Get money out in the open

Posted on 20 November 2018
Get money out in the open

Money and Life
(Financial Planning Association of Australia)

Money talk is one of our biggest taboos in Australia. But if we can't be open about it, how will our kids learn to thrive in the invisible money age? Find out more about the potential benefits of opening up about money for you and your kids.

In two recent surveys[1] on what Aussies prefer not to talk about, money came out on top. Personal finances are the topic most likely to make us squirm, even more so than sex, religion and politics[2]. This is hardly a surprising discovery when was the last time you had a casual discussion about your personal debts, income and how much you spent on that overseas holiday last year? But it's ironic and perhaps even worrying, that in a country where household debt and financial stress are rising, talking about our finances is still off-limits. Instead of opening up, for the benefit of ourselves and others, we're still keeping money matters good and bad under wraps.

Where's the harm in keeping quiet?

Should we start talking about money more? Surely there are good reasons for steering conversations away from troubling things like debt. Sharing salaries and how much we owe on our credit card can make us uncomfortably proud or ashamed, not to mention the feelings we might trigger in others. Being open about money leaves us vulnerable to judgement and introduces the possibility of making others feel envy or pity.

But these risks are likely to be worth the rewards, according to research conducted by ME Bank. In their 2015 survey, they found that getting finances out in the open can make a difference when it comes being less stressed about money. 78% of people who avoid discussing money are stressed about their finances, compared with 35% of those who are comfortable with money talk[3]. The survey also found that being open about money often means you're likely to be more active in managing your finances too[4]. While these findings might tell us that people who feel relaxed about money and in control are going to be more comfortable talking about it, perhaps it's also important to note that bottling up money problems and worries isn'tgoing to help you work out a solution or sleep at night.

At the extreme end of the spectrum, dishonesty about money can lead to serious problems with your partner and other family relationships. The ME Bank survey also notes that being open about finances in a relationship can cut your chances of arguing about money by almost half. 61% of couples who talk money will rarely or never fight about it, compared with only 34% of couples who consider money off-limits as a subject for discussion.

Money matters for a new generation

It seems clear from the ME Bank survey that talking more freely about money could be good for all sorts of things, including happier marriages and relationships. But we should also consider the benefits of changing the script about money for our kids. The Share the Dream report from the Financial Planning Association shows the majority of parents see their kids as more confident with money (69%) and financially literate (57%)[5]than they were as children. But this doesn't stop parents from being concerned about how well equipped their children are to become successful with their money as they reach adulthood. Almost half of parents surveyed (45%) worry their kids won't have the skills they need for financial success in the future[6].

What holds us back from opening up

In spite of this concern, only half of parents had talked money with their kids in the last month[7]. What's perhaps more concerning is that 68% of parents feel some reluctance to talk about money, even though 62% believe their kids are likely to be worse off than they are, financially speaking[8]. Surely it's worth overcoming this continuing view of money as a taboo topic if kids are going to stand a chance of being financially secure and independent. It's hard for them to learn positive money lessons if parents are hesitant to share their knowledge.

Get talking about invisible money

For parents who are taking on the task of money education for their kids, their number one lesson is on how to spend and save (52%), followed by how to earn money (43%)[9]. What they're not talking about much is the important subject of invisible money. Less than one in five parents have talked about online shopping (19%) or in-game app purchases (13%) in the past six months and the numbers discussing things like Afterpay are tiny a mere 5%[10].

While around one in 10 parents[11]might feel their own knowledge of money matters like these is stopping them from being open, far more of them are well aware that digital money could be a serious challenge for their kids financial wellbeing. Two thirds of parents agree digital money is making it harder for children to grasp the value of real money[12].

Getting the balance right

Whether it's traditional money issues that parents are addressing with kids, or the more modern ones like tap and go payments and bitcoin, it's important to make it a positive conversation. No-one wants to pass on financial worries as part of the lesson, so try to keep to yourself any stress or concern about your own finances. You can be honest about your experiences and still help kids to understand that money can be a positive thing in their lives if they get into good habits early and learn to manage cash flow when they're earning and paying their own way.

Planning your next money conversation with your kids? There are some great tips and activities in our free eBook: How to talk money with children

[1] Finder media release, Talking about money off limits for Aussies (but sex and politics OK), 17 February 2016,https://www.finder.com.au/press-release-talking-about-money

[2] ME Bank, Sex and money are our top taboo subjects, 4 November 2015,https://www.mebank.com.au/news/sex-and-money-are-our-top-taboo-subjects/?r404=1

[3] ME Bank, Sex and money are our top taboo subjects, 4 November 2015 "The more you talk openly about your finances with others, the less worried you are about them. Of respondents who said they don't like talking about their finances, 78% were worried about their finances compared to 35% of those who do like talking about their finances."https://www.mebank.com.au/news/sex-and-money-are-our-top-taboo-subjects/?r404=1

[4] ME Bank, Sex and money are our top taboo subjects, 4 November 2015, "Of respondents who said they like talking about their finances, 80% said they often/always actively manage their money compared to 69% of those who don't like talking about their finances."https://www.mebank.com.au/news/sex-and-money-are-our-top-taboo-subjects/?r404=1

[5] Financial Planning Association, Share the Dream report, page 5

[6] Financial Planning Association, Share the Dream report, page 9

[7] Financial Planning Association, Share the Dream report, page 6

[8] Financial Planning Association, Share the Dream report, page 5

[9] Financial Planning Association, Share the Dream report, page 6

[10] Financial Planning Association, Share the Dream report, page 6

[11] Financial Planning Association, Share the Dream report, page 10

[12] Financial Planning Association, Share the Dream report, page 5

Posted in: News  

Salary sacrifice: A lot less painful than it sounds

Posted on 19 November 2018
Salary sacrifice: A lot less painful than it sounds

Money and Life
(Financial Planning Association of Australia)

Maybe you've heard about salary sacrifice as a way to increase your retirement savings. But did you know it can be a very tax-effective way to make voluntary super contributions? Find out how you could boost your retirement savings and pay less tax all in one go.

What is salary sacrificing to super?

In very simple terms, salary sacrificing into super means paying an amount from your pre-tax salary into your chosen superannuation fund. The amount you decide to contribute could depend on lots of things, including how long until you retire, how much you currently pay in tax, and how much you can afford alongside your current financial commitments including mortgage and loan repayments, household bills and other living expenses.

What are the benefits?

Up to a certain amount, these extra contributions are taxed at a rate of 15%. If you're paying a higher marginal rate of tax on your income, you'll save on the amount of tax you're paying. Putting more into your super now helps you build your balance faster, so you'll have more money to draw on when the time comes for you to retire. So this way of saving for a retirement can be a win-win for your tax bill now and your future income when you're no longer working.

As well as potentially saving you money on your tax, there are two other key advantages of saving for your retirement in this way. The first is all about timing and compound interest. The earlier you start making extra contributions, the more potential investment returns you'll earn from your super balance over time. Even a very small contribution over time can make a significant difference in the long run. The MoneySmart Super Contributions Optimiser can show how much impact extra contributions could have on your super balance at retirement. It can also help you calculate whether making extra pre-tax payments is the right approach for your circumstances.

Salary sacrifice can also be a way to make sure you're taking steps to boost your super without having to prioritise payments from your day-to-day cash flow. There can be many reasons to delay saving for retirement, and salary sacrifice can work in your favour by automating your extra contributions so you don't have to make the effort to budget for super savings.

Things you should be aware of:

  • Does your employer offer salary sacrificing?

Many employers offer you the option to salary sacrifice contributions into your super but some may not. Check with your company payroll to make sure it's something they can do for you.

  • Will your employer continue to pay into your super under the Super Guarantee?

Your employer is required by law to pay contributions to your nominated super fund under the Superannuation Guarantee (SG)[1]. The current SG rate is 9.5%[2], so your employer must pay 9.5% of your annual salary as a contribution to your super.

  • Will your extra super payments stay under the annual cap for pre-tax contributions?

Current government policy allows you to make up to $25,000 in pre-tax (also know as concessional) contributions in each financial year[3]. That amount includes the 9.5% SG payments made by your employer. So the amount you'll be able to salary sacrifice will depend on how much you earn and the level of your annual SG contribution from your employer.

  • How will making these contributions affect your other financial goals?

Saving for super can be an important goal, but there may be other financial priorities you need to budget for. Saving on interest by paying off your mortgage earlier, for example, could get you further ahead with your finances than saving tax dollars.

  • Can you afford to have this amount of money tied up until retirement?

It's important to remember that you won't be able to withdraw from your superuntil you retire or reach your preservation age, except under a few special circumstances. If you think you're going to need access to the extra money you're paying into super, you might want to consider saving or investing it in another way.

Expert help

While salary sacrificing has advantages, it may not be the right strategy for you, depending on your age and circumstances. Advice from a CERTIFIED FINANCIAL PLANNER® professional can help you determine whether salary sacrificing should be part of your strategy for saving for retirement and how much you should contribute to make the most of the benefits.

Saving more into your super isn't the only way to boost your retirement nest egg. Find out more about investing your super for the right level of risk and return to make sure you're maximising your savings and income for retirement.

[1]Australian Taxation Office, Working out if you have to pay super,https://www.ato.gov.au/business/super-for-employers/working-out-if-you-have-to-pay-super/

[2]Australian Taxation Office, Super Guarantee Percentage,https://www.ato.gov.au/Rates/key-superannuation-rates-and-thresholds/?page=23

[3]Australian Taxation Office, Concessional contributions cap,https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?anchor=Concessionalcontributionscap#Concessionalcontributionscap

Posted in: News  

Govt to put $2b into business loans market

Posted on 15 November 2018
Govt to put $2b into business loans market

Marnie Banger
(Australian Associated Press)

Small and medium-sized businesses may soon be able to borrow money at more competitive rates, under a $2 billion federal government plan to boost the funds available to smaller lenders.

The money will be injected into the small banks and non-bank lending market in the coming years through a new Australian Business Securitisation Fund.

The initiative will mean more competition in the business loans market, currently dominated by the big banks which account for more than 80 per cent of loans that are less than $2 million.

The taxpayer-backed fund will buy packages, or securitisations, of secured and unsecured loans issued by small lenders, thereby giving them more money to lend out at potentially lower interest rates.

Small businesses currently pay borrowing rates of up to four percentage points higher than those for home loans.

"We want small business more than three million of them across the economy to get access to affordable finance," Treasurer Josh Frydenberg told reporters in Melbourne on Wednesday.

"More competition, more liquidity, stronger securitisation markets, will ensure lower rates for doing business."

Small businesses can also find it difficult to get financing without offering security such as real estate.

The new fund arrangement should address that because it would support both secured and unsecured loan markets.

Labor is open to the idea but shadow treasurer Chris Bowen wants to see the details to ensure all the right checks and balances are in place.

The Australian Business Securitisation Fund is expected to be operating by 2019 and will be overseen by the federal government's debt portfolio manager, the Australian Office of Financial Management.

Mr Frydenberg said the fund would be classed as an asset, won't increase the nation's net debt burden and will support the growth of Australia's securitisation bond market.

Prospa, Spotcap and Judio are among small lenders to have swiftly praised the step.

"High costs of capital for lenders like Prospa directly impacts interest rates and the availability of affordable finance for small business," Prospa chief executive Beau Bertoli said.

The coalition is also encouraging financial institutions to establish a private-sector Australian Business Growth Fund, to help small businesses access longer-term equity funding.

This would involve banks taking a stake in a business, enabling it to grow without taking on debt or giving up control.

Similar funds are already in place in the United Kingdom and Canada.

The establishment of an Australian version requires the Australian Prudential Regulation Authority to loosen the current arrangements governing the treatment of equity for bank regulatory capital purposes.

Mr Frydenberg will meet with regulators and stakeholders to discuss the fund at a roundtable later this month.

Small business ombudsman Kate Carnell says the new securitisation fund will go a long way towards to addressing the finance needs of the sector and has urged all lenders to back the creation of a growth fund.

Posted in: News  

Do most Aussies have enough super? Report

Posted on 12 November 2018
Do most Aussies have enough super? Report

(Australian Associated Press)

Many Australians fear they won't have enough money to retire on, but a new study says that's not so.

The Grattan Institute research found the vast majority of retirees today and in future are likely to be "financially comfortable".

"Even after allowing for inflation, most workers today can expect a retirement income of at least 91 per cent of their pre-retirement income well above the 70 per cent benchmark endorsed by the OECD," it said.

Grattan CEO John Daly also argues low-income Australians will effectively get a pay rise when they retire, through a combination of the age pension and their compulsory superannuation savings.

"The financial services industry 'fear factory' should be shut down, because it encourages Australians to worry unnecessarily about whether they'll have enough to retire on," he said in the report released on Wednesday.

But life could certainly get tougher for the poorest Australians, who are on low incomes, or don't work, and rent their homes.

To boost retirement incomes for the poorest Australians, the report calls for a 40 per cent increase in the maximum rate of Commonwealth Rent Assistance worth more than $1,400 a year for a single retiree.

The Grattan Institute also calls for legislated increases in the superannuation guarantee awarded to workers, which will rise to 12 per cent from a current 9.5 per cent, to be scrapped.

Workers would be earning the full 12 per cent by July 2025, at a cost of $2 billion a year.

The report argues this will ultimately cheat workers because it would "take away more money from working-age Australians that could be used to pay down the mortgage", potentially leading to larger household debt in retirement.

Posted in: News  

The super split

Posted on 9 November 2018
The super split

Money and Life
(Financial Planning Association of Australia)

By the time you retire your super may be one of your biggest assets. So when it comes to a divorce, it's a very important part of a financial settlement. Find out from legal and financial experts what you need to know, and what to keep in mind when it comes to super and separating your family finances.

Splitting your financial assets during divorce is often a complex and difficult process. In the first in our series of features on sorting out money matters after a relationship ends, we take a look at super.

Just how important is my super?

As something that many of us won't actually benefit from for many years, super can end up taking a back seat in the settlement carve-up. But according to our two experts, Alison Fischer, CFP®, Private Client Adviser for Crosbie Wealth Management and Donal Griffin, Director of Legacy Law, you'd be wise to give some very careful thought to how super should be treated in your financial settlement.

"The family home is the asset that's often the most emotional and hard fought," says Donal. "It represents stability and security, here and now, while super can seem invisible to people while they're still far away from retirement. And for that reason, paying out from super to a spouse is often preferred because it won't have an impact on your immediate financial position. But thanks to the super guarantee and contribution strategies from advisers, we're now seeing super balances that are close to equal in value to property held in the marriage. So it should be a front and centre issue for discussion in any settlement."

Alison agrees that people going through divorce are usually more focused on securing their finances in the present. "It's the future value of your super you need to bear in mind when you're weighing it up against other assets," says Alison. "Earnings within super are likely to be more tax-effective than income from other assets or investments, so it has the potential to grow faster. The difference is that you can't tap into that value any time you like. But by trading off super to stay in your home and preserve your current income level, you could be making a choice that has significant impact on your lifestyle in retirement and your choice of when to retire."

Can my ex claim some of my super (or vice versa)?

"Super is just like any other property of the marriage," says Donal "In a financial settlement, it's pooled with all the other assets a couple share and have contributed to their home and its contents, savings and investments. And as with these assets, both direct and indirect contributions are taken into account when determining how super is split. Your indirect contribution to your partner's super might come in the form of raising kids and managing the family home while they're earning and this may translate to a claim on their super."

"On the other hand, if you've been the main income earner and made significant, regular, contributions to your partner's super fund, then it could be argued you've already been dividing super between you in an equitable way. If the matter goes before a court, these are all things to be considered in deciding whether there will be a transfer of super from one partner to another."

Should I go to court to get my fair share?

"In my experience, people are generally quite worried about the cost of taking their financial settlement to court," says Alison. "So in most cases, they're quite motivated to come to an agreement between them on their super and other assets too. If their solution involves splitting super in an existing fund, then they will need to have a lawyer draw up a binding financial agreement to inform the fund trustee. In doing this, the legal representatives will certify that each party has been provided with appropriate legal advice in coming to this arrangement."

"But even if each partner has reached agreement, their financial split may not be in both their interests in years to come. Without comprehensive legal and financial advice, you may not have a clear view on the long-term impact of dividing assets in the marriage between you now."

Things to bear in mind with super and separation

Based on expert tips from Donal and Alison, we've put together six important things to be aware of when you're exploring options and making decisions about super and your financial settlement.

1. Check the value of super assets

Before making any decisions about how super will be retained or shared, take some time to get a full and up-to-date valuation of all super assets, whether they're held in an accumulation fund, defined benefit scheme or SMSF.

2. How long until you retire?

If you still have many years to go until retirement, you may be in a position to build up your super again through SG contributions. But by reducing your super balance now, you are sacrificing potential investment earnings on that amount. So you may wish to consider budgeting to make extra voluntary contributions going forward to compensate for this.

3. Mind the caps

There are annual caps on all your concessional (pre-tax) and non-concessional contributions into super both SG and voluntary payments go towards these caps. So if you're planning to catch-up on super after 'letting it go' in a financial settlement, you'll need to schedule future super payments with these caps in mind.

4. Review insurance and nominations

If your super splitting plans involve winding up or consolidating any of your current funds, check your personal insurance cover is still adequate for the needs of you and your family. As your family dynamic is changing, it's also a good time to review your super and insurance policy beneficiaries and update your nominations as needed. If you were to die following a separation, but without going through a legal divorce, the trustee of your super fund may pay the death benefit to your spouse, unless there is a current binding nomination naming your preferred beneficiary.

5. Impact on Centrelink entitlements

If you're approaching retirement, or retired already, super will likely play a far more significant role in a financial settlement. If your current income includes Centrelink payments, you'll need to consider how any distribution of super or other assets is going to affect your entitlements.

6. How will your super be invested?

You may choose to 'flag' super in an existing fund. This means the value of the fund will be shared between you and your ex-partner at a future time according to a binding financial agreement. And there may be other instances when joint super assets continue to be invested beyond a separation, in an SMSF for example. In cases like these, the two of you will also need to come to an agreement on making investing decisions to maximise the potential future value of your super assets.

Defined benefit schemes and SMSFs

If you or your ex-partner are defined benefit scheme members, or trustees of a Self Managed Super Fund, reaching agreement on what to do with your super, and acting on it, could be more complex. But no matter what super assets you have in your name or in what structure they are held, getting specific, expert and personalised advice on your financial settlement can make a significant difference to your financial security, both now and in the future.

Looking to explore more about superannuation? Money & Life features many useful guides, and articles to help you get the best from your retirement savings.

 
Posted in: News  

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