People who have their mortgage under control, children who have left school and earning their own income, and who are getting closer to retirement, may seem to have their financial situation under control, but they shouldn’t take their foot off the pedal.
Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney, says that people who are otherwise in a comfortable financial position can still take steps to improve their financial situation and, perhaps more importantly, avoid mistakes that could jeopardise their financial future.
Mr Philpot says he is seeing a growing trend in parents helping children with their first home purchase. However, it’s also an area where parents could put their own financial future at risk, if they aren’t careful.
“In the exorbitant Sydney and Melbourne housing markets, it is understandable that many parents want to help their children to enter the property market.
“It’s often the case that children just need some help to reach a 20 percent deposit, which will help them avoid mortgage insurance. They can then cover mortgage repayments on their own.
“But parents who are considering helping out should make sure they protect themselves. For instance, make the money a loan rather than a gift, with a proper loan document, even if it is an interest free loan. This is particularly important if the child is in a relationship because, if the relationship breaks down, they don’t have to hand over half the money to their ex-partner if there is a loan agreement.
“And definitely don’t act as guarantor for the loan, or put your own home on the line as security,” Mr Philpot says.
Once a mortgage has been paid off, savings can be put towards building up investment wealth. A common strategy is to invest in the name of the lower income-earning spouse, but people should be aware that there may be future problems with this.
“If a good amount of money has been built up – say, over $500,000 – having the investments in one person’s name will cause issues in the future. In particular, there may be significant capital gains tax on the sale of shares or property. It can also cause problems when both have retired, if all the income is in one person’s name.
“A better strategy might be a family trust, where income distributions can change over time.
“Another advantage of family trusts over superannuation is that the wealth can be accessed before retirement, if necessary.
“It is possible that a Labor government will look to change the way family trusts distribute to low income individuals, with a minimum tax rate of 30% to apply to these distributions, but we still believe they are a worthwhile option for many people,” Mr Philpot said.
While the number of adult Australians with a Will seems to be growing, it is still a concern that many of them are very simple Wills, often “DIY”.
Mr Philpot says they usually simply direct assets to the surviving spouse and then to be split equally to the children. But even this ‘simple’ approach can cause complications.
“Most people, when you talk to them about their Will, say that their situation is pretty straight-forward and they don’t need anything complicated.
“But often when we start to drill down, we find that this is far from the case.
“With the rate of divorce and relationship breakdowns – whether their own or that of other family members – many family structures are far from simple, and this needs to be taken into account in estate planning.
“People also need to consider whether they should protect their children or grandchildren if they are to receive a large inheritance.
“A testamentary trust is able to provide some significant tax and asset protection benefits. The asset protection benefit comes from the assets not being received in the child’s name but via a trust, which they can then benefit from.
“It can be further strengthened with ‘Inheritance Protection Agreements’, which is a clause in a Will requesting the beneficiary to enter into an IPA with their partner, that they each agree that any inheritances, received by either of them, shall be excluded from consideration should the relationship end,” Mr Philpot said.
The costs of life cover, particularly in group life cover plans, will increase substantially over the next few years, some by as much as 50 percent.
Mr Philpot says this will be particularly felt if the insurance premiums start to take up a large portion of the contributions, meaning that little is being invested for retirement.
Another issue is how much insurance is necessary.
“Many young people have life cover when they have no dependents or even large debts, and would be better off having all their contributions going towards their retirement savings. Likewise, many older people also have cover in place when they are in a position of being self insured.
“However the majority of working Australians do not have adequate cover in place to protect their family from financial difficulty in the event of death or incapacity, so the right level of cover needs to be assessed and any current policies that are in place will need to be reviewed for competitiveness.”
Mr Philpot says super contributions are becoming the great tax planning tool.
“With negatively geared loans not providing as much of a loss with the lower interest rates and many of the agri tax schemes now defunct, it is difficult to claim large tax deductions.
“However with the changes to the super rules from 1 July 2017, PAYG earners will now also be able to claim a tax deduction.
“Those with income levels above $87,000 and in the 39% tax bracket (incl. Medicare levy), the tax benefit of the contribution is 24%, but the individual personally receives the 39% benefit.
“Even if there is still a mortgage on the home with 5% interest, you are still well ahead by, say, taking $10,000 from the offset account and putting this into super and claiming the tax deduction. The limit on how much can be contributed to super personally is $25,000 less your SG contributions, which is 9.5% of your salary.
“For those aged 40 and over this will become much more common, even if a reluctance to lock away money until retirement age, the tax benefits will outweigh this, together with the benefit of having greater retirement savings,” Mr Philpot said.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.