A head start
As you look back over your life and finances do you ever wish someone had given you a few pointers earlier on? Perhaps if you’d started putting some money away in your younger years, it wouldn’t have been such a mad dash to make it across the line as you approached retirement. And perhaps your lifestyle could have been even better.
Well, what about the people you care about? Are they using superannuation to its full potential? Have they covered themselves, their loved ones and their income against financial misfortune? And would they know what to do if they came into a large sum of money? With the benefit of hindsight, chances are we could all improve the way we’ve managed our finances over the years but since life isn’t a time machine we have to rely on the next best thing – experience. And the most experienced people when it comes to planning your financial future are financial advisers. Could your children and other loved ones benefit from some professional guidance earlier on?
Some super strategies
Over the past few years the Government has been making a lot of changes to super, encouraging people to take control of their retirement savings and to make a start earlier in life. And on 1 July, super is undergoing a huge transformation, making it simpler and even more attractive. But are your friends and family aware of these changes and all the opportunities super provides to build wealth?
One of the best ways for investors to build super early on is to top it up with some of their own money. Making after-tax contributions to super can be an extremely effective way to save for retirement. This is because any earnings an investor makes on their investment are taxed at the concessional rate of 15% instead of their marginal rate. And from 1 July 2007, they will be able to withdraw this money tax-free as a lump sum or pension once they reach age 60.
The Government is also encouraging people to start this process earlier by limiting the amount of after-tax contributions you can make every year. From 1 July 2007, investors will be limited to after-tax contributions of up to $150,000 a year - though those under 65 will be able to bring forward two years' worth of contributions and contribute up to $450,000 in one year. So whereas people used to wait until later in life to sell an asset and make a last minute dash into super before retiring, they now have to start planning earlier.
For those who earn under $58,000 a year, making an after-tax contribution may also have the extra benefit of being eligible for a Government co-contribution. For example, if someone is eligible, earns less than $28,000 year and makes an after-tax contribution of $1,000 into super, they will get the maximum co-contribution of $1,500. This amount reduces 5 cents for every dollar they have above the minimum threshold of $28,000. Imagine how much this could add up after decades of concessionally taxed earnings?
Another way for an investor to build super early on is to invest part of their pre-tax salary into super. This also has many benefits. Firstly, contributing more money to super early on, means it has years to grow with concessionally taxed earnings being continually reinvested. Secondly the income a person invests into super will only be taxed at 15% on the way in, rather than at their marginal tax rate. And after 1 July, so long as they wait until age 60 to withdraw it, it will not be taxed on the way out either. This means the investor will pay less tax and increase the amount of super they have working hard for their retirement.
These are just a couple of the strategies that could benefit your children and other loved ones earlier on in life. Of course everyone’s circumstances are different, and which of these strategies or any others would most suit their personal financial situation is best gauged by a professional financial adviser.
A helping hand
It’s natural to want to leave something behind for younger loved ones when you pass on. But there are also a lot of things to consider. For example:
- Will they know what to do with such a large sum of money?
- Are they old enough to deal with the responsibility?
- How would you feel if they lost part of this money in a divorce settlement?
- Do they have a alcohol or gambling problem?
- Do they have a disability or mental illness?
- Are they at risk of becoming bankrupt?
Setting up a testamentary trust can ensure your assets are distributed tax-effectively, in the way you intended. Unlike in a basic Will, with a testamentary trust, assets remain in the estate’s name with your nominated trustee controlling assets in line with the terms and conditions set out in your Will.
Of course a testamentary trust does not suit everyone so financial advice is recommended. It can also be a good idea to get the family involved in this process. Chances are your trustee will be one of your loved ones and they will benefit from financial advice going forward. For example, an adviser will be able to help them distribute the income and assets from your estate in the most tax-effective way for your family.
Keep them covered
Many Australians tend to take a laid-back approach to planning (or not planning) ahead. Unfortunately, this mentality often extends to insuring against life’s unexpected mishaps – like sickness, injury and critical illness. When we work so hard for our money it seems a shame to be lax about protecting it. Of course the younger we are, the more invincible we feel. Have your children thought about protecting their most valuable assets – their life, their family and their income? It’s important to ensure your loved ones have the right protection for themselves and their family so if misfortune strikes, they’ll at least be ready on a financial level.
Financial advice is more than just retirement planning. Getting in early could give your loved ones better financial security, improve their lifestyle and prevent from making those mistakes we all wish we’d never made.