In previous articles, we have written about the importance of ensuring that your biggest asset – your earnings capacity is protected.

A question we often get however is how do I know if what I have is ok?

There are many Income Protection policies on offer with many options but one of the biggest differences you need to understand what happens in the event of a claim with an Agreed Value Policy compared with an Indemnity Policy. The wrong option can have catastrophic consequences to your financial position when you need the cover the most.

In order to make the right choice, you must first understand the differences between these two options.

An Agreed Value Policy is signed off at the start, i.e. what level of income they’re willing to cover. It provides you with certainty at the time of insurance application, the amount that you have been insured for will be paid, if you need it.

Whereas with an Indemnity Policy, the benefit amount is estimated at the start but not financially assessed until the time of claim.

In both instances, you generally are able to insure up to 75% of your income, but the difference in the event of claim can be significant.

So which one is advantageous for you?

Indemnity Value Policies are usually cheaper when compared to Agreed Value. However, there is no certainty on the monthly benefits received upon the claim. Although Agreed Value income protection might be a little more expensive, it holds more value as it provides you with certainty on the benefit amount you will receive.

Indemnity value covers are suitable for people with a steady income over the years. However, it is quite common for things to change which may lead to the decline (sometimes only short term) of your income.

Possible reasons for a decline in income (which would impact on an indemnity claim but not an agreed value claim):

– You may be in a stable employment now but have you ever dreamt about starting your own business? Clearly, the goal would be to return to a similar or high income but this move can often lead to a short-term income drop and provide an exposure.

– You may wish to change your career entirely. This could involve further study and again a reduced income for a period of time.

– Your current industry or expertise may be subject to disruption which could affect your earning capacity or require further study.

– You may wish to reduce your working hours or start a family.

– You may have your hand forced and need to give up your career or dramatically alter your hours if a family member becomes very ill.

Unfortunately, one of the most tragic situations we have seen was with a middle-aged man who overtime had his work hours, job performance and income gradually get affected as a result of a debilitating mental health illness. The illness caused him to have to reduce his hours and responsibility and even take periods of unpaid leave. Rather than going on a claim in the initial stages, he struggled through perhaps in denial. The gradual decline in health eventually resulted in a claim; however, the claim was reduced as his pre-disablement income was actually lower than what it was when he took the policy out. Had he taken out an Agreed Value Policy, he would have been entitled to a higher level of income which would have provided much more financial support to him and his family and would have allowed him to focus on his recovery.

For anyone who has default Income Protection cover through work or a Superannuation provider, it is critical to understand these differences as often default insurance is on an Indemnity Policy basis.

It is also important to understand that the older we get the more “uninsurable we become” so locking in a good policy now while you are young and healthy can make a significant difference when you need the policy the most.

At JBS we help people assess their need for cover every day. We provide clients with piece of mind which allows them to get on with their lives in comfort knowing that they are covered. Please contact us so that we can provide you with the same level of comfort.

From the 1st of July 2018, if you are at least 65 years old and meet the eligibility requirements, you may be able to choose to make a downsizer contribution into your Superannuation fund of up to $300,000 from the proceeds of selling your home. Normally after age 65 you would need to meet a work test in order to contribute into Super, the great thing about this is that you don’t need to meet the work test to be eligible.

The contribution will not be counted as a Non-Concessional Contribution and will not count towards any contributions caps. The downsizer contribution can still be made even if you have a total super balance greater than $1.6 million, however if your balance is above $1.6 million you are still restricted to having $1.6 million in the pension phase.

The contribution is only able to be made once on the sale of one home, therefore if you sell a second home you can’t make the contribution again. There is also no requirement that you have to purchase another home or actually downsize your home as the name may suggest. In order to be eligible you must tick all of the following criteria:

– You are 65 years old or older at the time you make a downsizer contribution (there is no maximum age limit)

– The amount you are contributing is from the proceeds of selling your home where the contract of sale exchanged on or after 1st of July 2018

– Your home was owned by you or your spouse for 10 years or more prior to the sale. The ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale

– Your home is in Australia and is not a caravan, houseboat or other mobile home

– The proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT asset (acquired before 20th of September 1985)

– You have provided your super fund with the Downsizer contribution into super form either before or at the time of making your downsizer contribution

– You make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement

– You have not previously made a downsizer contribution to your super from the sale of another home.

It is important to note that if your home was owned by just the one spouse, the spouse that did not have an ownership interest may also make a downsizer contribution, provided they meet all of the other requirements.

The maximum contribution you can make under the downsizer rules is $300,000, or $300,000 each if a member of a couple. However, the contribution can’t be greater than the total proceeds of the sale of your home. For example if you and your partner sell your home for $400,000 you’re only eligible to make contributions of $200,000 each, or it can be split in another way such as $300,000 and $100,000.

You must also make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement. In some circumstances the ATO may at their discretion extend this 90 day period, but you will need to apply for it. It is also possible to make the contributions in multiple batches, but the total amount can’t exceed $300,000, and all contributions must be made within the 90 day period.

If you’re thinking of downsizing your home and wish to explore your options in relation to making downsizer contributions, please don’t hesitate to contact JBS and we can assess your options and eligibility. It is a really great opportunity to help build your wealth in a tax effective manner.

Most of us can only dream about leaving our work forever to do as we please. For those who are close to retirement however, this can be a time of excitement and relaxation. Spending countless days at the golf course or with our community groups, families and friends sounds like heaven on earth. The transition from full time work to full time play however may have some unforeseen pitfalls. Here are 5 facts about retirement that you should consider before retiring.

Time
One of the first things retirees quickly discover is that they have too much time on their hands with nothing to do. Playing a round of golf with mates or enjoying a drink at the bar will only fill up a certain amount of time in the day and you can’t go doing the same thing every day. Retired couples and singles alike will quickly become very unhappy once they run out of things to do.

Having ideas in your head about what to do in retirement is one thing; however actually doing them is another. Some experts are suggesting retirees have a day to day plan on what they want to do and even seek an adviser leading up to retirement. You will never be as busy as you were pre-retirement so it’s important to map out ongoing hobbies, part time work and social events before embarking on retirement.

Retired husband syndrome
Many couples get very excited about retiring together, travelling the world together and spending a lot of time together. If this is you then consider the fact that you and your other half may have been together for the past 30 years working full time. Aside from weekends and holidays, you never have to see each other for more than a couple of hours in the morning and night. Now all of a sudden you see each other 24 / 7 and may even start to discover that you can’t stand being together for a prolonged period of time. Determining your own hobbies, goals and friends will assist to avoid “retired husband syndrome’. Again, seeking help from an adviser may also assist in preparing you and your loving partner for retirement.

Not having enough money to fund retirement
Once retired you might have the goal to travel, see the world and complete your bucket list, unfortunately you might not have the funds to do so. Travelling can become very costly. A single international trip can set you back several thousand dollars if not more. By the time your second trip comes around you may find that your retirement funds are not adequate and you’ll need to start tightening the belt. Having a good financial planner early on can prepare you and set realistic goals for your retirement. This way you will have a clear expectation of what you can afford in retirement and prevent any nasty surprises once you’ve retired.

Entitlement to social security
At the moment the Australian pension age is age 65.5 and increasing with each year. During retirement some retirees aren’t aware of what social security benefits they’re entitled to. Even if you are receiving funds from your Superannuation benefits, you may still be entitled to a government age pension (subject to the income and asset tests). Having a good financial adviser by your side will ensure you’re kept up to date regarding any social security payments you’re entitled to.

Losing your identity from not being at work
For those of us who are passionate about our profession, this becomes our identity. Anytime your friends or family think of Engineer, Accountant or Doctor, they think of you. So it’s no surprise that once you retire you may feel like you’ve lost your identity, which may lead to discontent and even depression. Without the daily interaction of your work colleagues your mental and even physical health may start to deteriorate. Retirees who are not very active tend to decline rather quickly mentally and physically. Joining up to the local gym, taking up classes and just continuing to meet new people will have a longer lasting effect for you.

Financial independence gives you the freedom to make your own choices, speak to the team at JBS to start your retirement journey today.

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Over the next few years the age at which you can begin to start receiving the Age Pension will gradually increase from age 65 to age 67 (depending on your birthdate), with most people now having to be 65 and a half before they can access the Age Pension. Every time the Age Pension age increases or there’s talk of it increasing, you’ll hear all over the media people who now can’t retire because they have to wait a few more years before they can access the Age Pension.

Unfortunately for some, the Age Pension will be critical to fund their retirement, but the Age Pension age doesn’t need to be your Retirement Age. There’s a few things you can do to help reduce your reliance on the Age Pension and retire when you want to retire, our motto is that we’d rather you be working because you want to, not because you have to.

Super Contributions – Your employer pays 9.50% of your wage into Super as a Super Guarantee Contribution (SGC), but if your cash flow allows for it, you can top that up through a Salary Sacrifice arrangement or making Personal Concessional Contributions, up to an annual cap of $25,000 (which includes your SGC). This allows you to boost your Super Savings while at the same time helping you save tax personally.

You also have the opportunity to put up to $100,000 in as a Non-Concessional (After-Tax) Contribution and even up to $300,000 utilising the bring-forward rule in one year (if you haven’t made large contributions previously). Depending on your Super Fund, this can be a transfer of any cash you may have or even other assets such as shares. Remember that the new $1.6mil balance rules need to be taken into consideration.

Depending on your income, if you make a Non-Concessional Contribution the government may give you a Government Co-Contribution up to $500 on a $1,000 contribution (you can contribute more, but the co-contribution is based on a maximum $1,000). If your income is below $36,813 for FY18 you will receive the full $500 Co-Contribution, and you will receive a pro-rata amount if your income is above $36,813 but below $51,813.

Consolidate your Super – For some you may have multiple Super accounts, each time you start a new job your employer may start a new Super Fund for you if you haven’t given them the details of your existing Super Fund. If you’ve got multiple Super accounts it may be worth consolidating them into the one account which may help to reduce the total fees you’re paying on your Super accounts. However, you need to be careful that when you rollover any Super into another account you will lose any insurance you may hold.

Review your Insurance – Most Super accounts come with default insurance cover, and insurance is a very powerful tool to protect you and your family in case something happens to you. For those later in life, who are empty nesters, paid off the mortgage and are close to retirement, your need for cover may not be as important as someone who’s just starting a family and recently taken on a mortgage. Although insurance may be needed, it is always worth reviewing it on a regular basis to ensure your level of cover is appropriate and you’re paying for what you need, as the premiums come out of your Super balance. In some circumstances it may also be worthwhile holding some of your insurance cover outside Super.

JBS can help provide a full review of your Superannuation and Insurance and help you put strategies in place to ensure that you’re working because you want to, not because you have to. We’d rather you work towards your Retirement Age.

– Peter Folk –

The Global Financial Crisis (GFC) was for the majority of us, the worst financial crisis of our lifetime. What started in 2007 with a US Subprime Mortgage collapse, developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers on 15th September 2008.

These 2 years between 1 January 2007 and 31 December 2008 resulted in the following returns:

The figures show that what started as a mortgage and property crisis, quickly spread and impacted all growth assets (shares) across the globe with double digit negative yearly returns across the 2 years. Only the high returns from the defensive fixed interest assets could have possibly saved you from disastrous returns across your entire portfolio. Diversification across all asset classes, and having a portion of your funds in defensive assets was crucial during this time period.

It’s important to remember however that just before the GFC, growth markets had been booming for years and by having a lot of funds in defensive assets during this time would have resulted in lower returns. If you were to base your investments on the recent past performance, when the GFC hit you would have been overweight in growth assets and suffered the full effect of the GFC.

In the ten years since the GFC it’s been quite a different story

The figures show that no matter the asset class, by staying invested throughout the GFC, you would have not only recovered your losses, you would have a positive return on all asset classes.

If we look at the returns based from the end of December 2008, growth assets have grown substantially once again showing that relying on the recent short term past performance would have resulted in poor returns as you would have allocated less money towards the growth assets due to their disastrous GFC performance and more towards the defensive assets.

The GFC was not the first big market downturn that we’ve had and it won’t be the last. It’s often hard during these times to ignore emotions and stay the course with your investments. When things are going well we tend to become overconfident and take on more risk (increased growth assets) than what we should. In contrast, when things are going badly, we tend to become pessimistic and be too cautious (not investing enough in growth assets).

Having a financial adviser by your side during these times can help guide you through the tough times. They can help you keep your emotions out of investing, have you stick to the plan, and ensure that you reach your financial goals. Remaining disciplined is the key.

To speak to a financial adviser to help you avoid making wrong decisions during emotional times, call JBS Financial Strategists on 03 8677 0688.

– Liam Rutty –

An article on moneymag.com.au cited that “retirees with modest savings can be better off than those with more than twice as much”. The argument was that due to the new age pension rules introduced in January 2017, there was a ‘sweet spot’ where the income from the age pension and the return from your pension savings would be equal to the income received by someone with more savings who would not qualify for the age pension.

The below table sets out the results.

The assumption was that you would take the minimum amount from your pension account and combine it with your age pension entitlement. As you can see a couple with $1,050,000 will have the same amount of income as a couple with $400,000. What the analysis conveniently doesn’t include however is the capital value. It also only looked at 1 year and did not take into account what would happen in future years.

From a very simplistic view, lets assume that no capital is being drawn in either scenario and hence the capital values remain the same. This means that when the retirees die, they will have $605,000 more money available to pass onto their beneficiaries than in the scenario where the couple only has $400,000. Yes, the income is the same but the actual wealth is way different.

A second and more complicated scenario outlining how the person with more money is in fact way better off is if the capital is drawn down. Let’s assume an extra $10,000 per year, with an earnings rate within the pension account of a modest 5%.

The below table sets out the results.

In the above example, the person with $1,050,000 has a significantly higher regular income over time due to the higher amount of capital available to them and the requirement to draw down an increased minimum amount from their pension accounts as they get older.

The above graph also shows that even with the increased withdrawals, in this particular scenario you will still have considerably more assets throughout your life that you can also draw down on if you need to. Not only that but you need to remember that even if you do not qualify for any age pension at the start of your retirement, as your assets decrease over time you may end up qualifying for the age pension later on in retirement.

In fairness to the author of the original article, it was probably designed to indicate that in order to have a ‘comfortable’ retirement, due to the age pension, you can get by on a smaller pension savings balance. To suggest however that “retirees with modest savings can be better off than those with more than twice as much” is just plain wrong and doesn’t take into account all the pieces of the puzzle.

To speak to someone about growing your retirement wealth so you can have a better lifestyle in retirement speak to one of our advisers at JBS Financial Strategists.

– Liam Rutty –

My partner and I have always taken it upon ourselves to build towards our family’s financial future. Having a roof over our heads and bills paid was one thing but we also wanted savings put aside each week for a rainy day, some savings in the kid’s bank accounts and back up plans for unexpected life events. From time to time I get asked how we’re able to have a mortgage, with 2 kids and think about saving all with me being the only one working. I simply explain that it all comes down to planning well before committing ourselves to any major long term commitments. Then it’s just a matter of defining the steps required and sticking to our guns.

Before we bought our home we decided that it was important to set out the financial ground work regarding what we needed to do in order to fund our loans, living expenses and at the same time able to save each week. So we sat down to determine what our repayments and bills would be once we moved into our home. From there we were able to work out the exact amount we were realistically able to save each week and made a commitment to put those funds aside without fail. Furthermore we made a commitment to put aside funds each week into our son’s bank account. Again this was a realistic figure and we stuck to it each week.

The main point we focused on was to be realistic in what we set out to achieve and how much we could achieve. Often I would think to myself that I’m able to save a certain amount each month; however my bank account does not reflect my theory. Once our second child was born, we again went through the same process to ensure we were continuously building towards our family’s financial future.

We also knew that having a saving’s plan and strategy in place wasn’t enough. Being the sole income earner of the family, I also took it upon myself to ensure my family was protected if I was suddenly unable to earn an income. Several months before we bought our house, we discussed the amount of personal insurance I would require in unforeseen circumstances, which takes into account future long-term loans and living expenses. I then made sure my personal insurance cover was all in place months before we started to look for a house. As you never know what might happen.

Having a financial goal for our family’s future is great but to achieve it, planning and commitment is key. Time and time again we have experienced that thorough planning has many benefits. It firstly provides us with a realistic expectation of what we’re in for and more importantly provides motivation to achieve the financial goals we set. Once our plan is in place it was then up to us to commit, keep each other accountable and more importantly encourage each other to achieve what we set out to achieve.

– Andy –

Employees, you can now get a tax deduction for Lump Sum Super Contributions Prior to the 30th of June.

Previously, as an employee you could only make tax deductible contributions into Super via Salary Sacrifice Contributions. The nature of Salary Sacrifice Contributions are that they must be pre-scriptive, therefore in the event that you have a windfall, sell some assets or decide late in the financial year that you have the capacity to make extra  superannuation contributions, historically it has been difficult or you haven’t been able to.

Since July 1 2017, the ten percent employment rule regarding tax-deductible super contributions has been replaced. The rule meant that a person could not claim a tax deduction on personal Super Contributions if more than ten percent of their assessable income was obtained as an employee. The new rule is now any person under age 65 now may be able to claim a tax deduction on their contributions regardless of their employment arrangement, whilst those aged between 65 and 74 need to satisfy the Work Test in order to be eligible to make a contribution, and subsequently claim a tax deduction.

The following example shows how John was able to save $3,300 in tax by taking advantage of the New Rules:

John works as an employee. He has a salary of $100,000 plus Super Guarantee Contributions of $9,500. He is focusing on reducing his mortgage and at the moment doesn’t have the cash flow to do any additional Salary Sacrifice Contributions. He has however recently decided to take a profit on some shares that he has held for a long period of time. This sale has caused a Capital Gain of $15,000 (after 50% discount).

Prior to the 1st of July 2017, as his income from employment was more than 10% of his total assessable income for the financial year, he wasn’t eligible to do anything about this gain and would simply have to add the $15,000 to his assessable income and pay approximately $5,550 in tax (plus Medicare).

Because of the changes on the 1 July 2017, he is now eligible to make a Lump Sum Tax Deductible Contribution into Super to offset the Capital Gain and reduce his taxable income by $15,000.

By contributing $15,000 into his super as a Lump Sum Tax Deductible Contribution, John is able to save $3,300 in net tax and move his wealth into the concessionally taxed super environment for future investment.

Like all strategies, your own personal circumstances need to be considered as factors such as your level of superannuation contributions (including employer contributions and the contributions caps), can trip you up and cause issues. However, when implemented correctly the new changes do open up a number of opportunities previously unavailable.

If you would like to discuss how these changes could benefit you, please contact the team at JBS.

– Warren Hanna –

It’s been more than 6 months since the Superannuation reforms came into force on the 1st of July 2017, and now with the Christmas break over and done with and most likely back to your day to day routine, now is as good a time as any to re-focus on your Superannuation.

One of the more prominent changes to Super that came into effect was the removal of the concessional tax treatment of Transition to Retirement Pensions (TTR Pension). Pre 1 July 2017 any money held within a TTR pension received a 0% tax rate on any income or realised capital gains, however post 1 July 2017 money held within the TTR pension is taxed at 15% (same as accumulation).

However, any funds that are held within an Account-Based Pension still receive the 0% tax rate (for balances up to $1.6 million). Unless you’ve met a condition of release, such as attaining age 65, you’re unable to commence an Account-Based Pension. The most common conditions of release are:

– Reaching preservation age (currently age 57 – depending on your date of birth) and retiring
– Reaching age 65

For superannuation purposes, a member’s retirement depends on their age and future employment intentions. A person cannot access Superannuation benefits under the retirement condition of release until they reach preservation age. At this stage, the definition of retirement depends on whether the person has reached age 60.

If you’re under age 60, then meeting a condition of release is a bit harder, effectively you generally have to completely cease employment and have the intention never to again work more than 10 hours per week. However, if you’re over age 60 (but under age 65), simply having a change of employment post age 60 means you may be able to satisfy a condition of release, opening up an opportunity to move your Super wealth into the tax-free pension environment.

For example, let’s say John (age 62) works full-time in a Supermarket, but for 6 weeks he was contracted to work on the Weekends as a Labourer. After 6 weeks John has stopped work as a Labourer, because of this John has now met a condition of release and can move his Superannuation savings into the tax-free environment. However, any later contributions made (employer and personal) and earnings will be preserved (i.e. can’t be accessed until a new condition of release is met).

Based on the above, if you’ve been operating a TTR Pension and potentially could meet a condition of release, you may be able to continue to receive the tax-free pension on your Superannuation benefits. Here at JBS we can help assess your options in relation to meeting a condition of release.

– Peter Folk –

Towards the end of each year we always focus a lot on celebrating Christmas and New Years, however there’s something else we could also celebrate post-Christmas. We’re talking about celebrating your family’s financial security by having personal insurance in place. Having personal insurance cover in place means you and your family won’t have to deal with financial stress in the event of you being unable to earn an income or even passing away. Ideally all your personal insurance covers should be in place prior to the “Silly Season”, however if you haven’t done so already the new year is a perfect time to review your insurance needs.

With all the festivities and celebrations over and done with, for most of us it’s now time to pick up the pieces and start the New Year a fresh, which is a perfect time to review your personal insurance needs. Research from one of Australia’s largest personal insurance companies have found that only 37% of Aussies aged between 18-69 actually have life insurance and even more disturbingly only 18% have disability cover and income protection insurance. Further findings include how Australians are grossly underinsured. It’s estimated that the underinsurance gap in Australia is approximately $1.8 Billion, meaning there are a lot of Aussies out there who believe they have sufficient insurance cover, but in fact don’t. For most of us, we don’t like to think about insurance and when asked about how much we have, the first response is usually “I don’t know”.

So we come to a point where you should ask yourself, do you need personal insurance? The main reason you would put in place insurance cover, is to secure your family’s financial wellbeing. So if you have a mortgage, loans, kids etc… chances are you will need personal insurance. The question you have to ask yourself is, “if I’m unable to earn an income tomorrow, what would happen”? Then for those of you that already have some form of insurance cover in place, the question you should ask is “how do I know the level of insurance I already have in place now is adequate?” The short answer is to seek professional advice.

Whether you don’t have any insurance at all or looking to review your insurance needs, the best thing to do is see someone who is a professional in the area. Financial Planning firms such as JBS Financial Strategists will be able to determine what your insurance needs are and then formulate a strategy to ensure you have the correct and adequate cover in place. So as a new year’s resolution, do yourself a favour by ensuring you have adequate cover in place so you’ve got something else to celebrate about (your family’s financial security).

– Andy Lay –