date business plan.
Many business plans sit gathering dust on a shelf, or haven’t even been committed to paper. But a well thought out, written and effectively implemented business plan is an invaluable tool for any business.
Creating a business plan is a major undertaking – definitely worth a New Year resolution – with some of the key sections being:
• Business description.
• Products and services.
• Market analysis, including customers and competitors.
• The all-important SWOT analysis (strengths, weaknesses, opportunities and threats).
• Organisation and management.
• The financial plan, including funding and financial projections.
Plenty of detailed information on creating a business plan can be found online.
Implement a plan to promote your business.
An important section of any business plan is the marketing plan. How are you going to let potential customers know you exist? What story do you want to convey?
The Internet has lead to an explosion in the number of ways in which businesses, even very small ones, can promote themselves. Websites and blogs, email newsletters and social media posts, search engine marketing and online ads allow businesses to market themselves to highly targeted audiences, sometimes at low or zero cost.
All this can take a considerable amount of time, however. So while it is possible for many small businesses to manage their own digital marketing, outsourcing this function to experts may be a more cost effective option.
Conduct an internal audit.
Exactly what needs auditing will depend on the individual business, but common areas to take a look at include:
• Stock levels and stock turnover rate.
• Key accounting parameters such as accounts receivable, average payment times, cash flow and debt.
• Business insurances: cyber insurance, key person insurance, public liability and professional indemnity insurance, and workers’ compensation.
• Business systems and processes. Is the business running efficiently? What are the opportunities for improvement?
• Staffing levels, turnover rate and employee satisfaction.
Improve internal communications.
When employees feel that their efforts are both recognised and appreciated, businesses are often rewarded by improved staff retention and productivity. That appreciation can be communicated in many ways; narrowly through wage reviews and promotions, and more broadly through support of a social club (good for improving communication between employees), the celebration of milestones, and other fun, seasonal events.
Consult your experts.
Your accountant is ideally placed to help with your financial analysis. An insurance broker can help you get the best deal on the general insurances you need, and your financial planner can advise on personal insurances for purposes including key person and succession planning.
This list is intended to be inspiring rather than daunting, and maybe you want to tackle it one or two resolutions at a time. But imagine the day when all this is done, and the only New Year resolution you need to make for your business is ‘keep doing what we’re doing’.
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