General Information about Financial Advice

Pitfalls to Avoid When Getting Financial Advice

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Good advice isn’t something to take lightly. Listen too often to the wrong people and you can do serious damage to your retirement accounts.

It’s natural for investors to seek advice from friends and family. But those closest to you don’t always have the right answers – because they aren’t financial experts.

Those claiming to be financial advisers sometimes are not. Paid financial advisers could represent a different problem from the well-meaning advice of friends and family. If the advisers are paid through commissions by third parties to sell insurance or exotic mutual funds, they may have their own best interests at heart rather than yours.

It’s up to everyday investors to determine if their financial adviser is putting their best interests forward. In order to do so, ask the adviser how they get paid. If it’s by commission, then look for a fee-only adviser who will get paid a flat amount for work.

Parental bias can leave children in harm’s way. More young investors turn to parents for financial advice, but parents are limited by their own experiences. While the parent probably means well, emotionally charged financial advice rarely results in good decisions.

Finally, there’s the issue of risk tolerance. The parent’s taste for risk may differ from the child’s. While a young investor has decades to save – and can therefore take more risk – an older investor could be more inclined to choose a strategy that favours bonds and less volatile equities. Young investors copying that strategy could be left wanting more when they are ready to retire, and if things go wrong, it can cause conflict within the family.

Friends often share successes, but forget about the failures. Clients who are considering buying a first home and converting it into a rental property often hear from friends about the potential profits, but not the effort or risk.

More than a quarter of young investors take advice from friends. It’s often difficult to ignore someone who brags about a sweet stock pick or huge returns from an investment. But people are less likely to talk about stock picks that fail or the hard work involved on a real estate property.

Introducing Children to Money

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How do we educate, motivate and empower children to become regular savers and investors? Here are 15 simple ways to help educate children about personal finance and managing money:

1. As soon as children can count, introduce them to money. Observation and repetition are two important ways children learn.

2. Communicate with children as they grow about your values concerning money. How to save it, how to make it grow, and most importantly, how to spend it wisely.

3. Help children learn the differences between needs, wants, and wishes. This will prepare them for making good spending decisions in the future.

4. Setting goals is fundamental to learning the value of money and saving. Nearly every toy or other item children ask their parents to buy them can become the object of a goal-setting session. Such goal-setting helps children learn to become responsible for themselves.

5. Introduce children to the value of saving versus spending. Explain and demonstrate the concept of earning interest income on savings. Consider paying interest on money children save at home; children can help calculate the interest and see how fast money accumulates through the power of compound interest. Some parents even offer to match what children save on their own.

Allowance and Spending Decisions

6. When giving children a allowance, give them the money in denominations that encourage saving. If the amount is $5, give them 5-1-dollar coins and encourage that at least one dollar be set aside in savings.

7. Take children to a bank to open their own savings accounts. Beginning the regular savings habit early is one of the keys to savings success.

8. Keeping good records of money saved, invested, or spent is another important skill young people must learn. To make it easy, use 12 envelopes, 1 for each month, with a larger envelope to hold all the envelopes for the year. Establish this system for each child. Encourage children to place receipts from all purchases in the envelopes and keep notes on what they do with their money.

9. Use regular shopping trips as opportunities to teach children the value of money. Going to the grocery store is often a child’s first spending experience. Spending smarter at the grocery store (using coupons, shopping sales, and comparing unit prices) can save more than $1,800 a year for a family of four. When going to other stores, show them how to check for value, quality, reparability, warranty, and other consumer concerns.

10. Allow young people to make spending decisions. Whether good or poor, they will learn from their spending choices. You can then initiate an open discussion of spending pros and cons before more spending takes place. Encourage them to use common sense when buying. This means doing research before making major purchases, waiting for the right time to buy, and using the “spending-by-choice” technique. This technique involves selecting at least three other things the money could be spent on setting aside money for one of the items, and then making a choice of which item to purchase.

Buying Smart

11. Show children how to evaluate TV, radio, and print ads for products. Will a product really perform and do what the commercials say? Is a price offered truly a sale price? Are alternative products available that will do a better job, perhaps for less cost, or offer better value?

12. Alert children to the dangers of borrowing and paying interest. If you charge interest on small loans you make to them, they will learn quickly how expensive it is to rent someone else’s money for a specified period of time.

13. When using a credit card at a restaurant, take the opportunity to teach children about how credit cards work. Explain to children how to verify the charges, how to calculate the tip, and how to guard against credit card fraud.

14. Be cautious about making credit cards available to young people. Credit cards have a message: “spend!”.

15. Establish a regular schedule for family discussions about finances. This is especially helpful to younger children–it can be the time when they tote up their savings and receive interest. Other discussion topics should include the difference between cash, cheques and credit cards, wise spending habits, how to avoid the use of credit, and the advantages of saving and investment growth. With teenagers, it’s also useful to discuss what’s happening with the national and local economies, how to economise at home, and alternatives to spending money.

Source: LaTrobe Financial

Insurance – Protecting your most valuable assets

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Life throws us different challenges all the time, and the risks that concern us will change depending on where we are on life’s journey.

Insurance is about managing risk – and risks may change with your circumstances.

Below are a few short videos; please spend the time watching them and think about your own circumstances.

Don’t leave it too late, give us a call on 8132 2655 to discuss your insurance needs today!!

Centrelink versus Risk Insurance – https://www.youtube.com/watch?v=A-QxmYkCJBI

The Facts of Life – https://www.youtube.com/watch?v=KFc2BtGDqTc

CommInsure Life Stories – https://www.youtube.com/watch?v=4I20YYWaO2A

Women and the Importance of Insurance – https://www.youtube.com/watch?v=M_JWXE9uFxc

Revisiting conditions of retirement

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A self-managed super fund case study the ATO has published highlights the importance of determining whether a person has officially retired for purposes of the Superannuation Industry (Supervision) Regulations 1994 (SIS regulations).

You may question whether it’s necessary to revisit something that has been in legislation for many years. The answer lies in the fact that the tax reforms will affect whether particular payments or pensions are measured against an individual’s $1.6 million pension transfer balance cap. This is particularly the case for transition-to-retirement income streams (TRIS) paid to anyone after reaching preservation age, as they may not realise retirement has or has not taken place.

The ATO’s case study involves Charlie, who is 57 and an employee, as well as a beneficiary of a discretionary trust, which carries on a smash-repair business. Charlie ceased employment with the trust and received his accumulated leave entitlements. As he was no longer considered employed, the trustees were satisfied that he never intended to be gainfully employed for more than 10 hours each week. After his retirement, he continues to perform substantial duties for the trust and receive distributions of trust income. The case study does not provide detail of what those duties are.

In its analysis of the situation, the ATO considers three issues:

  • Whether Charlie meets the definition of retirement in SIS regulations 6.01(7) for someone under age 60
  • The receipt of passive income from the discretionary trust
  • The substantial duties being performed by Charlie in relation to a business operated by the family trust.

The ATO points out that any decision on whether retirement has taken place depends on the circumstances surrounding the case. In Charlie’s situation, the distributions from the family discretionary trust would not normally be taken into account as part of any decision because they are not ordinarily linked to gainful employment. However, the link Charlie has with the business carried on by the family discretionary trust influences the amount of the distribution he ultimately receives. Therefore, the ATO’s interpretation of gainful employment and retirement is broad enough to include activities that could be attributed directly or indirectly to the receipt of the relevant income.

In Charlie’s case, if no retirement is considered to have taken place, the fund may be in breach of the preservation rules and expose itself and Charlie to tax penalties.

Definitions are pivotal

The definitions of retirement and cessation of gainful employment are pivotal to whether a person has met a condition of release in Part 6 and Schedule 1 of the SIS regulations. Retirement is defined in SIS regulation 6.01(7) and gainfully employed is defined in SIS regulation 1.03(1).
The retirement definition is split into the period between preservation age and age 60, and after 60.

If a person has reached preservation age (currently 56) and is younger than 60, retirement occurs when the person has ceased gainful employment and the trustee is reasonably satisfied the person intends at that time never again to be gainfully employed on a full-time or part-time basis. The words full-time and part-time are defined in SIS regulation 1.03. In practical terms, at the time of retirement, the person must not intend to work any more than 10 hours each week. This does not prevent a person from returning to work on a more substantial basis; however, as the case study indicates, retirement should be the severing of the gainful employment link on a full and effective basis.

Once a person is 60 or older, retirement is where gainful employment has come to an end and they were at least 60 when that employment ceased. There is a second arm to the post-60 retirement definition in paragraph (b)(ii), which operates where gainful employment has come to an end, presumably prior to age 60, and the trustee is reasonably satisfied that the person intends never again to become gainfully employed, either on a full-time or a part-time basis. In most cases, a member will meet the requirement that they ceased at least one means of gainful employment after reaching age 60 and be considered retired. There is no requirement that all gainful employment cease, as it is sufficient to cease just one employment arrangement after reaching age 60 to meet the retirement definition.

Broad enough to cover most activities

SIS regulation 1.03 defines “gainfully employed” to mean “employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment”. This definition is broad enough to cover those activities someone undertakes for which a payment is received. It includes anyone engaged as an employee, contractor, professional, religious calling, and so on. The amount of the payment, the level of effort involved and whether it results in a profit or loss is immaterial.

Gainful employment does not include activities for which an allowance or reimbursement is paid for an expense that is merely a coincidence to the activity. This would occur in the case of voluntary work where a person may be reimbursed, in part or in full, for the cost of meals, travel and other incidental expenses. It would also not include a person receiving a government allowance for looking after a disabled relative or a relative who undertakes child minding on an ad hoc basis. As an aside, prisoners who receive an allowance for making goods when serving their time are also not gainfully employed under the definition.

Now let’s look at the impact of the retirement definition on the superannuation reforms. These reforms impose a transfer balance cap of $1.6 million on amounts transferred to commence an income stream from July 1, 2017, and the value of income stream investments as at June 30, 2017. Where the $1.6 million cap is exceeded, a penalty tax applies to any excess. The value of a TRIS is excluded from being measured against the transfer balance cap, as the income on investments supporting the stream will be taxed at 15 per cent from July 1, 2017. However, once a person in receipt of a TRIS meets a condition of release, such as retirement or reaching age 65, it will auto-convert to an account-based pension that is counted against the $1.6 million transfer balance cap.

Anyone who has commenced or is planning to commence a TRIS and is nearing age 60 or over that age needs to be aware of the issues that could arise if they are nearing retirement or age 65. It is worthwhile to have the situation reviewed so they don’t fall into the trap of auto-converting to an account-based income stream. Once the stream has commenced, an alternative for anyone approaching retirement could be to fully or partially commute it to a lump sum and return it to accumulation phase in the fund to help avoid the penalty tax.

The lesson to be learned from not understanding what is meant by retirement for superannuation purposes and, in the broader context, conditions of release, may bring unexpected outcomes in the new world of superannuation reform post June 30, 2017. Anyone who has commenced or will commence a TRIS should be careful that they don’t end up having a super crash.

 

Source:  Graeme Colley | Executive Manager, SMSF technical and private wealth at SuperConcepts

Finance for every life stage

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The life journey

We understand that financial goals will shift as each client’s situation changes to serve their current needs. Some needs will be long-term. For instance, saving for retirement takes place across decades. But that doesn’t make shorter goals, such as saving for a deposit on a home, any less challenging. Knowing what financial milestones to target and when, will help finance brokers ensure that they respond to a client’s needs as they arise.

finance-every-life-stage

  Stage 1 – Getting onto the property ladder – purchasing the first home

Housing affordability generally in Australia has become, and will continue to be a significant issue for local property buyers. In particular those looking to buy in the Sydney and Melbourne markets, now two of the least affordable major metropolitan markets in Australia.

While home ownership rates in Australia have been in gradual decline for a few years now, the rate of decline has occurred much faster in younger households (such as the 25-34 year old age bracket). In Melbourne and Sydney the rapid rise in house prices has significantly outstripped income growth, meaning a bigger deposit is required. In our current low-wage growth environment combined with rapidly increasing house prices and low levels of housing on the market, this is easier said than done.

More and more young Australians are relying on the “Bank of Mum & Dad” for their first home deposit and will continue to do so, therefore like any “Bank”, it is important that Mum & Dad’s investment is secured ensuring their generosity does not go up in smoke.

Stage 2 – Getting Hitched

Once upon a time in towns and suburbs across Australia, couples were hitched in local churches and receptions were held in back yards or neighbourhood halls or even local footy clubs. It was a pretty simple affair, for family and a few good friends.

But today’s weddings are more outlandish trends consisting of, just to name a few, tropical island destinations, photo booths, drone photography, celebrity chef-designed menus, trendy food vans, and even photo shoots the day before the nuptials.

There are statistics and surveys that identify the average cost of a wedding in Australia and they can range from anywhere between $36,000 and $65,000.

So how much can a wedding cost?

 wedding-cost

If the Bride and Groom are lucky enough to have either or both sets of parents contributing to the cost, then it’s relatively simple to sit down and determine what funds are available to pay for the convoy of motorbikes and the luxury cars for the bridal party and a plane towing a sign of congratulations.

However, if they are amongst the many Australians who are getting married later in life, they are not relying on their parents – but rather on their disposable incomes and reasonable equity in their homes. They are part of a growing normality in 2016.

 

 Source:  La Trobe Financial