He gets thousands of emails a year from readers seeking financial advice. Noel Whittaker answers the most-asked questions.
Readers’ emails are a good indication of what worries people most. The dominant theme for 2010 is impending change. In nine months we have seen the release of the Ripoll report into financial planning, the Henry tax review and the Cooper review into superannuation.
Add to it a sharemarket that started with a bang but soon lost impetus, tighter lending to some businesses and a housing market that is one of the most expensive in the world.
Charles Darwin came up with the answer years ago: ”It is not the strongest of the species that survives, nor the most intelligent that survives – it is the one that is the most adaptable to change.”
The Ripoll, Henry and Cooper recommendations are not yet law and there may well be many changes before they are. However, it is obvious that embracing change and taking advice about the best strategies will become more important than ever.
When the sharemarket is booming everybody wants to know about margin loans and when the property market is booming the main question is: ”Should I buy an investment house?”
But right now many of our readers are asking ”How do I afford my first home?”, ”How safe is my super?” and ”Should I cash in my super and place the money in the bank?”
HOW SAFE IS MY SUPER?
Unfortunately, too many people fall into the trap of treating their super as an asset such as property or shares and not as a structure that holds those assets.
The safety of your superannuation savings will depend on the mix of assets your fund holds.
That’s why it is important to liaise with your adviser regularly to ensure your asset allocation is in line with your risk profile and that your managed funds are performing at least as well as their peers.
Remember, no other investment structure provides the benefits superannuation does.
It is the only investment you can make with pre-tax dollars and it enables you to move assets to an environment where income tax is just 15 per cent and capital gains tax is just 10 per cent.
Once you reach 55 and retire, you can draw $160,000 tax free and when you reach 60, all withdrawals are tax free. Furthermore, if you start an account-based pension, the fund itself will be tax free at the same time as you are drawing a tax free income.
How much better can it get?
A bonus is that super is the one asset that can’t be touched by the trustee in bankruptcy if you get into financial strife.
But what about those with relatively small super? They often ask if they should cash out and invest the proceeds in interest-bearing bank accounts to protect against further capital losses and ongoing fees.
But advice should always be taken before money in super is withdrawn as, in some cases, Centrelink benefits could be adversely affected.
Retirees should keep in mind that the senior Australians tax offset allows a couple who have reached pensionable age to earn $26,680 each and pay no tax. If their main financial asset was $100,000 in super, they may be better off to withdraw the lot and invest outside the super system.
CAN I AVOID CGT?
As the boomers’ parents age, more and more questions arise regarding the way in which estate assets will be treated for capital gains tax (CGT).
To simplify, bear in mind that, in most cases, death does not trigger CGT – it merely transfers any CGT liability to the beneficiaries.
If the asset is disposed of, they may be liable for CGT but if the asset is kept for their lifetime, any CGT applicable passes on, in turn, to their beneficiaries. If the assets are kept indefinitely, CGT could be deferred for generations.
Let’s imagine you have been left an investment property by your late mother. If she bought it before September 20, 1985, it would be CGT free and you will be deemed to have acquired it on the date of her death at its market value then.
Let’s say she paid $90,000 for it in August 1985 and its value was $400,000 when she died on April 1, 2010. For tax purposes, you are deemed to have bought it for $400,000 on April 1, 2010.
But you receive the property with no CGT liability because the original owner had none.
If she acquired the property after September 20, 1985, it is subject to CGT and any capital gain is effectively transferred to you. If she bought it for $90,000 on October 1, 1986, the tax office will assume that you acquired it for just $90,000.
These examples highlight the importance of seeking advice before you sell any assets you have inherited as you may find yourself facing an unexpected CGT bill.
If you are left a good property or quality shares, try to use that asset to borrow for more investments instead of selling and paying CGT. You can defer CGT, have more assets working for you and claim a tax deduction for the interest on the loan.
Jack is a high-income earner who has been left a property worth $600,000. It was bought in 1998 for $200,000 and now returns $24,000 a year. He wants to diversify his assets by buying $600,000 worth of quality share trusts but discovers he will be liable for CGT of nearly $93,000 if he sells the property. If Jack retains it, he will lose $11,160 of the rents in tax and have just $12,840 left.
An option is to keep the property and borrow the whole purchase price of the managed funds. He would continue to receive $24,000 from the property plus $24,000 from the funds. The interest on the loan may be $54,000 a year so he has to find just $6000 before tax out of his own pocket – only $3210 a year or $62 a week. That’s all it takes to retain the property, avoid paying CGT and put another $600,000 of assets to work for him.
SHOULD I SALARY SACRIFICE?
The average Australian has only $140,000 in super on retirement and it’s not unusual for the bulk of that to go towards paying off the mortgage and replacing the car. Rising life expectancies and pressure on welfare will create a two-class society: those who can afford private medical treatment and those who will have to join the queue.
So it makes sense to do everything you can while you are working to pay off your house and boost your super. A strategy worth considering is salary sacrificing to super while reining in the house repayments.
A couple aged 55 still owe $200,000 on their house. He earns $120,000 a year. Their goal is to have it paid off in 10 years when they are due to retire, which will require principal and interest repayments of $2322 a month.
An alternative would be to convert the loan to interest only. This would cost $1167 a month, leaving a surplus of $1155. On his salary, $1155 in after-tax dollars is equal to $1909 in pre-tax dollars. If he salary sacrificed $1909 a month into super, contributions tax would take $286 leaving $1623 going to super. If the fund achieved 8 per cent a year, they would have $297,000 in 10 years. They could then withdraw $200,000 tax-free to pay off the loan and have an extra $97,000 in super.
Obviously there are many factors to consider before using the strategy, including the age at which you intend to retire (your super may be inaccessible until then) and how much you currently have. However, for many it can be the best way to go.
A transition to retirement pension (TTR) strategy is a no-brainer for anybody aged 55 and over who is still in the workforce.
Jill is 55, earns $60,000 a year and has $220,000 in super.
If she rearranged her package by salary sacrificing $16,000 a year and made up the shortfall in take-home pay by starting a TTR of $13,000 a year, she could have an extra $38,000 in her super by age 65. That’s not a huge sum but it’s money for nothing and would certainly enable her to take a trip and replace the car.
CAN I CUT AGED-CARE COSTS?
Aged care is a growing worry.
The older baby boomers are now approaching 65 and many are helping parents move into aged care. It’s a difficult time emotionally and the plethora of rules and regulations that confronts their every move makes the process much harder.
So complex is it that some financial planning groups are training specialist advisers in this field.
A couple moving into aged care will often undergo an asset assessment in order to calculate the maximum amount payable for an accommodation bond or charge.
Unfortunately, most people do not yet understand that the timing of this assessment can create very different outcomes.
William is in high care and Ethel in low care. They have a house worth $700,000 with cash and contents worth $55,000. If they both complete the asset assessment while they are still living at home (or while one is in respite), William will not be liable to pay an accommodation charge and Ethel cannot be asked to pay an accommodation bond.
Therefore, their total assessable assets will be $27,500 each – less than the minimum asset amount of $37,500 each. The aged-care facility will receive a fully supported resident supplement for William and Ethel.
But, if they both entered care on the same day and completed the assessment after entry, each would be considered to have $340,000 of assessable assets (50 per cent of total assets – $377,500 less the minimum assets amount of $37,500).
Ethel could be asked to pay a bond of up to $340,000 and William would be liable to pay the accommodation charge of $26.88 a day.
If William and Ethel enter on separate days with the asset assessment completed after entry, the first person will not pay an accommodation bond or charge while the second would.
The huge difference in outcome is solely attributable to the timing of the assets assessment.
While it may seem attractive to have both William and Ethel enter care with no bond or charge payable, under this scenario they would not meet the criteria to keep and rent their former house with the pension and aged-care exemptions that can apply.
So any financial-planning strategy for aged care needs to take into account the ability to access care, the impact on pension entitlement, the effects on the cost of care and the ability to afford care in the short and long term
IS IT BETTER TO RENT OR BUY?
With interest rates increasing and prices rising, it is becoming increasingly difficult for young people to buy their first house.
Hence, the emails have been coming in about renting versus buying and whether it is better to forget about home ownership and start building a share portfolio.
It is usually cheaper to rent than buy but anybody doing this should make sure they invest what they save and don’t just fritter it away.
A great scheme for young people is the First Home Saver Account.
If $5000 is banked in the account in a year, the government makes a tax-free contribution of $850.
Even as a couple, each person is allowed to have an account so a pair of savers could bank $5000 each and pick up $1700 a year for nothing.
That is a capital-guaranteed return of 17 per cent after tax. You must be prepared to accept the condition requiring deposits of at least $1000 to be made into the account for each of four financial years before the money can be accessed.
If home ownership is not yet a goal, investing in shares may be a better option but bear in mind that a seven- to 10-year time frame is recommended for share investments to give the investor time to ride out the inevitable market slumps.
From The Sydney Morning Herald here: https://www.smh.com.au/money/investing/noel-whittakers-five-mostasked-questions-20100914-15a23.html