A Reality Check for Accessing Super Early

So as the dream of home ownership continues to recede further into the financial distance for younger Australians in our major cities it is not surprising that the public debate about levels of housing affordability is increasing in volume.

Australians have an ingrained faith in property – both on the shelter front and as an investment.

Residential property is like other investment markets and it moves in cycles and it is strongly influenced by things like interest rate rises or jumps in unemployment but convincing younger Australians that property prices may fall in the future is one of the great communication challenges of our time.

Today we are living in a record low interest rate environment. That – as someone who had their first mortgage application rejected at a time of 16% variable rates – has not always been the case nor can it be relied on to stay that way forever.

The economics of supply and demand will play out over time particularly as house price growth outpaces household income levels and we are already hearing warnings about oversupply particularly in apartment markets in Melbourne and Sydney.

This is not to dismiss the need for a public debate on the issue of housing affordability. Clearly that is a significant social issue and a key challenge facing our state and federal political leaders.

It also impacts different parts of our community in different ways – there is the obvious challenge to the aspiring new home buyer but increasingly it can also involve parents providing loans or guarantees to enable children to enter the property market.

It is also not surprising that when housing affordability is being discussed alternative funding solutions are often raised. Recently the idea of allowing access to superannuation accounts to help finance house purchases has again surfaced.

In investing, as in life, it is all about trade-offs. The appeal of allowing part of your super balance to be used to buy a home is understandable. For a start as a younger person your super is locked away for what seems a long, long time. So being able to access it to do something useful and personally beneficial right now is instantly appealing.

The immediate risk is that markets will adjust accordingly and all you will achieve is artificially inflating house prices to allow for the additional loan from the super account. Beneficiaries are more likely to be the sales agents courtesy of the commission structures in the industry rather than new home buyers.

But the longer term risk is that by taking a lump sum out of the super account investors will lose the impact of compound earnings over several decades. You do not have to be much of a mathematician to work out that your retirement account balance will be significantly lower than it otherwise would be.

Independent consulting firm Rice Warner modelled the impact on a fund member aged 35 who is earning average wages and takes $100,000 out of their super account to use as a housing deposit.

The loss of compounding investment earnings over many years would dramatically affect the young member’s retirement balance. Rice Warner calculates that allowing someone to withdraw $100,000 from their super account would mean the federal government would have to pay them an additional $92,000 in age pension.

What is often not well understood is that the investment earnings usually represents a larger component of the retirement benefit than your contributions.

So a short-term solution on housing could mean long term pain on retirement savings.

 

Source:
Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.

 

Free up your cash flow – insure through your super!

insurance concept

Personal insurance is necessary to protect your family’s future if the unexpected happens or tragedy strikes. But it’s also important to make sure you buy it in a tax-effective way.

 

Benefit from up-front tax concessions
If you buy personal insurances such as Life and/or Total and Permanent Disability (TPD) through your super fund, you may be able to take advantage of a range of ‘upfront’ tax concessions generally not available when insuring outside super.

For example:

• if you’re eligible to make salary sacrifice contributions, you may be able to buy insurance through a super fund using pre-tax dollars (read the case study below)
• if you earn less than 10% of your income from employment (e.g. you’re self-employed or not employed), you may be eligible to claim your super contributions as a tax deduction [1], and
• if you earn less than $50,454 pa, of which at least 10% is from employment or a business, and you make personal after-tax super contributions, you may be eligible to receive a Government co-contribution of up to $500 that could help you cover the cost of future insurance premiums. [1]
These concessions can make it cheaper to insure through a super fund, or help you get a level of cover that may not, otherwise, have been affordable. [2]

 

Case study
Jack, aged 44, is married to Claire, aged 41. Claire is taking a break from the workforce while she looks after their young children. Jack works full-time, earns a salary of $100,000 pa and they have a mortgage.
After assessing their goals and financial situation, their adviser recommends Jack take out $700,000 in Life & TPD insurance so Claire can pay off their debts and maintain the family’s financial position should he die or become totally or permanently disabled. The premium for this insurance is $1,0463 (in year one) outside super. [3]
Their adviser also explains it will be more cost-effective if he takes out the insurance through his MLC Wrap super account. This is because if he arranges with his employer to salary sacrifice the insurance premium into his super account, he’ll be able to pay the premiums with pre-tax dollars. [4]

On the other hand, if he purchases the cover outside super:
• he’ll need to pay the full premium of $1,046 from his after-tax salary, and
• he will also pay income tax of $669 (after taking into account his marginal rate of 39% ) on the part of his income required to fund the insurance premium. [5]

By insuring in super he could make a total effective saving of $669 on his first year’s premium.

MLC Table 3

Note: This case is for illustrative purposes only and has been prepared to highlight the importance of speaking to a financial adviser about the benefits of insuring in a super fund. It’s important that you don’t erode your super balance as a result of having premiums deducted from super. This can be prevented by ensuring sufficient contributions are made to cover premium deductions.
A financial adviser can also identify a range of other opportunities to make your insurance more cost-effective over the longer term.

More positives

Another benefit of insuring through your super account is you can have the premiums deducted from your super balance, without making additional contributions to cover the cost.
This can help you afford insurance if you don’t have sufficient cash flow to pay for it outside super. It may also free-up cash flow to help you take out other important insurances such as Critical Illness, which can generally only be purchased outside super.
Critical illness insurance may provide you with a lump sum payment to pay medical, rehabilitation and other expenses if you suffer one of a number of specified critical illnesses such as cancer, heart attack or stroke.

Protecting your income

Another type of insurance to consider is Income Protection, which can replace up to 75% of your income if you’re temporarily unable to work due to sickness or injury.
If you take out Income Protection insurance in a super fund, you can:
• make super contributions to fund the premiums and benefit from the range of upfront tax concessions, or
• arrange to have the premiums deducted from your existing account balance, without making additional contributions to cover the cost.

Alternatively, if you purchase the cover outside super, you can generally claim the premiums as a tax deduction. The best approach for you will depend on a range of factors, including the tax implications.

To find out more about the benefits of insuring through super, please contact Melbourne: 9654 0555, Geelong: 5229 0577 or Colac: 5232 1200

Note: Unless stated otherwise, this article does not take into account any of the measures announced in the 2016 Federal Budget that has a proposed date in future financial years.

Footnotes:
1. Includes assessable income, reportable fringe benefits and reportable employer super contributions. Other conditions apply.
2. This will usually also be the case if the sum insured is increased to make a provision for any lump sum tax that may be payable on TPD and death benefits in certain circumstances.
3. This premium is for a 44-year old non-smoking male, is based on MLC’s Life cover Super standard premium rates as at February 2015 and includes the policy fee.
4. Because super funds generally receive a tax deduction for death and most disability premiums, no tax on contribution is generally deducted from salary sacrifice super contributions.
5. Applies in the 2015/2016 financial year and includes a Medicare levy of 2%. Calculation of pre-tax income required to fund insurance premium:
– A. Pre-tax part of income for funding premium = $1715
– B. Tax on A. is A. x marginal tax rate $1715 x 39% = $669
– C. Post tax part of income for funding premium A.-B.= $1715 – $669 = $1046

Save small. Win big.

Do you try to save more for your future but find life keeps getting in the way?

With almost half of Australians reportedly living pay-cheque to pay-cheque^, it seems many of us will struggle to put our saving plans into practice.

Building wealth doesn’t have to be complicated or mean making big sacrifices. Adding just $10 extra per week to your super could significantly boost your savings for the future. The more you can contribute, the more this effect is multiplied by compound interest as your savings grow.

Just look at the difference regular contributions could make to your super balance.

Could you spare $10 per week?

By contributing $10 per week (after tax), you could save*:
Period of investment (years) 10 20 30
Amount saved $6,102 $14,664 $26,680

How about $20?

By contributing $20 per week (after tax), you could save*:
Period of investment (years) 10 20 30
Amount saved $12,203 $29,328 $53,360

$50?

By contributing $50 per week (after tax), you could save*:
Period of investment (years) 10 20 30
Amount saved $30,508 $73,320 $133,401

$100?

By contributing $100 per week (after tax), you could save*:
Period of investment (years) 10 20 30
Amount saved $61,015 $146,641 $266,802

Whatever you can spare out of your weekly budget, it’s important to start saving sooner rather than later. Your future self will thank you.

Please contact us on (03) 5229 577 if you would like to discuss, or visit www.incomesolutions.com.au/events to find out more about our free information session, First Steps to Financial Success.

Important information

Information is current as at 14/09/2016 and may change. Forecasts are not guaranteed to occur.

Source: MLC 14th September, 2016

^ MLC & IPSOS, Australia today report, Feb 2016.

*Assumptions:

  • The weekly contribution is made as a single annual contribution (eg $10pw is made as a $520 contribution 1x pa).
  • The individual is eligible to contribute to super for each year of the entire period.
  • Individual makes after tax contributions (i.e. Non Concessional Contributions). [As such the amount contributed is the amount invested].
  • Investment returns are growth 4% pa, income 3% pa, franking credits nil.
  • Investments are still held at the end of the period.
  • Investment income is taxed at 15%.
  • Result is in today’s dollars.
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