General Information about Financial Advice

Your Home – how attached are you?

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I am going to look at home ownership from an older generational point of view.

For the majority of age pensioners, their home is the largest asset they own and in most situations the most expensive asset. The costs associated with owning a home are not minor, from council rates which can be quite high depending on where you live through to water rates, the ongoing maintenance and of course the yearly home insurance premium.

For a single age pensioner, with very little other income outside a full pension, these costs can prove quite high, but in all my years of talking to retirees, suggesting a person sell their home and downsize is normally met with a scowl and that this is not an option.
Why is it not an option?

For a large number of people, the house they currently live in has been their home for a lengthy period of time. It is where they have raised their children, it contains special memories or it could be the last place they lived with their spouse who has since passed away. Like their neighbours, they feel secure, they are comfortable with the task of travelling to their local shopping centre or their doctor is close by. Last but not least, if they have extra cash after selling their home and buying a smaller home would this affect their pension?

Accessing the equity in your home via a reverse mortgage could certainly be an option. But again the fear of making the bank your silent partner again, holding mortgage papers on your house can be a very daunting thought for an older single age pensioner.

Trying to educate and change a person’s mind and attitude who maybe in their eighties in relation to home ownership and the age pension is not easy. However, for a person in their fifties and sixties approaching their retirement, I believe this education and attitude change is a must, going into the future.

Source: Mark Teale | Centrepoint Alliance

Should we be able to access our super to buy a home?

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Is it a viable solution to grant early access to super to put towards purchasing a home?

The first thing we need to come to grips with is whether the access to super should be available irrespective of the number of houses people have owned, or whether it should be restricted to first home buyers. Secondly, just how much should we be able to withdraw – 20%, 50%, or all of our super savings?

The most recent version of the discussion talks about allowing a couple of years of compulsory superannuation contributions – the 9.5% superannuation guarantee contributions – to be diverted and used towards a home deposit. The information that I was looking at required an individual to match their superannuation contributions with personal savings on a dollar for dollar basis.

This would at least encourage people to make a concerted effort to save for their home rather than simply rely on their ability to withdraw amounts already in super.

Allowing access to superannuation savings, or providing other cash incentives including first home buyer grants, stamp duty concessions and the like, will simply mean that more money is available to chase the same number of properties. This means, when our first home buyer goes to an auction on Saturday morning, they will have another few thousand dollars more they can bid and so will the other bidders. The highest bidder will win the prize.

I don’t think that throwing more money at the problem is going to make housing any more affordable than it currently is. Perhaps, part of the solution is to seriously examine the supply side of the equation.

I am not necessarily suggesting we should be creating even more housing stock in our capital cities. An increasing focus on regional development, placing some restrictions on the sale of Australian properties to foreign investors, and changing the tax mix in relation to negative gearing and capital gains tax, might be ideas worth considering.

Source: Peter Kelly | Centrepoint Alliance

Real Estate Investment – not that simple?

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A large number of Australians have a diversified portfolio when they retire consisting of investments, including cash, shares and superannuation and in a substantial number of cases, an investment property.

During a person’s working life the investment property can provide a number of benefits including possible increases in the property’s value, a regular rental income stream and depending on the level of borrowings, a tax benefit via a common strategy called “negative gearing”.
I would like to discuss the treatment of an investment property under the Social Security Act, for the purposes of calculating a person’s age pension entitlement

A person’s age pension entitlement is based firstly on their age, and then on their assets and income.

For the purposes of this article, I will explain the assessment of the investment property under each test separately, starting with the assets test.

The investment property is an asset and the “net” value of the property adds to the total sum of all your assessable assets.

If you have borrowed money to purchase the investment property, and the borrowings have been secured by a mortgage against this property, the value of the investment property is reduced by the borrowings. For example, if the property is worth $500,000 and has an outstanding mortgage of $300,000, the net value of the property for the purposes of the asset test is $200,000.

However, if the borrowing of $300,000 is mortgaged against the age pensioner’s own primary residence – which is an exempt asset – then the value of the investment property is now $500,000 because the $300,000 has not been secured by a mortgage against the assessable asset – the investment property.

Even more confusing is the situation where the borrowings are mortgaged against both the age pensioner’s primary residence and an investment property. In this scenario, the borrowings are apportioned between the two properties based on the value of each. We know the investment property is worth $500,000, but if the pensioner’s residential home is worth $750,000, then only one-third of the $300,000 borrowing – i.e. $100,000 would be assessed as borrowings mortgaged against the investment property, reducing the value of the investment property to $400,000.

Now let us examine the treatment under the income test.

The assessment under the income test is a little easier to understand. The gross weekly rent being received is assessed as income. This income can be reduced by the expenses associated with the management and maintenance of the property. A good guide, if you have not completed a tax return is to maintain a deduction equivalent to one-third of the gross rent. A further deduction, which can be made from the net rent (after expenses) is the interest payable on the borrowings.

Interest paid on borrowings to purchase the investment property is a deduction from the rent, received regardless of which property the mortgage has been secured against. This is providing the purpose of the borrowed funds was to purchase the investment property.

At the beginning of this article I mentioned a tax strategy called “negative gearing”. This strategy allows for any losses incurred by your investment in the property to be used to reduce other taxable income.

This is not the situation under the Social Security Act. Any loss of the rent you are receiving may not be used to reduce the value of other income being assessed to establish your correct age pension entitlement.

Mark Teale | Centrepoint Alliance

Financial ruin – a slippery slope

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In the past week I have heard of three separate stories that, because of past decisions, have had a profoundly negative outcome for each of the people involved.

I like to talk about personal financial well being and the need for each of us, irrespective of our age or circumstances, to live a financially responsible life.

Let me relate one of the stories in the hope there are lessons we can take from it – if not for ourselves, perhaps for our family or friends. I don’t profess to have all the answers!

The story relates to a couple in their early 20s. This couple are renting, have two leased cars, a heap of credit card debt, no savings, and have a baby on the way. Their financial situation is such that they are behind with their repayments and are facing a very tough time financially.

The man in the relationship has a job that pays a salary of around $70,000 per annum. His pregnant partner is not working and she is unable to get Centrelink income support benefits, because of his income.

One question I asked was whether they could get by with just one car? The answer I was given was ‘no, because she is pregnant’.

I know very little about this family or their lifestyle but by all accounts, things appear to be quite dire. I was asked if this couple could access their superannuation in order to get themselves back on track financially.

In certain circumstances superannuation can be accessed in cases of severe financial hardship, and on compassionate grounds, however the rules around access are very prescriptive. Sadly, in this case, their personal circumstances would not allow early access to super.

Apart from this couple getting really serious about tackling their debt, financial ruin and even personal bankruptcy, could be a very real outcome.

I suggested they probably need to start looking at their lifestyle, objectively reviewing all their expenses and commitments, then prepare, and stick to a realistic budget that will ensure they live within their current means, and progressively repay their debts.

I also suggested that a phone call to the National Debt Helpline might be worth considering. Details can be found at ndh.org.au. This is a free service. Sometimes we just need to swallow our pride and ask for help.
 

Source:  Peter Kelly | Centrepoint Alliance

‘Tap and Go’…is PayWave a help or a hindrance?

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These days we don’t need to carry any cash. We can buy almost anything we like simply by swiping our card.

Recently we have seen the developments of apps that allow us to use our smart phone as a device for paying. As convenient as shopping without cash is, it does have its drawbacks.

How often have you looked at your bank account only to see pages and pages of often small debits? The cup of coffee, a sandwich, a magazine or tickets to a movie – they’re all there. And when we look at the remaining balance, we ask ‘where did the money go?’

When we live in a cashless world, it is hard to keep track of our spending. We just spend until there is nothing left.

This becomes a double–edged sword.

For many of us, if we are going to save anything, we save what is left over from the previous pay when our next pay comes in. We should be paying ourselves first – that is transferring our agreed savings before we start spending the remainder.

Of course, when we get to the end of our pay period, there is often nothing left to save anyway. We spend without knowing where the money goes. Sure, there are big ticket items like rent, petrol, insurance, electricity etc. but it is amazing just how much we spend on ‘junk’ without giving it a moment’s thought.

Back in the ‘old days’, we didn’t have the convenience of swiping a card, phone or other devices. And, we didn’t have ATMs!

So how did we manage our cash?

One popular strategy was to have ‘jars’. We were paid in cash which made things a bit easier. Each pay, amounts were allocated to our different jars. We always knew how much was left, and when a jar was empty, we went without.

One of the problems today is a lack of discipline when it comes to spending. It is just so easy to swipe a card.

A couple of months back I found that I was going through my money quite quickly and couldn’t reconcile where it was being spent.

I found that I needed (let’s say) $20 each day for discretionary spending. So, rather than just swiping my card each time I needed something, I got 8 small jars – one labelled for each day of the week, and one called ‘leftover’.

I then put $20 in each of the ‘day jars’. Every morning I took my daily allowance from its jar and put it in my wallet. If there was any money remaining from the previous day, it went into the ‘left-over’ jar.

I know this sounds extremely simplistic, but here’s what I found after a couple of weeks:

  1. Having the physical cash reminded me of how much discretionary spending I have each day.
  2. I am no longer running out of money before the next pay comes in.
  3. I am thinking twice before buying things I don’t really need.
  4. I have money left over at the end of each week, for saving or putting towards larger bills.

Managing cash flow is a significant problem in today’s world. It is not confined to younger people, but is experienced by all generations.

Learning to live within our means will result in a more financially secure future, with the added bonus of less stress.

 

Source:  Peter Kelly | Centrepoint Alliance