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Parental Guarantee Strategy

Parental Guarantee Strategy

A step-by-step guide for Parents who are acting as Guarantors

With today’s property prices, first home ownership is becoming harder and harder to achieve.

Too often, we’re finding that parents want to help their children achieve their home ownership dreams, but are worried about how it may affect them financially. The risks appear to outweigh the benefits and parents are left in a do-or-die situation where they feel responsible for helping their children financially.

The questions and concerns surrounding the possibility of future divorce, job loss or injury cloud the minds of potential guarantors, leaving them in a vulnerable position when signing the bank papers.

‘What if the borrower loses their job?’ ‘What if they can’t make the minimum loan repayments?’What happens then?’

‘Where does that leave us?’

The theory dictates that this situation leads to the Guarantor having to find the money to pay for the amount in arrears, before their security property is sold to repay the debt. Often, this also means that the financial future of the Guarantor is uncertain, as they are faced with having to delay their retirement, while dealing with undue financial hardship… not to mention the overall tension within the family.

It’s a devastating situation that leaves all parties out of pocket, and is something that can be easily avoided. Here’s how:

 

Cash flow

A simple, no-frills income protection policy can help to reduce risk.  If a child can work and, adequately repay the loan, there is every opportunity to make repayments and continue to do so should any unforeseen circumstances occur.

Recently, we had a case where parents who were acting as their son’s Guarantors paid for his $500 per-year income protection to ensure the mortgage was looked after until he had enough equity to refinance them out. It was a great back up plan that helped to minimise risk.

 

 

Actual Debt

If death was to occur, a life insurance policy on the child that is owned by the parents can help extinguish the child’s debt. This includes debt on the family home, and avoids any ‘son or daughter in law’ issues that may arise from such circumstances.

Parental Guarantee Strategy; they’re a great idea but, like most things in life an exit plan is needed.

To find out more, contact Partners in Planning.

*Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

The Four Most Common Mistakes when Buying Life Insurance

The Four Most Common Mistakes when Buying Life Insurance

Buying Life Insurance is no easy task. It raises a lot of uncertain questions that leave us wondering what we need to do to make it easier for our loved ones should anything unexpected occur.

Here are the four most common mistakes that people make when buying life insurance;

1. Chasing the best price, and not the best cover

Let’s face the facts; we buy life insurance to have some sort of peace of mind if something major was to happen to us.

In saying this, we’re always reluctant to pay too much for cover. Cheaper policies (aka too good to be true) can be riddled with potential issues, so have a good read of the fine print and look into the providers claims and dispute handling history, and MOST importantly, above all else, review the listed policy exclusions.

2. ‘It’s ok, my superfund has Life Insurance

I have heard it one too many times. People often rely on the Life Insurance cover provided by their individual superfund.

Most super funds provide a default level of cover but, this is often well below the level most people need. Have a look at your latest super statement and see if the level of cover will even cover half your mortgage. Chances are, it won’t.

Did you know some policies are canceled automatically when you change jobs or stop receiving super money from your boss? It’s important to know and understand all the finer details when it comes to life insurance and super. Do your research; it’s worth the extra time.

3. ‘I don’t need advice, the guy on TV said its easy

Buying a Life Insurance policy is as easy as buying chocolate. Nowadays, it’s all a matter of picking up the phone or clicking a button online, and your Life Insurance Policy is sorted. You can walk into Coles and buy toilet paper and life insurance, all in the same aisle. It’s accessible. However, accessibility can be dangerous. Like I always say if it’s too good to be true, it is. Life insurance that is quick and easy to get may be declined at claim time for reasons such as non-disclosure, exclusions or hidden clauses.

Sitting down with a qualified and independent financial planner means you can benefit from advice on a multitude of policies that can be tailored to your needs. There’s no point in taking short cuts when it outrageously increases the risk.

4. Life changes, so should your insurance

Make the conscious effort to review your cover annually, and adjust accordingly. You may need to make some changes if;

·         You’ve recently been married or divorced (hopefully not within the same year!)

·         Have children on the way, or children who have left the nest.

·         Have an increase in income, more debt or are paying off a mortgage.

All these are circumstances shape the level of cover that you have, and naturally change over time.

We never buy life insurance for ourselves. It’s a small investment that we make to ensure that we don’t leave our families high and dry in the event of our death.

Spending 20 minutes to consider your life insurance choices now, will avoid any confusion later on. In my opinion, it’s the greatest gift you can give.

Find our more about the Life Insurance policy that is right for you by contacting Partners In Planning.

 

Finding the Perfect Financial Planner

Finding the Perfect Financial Planner

With a Royal Commission into the finance industry just around the corner, it’s important now, more than ever, to obtain accurate financial advice. We’ve created a list of go-to questions to ask before partnering with a financial planner.

Traditionally, the local Bank Manager was seen as the oracle of all things financial. Our parents would look to the Bank Manager to obtain advice and guidance on all things money. Oh, how the world has changed.

Now, banks employ teams of Financial Planners to give advice and indirectly sell products that, in many cases, the banks own themselves.

The big question is; how can you be sure you’re getting the best advice, without being sold an in-house product that may not meet your needs? How do you decipher through all the financial jargon, and reach a point where you’re satisfied with the information you have, and the product that you have received?

It’s true, having the right financial planner can make a world of difference. Research by the Financial Services Council has shown that people who received financial advice were almost $100,000 better off in retirement. However, how do you know which financial planners are putting your best interests before theirs?

To get you closer to your financial goals, here is a list of questions to ask before you decide to partner with a financial planner;

1.      Who owns/controls your license to give financial advice?
         It’s a sad fact 80%* of financial planners are owned/controlled by the banks.

2.      What are your qualifications?|
          It’s a worrying fact only 52% of advisors have a tertiary degree or higher.

3.      How many years experience do you have?
         This is important. They may have the knowledge, but do they have the experience?

4.      What are your fees? And how do you charge?
         If the fees outweigh the benefits, what’s the point?

5.      Does the planner have a conflict of interest with any in-house products?
         If they manufacture the products, how do they have a clear view of what product is best suited to your needs and requirements?

Asking these questions upfront at your first financial planning meeting is a responsible measure to take to help avoid any unpleasant surprises down the road.

Be sure to chat to Partners in Planning about all of your Financial Planning needs.

Can my Super pay for insurance?

Can my Super pay for insurance?

Can my Superannuation pay for insurance? A Super Way To Insure
An essential part of every financial plan is having personal insurance. But it’s also important to make sure you purchase it in a tax-effective way.
Benefit From Up-Front Tax Concessions
If you buy personal insurances such as Life and Total and Permanent Disability through a super fund, you may be able to take advantage of a range of ‘upfront’ tax concessions generally not available when insuring outside super.

For example:
If you’re an employee and are eligible to make salary sacrifice contributions, you may be able to buy insurance through a super fund with pre-tax dollars (see case study)
If you earn1 less than 10% of your income from employment (eg you’re self-employed or not employed), you can generally claim your super contributions as a tax deduction – regardless of whether your contributions are used by the super fund to purchase investments or insurance, and
if you earn1 less than $61,920 pa, of which at least 10% is from employment or a business, and you make personal after-tax super contributions, you may be eligible to receive a Government co-contribution of up to $1,000 that could help you cover the cost of future insurance premiums.
These concessions can make it cheaper2 to insure through a super fund, or help you get a level of cover that, otherwise, might not have been affordable.

Case Study
Jack, aged 45, is married to Claire, aged 41. Claire is taking a break from the workforce while she looks after their young children. Jack works full-time, earns a salary of $100,000 pa and they have a mortgage.

After assessing their goals and financial situation, their adviser recommends Jack take out $700,000 in Life insurance so Claire can pay off their debts and replace his income if he dies. The premium for this insurance is $827 in year one.

Their adviser also explains it will be more cost-effective if Jack buys the insurance in a super fund. This is because if he arranges with his employer to sacrifice $827 of his salary into super, he’ll be able to pay the premiums with pre-tax dollars4.

Conversely, if he purchases the cover outside super:
he’ll need to pay the premium of $827 from his after-tax salary, and
after taking into account his marginal rate of 38.5%5, the pre-tax cost would be $1,345 (ie $1,345 less tax at 38.5% [$518] equals $827).
By insuring in super he could make a pre-tax saving of $518 on the first year’s premium and an after-tax saving of $318, when you take into account his marginal rate of 38.5%.

Furthermore, if he maintains this cover for 20 years, the after-tax savings from insuring in super could amount to $18,413 (in today’s dollars).

Note: This case study is for illustrative purposes only and has been prepared to highlight the importance of speaking to a financial adviser about the benefits of insuring in a super fund. A financial adviser can also identify a range of other opportunities to make your insurance more cost-effective over the longer term.

Cash Flow Benefits
Another benefit of insuring inside super is you can have the premiums deducted from your investment balance, without making additional contributions to cover the cost. This can help you afford insurance if you don’t have sufficient cashflow to pay for it outside super.

Alternatively, it can free-up cashflow to help you take out other important insurances such as Critical Illness, which can generally only be purchased outside super.

Critical illness insurance can provide you with a lump sum payment to pay medical, rehabilitation and other expenses if you suffer a critical illness such as cancer, a heart attack or a stroke.

Don’t Forget To Protect Your Income
Another type of insurance to consider is Income Protection, which can replace up to 75% of your income if you’re temporarily unable to work due to sickness or injury.

If you take out Income Protection insurance in a super fund, you can:

make super contributions to fund the premiums and benefit from the range of upfront tax concessions outlined earlier, or arrange to have the premiums deducted from your existing account balance, without making additional contributions to cover the cost.

Alternatively, if you purchase the cover outside super, you can generally claim the premiums as a tax deduction. The best approach for you will depend on a range of factors, including the tax implications.

To Find Out More About The Benefits Of Insuring Through Super, You Should Speak To One Of Our Financial Planner, Who Can Tailor A Protection Plan For Both You And Your Spouse.

Footnotes:

  • Includes assessable income, reportable fringe benefits and reportable employer super contributions. Other conditions apply.
  • This will usually also be the case if the sum insured is increased to make a provision for any lump sum tax that may be payable on TPD and death benefits in certain circumstances.
  • This premium is for a 45-year old non-smoking male, is based on MLC Limited’s standard premium rates as at 1 September 2010 and excludes the policy fee.
  • Because super funds generally receive a tax deduction for death and disability premiums, no contributions tax is deducted from salary sacrifice super contributions.
  • Applies in the 2010/11 financial year and includes a Medicare levy of 1.5%.
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.