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Financial Case Study: Young Family

Financial Case Study: Young Family

Smart Strategies For Families With Young Children

The arrival of a new child can present a whole range of financial challenges. Not only does the household income usually drop, costs generally go up.

However, there are several Government benefits available to families with young children which may assist:

Paid Parental Leave Or The Baby Bonus?

After the birth or adoption of a child, many people will have the choice of claiming either Paid Parental Leave or the Baby Bonus.

While the Government estimates that more than 85% of families will be better off claiming Paid Parental Leave, the best option will depend on factors including you and your partner’s income and how many children you have.

To help parents make the best choice for them, an on-line estimator is available on the Department of Human Services website. This estimator can make it easy to quantify the best option, but there are some clever things you can do to receive more money.

For example, unlike the Baby Bonus, Paid Parental Leave is a taxable payment. So the more you earn, the more tax you pay on the benefit.

But few people know you can defer receiving the payment and if you push it back to the next financial year when your income could be much lower, you may end up paying less tax on the payments.

You need to ensure you don’t push it back too far as the payment, which is for a maximum of 18 weeks, must be paid in full within 52 weeks of the date of birth or adoption.

Also, any unused Paid Parental Leave can be transferred to your partner, so long as they meet the eligibility rules. So, if you split the time you take off to look after your child, you could split the taxable benefit payments and possibly save tax as a family.

Contributing To Super

Another smart strategy is to consider making super contributions while you are on parental leave.

This could help make up for any reduction in super contributions while you are not working but because your income is likely to be lower when you are on parental leave, you may also qualify for Government benefits that wouldn’t normally be available to you.

For example, if you make a personal after-tax contribution and meet certain other criteria, you could be eligible to receive a super ‘co-contribution’ of up to $500 from the Government.

Alternatively, if your spouse makes a contribution into your super account while your income is low, they may be eligible to claim a tax offset of up to $540 when they complete their tax return.

While these benefits can be quite attractive you will need to find the money to make the contribution while on leave! However, don’t forget that you may get a significant refund of tax deducted by your employer while you were still working.

It’s also possible to contribute some (or all) of the Paid Parental Leave benefit directly into super if allowed by your employer.

This could be an attractive strategy for higher income earners who take leave from their employer to care for a child and their partner earns sufficient income to meet the family’s living expenses.

Child care payment options

If you send a child to an ‘approved’ childcare centre, you may be eligible for the Child Care Benefit if you qualify for Family Tax Benefit Part A and you meet certain other conditions.

Also, regardless of your income, you may be eligible for the Child Care Rebate. This is where the Government pays or reimburses 50% of the ‘out-of-pocket’ costs of approved childcare, up to a maximum of $7,500 per year per eligible child.

Out-of-pocket expenses are the total childcare fees you pay to an approved centre, less any Child Care Benefits and Jobs, Education and Training Child Care Fee Assistance you receive.

When you combine the Child Care Benefit and the Child Care Rebate, you will usually get 50% or more of the fees back from the Government.

The exception is where you are not eligible for the Child Care Benefit and the fees total more than $15,000 for the year. This is because 50% of more than $15,000 would exceed the annual cap of $7,500.

However, some employers provide child care at the workplace, where employees contribute towards the costs by sacrificing some pre-tax salary and no fringe benefits tax is payable.

If this is an option, it’s worth considering from a convenience point of view. It could also be more cost-effective.

This would be the case, for example, if you pay tax at a higher marginal rate (ie 38.5% or 46.5%) and the total fees payable over the year exceed $15,000.

Salary packaging fees could also be attractive if you are taxed at the highest marginal rate of 46.5% and the fees are less at the employer provided centre.

If you have a choice, the best financial option for you will depend on your marginal tax rate, the daily fees charged by the centre and the total net expenses you will pay over the year.

Financial Planners Melbourne

Transition to Retirement explained

Transition to Retirement explained

Easing Into Retirement
More than ever before, Australians are now transitioning gradually into retirement, rather than abruptly ending full-time work. In fact, 48% of full-time workers aged 45 or over are planning to move to part-time work before retiring.¹

This can be driven by financial concerns or lifestyle goals, or a combination of the two. Many people like the flexibility of easing into the next phase of life after over 40 years in the workforce. The following case study shows how this can be achieved.

Robin’s Goals

Robin is one such person who wants to wind back her working hours gradually. At 59, she’s keen to spend time with her first grandchild, but isn’t quite ready to retire just yet as she’d like to maintain the social interaction and mental stimulation she gets from work. With this in mind, she decides to cut back to three days (24 hours) a week.

She meets with her financial planner to make sure she can maintain her current lifestyle, while structuring her salary in the most tax-effective way possible.

Work Part-Time Without Reducing Income

After scaling back her working hours, Robin’s salary drops from $100,000 to $60,000. Her adviser suggests setting up a Transition to Retirement Pension (TRP) as the income from this will replace her pay cut of $40,000. This means she can maintain her after-tax income.

A TRP is a special type of income stream available for people aged 55 and over that lets you access your super benefits before you retire3. By implementing a TRP, Robin can now:

invest some of her super in the TRP, and
use the regular payments from the TRP to replace the income she misses out on when moving to part-time work.
She can also:

reduce her hours without reducing her income; and
replace her salary with a tax-effective income stream.
It’s important to note that limits apply to the amount of income you can receive each year and you can only make lump sum withdrawals in certain circumstances.

How Does It Work?

Robin’s TRP will provide her with an income each year, allowing her to maintain her current living standard. There are minimum and maximum income thresholds she needs to consider though, such as only being able to access up to 10% of her account balance each year. For this reason, it’s important to make sure she puts an appropriate amount of super into her TRP.

The good news is Robin will pay less tax on the income payments from her TRP than she does on her salary.

As a result, she won’t need to draw down her full pay cut from the TRP. In fact, a pre-tax income of $32,157 will cover her salary reduction of $40,000 as she is entitled to a tax offset on taxable TRP payments.

Before strategy After strategy
Pre-tax salary $100,000 $60,000
TRP income N/A $32,157
Total pre-tax income $100,000 $92,157
Less tax payable including Medicare levy $26,447 $18,604
After-tax income $73,553 $73,553
What’s more, when she turns 60 next year the income stream payments will be completely tax-free², meaning a TRP payment of $25,400 will cover Robin’s $40,000 pay cut.

Tips And Traps

It can be tempting to focus on the short term and maintain your current lifestyle when you’re working part-time. But be careful you don’t draw down your super too quickly and fall short of income during retirement as a result. Your planner can help you determine your expected length of retirement and the income you’ll need each year, so your super lasts as long as you need it to.

Once you purchase a TRP, you can transfer the money back to super at any time. This flexibility is a great option if you think you might return to full-time work at any point. However, a TRP can still be a smart strategy when you’re working full-time and want to boost your retirement income.

Some super funds have a minimum account balance, so it’s important to check if yours has a limit before you start a TRP.

A TRP isn’t always the most effective strategy. If you have investments outside super, you may actually be better off keeping your super as it is and using your other assets to supplement your income. Your financial planner can help you choose the best option for your situation.

Los Angeles

Los Angeles

Los Angeles – Santa Monica:

Services offered:

  • Private wealth only
  • PW Financial planning

Office Address:
312 Arizona Ave,
Santa Monica, CA, 90401
USA

Robin Harley

Robin Harley

Staff

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Rosy Biber

Rosy Biber

Marketing Executive

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Jack Peterson

Jack Peterson

Sales Executive

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