Risky period ahead for home buyers, banks

Posted on 3 June 2022
Risky period ahead for home buyers, banks

Marion Rae
(Australian Associated Press)

Australia is in for a period of banking sector turbulence as households deal with rising inflation and mortgage payments, the industry regulator says.

“The next few years will be far from plain sailing,” Australian Prudential Regulation Authority chair Wayne Byres told a conference on Tuesday.

APRA has highlighted the rising risk from heavily indebted borrowers in the housing market, as inflation and interest rates accelerate more quickly than anticipated.

“Housing loans have been, as they say, as safe as houses. That may not be the pattern in the future,” Mr Byres told the Australian Financial Review Banking Summit in Sydney.

As Australia enters a very different economic environment, higher inflation and costlier mortgages will have a significant impact on many borrowers with pockets of stress likely to emerge, particularly if housing prices fall “as expected”.

Some may face a sizeable “repayment shock, possibly compounded by negative equity” when they try to refinance in the next year or two, Mr Byres added.

APRA has opted to tackle any sector concerns on a bank-by-bank basis, rather than impose market-wide rules.

In response, Mr Byres expects lending policy changes, coupled with rising interest rates, will mean risky borrowing will “moderate in the period ahead”.

Meanwhile, a $3.5 trillion pool of national superannuation savings will provide a very healthy flow of new savings that will need to be invested, which would “only be beneficial” for the Australian economy.

But APRA remains concerned with the banking sector’s response to climate change risk, after discovering only around half of the banks it surveyed were assessing emissions linked to their lending exposures.

“If Australia is to invest in the transition to a low carbon economy, consistent with our 2050 net zero emissions target, the banking system will play an important role financing that investment,” he said.

But banks needed to properly understand how borrowers would be impacted by the transition.

“And second, it makes it difficult for banks to satisfy the increasing demands from investors, standard-setters and peer regulators for greater climate risk disclosure,” Mr Byres said.

Insurance affordability and availability also “warrants serious attention” by policymakers and the industry, as the issue grows in urgency.

“A range of factors – poor product design, rising claim costs, increasing litigation, and a changing climate – mean that insurance is increasingly more expensive and, in some sections of the market, harder to find,” Mr Byres warned.

Innovation and digitisation, including the rapid growth in crypto-assets, are also on APRA’s agenda.

“There is no doubt the Australian regulatory framework will need to adjust to new forms of money, payments and finance,” he said.

APRA is also wary of new business models, such as aggregator apps and banking-as-a-service.

These developments “test regulatory boundaries and can make it difficult for consumers to understand exactly who they are entrusting their money to,” he said.

 

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Claiming deductions for personal super contributions

Posted on 2 June 2022
Claiming deductions for personal super contributions

Australian Taxation Office
(ATO)

You can’t claim a deduction for superannuation contributions paid by your employer directly to your super fund from your before-tax income such as:

You may be able to claim a tax deduction for personal super contributions that you made to your super fund from your after-tax income, for example, from your bank account directly to your super fund. Before you can claim a deduction for your personal super contributions, you must give your super fund a Notice of intent to claim or vary a deduction for personal contributions form (NAT 71121) and receive an acknowledgement from your fund. There are other eligibility criteria that you must meet.

People eligible to claim a deduction for personal contributions include people who get their income from:

  • salary and wages
  • a personal business (for example, people who are self-employed contractors, or freelancers)
  • investments (including interest, dividends, rent and capital gains)
  • government pensions or allowances
  • super
  • partnership or trust distributions
  • a foreign source.

The personal super contributions that you claim as a deduction will count towards your concessional contributions cap. When deciding whether to claim a deduction for super contributions, you should consider the super impacts that may arise from this, including whether:

  • you will exceed your contribution caps
  • Division 293 tax applies to you
  • you wish to split your contributions with your spouse
  • it will affect your super co-contribution eligibility.

If you exceed your cap, you will have to pay extra tax and any excess concessional contributions will count towards your non-concessional contributions cap.

For more information, see Super contributions – too much can mean extra tax.

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Insurance: Every 12-18 months, make sure you ask yourself these questions

Posted on 4 May 2022
Insurance: Every 12-18 months, make sure you ask yourself these questions

Clarity
(OnePath)

We have 5 important questions to ask yourself in relation to your insurance needs. If you answer YES to any of these questions, you could benefit from reviewing your insurance cover with the help of your financial adviser.

1) Have you welcomed any new members to the family or taken on new responsibilities such as caring for an older relative?

You might want to add a new beneficiary to your policy or increase your amount insured to cover for your growing family’s future needs and the increased financial responsibility you have.

2) Have you changed jobs or got a promotion?

Your income is your biggest asset over the course of your life. If your income has changed, your future needs have likely changed too – so you’d benefit from reviewing your sum insured with your financial adviser.

This is especially important if you’ve got income protection. That’s because your benefit amount, and the premium you’re paying, are directly linked to the personal income we have recorded on your policy.

If your income has changed, get in contact with your financial adviser to review your policy.

3) Have you paid off large debts?

The amount you’re insured for is to cover for your future financial needs should something happen to you. If you’ve significantly paid down large debts, your needs may have changed.

You may want to think about reviewing your sum insured to ensure it’s right for your needs – not too little, and also not too much.

4) Have you taken on any new debts?

Being insured for the right amount is an important factor of cover suitability. Customers usually need a level of cover that can, as a minimum, pay off any existing debts should something happen to them. If you’ve taken on new debts, your needs may have changed.

You should review your cover with your financial adviser to ensure you’re covered for the right amount.

5) Does your policy have a health loading? Has your health improved – or have you stopped smoking?

Personal risk factors such as smoking and your Body Mass Index (BMI) add what are called ‘premium loadings’ to your cover – which means you pay a higher premium than someone who doesn’t have this risk factor.

If your health has improved (e.g. you’ve lowered your BMI or your lifestyle has changed recently), get in touch with your financial adviser to review your policy and determine if these loadings can be removed to help lower your premium.

Ways you can adapt your cover to your current needs:

a) Choose the amount you’re insured for

Your premium is closely linked to the total amount you’re insured for. And it’s important to make sure you’re covered for the right amount, not too little, not too much. To find out more, see How much cover do I need?

Choosing the premium type that’s right for you can have a big impact on the lifetime cost of your policy, and your financial adviser will be able to help with forecasting that impact.

To find out more, see What’s the difference between stepped and level?

b) Choose to accept or decline indexation

Indexation, if available, is an automatic increase to your sum insured to ensure the value of your policy is not eroded by the impacts of inflation.

But you’re in control – it’s important to know that as the sum insured increases, the premium you pay may also increase. This means there are circumstances in which you might want to decline the indexation offer. Speak with your financial adviser about what is best for your personal circumstances.

To find out more, see What is indexation and how does it work?

c) Remove any loadings you might have

Personal risk factors such as smoking, dangerous hobbies or occupations, or a high Body Mass Index (BMI) may add what’s called a ‘premium loading’ to your cover – which means you pay a higher premium than someone who doesn’t have those risk factors.

Any loadings like these are recorded on your Policy Schedule. So, if your health improves or your lifestyle has changed recently, get in touch with your financial adviser to review your policy and determine if these loadings can be removed to help lower your premium.

In the end, you’re in control – you can review your cover with your financial adviser and adapt it to your needs.

 

 

 

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The importance of a will

Posted on 3 May 2022
The importance of a will

(Feedsy Exclusive)

Planning our estate is a vital part of any wealth management process. Deciding who is entitled to what after we die is not something that can be put off and left until later. It must be clearly and legally defined well ahead of time.

This article is designed to serve as a guide, answering some of your questions and preparing you for planning your estate. Don’t forget to get in touch for further information or support.

Our will is essentially a contract; a legally binding document which dictates what happens to our estate after we are no longer here. In many instances, a will is straightforward and non-complex, but it should not be assumed that this is the case.

Instead, it is critical that we understand precisely the contents and structure of our will so that we can ensure that each benefactor is getting what they are entitled to. Passing on a legacy and assets is a serious business. It pays to make sure everything is being taken care of.

Wills and Power of Attorney

A Power of Attorney document is similar to a will but it is enacted while the individual in question is still alive. In short, it ensures that a trusted candidate is able to take legal and executive action regarding your assets or estate if you are unable to do so yourself.

There are two types of Power of Attorney applicable in Australia. Each comes with its own set of caveats according to which state or territory you are in. The types are:

Enduring power of attorney – which enables a nominated individual to manage your assets in the event of an illness or accident, or in the event that you are absent.

Medical power of attorney – which enables an individual to take control of your assets and act in your best interests if you medically are unable to decide for yourself.

What Happens Upon Death Without a Will in Place?

If the worst happens and someone dies without an adequate will in place, the estate will be dealt with according to the laws of the territory or state. In Western Australia, for example, the estate is divided up among immediate family members and the spouse, based on a ratio which decides who is entitled to what.

This can lead to step-children being left with nothing, for example, or a spouse being left homeless because the house is in the deceased’s name and is more than their entitlement is worth.

Superannuation as Estate Planning Vehicle

A superannuation can provide an effective means of planning your estate and ensuring the right benefactors get the right assets. However, this can be a complicated procedure, thanks to the taxes involved with superannuation death benefits and the fact that not all assets tied up in the fund will automatically be counted as part of the estate.

However, despite the complexity, the SMSF option can still be beneficial. By including a death benefit clause to pay out to your children – all minors – in the event of death, your children can receive the benefit tax free if tragedy occurs. This can be reviewed at a later date to ensure that you and your loved ones continue to enjoy the most advantageous terms.

Tax Dependent vs Superannuation Dependent

Under Australian law, a tax dependent is defined as any individual who is classed as a dependent for tax purposes. This can include a spouse or a child under the age of 18.

A superannuation dependent, on the other hand, is defined as an individual named as part of the superannuation death benefit benefactors, but is not dependent on the trustee for tax purposes. This can include an adult child, for example.

A death benefit on a superannuation fund can be paid out in a number of ways, based on which of the dependent categories the benefactor fits into.

If the benefactor is receiving a lump sum directly from the fund, they must be classed as a superannuation dependent. If they receive a pension from the fund, they may be classed as a tax dependent in some circumstances.

It can be difficult to disentangle the two categories and to position your superannuation fund in the most advantageous way. Get in touch with us for guidance and more information.

Child Account Based Pensions

Finally, a child account based pension can ensure that a pension is paid to your child in the event of your passing until the child reaches 25, upon which they receive a lump sum. Children with severe disabilities may be eligible to receive the pension for longer.

In certain circumstances, these pensions can be delivered tax free, so it is advisable to seek advice to find out if they are the best option for you. Speak to your financial adviser today to learn more about the importance of planning your estate and to ensure that all the moves you make are the right ones.

 

 

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Think about Superannuation early on in life

Posted on 28 April 2022
Think about Superannuation early on in life

You may think your retirement is far off—so no worries, right? Not so fast. To ensure you have enough funds to live well when you retire, you need to learn what you need to do now to make sure you can have the lifestyle you’ve worked so hard to have—for the rest of your life. A big part of that planning has to do with your superannuation—your “super.”

People used to start thinking about their super at around their fiftieth birthday, but now we know that thought process needs to start earlier—much earlier. The laws that govern your super can be difficult to navigate, but you need to dig into them to find out how to maximise your benefits. Do it now—and you can chart a wise financial course for a lifetime.

How does my super work? Supers work like managed funds. The government pools your super contributions together with other members and invests it. Your employer will contribute to your super fund, as can you—up to a certain amount per year. If you earn below a given amount, the government will also contribute to your super.

How do I choose a super fund? Ask your employer if you have a choice in the fund into which they pay your super. Some employers limit your choice of funds. If not, then you can get advice from a financial professional or look at comparison websites to help you choose.

Take Charge—Take Ownership

Your superannuation is just as important as your bank account. Perhaps even more so, since it’s your financial cushion for a time when your earning power isn’t as great as it is now. It’s your money, after all–so take ownership of it. Become proactive, and you’ll maximise your investments for a lifetime free from worry.

How can I maximise my contributions? If you’re not self-employed, the more you earn, the more your employer will pay into your super, since the amount required is equal to a percentage of your earnings—currently 10%. If you are self-employed, you must make your own super contributions. A wise guide would be to invest as much into your super as you would with another employer.

May I make extra contributions? Yes, you can. There is a limit, however. You can either ask your employer to deduct part of your pre-tax salary into your super, or you can transfer a part of your savings accounts into your super. You can also transfer part of other investment funds into your main super fund. Here’s where it pays to have some advice to learn which laws apply—and how to leverage those best for you.

How do I choose investment options? Because most super funds give you a choice of investment options that include various types of investments—shares in stocks and other funds, real property, or cash—it’s important to choose the best alternative for your needs. Your choice impacts your risk for market ups and downs, as well as how quickly your investment will grow. If you’re not a financial professional, it helps to talk to someone who is to help you sort out all your options.

Discuss Superannuation with Your Kids

Once you see how much benefit proper super planning can be to creating the kind of financial cushion that will ensure a comfortable life in one’s golden years, you’ll want to share your knowledge with your children. It’s never too early to plant the seeds of financial prudence.

Your kids, too, need to be aware of the opportunity they have to start early to build up their investments while they’re still young. Show them a disciplined pattern of saving, and they’ll follow your example to become savvy investors when they start earning their own money.

  • Superannuation–a Lifetime Vehicle for Tax-Effective Investment: Teach your kids that from the moment they start working, they need to think about how their super will help them invest wisely so they can have a lifetime of income.
  • Superannuation—a Legacy of Love: When your kids learn that their prudent planning can help provide for the needs of their own children, they will begin to look beyond the “now” and think more long-term. That’s a legacy that will outlast you—and help provide for your family’s future down through the generations.

Seek Professional Advice on Superannuation

Legislation changes constantly to keep up with the times, all changes are complex in terms of how they can affect your overall financial position, so it helps to have someone in your corner who can sort through all the regulations and to help you find the best way to save for your retirement.

To learn more about how you can get support to maximise the benefits of your superannuation, contact your financial adviser today.

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