How can a financial advisor help?
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Budgeting
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Do you know how much you spend – each week, each month, each quarter? If your money seems to disappear, try setting yourself a firm but achievable budget and start taking control of your money.
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There are many ways you can get your money working harder:
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- identify your medium to long term personal goals and prioritise them
- take a hard look at your bills to see how you have been spending your money and work out where you can cut down
- identify debts that have the highest interest charge and pay these off as a priority
- consider having part of your salary regularly deducted from your savings account (ie. a salary sacrifice arrangement) and transferred to an investment account
- create a realistic but firm budget to help determine your saving capacity
- reward yourself when you reach budget milestones.
- A Bridges financial planner can help you assess your individual needs, explain suitable investments and develop appropriate strategies.
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Saving versus Investing
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The terms ‘saving’ and ‘investing’ are often used interchangeably but actually are very different.
Saving is putting money aside for some short-term goals or as a back-up in case of an emergency. While relatively safe, savings are generally placed in a basic savings account earning relatively low rates of interest. The return on your savings may be outweighed by inflation and account charges.
Investing, on the other hand, is putting your money to work strategically for the longer term, to build wealth and increase your financial security over time. Reinvesting dividends utilises the magic of compounding interest, making your money work even harder.
There are many factors that will determine the nature of the investments that are suitable for you. These include:
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- your objectives – what do you want to achieve?
- your timeframe – how long do you have to invest?
- your risk tolerance – how comfortable are you with fluctuations in the value of your investment?
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All investments carry a level of associated risk. Generally, those investments with higher rates of return over the long term have a greater level of risk over the short term. Similarly, those investments with lower risk usually have a lower long-term return.
Diversification is a strategy that spreads the ‘risk’ across a variety of different asset classes. Minimising the overall risk helps build the value of your portfolio.
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There are many types of investments available to help you build your wealth:
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- Cash
- Fixed interest
- Property
- Australian shares
- International shares
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Everyone’s situation is different and a Bridges financial planner can help identify appropriate strategies and investments just for you.
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Tips to help build your wealth
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- Consider having part of your salary regularly deducted from your savings account and transferred to investments with a higher rate of return Invest for
- the medium to longer term which will help smooth out the short term volatility of some investments
- Growth investments such as property and shares, although higher risk, generally offer a higher return over the longer term than lower risk investments such as cash and fixed interest
- Avoid investments that sound too good to be true, as this is often the case
- Consider investments that are more tax effective such as Australian shares
- Contribute more to super as this is one of the most tax effective investments available
- Diversification helps to reduce risk by investing across a range of asset classes
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Superannuation
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Superannuation is important because it may be your only means of financial support in retirement.
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A basic retirement versus a great retirement
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Wouldn’t you like to enjoy your future without having to worry about money? Unfortunately most people have a huge shortfall in their retirement savings: the average Australian’s superannuation balance is just $63,000*, not much considering a comfortable retirement can cost up to $35,789# pa for a single person and $47,967# pa for a couple.
Your employer’s compulsory 9% Superannuation Guarantee (SG) contributions are unlikely to give you a comfortable retirement. But if you start contributing to your super now you can make more of your retirement later.
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*Australia’s exploding DIY funds, Eureka report, February 2007 # ASFA Retirement Living survey
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Super tax advantages
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Superannuation is one of the most tax effective ways to save for your future.
Your contributions are taxed at up to 15% which is much lower than most of the marginal tax rates. If you contribute part of your pre-tax income to super (salary sacrifice) you will be taxed at 15% rather than your marginal tax rate, which may be as high as 45%.
The tax paid on the fund earnings again is only 15% instead of up to 45% on other investment earnings outside of super. If your super is then taken as a lump sum or converted to a retirement income stream there are further tax concessions.
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Contributions from the Government
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Do you earn less than $58,000? If so, you may be eligible to receive a co-contribution from the Government? For every dollar you contribute to super, the Government will contribute $1.50, up to a maximum of $1,500, if you earn up to $28,000 pa. This Co-contribution reduces by five cents for every dollar of income over $28,000 pa and phases out completely at $58,000 pa.
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Investing super wisely
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It is beneficial to understand where and how your super is invested because you do have a choice.
Eligible employees can choose the super fund to which their employer’s compulsory contributions are made. Your super may be portable now so you no longer need to change funds when you change employers.
It is also important to ensure your super is invested in line with your personal circumstances and objectives, including your risk profile, performance objectives and investment timeframe. If your super is primarily in cash or other conservative investments you may be missing out on higher returns that could be generated from a larger allocation to growth investments (such as shares).
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Consolidate your super
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Do you have more than one super account, perhaps from changing jobs over the years? Consolidating your multiple accounts could save you money in fees and charges. A larger combined account balance may also generate a greater return.
For more information on managing and building your super, organise an appointment with a Bridges financial planner.
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Self-managed super funds (SMSF)
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Self managed superannuation is a vehicle that gives you freedom of investment choice allowing you to take greater control of your retirement.
An SMSF, also known as a DIY fund, is a super fund with four or less members, where each member of the fund is a trustee. Each trustee therefore controls the investment of their contributions and the payment of their benefits.
Over the last decade, the growth in SMSFs has been phenomenal and is one of the fastest growing segments of the superannuation industry. The impetus for this growth is threefold: the desire for more control by fund members, the advent of Super Choice, and the increased focus on retirement planning. There are now over 317,000 self managed super funds registered with the ATO which hold in excess of $208 billion in assets. Over 1,500 new funds are being established each month.
Whether an SMSF is suitable will depend on your circumstances. Part of the attractiveness of SMSFs is that they give you access to a large variety of investments not typically available through other superannuation funds. For example, you can invest in private assets such as artwork.
They also provide a way for family members (as the trustees) to combine their retirement savings in the one fund.
If you have your own business, an SMSF can be attractive because you can roll your business property into the fund. However, the changing legislation for SMSFs can be complex. Obtaining financial advice can help you understand what is required.
It is also important to note that an SMSF may involve a lot more administrative work for you and the compliance requirements can be onerous. You also need to ensure that the costs of running your SMSF do not outweigh the returns. General guidelines suggest SMSFs are more cost effective for those with $250,000 or more to invest.
There are many things to consider before setting up an SMSF including:
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- understanding how an SMSF differs from other super funds
- the roles and responsibilities of the trustees
- the establishment process for an SMSF
- how the fund is structured and what investments are permitted
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Retirement Planning
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Retirement is a time of life for you to relax and do the things you have always wanted to do. Therefore, careful planning can help ensure you are financially comfortable.
Prior to retirement, there are some important questions you need to ask yourself, including:
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- What do I want to do in retirement?
- How much money will I need to do it?
- Do I need a regular income?
- Where will this income come from?
- When can I retire?
- How and when will I be able to access my super?
- What Government support will I be eligible to receive?
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Planning ahead can assist you in making the most of what you have and help you achieve financial security, reduce uncertainty and enjoy your retirement.
There are many different options available to help fund your retirement. These include taking your super as a cash lump sum, purchasing an income stream product to give you a regular income or a combination of both.
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A regular income in retirement
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Allocated pensions
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An allocated pension is purchased with super monies and provides a flexible, tax-effective, regular retirement income stream. It is not guaranteed, however the payments are flexible and can be adjusted within maximum and minimum limits set by the Government. Any capital remaining upon death is distributed to your estate or dependants.
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Annuities
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An immediate annuity on the other hand is an investment of a lump sum, usually with a life insurance company, that provides a regular guaranteed income for a specified period. The income will depend on the initial investment, frequency of payments and the prevailing interest rate. The income you receive is generally set at the time of investment and will not change.
A complying pension or annuity is one that meets certain conditions and may provide partial or full exemption from the Social Security Assets Test (although not the income test) and receives favourable treatment under the Reasonable Benefit Limits (RBLs) system. This allows you tax-effective access to your super savings.
Each type of income stream has different features. The 2006/2007 Federal Budget also proposed many changes that may affect income stream products and your retirement. A Bridges financial planner can help you with these changes and your retirement planning by identifying income options that best suit your circumstances and goals.
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Insurance
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Building your wealth is important and so is protecting it
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What would your family do if something happened to you? Illness, injury and death can have a huge impact on your family and your finances. Most of us insure our car and home etc, but what about your most important assets: your life and your ability to earn an income. Make sure you look after your loved ones and protect them against these risks.
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Income protection (salary continuance)
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Covers the loss of income, during an extended absence from work due to illness or injury.
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Trauma insurance
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Provides a lump sum payment as a result of a specified ‘trauma’, such as a heart attack, stroke etc.
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Total and Permanent Disablement (TPD)
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Covers the permanent loss of income through illness or injury that prevents your return to work.
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Life insurance
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Provides financial support for dependants in the event of your death.
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Business expense insurance
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Covers the costs of running your business in the event of extended illness or injury.
A Bridges financial planner can help you identify:
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- areas where you may need protection
- appropriate insurance for your circumstances
- the level of cover required
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Is it worth the risk? Without insurance the risks are high. For more information on protecting your wealth, contact us to arrange an appointment with a Bridges financial planner.
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Share Investing
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Direct investments versus managed funds
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Investing your money is an effective way to build your wealth. You can choose whether you invest directly, indirectly (through a managed fund) or a combination of both.
If you prefer to control where your money is invested you can purchase shares directly. However, it is important to conduct thorough research before investing directly as there are many factors that will influence the performance of shares.
Alternatively, managed funds pool the money of multiple investors into a single investment vehicle with a common objective and strategy. Just as their name suggests, managed funds are managed by investment professionals for you. They give you an easy way to invest in one or multiple asset sectors such as shares, property and fixed interest.
Everyone’s situation is different and it is important to work with a professional to identify which investments may be suitable for you. Bridges is one of the few financial planning groups that offers a full stockbroking service to help you with both direct and indirect investment options.
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Redundancy
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Redundancy can affect anyone from the chairman to the trainee. In this situation, there are many things to consider. It is important to understand how you can manage a redundancy payment so you can make the most of it.
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Money to live on
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You need to assess how much money you require to live on and how much you will be able to put aside from your payout.
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Reducing the tax on your payout
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Part of your payout may be tax-free. There are also ways to reduce the tax you pay on the taxable component.
Some components of a redundancy must be taken as a cash payment while others can be rolled over into super, which may be more tax effective.
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Social Security
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You may be eligible for some Social Security support following a redundancy. The structure of your assets and income may increase your eligibility for Government support.
Make sure you get the right advice so that your payout provides long term benefits, for example you may choose to reduce your mortgage or invest it for the long term in growth assets such as shares or contribute it to your super.
The 2006/2007 Federal Budget proposes changes that may affect redundancy payments. Bridges financial planners can help you plan for redundancy to make sure your payout is used wisely. For more information contact us to arrange an obligation free appointment with a Bridges financial planner.
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Tax Minimisation
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No-one likes paying tax but it is a given. Minimising tax is the key. When it comes to investing, there are many investment strategies that you can utilise to minimise the amount of tax you pay.
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Contribute more to super
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Salary sacrifice contributions to super can reduce the amount of tax you pay and build your retirement savings. The contribution is made prior to income tax being taken out of your wages. These contributions are taxed at a maximum of 15% instead of your marginal tax rate which may be as high as 45%.
Whilst your money is in super, the earnings are also taxed favourably at just 15%, again, instead of your marginal tax rate.
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Tax-effective investing
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Some investments are more tax effective than others. Growth investments such as shares and property often receive more favourable tax treatment. The capital gains tax and earnings tax, particularly on shares may be lower than the tax on fixed interest investments, for example.
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Investment loans
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Borrowing money to invest (gearing) is also a good way to manage your tax. You can receive a tax deduction if the cost of borrowing exceeds the income generated by the investment.
If you have an investment loan you may be able to prepay the loan interest up to 12 months in advance and claim a tax deduction.
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Selling assets
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Timing the sale of assets can affect the amount of tax you pay. Try to avoid selling shares within the first 12 months of the purchase date. After this time only 50% of the growth in capital will be subject to capital gains tax.
An unused capital loss can be carried forward to a financial year when a capital gain applies therefore incurring less tax on that gain.
If you would like advice on tax-effective investing, please contact us to arrange an appointment with a Bridges financial planner.
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Estate Planning
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Who will look after your family when you have gone? You have worked hard all your life, so don’t let it all be for nothing.
Equally important as creating wealth is planning for the distribution of it to your loved ones after you have gone. First and foremost, this means having a current and valid Will in place.
Did you know that dying ‘intestate’ (that is, without a Will) means that your assets (known as your ‘estate’) will be distributed according to a statutory formula which, perhaps, may not be in line with your wishes?
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The importance of a valid Will
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A valid Will is fundamental, but there is so much more to consider to ensure that your intentions are fully carried out after you’ve gone. Many life events such as marriage, divorce, the birth of children and the buying or selling of assets will impact your Will. To account for such circumstances, it is important to ensure that you not only review your Will regularly, but your estate plan as well, to ensure that they both remain appropriate.
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Have you considered who would manage your affairs if you were to become incapacitated?
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A Power of Attorney is a legal document that allows you to appoint a person you trust to make financial decisions on your behalf. A Power of Attorney however, ceases to have effect if you lose mental capacity. An Enduring Power of Attorney on the other hand, will continue to have effect, whatever your mental capacity.
Whilst a person appointed under an Enduring Power of Attorney can make financial decisions on your behalf, an Enduring Guardian can be appointed to make personal or lifestyle decisions for you, such as where you should live, what doctor you should use and the medical treatment you should receive, particularly if you do not want your life artificially prolonged.
Estate planning not only ensures your wealth is managed and transferred according to your wishes, but also in the most financially tax efficient way.
When it comes to distributing your assets, it’s hard to please everyone, particularly family members. However, the right planning can minimise the likelihood of claims being made against your estate.
A trust created within your Will can provide significant flexibility, together with tax minimisation and asset protection, for those who will benefit from your estate.
You have paid tax throughout your life but you don’t want your family to pay unnecessary tax once you have gone. It is important to make sure your estate is structured appropriately to avoid paying unnecessary tax.
A testamentary discretionary trust, for example, is established within your Will as a structure that can hold your assets for your beneficiaries. As it does not take effect until after your death and is managed by a trustee, the distribution of capital and income can be made at any time and in any proportion, thereby providing flexibility for your beneficiaries. A testamentary discretionary trust could also provide some protection for your assets. As none of the assets are legally owned by the beneficiaries, to a certain degree, they are protected in the event of legal proceedings, such as marital breakdown or bankruptcy for example.
A testamentary discretionary trust structure can also provide other advantages for your beneficiaries such as tax-effective distribution of the income generated. Beneficiaries will pay income tax on their allocated share of income according to their marginal tax rates. Unlike other trust structures, beneficiaries under the age of 18 are taxed at adult rates rather than penalty rates, thereby allowing you to take advantage of a substantial tax-free threshold.
As legislation varies from state to state, a Bridges financial planner can help you determine which documents are appropriate for your needs.
With an effective estate plan in place you can reduce your family’s tax liability and maximise their benefits.
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Social Security
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There are ways to reduce the impact of an inheritance on a beneficiary’s Centrelink benefits.
A Bridges financial planner can show you how to preserve and manage your assets with an effective estate plan. For more information, contact us to arrange an appointment.
This is general advice only and has been prepared without taking into account your particular objectives, financial situation and needs. Before making an investment decision based on this information, you should assess your own circumstances or consult a financial planner.
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Bridges Financial Services Pty Limited (Bridges). ABN 60 003 474 977. ASX participant. AFSL No 240837. This is general advice only and has been prepared without taking into account your particular objectives, financial situation and needs. Before making an investment decision based on this information, you should assess your own circumstances or consult a financial planner. In referring members to Bridges, Community First does not accept liability or responsibility of any act or omission or advice provided by Bridges or its authorised representatives. Part of the IOOF group.
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