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Several shares that I have been looking at are shown as having dividend yields of over 15%. Is this sustainable?

Beware of high historic dividend yields as in many cases they provide little or no indication of future dividend levels. For example, the yield may be high because the share price has collapsed or because the company paid a special or one off dividend.

What is Superannuation?

Superannuation is a way of saving for your retirement.

Both you and your employer can make contributions that accumulate over time and this money is then invested in shares, government bonds, property, or other appropriate investments.

On retirement, or after disability or death you then receive the money as regular periodic payments (ie, a pension), a lump sum payment, or a combination of both.

Should my employer be paying me Super?

Generally, if you are classified as an employee you are entitled to super guarantee contributions from your employer.  Employers do not have to pay the Superannuation Guarantee in certain circumstances.

Some of the exceptions are:

  • employees earning less than $450 per month
  • employees under the age of 18 who work 30 hours per week or less
  • employees over 70 years of age (it is proposed to abolish this from 1 July 2013)
  • anyone paid to do domestic or private work for 30 hours per week or less

If you’re eligible for super guarantee contributions, at least every three months your employer must pay into your super account a minimum of 9.25% of your wages (excluding overtime, leave loading and fringe benefits).  This minimum amount is set to increase year by year until it reaches 12% in the 2020 Financial Year.

I have a mortgage fund with one of the major managers that has restricted redemptions. What is the outlook for these funds?

Most of the major mainstream mortgage funds are in reasonable shape and are not suffering unusually high levels of arrears or delinquencies in their loan portfolios. The hope is that they will gradually ease restrictions as confidence returns to the credit markets.

I have been told I need to move into an Aged Care Facility? Do I have to sell my house?

Selling your home and using the proceeds is a common strategy to fund the costs of Aged Care. However, depending on the level of care you require, you may not need to sell your home. By negotiating with the Aged Care facility, you may find that they are prepared to accept alternative arrangements. In any case, it is a complex area and you should seek specialist advice.

As a result of the Global Financial Crisis, my share portfolio has fallen in value. Do I need to let Centrelink know so they can update my Age Pension?

As long as the number of shares that you hold has not changed, you do not need to let Centrelink know of the fall in value of your portfolio. Centrelink regularly update the share prices in their database to reflect more current prices. You can either wait for their next update, or request them to revalue your portfolio at any time.

I am turning 65 later this year. When should I apply to Centrelink for the Age Pension?

The application forms for Age Pension are be quite lengthy, so we would suggest obtaining these forms from Centrelink approximately 3 months before turning Age Pension age. This will then give you plenty of time to work through the forms and seek advice if required. While the forms can be lodged anytime in the 3 months before turning Age Pension age, we would suggest lodging the forms approximately 2 to 4 weeks prior to this date.

What are the different ways to get money into super and how much can I contribute?

There are two main types of contributions that can be made into your super fund; concessional and non-concessional.

Concessional contributions are contributions that are made into your super fund before any tax is paid on them. They can include super guarantee, insurance premiums paid to a super fund on your behalf, salary sacrificed amounts and also any amount allowed as a personal super deduction in your income tax return.

Non-concessional contributions are personal contributions made from after-tax income and other contributions that are not subject to tax in the super fund.

Contributions can only be made as long as you meet the specific requirements to contribute.  The contribution rules are outlined below:

Contribution Type

Work Test:

Applies if the member is age 65 or more.  Requires that the member has been gainfully employed for at least 40 hours in no more than 30 consecutive days in the financial year

Age Limit

Member (Personal)

Yes

75

Employer Mandated

No

None

Employer Non-Mandated

Yes

75

Spouse/other

Yes

70


Contribution caps apply to your contributions made into Super each year.  The current contribution caps are as follows:

Contribution Type

Cap Limit

Notes

Concessional Contributions

$25,000

Indexed annually with AWOTE rounded down to the nearest $5,000.

Non-Concessional contributions

$150,000

If you are aged under 65 you may bring forward up to 2 future years entitlements.  Therefore you can make one lump sum contribution of $450,000 during a three year period.

What is Financial Planning?

Financial planning is the process of identifying and developing strategies to assist you to meet your financial needs, goals and objectives.

The financial planning process involves the following steps:

  • Gathering relevant financial information
  • Examining your current financial status
  • Coming up with a financial strategy or plan for how you can meet your goals
  • Implementing the financial plan
  • Monitoring the success of the financial plan, adjusting it if necessary

Using these steps, you can determine where you are now and what you may need in the future in order to reach your goals.

What are the benefits of Financial Planning?

Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances.

For example, buying a particular investment product might help you pay off your mortgage faster, or it might delay your retirement significantly.

By viewing each financial decision as part of a whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.

I have a very old whole of life insurance policy that was taken out when I was a child. Should I keep it or cash it in?

There are a range of options available including cashing in, converting to mature, making the policy paid up, or continuing to pay premiums. If the annual premium is only small it may be an option to retain the policy and use it as a prepaid funeral plan. A good adviser can explain the options to you and help you decide.

I am looking to retire in 2 years time. How long before I retire should I get advice from a financial planner?

You should seek advice sooner rather than later. That would give you time to decide on a strategy and become comfortable with that strategy. There will be enough other things happening in your life at retirement without having to grapple with major financial decisions.

I need to see an adviser but am worried about being charged excessive fees or paying commissions. Who can I trust?

Our suggestion is that you talk to a Certified Financial Planner who can explain clearly to you what services they can provide and what the costs will be. All fees and commissions must be disclosed to you so you know how much you are being charged and how much remuneration they are receiving.

What happens if I breach my Super Contribution Cap?

If you breach your concessional cap there are four aspects you need to be aware of:

  1. The excess contributions are included in your assessable income and taxed at your marginal tax rate
  2. You will be liable to pay an excess contribution charge to neutralise any benefit that you may have received from having the funds held in the concessionally taxed super environment
  3. You can elect to have up to 85% of the excess amount released from your super fund
  4. Any excess amount remaining within the fund will count against the non-concessional contributions cap

If you breach the non-concessional cap there are three aspects you need to be aware of:

  1. An amount equal to the excess contributions tax (46.5%) will be subtracted from your non-concessional contributions over the cap limit
  2. You must withdraw the after tax excess contributions from your superannuation fund
  3. Amounts in excess of the concessional contributions cap that you have not withdrawn count towards the non-concessional cap

 

What happens to my superannuation payments when i change jobs?

There are a few options:

  • You can leave the money in the fund
  • You can ask your new employer to pay contributions to your old fund – they may or may not be able to do this
  • You can transfer or roll-over the money from your old fund into your new fund

When can I withdraw my super?

Generally you can withdraw your non-preserved contributions at any time. However, preserved moneys can usually only be withdrawn when you retire and reach a condition of release.

You cannot withdraw preserved contributions, until you:

  • retire and reach preservation age (between the age of 60 or 55 depending on your date of birth)
  • turn 65
  • ualify under what is called the “transition to retirement” rules
  • suffer from a total and permanent disability
  • have a terminal illness and are under the age of 60
  • pass away
  • can show that there is severe financial hardship or other compassionate grounds

What is the difference between tax-free and taxable components of super?

Superannuation benefits are comprised of two tax components:

  • a tax-free component
  • a taxable component

The tax free component includes all non-concessional contributions made on or after 1 July 2007 and all pre-July 2007 components of superannuation that have been crystallised.

The balance of money remaining in your superannuation account, after subtracting the tax free component, is the taxable component.

When part of a superannuation interest is paid out as a lump sum or as an income stream, the benefit must always be paid in proportion to the tax free and taxable components.

How can I increase the tax free portion of my super?

Increasing the tax free portion of your super can be very beneficial if you plan to withdraw funds as an income stream before the age of 60 and for benefit payments in the event of your death.

There are strategies can be put in place to increase the tax free component of your super balance.


One such strategy is as follows:

If you are under the age of 60 but above your preservation age you can withdraw funds from your super completely tax free by utilising what is known as the low cap lifetime benefit.  You can then re-contribute the withdrawal amount back into super as a non-concessional contribution.  This non-concessional contribution will then be added to the tax free component of your super balance.  This strategy essentially turns the taxable portion of the withdrawal into a tax free component.

What is the difference between Super Pension and Super Accumulation?

Generally up until you reach your preservation age your super must stay in the Accumulation Phase of superannuation.

Upon reaching your preservation age you then have the option to roll your benefits into Pension Phase.

You can choose one of the following set ups once reaching this age:

  • commence a pension income stream and take a regular income payment from your superannuation
  • retain your funds in the accumulation phase and draw lump sum amounts when required
  • have a combination of the two - that is, a pension account and an accumulation account

If you elect to remain in the accumulation phase you will only need to draw lump sums when you physically require the money.  However, if your superannuation is held in the accumulation phase there are tax consequences.  Earnings on investments are taxed at 15% and capital gains tax will also apply if assets are sold to fund a lump sum withdrawal.

In contrast, if you choose to roll over your super benefits into pension mode in order to commence drawing an income stream, the pension balance will be exempt from income tax and there will be no capital gains tax if assets are sold.  Nevertheless, you must meet the minimum payment rules which require you to draw a certain pension payment each year regardless of your overall income position.

It is important to note that the choice of being in either accumulation or pension phase can have numerous effects upon longevity of your super fund, Age Pension and many other factors.

What are the minimum and maximum pension requirements?

If you elect to commence a super pension you be will required to satisfy a set of minimum standards in order for you to claim an exemption for the income earned on your pension assets.  These standards include:

  • the pension must be account-based
  • a minimum amount must be paid out to you annually
  • the capital supporting the pension cannot be increased using contributions or rollover amounts once the pension has started
  • upon your death your pension can only be transferred to a dependent beneficiary of yours
  • the capital value of the pension or the income from it cannot be used as security for borrowing
  • before a pension can be commuted, the minimum pension must be paid out

If you elect to commence a Transition to Retirement Pension you will also be restricted to withdrawing a maximum of 10% of your opening balance annually.

What is a Transition to Retirement Pension (TRIS)?

A TRIS is a non-commutable income stream that provides access to your super money prior to retirement and is available to you once you have reached your preservation age.  If you elect to commence a Transition to Retirement Pension (TRIS) you will be faced with a maximum pension limit as well as a minimum limit.  If you have a TRIS pension you will be restricted to withdrawing a maximum of 10% of your opening balance annually.

What if I pass away before retirement?

If you have made a binding nomination and appointed a beneficiary, this person will receive your funds.  If you haven’t done this, the trustee decides who they pay the money to based on what is set out in the trust deed.

Superannuation death benefits are taxed differently depending on who receives them.  It essentially depends on whether the recipient is a dependent or a non-dependent.

A dependent includes:

  • a spouse or de facto i.e. a married partner or a domestic partner who, although not legally married to you, lived with you on a genuine domestic basis recognised by the law in the same way as a husband or wife
  • a child under 18
  • someone financially dependent on you (this could include an adult child)
  • or a person with whom you had an “interdependent” relationship (e.g. may be a same sex relationship or someone with whom you lived in a close and ongoing relationship with  financial and domestic support)

For tax purposes:

  • super benefits paid to dependants are tax-free
  • benefits paid to “non-dependents” are taxed

What is a Self Managed Superannuation Fund (SMSF)?

Generally, as an Australian resident, you can choose to direct your super guarantee payments and your personal super contributions to your own Self Managed Superannuation Fund (SMSF).  A SMSF is a do-it-yourself superannuation fund of 1-4 members where each member acts as a trustee of the fund.

There are many advantages and disadvantages of establishing a SMSF including:

Advantages:

  • more control over retirement assets with the ability to have more transparent investment strategies
  • greater flexibility is possible in the investments that a SMSF may invest in including business real property
  • a member may commence a Pension while retaining the assets that were held pre-pension
  • greater flexibility is possible in the overall management and administration of the fund
  • greater control and flexibility over the tax position of the fund
  • excellent estate planning benefits
  • Flat Fee structure may mean lower fees to operate; fees more transparent.

Disadvantages:

  • costs of running a SMSF may be greater than the cost of public offer superannuation funds, particularly when the fund is starting out
  • increased time needs to be set aside for the ongoing management of the fund
  • the Trustees and Directors of Corporate Trustees are personally liable for any actions of the fund

What is a Trustee of an SMSF

Upon creation of an SMSF, a trustee must be established to govern the fund.  The trustee can take the form of either one or more individuals or a company.  The trustee or directors of the company are ultimately in control of the fund and hold and invest the fund’s assets for the benefit of the members.

A trustee’s main role is to:

  • act in the best interests of all fund members when making decisions
  • manage the fund separately from personal non super affairs
  • ensure the money in the fund is only accessed when conditions of release (“retirement”) are met
  • ensure that the fund meets the ‘Sole Purpose Test’.  This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.

It is important trustees understand their duties, responsibilities, and obligations of being a trustee.  As a trustee of an SMSF, one needs to act according to:

  • the fund’s trust deed
  • the provisions of the super laws, tax laws and trust laws

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