The ‘wait too late’ trap for getting advice
With some big changes around the corner, don't put off getting financial advice if you are approaching, or in, retirement.
Divorce, or death of a loved one, are for most people the key life-changing events where professional assistance with financial arrangements are vital. Yet for other key financial moments in our lives, like changing jobs or getting a mortgage, we often rely on online information.
When debt is going to be paid down over a long period, getting professional advice to make the smallest improvement to arrangements can save tens of thousands of dollars. For some retirees and super fund members facing the 1 July 2017 super changes it might not be clear that not reviewing plans could incur penalties.
Although online material is useful and a great place to start, it is important to understand when going to a professional adviser as the next step can make all the difference.
New jobs, mortgages and planning for the unexpected
A new job or inheritance can create increased cash flow and using this effectively, by paying down debt (mortgage, credit cards or personal loans), building a deposit for a property or putting funds into an investment portfolio, can improve your financial situation.
High-income earners and defined-benefit pension holders may benefit from maximising their super contributions as a priority over putting more into debt repayments. But for most people, if debt is not tax deductible, it makes sense to prioritise paying it down.
If paying a home loan is the priority, ASIC’s MoneySmart online mortgage calculator can show how a lower interest rate can make a big difference.
For instance, getting the borrowing rate down from 5 per cent to 4 per cent on a $500,000 loan could save more than $120,000 in interest charges over 25 years and help to pay off the loan sooner if you can keep making payments of $3,000 a month.
If you need help with broader debt and loan issues, an adviser can help you prepare for and manage risks, such as rises in interest rates, redundancy, starting a family or starting a new business.
If you are approaching 50, still working and most debt has been paid down, it may be worth discussing with an adviser your options for boosting super.
Globally, life expectancies are longer than ever and today’s 65-year-old female can expect to live to 90. And today’s 50-year-old with $150,000 in super can expect to reach approximately $660,000 in super by age 65, if they can make the maximum $25,000 concessional contribution each year (assuming a moderate real return of 3.5 per cent each year).
As a starting place, there is information online about contribution types and limits, but an adviser can help you afford to increase savings levels and show how your retirement assets could look, not just next year but in five or 10 years’ time.
Once-in-a-decade legislative reforms
In just a few months, the biggest changes to super rules in a decade will take effect. There is much material to read online, but the changes are very complex and misunderstanding an area such as how to manage capital gains tax could result in you paying thousands of dollars more than you need to. If you are not sure if you need professional help, here are some of the big changes:
In short, it is going to be a lot harder to get money into super under the new rules, because the contribution limits will be lower. If you are approaching retirement, understanding what you need to do this financial year could be invaluable.
Over the next two months you can contribute up to $540,000 if you are under 65 and can use the three-year bring-forward rule. Otherwise an annual limit of $180,000 applies.
From 1 July, if you have more than $1.6 million in total super you will not be able to make non-concessional contributions. Otherwise there will be an annual limit of $100,000 with the option of up to $300,000 if you are under 65 and can use the bring-forward provision.
For long-term savers, super fund members approaching 65 and pre-retirees, it is worthwhile getting advice as soon as possible about your capacity to make contributions, to take advantage of this window of opportunity.
Under the new rules, at retirement no more than $1.6 million can be held in a tax-free pension. Fortunately, unlimited amounts can still be held in the super accumulation phase, where the maximum tax rate is 15 per cent.
Tax concessions available in super are still very attractive, particularly compared with personal marginal tax rates as high as 49 per cent if investments are held outside super.
Retirees who do have more than $1.6 million in pensions may also need to speak to an adviser to understand what options they have, to be compliant before 1 July 2017. Considerations may include: the best place to house amounts over $1.6 million, if monies can be retained within the existing super structure and if couples can work together to maximise the amount they hold tax-free.
For most people, holding excess funds in the accumulation account will be a preferred option. If you are in this group and can hold an accumulation account within your existing super structure (such as SMSF trustees), you may not need advice but may still benefit from some assistance with the implementation.
Pre-retirees with transition-to-retirement income streams also face a complex decision on whether to keep or stop that arrangement after 1 July 2017. Although the tax rate inside these accounts will increase from that date, there are strategic reasons why keeping this account in place could be worthwhile.
Online fact sheets will be very helpful with this decision and good fund administrators are likely to provide them to members in the new financial year. If you are still unclear what to do after reading them, speak to a professional adviser.
Lastly, if you are thinking of starting an SMSF, you need to make sure you understand the responsibilities of being a trustee and the rules about who can advise you. For instance, after 1 July, accountants can no longer provide help setting up SMSFs unless they are also licensed financial advisers.
Stressful but don’t put it off
Changing financial arrangements can be stressful, which makes it all too easy to put off. Ease into it, by looking at online guidance and e-books. If you need more help, see if reputable businesses are providing workshops or seminars you can attend. This is a great way of learning more and getting a feel for the philosophy of the business before you engage their services for personal advice.
If you don’t feel confident about self-research and would like to see a professional, choose a business with strong knowledge in the area you need help with. Businesses that invest heavily in their internal systems and training their people are more likely to give you value for money.
When you meet the adviser, they should be able to clearly explain what is included in the service and advice, and what is not. Apart from tax savings and investment options, your adviser should consider options to increase the efficiency of arrangements already in place. Importantly, a good adviser helps to build your financial understanding, so moving forward you can take more control of your financial future.
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