Whether you’re doing it because you want to travel, study or start a family, taking a career break can really affect your financial future. Thankfully, there are ways to help keep your superannuation in shape.

Different types of breaks from your career can have different impacts on your super savings. In some cases, such as taking annual and long-service leave (unless on termination), you’ll still get paid a regular income and receive superannuation contributionsi, so there won’t be an impact at all.

If you’re a full-time employee, you can usually also take 10 days paid sick/carer’s leave annually and still be eligible for SG payments from your employerii(the number of days may be on a pro-rata basis for part-time employees). In other instances, you may forego superannuation if you take a career break, even if your employer commits to hiring you back at the end of your time away from work.

Tips for managing your super on a career break

When it comes to a career break, many people start planning their exit from the workplace well in advance. As part of this planning, you might want to consider contributing extra into your super as a way to minimise any impact on your retirement savings.

Concessional contributions

Concessional contributions are one way to do just this. There are two types of concessional contributions:

    • Salary sacrifice contributions are pre-tax contributions taken from your salary before your income tax is calculated. This is on top of what your employer might pay you under the Superannuation Guarantee.
    • Personal deductible contributions are voluntary contributions you can make using after-tax dollars (such as when you transfer funds from your bank account into your super), then claim a tax deduction for these payments.

Because concessional contributions are generally taxed at 15% which is usually lower than most people’s personal income tax rateiii, this can be a tax effective way to boost your super.

If you’re making contributions to your super, keep in mind that there are limits on the amount you can contribute each year.

The good news is that if you do take a career break, you may be able to make extra concessional contributions above the general cap using ‘carry forward’ arrangements. If you’re eligible, this allows you to access unused concessional cap amounts from previous years and add them to the current year instead – without paying additional taxiv.

Spouse contributions

If your spouse is taking a career break, you may choose to help their super to grow by making a spouse super contribution. If your partner earns under $40,000, and you meet the other eligibility requirements, you can make after-tax contributions into their super, and may be eligible for a tax offset as well, depending on their income and your contributionsv. Keep in mind that there are limits for how much can be contributed.

Contribution splitting

In addition to contributing directly into your spouse’s superannuation account, you can opt to transfer some of the super you recently contributed to your own account, into theirsvi. You can typically redirect up to 85% of your concessional super contributions from the previous financial year.

Government co-contributions

The government’s co-contribution scheme is designed to help boost savings in super funds of low and middle-income earners. If you’re in this category and make personal (after-tax) contributions to your fund, the government may also make an annual contribution of up to $500vii. You don’t need to apply – it will happen automatically after you’ve lodged your tax return, provided you’ve given your tax file number to your super fund.

Other ways to keep on top of your super

In addition to making contributions into your super account, there are other ways you could nurture your nest egg while on a career break. You could look at consolidating your super – that is, bringing all your super together into one account. It could save you time and money on managing multiple fund fees. Although before you consolidate, consider whether you’ll pay any exit or withdrawal fees from your other super funds and check the features and benefits you have in your other super funds to make sure you’re not losing anything that’s important to you (like insurance). We can help you weigh up the pros and cons of consolidating.

Also, make it a priority to monitor how your super account and its investments are working for you. Your needs and attitudes toward investing will likely change at different stages of your life, and understanding how your money is growing accordingly will help you plan for your financial future.

What to keep in mind

    • If you exceed the super contribution limits, additional tax and penalties may apply.
    • The value of your investment in super can go up and down. Before making extra contributions, make sure you understand and are comfortable with any potential risks.
    • The government sets general rules about when you can access your super, which means you typically won’t be able to access your super until you retire.
    • If you’re 65 or over and making contributions, you generally need to satisfy work test requirements and be under age 75.

i Australian Taxation Office: Checklist: Salary or wages and ordinary time earnings

ii Australian Government, Fair Work Ombudsman: Paid sick and carer’s leave

iii Australian Taxation Office: Tax on contributions

iv Australian Taxation Office: Carry-forward unused concessional contributions

v Australian Taxation Office: Super-related tax offsets

vi Australian Taxation Office: Contributions splitting

vii Australian Taxation Office: Super co-contribution

©AWM Services Pty Ltd. First published May 2021

Salary sacrificing into super involves reducing your take-home pay to put more money away for your retirement. See what you need to know.

Salary sacrificing into super is where you choose to have some of your before-tax income paid into your super account by your employer. This is on top of what your employer might pay you under the super guarantee, which is no less than 10% of your earnings, if you’re eligible.

Making salary sacrifice contributions does involve a reduction in your take-home pay, but it also means you could increase your retirement savings while also potentially reducing what you pay in tax. If you’re thinking about setting up a salary sacrifice arrangement, here are some things to consider.

What can I contribute?

You decide how much you want to contribute (as long as you don’t exceed super cap limits) and whether it’s a one-off payment, or something you can afford to do regularly.

How much I can contribute?

You can’t contribute more than $27,500 per year under the concessional super contributions cap or penalties will apply. It’s also important to note that contributions made into your super as part of a salary sacrifice arrangement are not the only contributions that count toward this cap.

Other contributions that count toward your concessional contributions cap typically include:

    • Compulsory contributions your employer pays under the super guarantee, including contributions from any other jobs you may have held in the same financial year.
    • Contributions you make using after-tax dollars which you choose to claim a tax deduction for.

What are the potential tax benefits?

If you choose to reduce your before-tax income by salary sacrificing into super, a potential benefit is you may be able to reduce what you pay in income tax for the financial year.

That’s because contributions made via a salary sacrifice arrangement are only taxed at 15% if you earn under $250,000 a year, or 30% if you earn $250,000 or more a year, with most people generally paying more tax on their income than they do on salary sacrifice contributions.

There could also be further tax benefits as investment earnings made inside the super environment also benefit from an equivalent tax saving, which could make a difference when you do eventually withdraw your super savings and retire.

How do I set up a salary sacrifice arrangement?

If salary sacrificing into super is right for you, here’s a quick checklist for how you could set this up.

Make sure your employer offers salary sacrifice

You will need to confirm with your payroll team at work that your employer offers this type of arrangement. If not, you may be able to achieve broadly the same benefits by claiming a tax deduction on contributions you may choose to make using after-tax dollars, but you’ll need to consider whether this is right for you.

Decide how much you want to salary sacrifice, how often and when

You might want to salary sacrifice on an ongoing basis, or as a one-off. Also, you can’t salary sacrifice income that you’ve already received, such as a bonus or leave entitlements, so you’ll need to act well before this money is paid into your regular bank account if you want to salary sacrifice it.

Notify your employer and get any agreement in writing

If you can salary sacrifice (and you know how much, how often and when you want to do it), contact your payroll team at work to find out what information they need. Ask them to confirm in writing when your contributions will start being paid, so you can check that the contributions are being received into your super account.

Make sure you don’t exceed the concessional contributions cap

If you do exceed the cap, additional tax and penalties may apply. Remember, the cap applies to all concessional contributions, whether they’re made into one or more super accounts.

It’s also worth noting that in addition to your annual cap, you may also be able to contribute unused cap amounts accrued since 1 July 2018, if you’re eligible. This broadly applies to people whose total super balance was less than $500,000 on 30 June of the previous financial year.

Everyone’s different, so if you’re thinking about setting up a salary sacrifice arrangement, consider your circumstances and whether it’s the right thing for you.

©AWM Services Pty Ltd. First published July 2021

Running a few simple checks on your home loan could potentially save you thousands of dollars over the life of your loan.

For many of us, paying off a home loan is likely to be one of the biggest regular expenses in our budget. And it could stay that way for up to 30 years. But that shouldn’t mean you ‘set and forget’ it for the life of the loan.

Running a few simple checks will help you decide whether your home loan is still right for you, or whether you should be looking for a better deal. Here’s how to get started.

Find out all the home loan features

Getting your head around all the types of home loans available can be confusing. It’s even more so when each of them comes with a plethora of features, making a loan appealing (or unappealing) for different reasons.

Some (generally variable-rate loans) come with redraw facilities, which can be a handy home loan feature if you’ve made extra repayments in the past and need to access that cash for an unexpected expense.

Others have an offset account, which is a bank account linked to your loan. Any cash in the account is offset daily against your home loan principal, essentially reducing the interest you pay.

These features can sound good in theory, but they may also attract additional fees. For instance, the redraw feature on some home loans may have associated fees and withdrawal limits. An offset account may have an annual fee that more basic home loans may not. It’s worthwhile checking which features you have bundled into your loan, and what they’re costing you.

Understand your home loan interest rate

What interest rate are you currently paying on your home loan? With many first-home buyers borrowing hundreds of thousands of dollars, there’s a big financial incentive to do a health check on your home loan.

Unfortunately, comparing loans is not as simple as looking at interest rates. While it’s easy to be lured into a new agreement by a rate that seems lower, like many things in life, appearances can be deceptive.

There are two rates to consider when re-evaluating the interest payable on your loan: interest rates and comparison rates.

The interest rate is the annual interest cost for borrowing money, but it doesn’t take into account any fees. The comparison rate incorporates the annual interest rate as well as most upfront and ongoing fees, providing a clearer picture of how much you’ll be up for.

If you’re looking at switching providers, it’s a good idea to use comparison rates as your guide across various offerings. However, the comparison rate is calculated based on a $150,000 principal and interest loan over a 25-year term, so it’s not necessarily an accurate rate for your circumstances.

Ask to reduce your home loan interest rate

If you find a lower interest rate on the market, you don’t automatically need to change. First, use a home loan comparison calculator to evaluate the two loan types side-by-side, and a home loan repayments calculator to estimate how much your ongoing mortgage repayments could be.

Next, you could contact your current lender and tell them you’re thinking about switching. If you have a good credit rating and more than 20% equity in your homei, you may be in a better position to negotiate.

If you’ve found a better deal and are still considering making a switch, be aware that the costs of refinancing may outweigh the savings made by switching. If you decide to go ahead, there are a number of steps to navigate when making the switch. Next, you could contact your current lender and tell them you’re thinking about switching.

Should you make the home loan switch?

If you do your homework (or get a mortgage broker to do it for you), it’s possible you’ll find a home loan option that offers a lower interest rate, lower fees, more flexible repayment options or better features than the one you have.

Get started in 3 easy steps

  1. Find out the features of your home loan
  2. Understand your home loan interest rate
  3. See if you can get a better deal, or need to switch

i Moneysmart.gov.au: Switching Home Loans

From 1 July 2021, the contributions your employer is required to make into your super fund, under the super guarantee, will increase to 10% of your before-tax income.

The super guarantee will increase from 9.5% to 10%, as planned, on 1 July 2021.

The outcome of this is that Aussie employees, who are eligible for the super guarantee, should have more savings in their super to help fund their retirement.

Below we explain what you need to know and when further increases might be expected.

What is the super guarantee?

The super guarantee (or SG for short) determines how much your employer is required to contribute into your super fund, according to the Australian government. Currently that figure is 9.5% of your before-tax income.

However, from 1 July 2021, your employer will be required to contribute a minimum of 10% of your before-tax income into your super account.

Who’s eligible for the super guarantee?

Generally, you’re eligible for SG contributions if you’re earning at least $450 before tax a month, regardless of whether you’re a full-time, part-time or casual employee, including if you’re a temporary resident.

You’re also typically eligible if you’re:

  • an employee under 18 years old, or a private or domestic worker, doing more than 30 hours a week
  • a contractor, even if you’re working under your own ABN, although this is only in some instances
  • an older employee, who might’ve already begun accessing some of their super.

You can check your eligibility using the ATO’s super guarantee eligibility decision tool.

Rules if you’re self-employed

If you’re self-employed (for example, as a sole trader), you’re typically not obligated to make SG contributions for yourself into a super fund, but that may be different if you run your business through a company or trust.

Whatever your situation, you may still consider making voluntarily contributions into super to save for your retirement.

How is the SG rate calculated?

If you’re wondering how the super guarantee is calculated, employers are required to pay a percentage (determined by the Australian government) of your ordinary time earnings into your super.

This is generally what you earn for your ordinary hours of work, including commissions, shift loading, annual leave and sick leave.

Payments that aren’t considered as part of this include overtime, unused annual leave, long service leave paid on termination of employment, and ancillary leave, which includes when you might be on jury duty.

What you might get paid while you’re on parental leave is also not taken into account. However, some companies will still choose to make SG payments for you during this time.

To calculate the amount of SG you should expect to receive from your employer, use the ATO’s estimate my super tool.

Note, the SG rate is scheduled to increase in increments and will gradually reach 12% by 1 July 2025i.

When are SG contributions paid?

If you’re eligible, your employer must make SG contributions into your super fund at least four times a year on dates determined by the ATO. Employers can also choose to do this weekly, fortnightly or monthly.

If employers fail to pay SG on time, they may have to pay the super guarantee charge. If your employer hasn’t paid your super, paid it late, or into the wrong fund, speak to the person who handles the payroll at your work.

If you’re not satisfied with what they tell you, you can lodge an unpaid super enquiry with the ATO. You’ll need to give your personal details, including your tax file number, the period relating to your enquiry and your employer’s details. You can also call the ATO on 13 10 20.

How can I keep track of my SG contributions?

You can check your SG payments by looking at your payslips and know that while super contributions may be listed on your payslip, this doesn’t always mean money has been deposited into your super account.

With that in mind, consider checking your super statements, calling your super fund or logging into your online account to see exactly what has been paid into your super.

If you’re an AMP client, you can do this by logging into My AMP, choose your super account, go to ‘transaction history’ and then select ‘contributions received’.

Other things worth noting

There are limits to how much can be contributed into your super fund, which will depend on what type of contribution you’re making. For instance, you may choose to make contributions on top of what your employer is required to make under the super guarantee.

If you exceed super contribution caps, additional tax and penalties may apply.

Whatever your age, if you’ve ever had questions about your retirement savings we are here to help.

https://www.ato.gov.au/Calculators-and-tools/Super-guarantee-eligibility/

©AWM Services Pty Ltd. First published June 2021

The amount of money you can contribute into your super each year is about to increase.

The caps on concessional and non-concessional super contributions will increase from 1 July this year, meaning you may be able to put more money into super.

Below we explain how the new caps differ to the old ones and what these changes could mean for you.

What are the new concessional and non-concessional contribution caps?

If you’re making contributions to your super, there are limits on the amount of concessional and non-concessional contributions you can make each year.

Below you can compare the current contribution caps with the contribution caps that will apply from 1 July 2021.

Your age Current cap Cap from 1 July 2021
Concessional
All $25,000 a year
Plus, unused cap amounts accrued since 1 July 2018 if you’re eligible*
$27,500 a year
Plus, unused cap amounts accrued since 1 July 2018 if you’re eligible*
Non-concessional
Under 65*** $100,000 a year
Alternatively up to three years of annual caps ($300,000) under bring-froward rules if you’re eligible**
$100,000 a year
Alternatively up to three years of annual caps ($330,000) under bring-froward rules if you’re eligible**
Non-concessional
65 or over*** $100,000 a year** $110,000 a year**

* This broadly applies to people whose total super balance was less than $500,000 on 30 June of the previous financial year.

** How much you can make as a non-concessional contribution depends on your total super balance as at 30 June of the previous financial year. More on this below.

*** Age determined as at 1 July of the financial year the contribution is made

What’s the difference between concessional and non-concessional contributions?

Concessional contributions include:

    • Compulsory contributions – these are the before-tax contributions your employer is required to make into your super fund under the Superannuation Guarantee scheme, if you’re eligible.

 

    • Salary sacrifice contributions – these are additional contributions you can get your employer to make into your super fund out of your before-tax income if you choose to.

 

  • Tax-deductible contributions – these are voluntary contributions you can make using after-tax dollars (such as when you transfer funds from your bank account into your super), which you then claim a tax deduction for. These can be made by both self-employed people and employees.

Concessional contributions are usually taxed at 15% (or 30% if your total income exceeds $250,000). This will typically result in an overall tax saving when compared to the tax rates most people pay on their personal income.

Non-concessional contributions include:

  • Personal after-tax contributions – these are contributions you put into your super fund using after-tax dollars, which you don’t claim a tax deduction for. Some reasons why you might choose to make non-concessional contributions, include if you’ve reached your concessional contributions cap, if you’ve received an inheritance, or if you’re after a government co-contribution into your super fund.

Will there be any changes to the total super balance cap?

Currently, if you have a total super balance of $1.6 million or more, as at 30 June of the previous financial year, you can’t make additional non-concessional contributions to your super, or you may be penalised. While non-concessional contributions can’t be made once you reach this limit, concessional contributions can be.

Meanwhile, from 1 July 2021, this cap will increase from $1.6 million to $1.7 million.

How does the total super balance cap affect bring-forward rules?

Your total super balance may also impact your ability to contribute up to three years of non-concessional contributions under the bring-forward rules.

Currently, your total super balance must be below $1.4 million, as at 30 June of the previous financial year, for you to be able to contribute up to three years of annual caps ($300,000) under the bring-forward rules.

From 1 July 2021, that figure will change, and your total super balance will need to be below $1.48 million, as at 30 June of the previous financial year, to contribute up to three years of annual caps ($330,000) under bring forward rules.

As your total super balance rises above this level, your ability to bring forward future year caps may be reduced, or no longer available at all, meaning only the standard cap may be available.

What other things should I know about super contributions?

    • If you exceed super contribution caps, additional tax and penalties may apply.

 

    • If you’re 67 or over when a super contribution is made, you’ll need to have met the work test or be eligible to use the recent retiree work test exemption.

 

    • If you’re 65 or over, you can make an after-tax downsizer contribution to your super of up to $300,000, using the proceeds from the sale of your home (if it’s your main residence), regardless of your work status, super balance, or contributions history.

 

  • The government sets general rules around when you can access your super, which typically won’t be until you reach your preservation age and meet a condition of release, such as retirement.

Superannuation rules can be quite complex, so speak to us about what might be right for you.

In the meantime, remember the value of your investment in super can go up and down. Before making extra contributions, make sure you understand and are comfortable with any potential risk you might be taking on.

©AWM Services Pty Ltd. First published April 2021

Insurance might not always be top of mind, but it’s important to review your policies regularly to make sure you’ve got the right cover

Whatever your mix of cover — life, total and permanent disability, income protection and trauma — insurance can be an important part of protecting yourself and your family, now and into the future.

Thanks to the ability to pay for insurance through super, an estimated 94 per cent of working Australians have some level of life coveri. So it’s a good idea to review your insurance regularly to make sure you have the right type of cover—and enough of it.

You probably don’t think about your insurance regularly, but there are certain times when you should consider updating your policies to make sure they still reflect your lifestyle and insurance needs.

When and why you should review your insurance

Insurance works best when you have the right level of protection for your situation and as your life changes, so might your insurance needs. You should consider reviewing your cover whenever your situation changes, like:

    • taking on a mortgage to buy a property
    • having children
    • getting married
    • upsizing or downsizing your home
    • getting a pay rise or take a pay cut
    • starting a business
    • experiencing a change in your health or lifestyle
    • paying off your mortgage
    • stopping supporting financially dependent children
    • joining a new super fund that may provide automatic insurance cover
    • retiring

These milestones mark important times to review your insurance, including the amount of cover you have and whether your beneficiaries (those who will receive your insurance in the event of your death) are up to date.

How to review your insurance

Insurance is flexible and can be changed to align to your needs. Below is a step-by-step guide to reviewing what you have.

Step 1: Read your insurance contract

Refer to your product disclosure statement (PDS) and read it to fully understand what you’re covered for (death, disability or injury for instance) and compare this against what you’d ideally like to be covered for.

Step 2: Check the insurance policy expiry date

Check if your insurance policy has an expiry date, and if so, make note of when it is so you’re not caught off guard. It can be a good idea to set yourself a reminder a month or two before it’s due so you can contact your insurance provider ahead of time.

Step 3: Know your beneficiaries

An insurance beneficiary is the person, or people, who will receive your insurance payout in the event of your death. It’s important to make sure your beneficiaries are up to date so your money ends up in the right hands.

Step 4: Check if you have enough insurance

To help you work out the right level of insurance cover consider the following questions.

    1. How much money would your family have if you were to pass away or become disabled? Consider the amount of money you have in super, savings, shares and other assets, and existing insurance policies as a starting point.
    2. How much money would your family need if you were to pass away or become disabled? Consider the size of your mortgage and any other debts you have, as well as other costs such as childcare, education and day-to-day expenses you may be covering.

The difference between these figures should provide some guidance on the amount of insurance cover you may want to have. However, you might need to compromise between what you’d like and can afford. We can help you crunch the numbers to ensure that your coverage meets your needs.

Step 5: See if you have any other insurance policies

Like many Australians, you may have insurance through super. So, it’s a good idea to check this against other policies you might have outside super.

Then compare your cover, check whether you have any insurance double ups – if you have more than one super account with the same type of insurance, you may be paying for more insurance than you need.

Something to note on your TSC insurance, you’ll most likely only be able to claim up to 75% of your pre-disability income, regardless of whether you have TSC cover within multiple super accounts.

Changing your insurance policy can be complicated, so it helps to have an expert to talk things through with. We are here to help.

i Rice Warner, Life insurance adequacy, paragraph 8.

The Federal Government allowed Australians affected by COVID-19 to access some of their superannuation during much of 2020.

For many people, the early release of super scheme was a lifesaver, with the money accessed from retirement savings helping provide additional support at a time of economic uncertainty.

The scheme is now closed to new applications but over the lifetime of the scheme, Australians made 4.8 million applications to withdraw a total of $35.9 billion from super funds, at an average payment per person of $7,643i.

If you’re one of these Australians, you might be wondering about the long-term impact your super withdrawal could have on the quality of your retirement.

The good news is there’s plenty you can do to help make sure you can still enjoy the kind of retirement you’ve always dreamed of.

How much super do you need?

According to the ASFA Retirement Standard, to be able to live a comfortable life in retirement, doing things such as eating out at restaurants, enjoying leisure activities and travelling occasionally in Australia and overseas (once restrictions ease), it’s estimated you’ll need a super lump sum of $545,000 if you’re single, or $640,000 between you if you’re in a coupleii.

These figures assume you’ll also receive a part age pension from the government and that you own your own home.

What is the impact of a super withdrawal?

By withdrawing part of your super early, you don’t just lose the amount you’ve withdrawn from your retirement savings, you also lose the opportunity to earn an investment return (or make additional money) on that money. As super is a long-term investment, the amount you stand to forfeit could be larger, the younger you are.

If you’re interested in getting an idea around what possible impacts a withdrawal now may have down the line, you can check out the MoneySmart’s Superannuation calculator.

Unfortunately, if left alone this shortfall won’t take care of itself, but there are some things you can do to help rebuild your retirement savings.

Ways to help rebuild your super

As a result of the economic shutdown you may have been forced to cut back on your spending and live a little more frugally. Rather than returning immediately to your former lifestyle as your income recovers, try to maintain some of the measures you adopted to save, and that might include putting extra money into your super.

There are a number of ways you can make super contributions in addition to those your employer makes on your behalf.

• Concessional (before-tax) contributions

These can take the form of either salary sacrifice contributions, which are voluntary contributions you ask your employer to pay out of your before-tax income, or tax-deductible personal contributions, which are contributions you make using after-tax dollars (such as when you transfer funds from your bank account into your super), then claim a tax deduction.

• Non-concessional (after-tax) contributions

This refers to money you put into your super fund using after-tax dollars and don’t claim a tax deduction on. Some people choose to make non-concessional contributions when they’ve reached their yearly concessional contribution cap.

• Spouse contributions

If your spouse is in a better financial position than you, they may be able to help rebuild your super through spouse contributions, provided you earn less than $40,000 per year. Subject to eligibility rules, they may also benefit from a tax-offset on the after-tax contributions they make into your super account.

• Government assistance

If you’re a low-to-middle-income earner and make an after-tax contribution to your super, which you don’t claim a tax deduction on, you might be eligible for a government co-contribution of up to $500 into your super.

The government also offers another type of super assistance known as the low income super tax offset (LISTO). If you earn $37,000 or less a year, and receive concessional super contributions, the government may refund the tax you paid on those contributions back into your super account, up to a maximum of $500 per year. This will happen automatically at tax time if you qualify.

• Find and consolidate your super

As at 30 June 2019, there was $20.8 billion in lost and unclaimed super across Australia according to the ATOiii. If you think you might have some super floating around in the system from a previous employer, it’s worth doing a super search to locate it.

And if you find any lost or unclaimed super, you might consider consolidating all your super into one account to make it easier to manage and keep track of, and avoid paying multiple fees and charges. Before deciding which super fund to consolidate into, consider all the features and benefits of your super funds, whether any exit or withdrawal fees apply and any insurance cover you may have, when making your decision.

Please get in touch if we can be of assistance. We are here to support you through these challenging times.

i APRA, COVID-19 Early Release Scheme – Issue 35

ii ASFA, Retirement Standard, September 2020

iii ATO, Lost and unclaimed super by postcode

©AWM Services Pty Ltd. First published February 2021

In its first board meeting of 2021, the Reserve Bank of Australia (RBA) decided to keep the cash rate at a record low of 0.1%. Find out why rates are so low and what it may mean for you and your financial goals.

Why does the RBA keep rates low?
Lower interest rates and rate cuts are a way for the RBA to help stimulate the economy. The idea is, when the official cash rate is low, banks may follow suit and lower interest rates on the loans they provide.

When rates are lower, you pay less interest on your debt, freeing up money for you to spend elsewhere. You may also be more likely to borrow money. This increased spending has a ripple effect through the economy, giving it a boost.

It’s important to note that when the RBA cuts the official rate, or keeps it low, there’s no guarantee that the banks will do the same. For example, in recent times, some banks have only passed on part of the rate cut.

In a statement from the RBAi, they advised they will not increase the cash rate until inflation is within the target range of 2-3%. For this to occur, wages growth will have to be higher than it is currently, requiring significant gains in employment and a return to a tight labour market. The RBA isn’t expecting these conditions to be met in Australia until at least 2024.

What could low interest rates mean for me?
So, it looks like low interest rates may be around for a while. This could be good news or bad news, depending on your financial goals. Here’s what low rates could mean for four common financial goals:

Paying off debt
If you have a variable rate loan, a rate cut can work in your favour, provided your lender passes on the cut. This could be a good opportunity to start clearing debt. One strategy to consider is to keep your loan repayments the same despite the rate cut, so that you pay off more of your loan, faster. Or, you may consider using the money you save on repayments to invest elsewhere to help grow your wealth.

It generally makes sense to pay off bad debt first (ie debt used to pay for day-to-day expenses like credit card debt, rather than debt used to pay for an income-generating asset like an investment property). It’s also usually a good idea to start paying off the debt with the highest interest rate first.

If you have a fixed-rate loan, it may be a good time to crunch the numbers to see if refinancing is worthwhile, so you can take advantage of the lower rates on offer. When you’re working this out, make sure you factor in, not only the amount you could save on repayments, but also the break costs associated with the current loan, as well as any set-up fees associated with the new loan.

It’s important to consider your circumstances and goals before deciding what’s right for you, so financial advice may help.

Buying a property
If you’re in the market to buy a property, a reduction in interest will probably be welcome news. That’s because lower rates will influence how much you can borrow and how much you can afford to repay on your loan.

While it may be tempting to borrow more, keep in mind that interest rates will eventually increase and so will repayments. It’s a good idea to check whether you can afford the home loan if rates were to go up.

Increasing your savings
A low-rate environment is generally less favourable for savers with cash in the bank and may prompt some investors to consider whether their money could be working harder for them elsewhere.

With little interest to be earned by keeping money in the bank, alternative options such as income-generating shares that pay attractive dividends may be worth a look.

Before making any changes, it’s important to understand the risks involved. Shares, for example, are much riskier than keeping money in the bank. But they may offer the potential for much higher returns than a cash deposit.

Other options which may help your money to work harder for you include managed funds or property. Again, these investments carry more risk and can tie-up your cash for a longer period of time. Also be sure to understand any fees involved.

Growing your super
This is a timely reminder to check what portion of your super is invested in cash. Consider whether the amount of super you have in cash is still appropriate given the level of risk you’re comfortable with and the time you have left until you retire.

Ultimately it comes down to what’s important to you, what stage you’re at in life and how much risk you’re willing to take on for potentially higher returns. If retirement is still a while away, you may consider taking on riskier, higher growth investment options like shares or property that have the potential to help grow your super balance over time. However, if you’re retiring soon, you may not be as willing to take on too much risk, as preserving your super balance may be a higher priority. We can help you make the most of this low interest-rate environment and stay on track to reach your goals.

i RBA website – Supporting the Economy and Financial System in Response to COVID-19

©AWM Services Pty Ltd. First published February 2021

As every parent knows (even before they become one), raising a child isn’t cheap. And those expenses don’t necessarily stop once they reach 18. Parents often hope to help their adult children with significant financial milestones in life too. We look at some of the main expenses for parents, how you can start saving for your child’s future and the different ways to go about it.

What do you need to save for?

Education

Probably the biggest single expense parents think about is education. In 2019, one third of students were attending an independent school according to the ABSi. And with the national metropolitan average being $298,689ii for a private school education, it can pay to start planning early.

Weddings

Granted, not everyone will get married. But with the average cost of a wedding sitting at $36,000iii, it’s no small expense. Couples might find themselves having to choose between paying for a wedding or saving for a house deposit, so a monetary contribution from the parents is often gratefully received.

House deposit

Helping adult children with a down payment on their first home is something 32% of parents are doing, a 2020 report from Mozo revealed. And they’re gifting an average of $73,522iv. It could be something to consider when saving for your child’s future.

Unexpected costs

Life is not always plain sailing. Parents can find themselves helping grown-up children with unforeseen medical bills, periods of unemployment, meeting mortgage payments or dealing with the financial aftermath of a divorce or separation. Putting money aside for unplanned costs can mean you don’t have to dip into your savings or end up working for longer.

When should I start saving for my child’s future?

In most cases, the earlier the better. The sooner you start planning for future costs, the more time you have to save, and potentially benefit from things like compound interest – where interest is paid in regular intervals, building on top of earlier interest paid.

Once you’ve worked out how much you need to save and by when, the next step is to understand your current position. You can use AMP’s handy budget planner calculatorv to work out how much you can afford to save towards your financial goal.

What’s a good way to save money for my child’s future?

It depends on your financial situation, how long you have to save or invest, the level of risk you’re comfortable with and if you want to have the option of being able to access your savings at any time. Here are some options you could consider. When weighing up what’s right for you, remember to take into account all fees, charges and costs.

Savings accounts

For time-poor first parents, a regular or high-interest savings account could be a good place to start. Set up regular, automatic payments and keep it separate from your other current or savings accounts, so it doesn’t get accidentally used for something else. Then when you’re ready to do some research, you can think about another option for those savings.

Things to consider

  • Generally, you can access the money whenever you need.
  • There may be minimum or maximum deposit and withdrawal limits.
  • Low-interest rates can equal low returns.

Term deposits

This option offers guaranteed interest rates, provided you save your money for a set period. With a term deposit, you won’t be able to access the money ahead of time without incurring a fee, so if you think you’ll be tempted to dip into the savings at any time, it’s one to reconsider.

Things to consider

  • Your money will be locked away for an agreed period.
  • There may be minimum or maximum deposit limits.
  • It’s likely you’ll have to pay a fee if you want to access the money sooner.
  • Low-interest rates can equal low returns.

Growth or investment bonds

Depending on your financial situation, a growth or investment bond could be a tax-effective way to save for your child’s future. They let you invest on behalf of a child (or a grandchild). Ownership of the bond is then automatically transferred to the child at a date in the future, set by you.

Things to consider

  • Your money will be locked away for an agreed period, usually a minimum of 10 years.
  • There may be minimum or maximum deposit limits.
  • You’ll need to think about tax implications.
  • The expected rate of return.

Education saving plans

Some providers offer savings plans specifically designed for education. There might be potential tax benefits, and they often have features designed to maximise education savings depending on which stage of schooling you’re saving for.

Things to consider

  • Depending on the plan, your money could be locked away for an agreed period.
  • There may be minimum or maximum deposit limits.
  • You may need to pay a fee to access the money early.
  • There could be tax implications.
  • The expected rate of return.

Family trust

A family trust may be a suitable way to save for your child’s future. How the tax benefits may compare to other options depends on the ages, taxable income and number of family members in the trust. Generally, you’ll need a financial adviser or accountant to help you set it up.

Things to consider

  • There can be significant costs to establish a family trust.
  • There are strict guidelines and rules set out by the ATO.
  • Tax treatments are complicated and will require the help of an accountant or financial adviser.

If you’re a parent who wants to save for your child’s future, we can help you with an appropriate approach to provide for their future needs.

https://www.abs.gov.au/statistics/people/education/schools/latest-release#students

ii https://www.goodeducation.com.au/estimated-total-cost-of-a-government-catholic-and-independent-education-revealed

iii https://moneysmart.gov.au/getting-married

iv https://mozo.com.au/home-loans/articles/bank-of-mum-and-and-dad-report-2020

https://www.amp.com.au/banking/calculators/budget-planner-calculator

©AWM Services Pty Ltd. First published February 2021

A million dollars is a figure that’s often cited as the amount you need to retire. But while $1 million doesn’t go as far as it used to – it only goes slightly above the median house price in Sydneyi – for many people it still sounds like an impossibly large amount of money to save.

In reality, there’s no set figure you need to have accumulated in savings, super, real estate or other investments before you can retire. Instead, the size of the retirement nest egg you’ll need will really be determined by your individual goals and circumstances.

Calculate how much you need to retire

A large part of working out how much money you’ll need to cover your retirement depends on the sort of lifestyle you’d like to enjoy.

The Association of Superannuation Funds of Australia (ASFA) estimates that Australians aged around 65, who own their own home and are in relatively good health, will need the following amount of money each year in retirement, depending on whether they intend to live a modest lifestyle or a comfortable oneii:

Modest lifestyle Comfortable lifestyle
Single Couple Single Couple
Total per year $27,902 $40,380 $43,687 $61,909

A modest retirement lifestyle is considered better than one solely dependent on the Age Pension but includes only basic activities. A comfortable retirement assumes you’ll be involved in a broad range of leisure and recreational activities, do some travelling, and have a good standard of living.

If you own your own home, another useful measure is that you’ll typically need around two-thirds (67%) of your pre-retirement income to maintain the same standard of living in retirementiii.

Calculate your day-to-day expenses

Your current monthly budget is a good place to start when trying to forecast your day-to-day living expenses in retirement, but don’t forget to factor in increases in the cost of living over time.

Some costs may be removed – for example, if you own your home you might be planning to have your mortgage paid off before you retire and perhaps the education costs of any children will also be out of the way by then. Work-related expenses, such as petrol or public transport costs, takeaway lunches, work clothes and dry cleaning will probably also be a thing of the past.

But you’ll still have ongoing costs such as utilities, food, healthcare and insurances to cover, along with the costs associated with owning a car, if you have one. And it’s likely that your spending on recreational activities could also increase once you have the time to enjoy them.

Your lifestyle

The type of lifestyle you’d like to enjoy in retirement could have a big impact on how much money you’ll need.

Give some thought to the things you like to do now that you may want to do more of in retirement, or any new hobbies you might like to take up, and the expenses involved in doing these.

And if you plan to travel – be it around Australia in a caravan or eventually by plane across the globe – you’ll need to plan for those costs, too.

Check your life expectancy

If you plan to retire at age 65 it’s possible that your retirement savings will need to last you at least 20 years, as life expectancies in Australia continue to increase. Currently men aged 65 can expect to live to 84.9 years, while women can expect to live to 87.6 yearsiv. There are different living options available in retirement too, so it’s important to think about the long term when considering your financial situation once you stop working.

Check eligibility for government entitlements

Depending on your circumstances, you could be eligible for a part or full age pension payment, which could boost your retirement income.

Other government benefits you may be eligible for include Carer’s AllowanceDisability Support Pensiontax offsets or government loans.

You could also be eligible for a Seniors Card and/or a Pensioner Concession Card, which can help reduce the cost of public transport, some entertainment, healthcare and medications.

And don’t forget that once you hit 60, there’s a number of other benefits you might be able to access.

Options to boost your retirement funds

If you’re concerned you won’t have enough to retire and enjoy the lifestyle you’d like, you could consider working beyond the retirement age, whether full time or part time. Though this can affect access to your superannuation and other government benefits, so it’s important to do your research.

And it’s worth remembering that even beyond retirement your money can continue to grow if you leave your super invested and only draw it down as you need it via a pension, instead of taking it as a lump sum.

If you’re unsure about how much money you’ll need to retire, we can help you determine whether your retirement savings are on track.

i Core Logic, Hedonic Home Value Index, November 2020.

ii Association of Superannuation Funds of Australia (ASFA), Retirement Standard June 2020.

iii Moneysmart, How much super you need.

iv Australian Institute of Health and Welfare, Deaths in Australia, August 2020.

©AWM Services Pty Ltd. First published November 2020