It is important to understand where this income will come from, how long it will last, and whether your retirement investments are on track, or whether some adjustments need to be made to get you there.

Work out how long your super or account-based pension will last

There are many variables that come into play when calculating how long your super or account-based pension will last in retirement, and it can be challenging to figure it out alone.

If you’ve transferred your super to a pension account already, then you can use the MoneySmart calculator to help estimate how long your pension will last. And if you haven’t, we recommend you speak to an adviser who can discuss with you different considerations that will impact how long your account-based pension will last.

Here are some of the fundamental things you need to know about a couple of other retirement income options.

Account based pensions

Account-based pensions are a popular retirement income product. They fluctuate in value and are linked to the market so your investment, and therefore your long-term income, isn’t guaranteed.

How long an account-based pension lasts will depend on:

• the amount of initial capital invested
• the return from the underlying investments
• the amount of fees charged
• how much you withdraw as income each year.

The tax benefits of account-based pension are:

• you don’t pay tax on pension payments from age 60
• if you’re aged between preservation age and 59, the taxable portion of your pension payments will be taxed at your marginal tax rate less a 15% offset
• you don’t pay tax on investment earnings.

In some cases, the underlying investments for most pension accounts are chosen to minimise fluctuations but still provide a bit of growth.

Defensive assets

These include cash and fixed income. In general, they’re lower risk and provide lower returns over the long term.

Growth assets

These include equities and property. They’re usually open to market fluctuation but tend to provide higher returns over the long term.

Generally, defensive assets provide you with a relatively steady return and, therefore, income. However, some growth assets are usually needed to keep your funds growing during your retirement, so they last longer. With an account-based pension, you can mix defensive and growth assets to a ratio that you’re comfortable with.

Annuities

Some annuities could provide you with regular and guaranteed income for either a fixed period or for life. They are more secure than account-based pensions as your income is guaranteed regardless of what the share market and interest rates do.

The downside is that you’re locked in to the agreed income for the whole term or the rest of your life. If your circumstances change, you generally can’t withdraw a lump sum. A lifetime annuity also has no residual capital value, which means you can’t leave it to someone in your will.

The best of both systems

Continuing to build your investments, including your super funds, is still crucial in retirement. They need to keep growing to ensure your retirement income lasts as long as possible.

This means it becomes increasingly important to protect your super growth funds from market falls while still allowing them to grow if the market goes up.

Other things to consider

Age pension eligibility

When it comes to the Age Pension, there are several rules to determine your eligibility. You can learn more by visiting Services Australia but some of the basic rules are:

• You must have reached your Age Pension age, which is currently 66 (after 1 July 2019, age pension age will go up 6 months every 2 years until 1 July 2023).
• You must be a resident of Australia.
• You must pass income and asset tests.

If you don’t meet the income and assets tests to be eligible for the Age Pension, you may be able to access the Commonwealth Seniors Health Card (if you pass an income test). This card provides affordable medicine, bulk billed doctor visits and depending on what state you live in, there may be some other concessions that you’re entitled to. You can find out more from Services Australia.

Speaking to a financial planner

With so many options, it’s a good idea to seek help to ensure you’re investing in a way that suits you. Particularly as there are some more complex considerations, such as tax implications.

Source: NAB

Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/personal/life-moments/work/plan-retirement/income

Is the constant property market coverage making you feel anxious about your plans? It’s little surprise with headlines such as ‘New study finds housing affordability in Sydney, Melbourne, Brisbane & Adelaide now worse than New York’. But this doesn’t have to signal the end of your property dreams.

Whether you’re looking to buy, upgrade, invest or simply to restructure your loan, you probably have more options than the 24-hour news cycle leads you to believe. Now is a good time to re-examine your property goals and how you’re going to achieve them – even in these volatile times.

First home buyers – time to broaden your horizons?

First of all, stay up to date on all the government schemes, both current and upcoming, that you’re eligible for.

Next, if you’ve been looking at areas you can’t afford, now’s the time to realistically consider what you can and can’t accept. Broaden your options by considering other locations, looking at apartments instead of houses or buying off plan. These are all ways to uncover more affordable options. If you can work from home or in a regional area, it might be worthwhile investigating a move to the outer suburbs or a regional centre.

Changing what you consider ‘must-haves’ may also need a rethink. Would you accept an older renovation or smaller outdoor area? Can you live with street parking? Could the kids share a bedroom? These changes can reduce costs significantly.

Don’t go it alone

If you have family members who can act as a guarantor or contribute to the deposit, then seriously consider it. This can allow you to enter the market sooner rather than later and avoid expensive Lenders Mortgage Insurance.

Buying with others is another option. If you’ve house shared together, it’s going to be easier to ensure your needs and mid-term plans are compatible. Seriously consider drawing up a legal agreement that spells out what happens if one of you wants to sell, rent, renovate or defaults on their payments. It can save relationships and headaches later on and the process will ensure you are both on the same page before heading into the investment.

Rentvesting: the best of two worlds

If you’re committed to living in an area you can’t afford to buy in, reinvesting is a popular option. This is when you buy an investment property in a cheaper area and continue renting where you prefer to live. Regional areas are booming, so if you do your homework, this may be a profitable option. It’s also a good way to buy into a market at a lower price if you’re thinking of moving there in the future.

Restructuring to fuel an investment

Restructuring your mortgage is useful if you want to release equity to renovate, buy an investment property or support a child’s first purchase. It could also lock in a lower interest rate for a set period of time.

Get your calculations right

With all the talk of mortgage rate rises and volatile property prices, both investors and owner-occupiers will need to crunch their numbers very carefully.

It’s especially important for investors to calculate their yield and expenditure ratios. You’ll need to be able to cover any regular or extraordinary shortfalls.

Investors also need to be clear if they are buying for a regular income, mid- or long-term value increase or for another purpose like providing accommodation for their children or parents.

Get your spending patterns under control

Whatever your goal, getting your mortgage approved often involves banks assessing your financial responsibility by running a fine-tooth comb over your spending. They check that you can afford repayments, usually with up to 5% interest. This can mean cutting back on unnecessary expenditure and reducing debts.

Whether you’re looking to buy, upgrade or simply restructure your loan for the times ahead, you don’t have to give up on your property goals. Please get in touch and we can discuss your options to make your property dreams a reality. You probably have more options than the 24-hour news cycle leads you to believe.

There’s good news for first home buyers. The First Home Super Saver (FHSS) scheme which allows you to save for your deposit in your super account, is increasing its maximum release to $50,000.

How it works is a little complicated, but we’re here to guide you through the steps. Here’s what you need to know.

The FHSS scheme helps first-home buyers save for a deposit through their super. It allows you to reduce your taxable income as you save money for your future home. From 1 July 2022, the maximum amount you can access will increase from $30,000 to $50,000.

How does FHSS work?

Under the FHSS scheme, first-home buyers can use voluntary super contributions of up to $15,000 each financial year to help them save for their first home. You make voluntary super contributions from your salary or savings. The benefit is that the money you save in your super is taxed at a lower rate – only 15%. This means you pay less tax on the money you put towards your deposit, and it may earn more than if it was in an ordinary bank account.

On top of your contributions, a percentage of the earnings your contributions make is included when calculating how much you can withdraw through the FHSS. This figure is calculated by the Australian Taxation Office (ATO) not your super fund. We can give you an idea of the current earning percentage being used. Here are some examples of how the scheme works.

• You have salary sacrificed $15,000 every year for three years ($45,000) and the ATO calculates you earned $5,000 from that investment. You can then apply to release the full $50,000 amount.
• A couple who have saved in their individual super accounts would have a combined FHSS release of $100,000.
• If you salary sacrifice $10,000 a year, you may need to wait four or five years to reach $50,000 or access a lower amount sooner.

Are you eligible for the FHSS scheme?

You must be 18 or older to register for and release money under the FHSS scheme. You must also never have owned any type of property in Australia.

Eligibility is assessed on an individual basis. This means that individuals can access their own FHSS contributions to put towards the same property. It also means that if another person who already owns a property is buying with you, you can still apply for your FHSS release.

Getting your funds in time for settlement

It’s important you understand the process for having your funds released in time for settlement. The ATO can take some time, so it’s a good idea to start the FHSS process when you first apply for pre-approval on a home loan. You’ll need a minimum of six weeks for each step.

The first step is to apply for a FHSS ‘determination’ from the ATO – not your super fund. You can do this using your MyGov account. The ATO will calculate how much you can release and give you their ‘determination’. It’s very important that you receive your determination before signing a contract for a property.

Once you get the determination, you can request the funds be released. Again, do this through your MyGov account and as soon as possible. The ATO website has a summary of all the conditions for releasing money under FHSS.

Remember that you can only use the FHSS scheme once. However, you have up to 12 months to sign a property contract from the date you make a valid release request to notify the ATO.

The First Home Super Saving scheme may help you save for your first home deposit faster than a regular bank account – and help you pay a little less tax too.

We can help you manage the timelines and rules involved so your funds are released in time for your settlement. Simply give us a call to find out how the FHSS scheme could help you own your first home sooner.

Rising costs of living, increasing interest rates and high prices have all combined to create the imperfect storm for struggling first-home buyers. However, if every cloud has a silver lining then the ray of light this new financial year is the boosted array of government assistance schemes.

The First Home Owner Grant was introduced back in 2000 and has gone through many versions since, with supplementary add ons. As the buyer bonuses change almost annually, it can be difficult to keep up because the helping hand your friend, neighbour or cousin got when entering the market, isn’t necessarily what you’ll be eligible for just months down the track.

Unsurprisingly, first-home buyer affordability was on the table at the recent Federal election and now with a change of government there will likely be more amendments. To get your head around what is on offer from July 1, 2022 here is an updated overview of schemes.

First Home Owner Grant (FHOG)

Although the FHOG is a national scheme, it’s funded by the states and territories and is therefore administered under their own legislation with independent eligibility requirements. While some still offer a one-off payment for the purchase of newly built homes or vacant land, others now only have stamp duty (also known as transfer duty) concessions available. To find out what is available in the state or territory you are buying in, visit firsthome.gov.au.

First Home Guarantee (FHG)

Formerly known as the First Home Loan Deposit Scheme, the FHG is a low-deposit loan initiative allowing first timers to buy a home with a 5% deposit, with the Federal Government guaranteeing the remaining 15 per cent. Without the scheme, banks expect first-home buyers to provide a 20% deposit or pay pricey lenders mortgage insurance (LMI).

Originally providing for just 10,000 places per financial year, from July 1, 2022 until June 30, 2025 there will be 50,000 spots annually including 35,000 allocated for the FHG and 15,000 set aside for the Family Home Guarantee and the Regional Home Guarantee (see below).

There are eligibility requirements for the FHG starting with the buyers’ income. Singles can earn up to $125,000, or $200,000 for couples combined. Property price limits also apply with purchase thresholds differing depending on location. To find out local thresholds visit the National Housing Finance and Investment Corporation.

Property price caps

Region Price cap from 1 July 2022

New South Wales—capital city and regional centre $900,000 – other $750,000
Victoria—capital city and regional centre $800,000 – other $650,000
Queensland—capital city and regional centre $700,000 – other $550,000
Western Australia—capital city $600,000 – other $450,000
South Australia—capital city $600,000 – other $450,000
Tasmania—capital city $600,000 – other $450,000
Australian Capital Territory $750,000
Northern Territory $600,000

Help to buy scheme

New Prime Minister Anthony Albanese has promised to assist struggling buyers (and not just first-timers) with a shared equity scheme. The initiative means the Government will effectively co-purchase a property with a homebuyer, however first-time investors are not eligible.

Buyers who meet requirements could put down a deposit of as little as 2% and access a government contribution of up to 40% towards the purchase of a home. Just like the FHG, the Help to Buy scheme means buyers can avoid paying LMI. Homeowners can then either buy the additional portion of the home (which was co-purchased by the Government) during the loan period or sell the property and give back the portion of equity and a share of any capital gain.

Individuals with a taxable income of up to $90,000, or couples earning up to $120,000, can apply for 10,000 spots each year, but be sure to check the purchase price thresholds in your area.

Regional First Home Buyer Support Scheme

The new Government is also introducing an initiative tailored to buyers in the regions. This initiative is the first of its kind solely devoted to the regions where dwelling prices have skyrocketed since the pandemic and outpaced capital city growth. Under the offer, the Government will pledge up to 15% of the home’s value so local first-home buyers (who have already lived in the area for at least 12 months) can buy with a 5% deposit and avoid paying LMI. Income thresholds are the same as the FHB and again be sure to check purchase price caps in your area.

Family Home Guarantee

Single parents with at least one dependent child, who meet the eligibility requirements, can access the Family Home Guarantee regardless of whether they are a first home buyer or not.

Under this Scheme, which works much like the FHG, buyers will only need a 2% deposit because the Government will guarantee up to 18% of the property’s value. Purchase price and income thresholds apply.

First Home Super Saver Scheme

Given that the deposit can be the biggest barrier to getting onto the property ladder, there’s a way first-home buyers can beef up savings by tapping into their superannuation. In the right circumstances, the First Home Super Saver Scheme can help first timers save for a home faster, but they will essentially be dipping into their retirement to get there.

It should also be noted that only the voluntary contributions made to the super fund can be withdrawn, not the mandatory contributions made by an employer. First-home buyers can release up to $15,000 each financial year and from 1 July 2022, the maximum accessible amount will jump from $30,000 to $50,000. Further details of the scheme can be found on the ATO website.

With so many schemes on offer across the country with varying caveats regarding purchase prices, taxable income and eligibility requirements, the first-home buyer landscape can be a little overwhelming. To find out which initiatives you can claim, give us a call.

New rules that came into force on July 1 will create opportunities for older Australians to boost their retirement savings and younger Australians to build a home deposit, all within the tax-efficient superannuation system.

Using the existing First Home Super Saver Scheme, people can now release up to $50,000 from their super account for a first home deposit, up from $30,000 previously.

Another change that will help low-income earners and people who work in the gig economy is the scrapping of the Super Guarantee (SG) threshold. Previously, employees only began receiving compulsory SG payments from their employer once they earned $450 a month.

But the biggest potential benefits from the recent changes will flow to Australians aged 55 and older. Here’s a rundown of the key changes and potential strategies.

Work test changes

From July 1, anyone under the age of 75 can make and receive personal or salary sacrifice super contributions without having to satisfy a work test. Annual contribution limits still apply and personal contributions for which you claim a tax deduction are still not allowed.

Previously, people aged 67 to 74 were required to work for at least 40 hours in a consecutive 30-day period in a financial year or be eligible for the work test exemption.

This means you can potentially top up your super account until you turn 75 (or no later than 28 days after the end of the month you turn 75). It also opens potential new strategies for making big last-minute contributions using the bring-forward rule.

Extension of the bring-forward rule

The bring-forward rule allows eligible people to ‘’bring forward” up to two years’ worth of non-concessional (after tax) super contributions. The current annual non-concessional contributions cap is $110,000, which means you can potentially contribute up to $330,000.

When combined with the removal of the work test for people aged 67-75, this opens a 10-year window of opportunity for older Australians to boost their super even as they draw down retirement income.

Some potential strategies you might consider are:

• Transferring wealth you hold outside super – such as shares, investment property or an inheritance – into super to take advantage of the tax-free environment of super in retirement phase
• Withdrawing a lump sum from your super and recontributing it to your spouse’s super, to make the most of your combined super under the existing limits
• Using the bring-forward rule in conjunction with downsizer contributions when you sell your family home.

Downsizer contributions age lowered to 60

From July 1, you can make a downsizer contribution into super from age 60, down from 65 previously. (In the May 2022 election campaign, the previous Morrison government proposed lowering the eligibility age further to 55, a promise matched by Labor. This is yet to be legislated.)

The downsizer rules allow eligible individuals to contribute up to $300,000 from the sale of their home into super. Couples can contribute up to this amount each, up to a combined $600,000. You must have owned the home for at least 10 years.

Downsizer contributions don’t count towards your concessional or non-concessional caps. And as there is no work test or age limit, downsizer contributions provide a lot of flexibility for older Australians to manage their financial resources in retirement.

For instance, you could sell your home and make a downsizer contribution of up to $300,000 combined with bringing forward non-concessional contributions of up to $330,000. This would allow an individual to potentially boost their super by up to $630,000, while couples could contribute up to a combined $1,260,000.

Rules relaxed, not removed

The latest rule changes will make it easier for many Australians to build and manage their retirement savings within the concessional tax environment of super. But those generous tax concessions still have their limits.

Currently, there’s a $1.7 million limit on the amount you can transfer into the pension phase of super, called your transfer balance cap. Just to confuse matters, there’s also a cap on the total amount you can have in super (your total super balance) to be eligible for a range of non-concessional contributions.

Combining downsizer and bring-forward contributions

Australians aged between 60 and 74 now have greater flexibility to downsize from a large family home and put more of the sale proceeds into super, using a combination of the new downsizer and bring-forward contribution rules.

Take the example of Tony (62) and Lena (60). Tony has a super balance of $450,000 while Lena has a balance of $200,000. They plan to retire within the next 12 months, sell their large family home and buy a townhouse closer to their grandchildren. After doing this, they estimate they will have net sale proceeds of $1 million.

Under the new rules from 1 July 2022:

• They can contribute $600,000 of the sale proceeds into their super accounts as downsizer contributions ($300,000 each)
• The remaining $400,000 can also be contributed into super using the bring-forward rule, with each of them contributing $200,000.

By using a combination of the downsizer and bring-forward rules, Tony and Lena can contribute the full $1 million into super. Not only will this give their retirement savings a real boost, but they will be able to withdraw the income from their super pension accounts tax-free once they retire.

As you can see, it’s complicated. So if you would like to discuss how the new super rules might benefit you, please get in touch.

Source: ATO

Rising interest rates are almost always portrayed as bad news, by the media and by politicians of all persuasions. But a rise in rates cuts both ways.  

Higher interest rates are a worry for people with home loans and borrowers generally. But they are good news for older Australians who depend on income from bank deposits and young people trying to save for a deposit on their first home.

Rising interest rates are also a sign of a growing economy, which creates jobs and provides the income people need to pay the mortgage and other bills. By lifting interest rates, the Reserve Bank hopes to keep a lid on inflation and rising prices. Yes, it’s complicated.

How high will rates go?

In early May, the Reserve Bank lifted the official cash rate for the first time since November 2010, from its historic low of 0.1%. The reason the cash rate is watched so closely is that it flows through to mortgages and other lending rates in the economy.

To tackle the rising cost of living, the Reserve Bank expects to lift the cash rate further, to around 2.5% . Inflation is currently running at 5.1%, which means annual wages growth of 2.4% is not keeping pace with rising prices.

So what does this mean for household budgets?

Mortgage rates on the rise

The people most affected by rising rates are likely those who recently bought their first home. In a double whammy, after several years of booming house prices the size of the average mortgage has also increased.

According to CoreLogic, even though price growth is slowing, the median home value rose 16.7% nationally in the year to April to $748,635. Prices are higher in Sydney, Canberra and Melbourne.

CoreLogic estimates a 1% rise would add $486 a month to repayments on the median new home loan in Sydney, and an additional $1,006 a month for a 2% rise.

While the big four banks are not obliged to pass on the cash rate changes, in May they passed on the Reserve Bank’s 0.25% increase in the cash rate in full to their standard variable mortgage rates which range from 4.6 to 4.8%. The lowest standard variable rates from smaller lenders are below 2%.

Still, it’s believed most homeowners should be able to absorb a 2% rise in their repayments.

The financial regulator, APRA now insists all lenders apply three percentage points on top of their headline borrowing rate, as a stress test on the amount you can borrow (up from 2.5% prior to October 2021).

Rate rise action plan

Whatever your circumstances, the shift from a low interest rate, low inflation economic environment to rising rates and inflation is a signal that it’s time to revisit some of your financial assumptions.

The first thing you need to do is update your budget to factor in higher loan repayments and the rising cost of essential items such as food, fuel, power, childcare, health and insurances. You could then look for easy cuts from your non-essential spending on things like regular takeaways, eating out and streaming services.

If you have a home loan, then potentially the biggest saving involves absolutely no sacrifice to your lifestyle. Simply pick up the phone and ask your lender to give you a better deal. Banks all offer lower rates to new customers than they do to existing customers, but you can often negotiate a lower rate simply by asking.

If your bank won’t budge, then consider switching lenders. Just the mention of switching can often land you a better rate with your existing lender.

The challenge for savers

Older Australians and young savers face a tougher task. Bank savings rates are generally non-negotiable, but it does pay to shop around.

The silver lining is that many people will also see increased interest rates on their savings accounts as the cash rate increases. By mid-May only three of the big four banks had increased rates for savings accounts. Several lenders also announced increased rates for term deposits of up to 0.6%.

High interest rates traditionally put a dampener on returns from shares and property, so commentators are warning investors to prepare for lower returns from these investments and superannuation.

That makes it more important than ever to ensure you are getting the best return on your savings and not paying more than necessary on your loans. If you would like to discuss a budgeting and savings plan, give us a call.