Independent Financial Advisor in Burwood and Chatswood

Do you consult an Independent Financial Planner?

Many people find planning for their future and setting out long-term financial goals daunting. Is this caused by a fear of failure? If they are unable to reach that milestone they set? Perhaps a feeling of unwelcomed restriction? After all the most common word you will hear after the term ‘financial plan’ is usually budget.

Independent financial planners aim to make this process less of a chore. They look at your personal situation and provide advice on all areas of your finances. From estate planning and superannuation advice to asset management and aged care financial advice.

Important considerations for income protection

Important considerations for income protection

Is your income protected? Talk to an Independent Financial Advisor in Sydney

Many people seek risk management products. Here are the important considerations for income protection.

For a start, there are four types of personal risk management tools:

  • Death cover or life insurance
  • Income protection or income replacement
  • Total permanent disability
  • Trauma cover or critical illness cover

Income protection is designed to pay a monthly benefit, whilst the other covers are designed to pay a lump sum benefit.

In simple terms, income protection will be an important safety net for you if you fall into one of the following scenarios:

  • Have people that are financially dependent on you eg your family
  • Are in a debt-laden situation due to the love of property see “Mortgage debt levels in Australia: debt management” and “Debt, gearing, leverage and money management – the simple truth”
  • You deploy similar strategies as Warren Buffet see “Warren E Buffet and wealth creation via long-term investments”
  • You want to be forward thinking see “Forward thinking: Contingency plans and protection for your family”

This is because prudent money management means that you don’t get into too much debt and still have room to move when the economic environment changes or when something unexpected happens in life.

If due to illness or injury, you are unable to perform one or more duties necessary to produce income from your regular occupation, how are you going to continue with your lifestyle?

How are you going to pay your bills and make debt repayments to avoid a fire sale?

What about covering additional cost due to treatment and rehabilitation?

Look at these income replacement benefit payments made by various insurance companies:

Companies in year 2014:

  • A: $100m
  • B: $121m
  • C: $275m

Here is a statistical view of the type of cases company C has paid over the past 6 years.

Death cover, income protection, total permanent disability and critical illness cover is not about winning a lottery. It is not an investment, but rather a safety net for unforeseeable disastrous events that can happen in life.

The aim is to dampen the financial impact for you and your family.

Money buys you options and provides you with choices – nothing more. Make an informed decision, whether it is having no income protection, some cover or a large amount of cover.

Speak to our independent financial advisors today about a customised income protection solution for you.

The Advantages of a Self Managed Super Fund (SMSF)

Self managed super funds (SMSFs) have gained increasing popularity in recent years. There are various scenarios where an SMSF is appropriate for you and complements your long-term wealth creation needs. In this article we look at potential advantages of a self managed super fund. See past Goggling articles below for more details on SMSF:

Advantages of self managed super funds include considerable investment flexibility subject to strict rules.

Your self managed super fund, can invest in collectibles such as artwork, jewellery, antiques, coins, stamps, vintage cars and wine.

Check out the ATO website for more details on collectibles and personal use assets.

You can also make direct investments in real estate such as residential property or business real property.

Let’s walk through an example as to how an SMSF can be of advantage in the scenario of property investment. You and your spouse are residential property lovers and do not believe in any other type of investments or assets. Over the years, you have accumulated a combined superannuation balance of $300k and want to use this to invest in a residential property.

With the understanding of appropriate money management and debt management strategies including an appreciation of the miscellaneous costs of property ownership, you enlist the help of a financial advisor. You then setup an SMSF and borrow to purchase a $600k apartment or house. You believe when you both decide to retire in 25 years’ time, this property will be fully paid off and worth about $1.6m.

So what happens to this property when you both retire?

Remember that superannuation is a concessional tax vehicle for long-term wealth creation? This is even more so at retirement, as investments inside your superannuation will not be subject to income tax nor capital gains tax.

Furthermore, income you receive at retirement from investments inside your superannuation will not be subject to personal income tax.

For example, you could sell the property and realise a capital gain of approximately $1m ($1.6m less $600k) and not have to pay any capital gains tax on it. You can read more about SMSF and residential property by going to the Australian Securities and Investments Commission ASIC MoneySmart website.

Whether you decide to go with an SMSF or not, consider the following aspects of your money management plan:

Planning for the above will ensure good financial health and wellbeing.

Financial Planning For The Long Term

The McKinsey Global Institute issued an interesting discussion paper.

Companies with a long-term view outperform their peers on a range of key economic and financial metrics.

Their analysis used a data set of 615 large and mid-cap US publicly listed companies from 2001 to 2015.

It is based on patterns of investment, growth, earnings quality, and earnings management.

This enabled them to separate companies that take a long-term view from others and compare their relative performance, after controlling for industry characteristics and company size.

It would seem that companies would highly benefit from long-term independent financial advice.

In summary, companies with a long-term view:

  • Exhibit stronger fundamentals
  • Deliver superior financial performance
  • Continue to invest in difficult times
  • Add more to economic output and growth

Independent financial advice for your long-term

Here at Plutus Financial Guidance, we are financial planners offering certified independent financial advice. This simply means we will not take incentives for any of the advice we offer, nor will we charge asset-based fees. All of our work is tailored to each of our client’s particular needs.

Book a consultation for an unbiased review of your financial position today.

Source: McKinsey Global Institute

Negative gearing explained

We’ve all heard a thing or two about negative gearing or positive gearing in the news lately. Especially in relation to property investment and mortgages in Australia, everyone seems to have an opinion on this matter. So here is a short article on negative gearing explained.

So what is negative gearing or positive gearing? Does it deserve so much attention?

When investing in an asset you might be considering if it is worthwhile to apply leverage and get a loan to amplify the investment.

This will require appropriate money management and debt management strategies. You will need to think carefully about your personal circumstances and objectives. The interest expense on the loan can reduce your tax bill, which is a small added bonus.

Generally, when you use debt to invest and if your investment income is less than your investment expense, it is negative gearing (for more details, see ASIC article). When you have negative gearing, you will need cash flow from elsewhere to make up for the cash flow shortage. When you have positive gearing, you have extra cash flow at your disposal.

Of course, if your investment is in a cash flow shortage position and is making a loss, your tax bill will reduce. Similarly, if your investment is in cash flow surplus territory and is making money, your tax bill will increase.

Wealth creation is not about seeking negative gearing or positive gearing.

You can read more about wealth creation via long-term investments here.

Do not start your investment process with negative gearing or positive gearing in mind as they are merely an outcome that needs to be understood and managed.

Negative gearing explained

Source: afroginthefjord.com

Start with critical investment decisions and due diligence.

Do your research and ask yourself:

All else being equal, generally you want your investments to have positive gearing. Neutral gearing is the second preference and negative gearing should be the last preference.

Property costs: the miscellaneous costs of property ownership

Property or real estate is an important part of your financial health and property costs can be quite high.

Careful considerations ought to be made as to what strategic role real estate plays in your overall financial health. Especially relating to managing property costs as a property investor, retiree, mortgagor or via self-managed super fund.

Whilst most people strive for a place to call home, I think “home” is what you make it to be. Think about what’s really important to you.

In order to achieve the right balance, you need to compromise or make some trade-offs. You don’t have to start with an ultimate Playboy mansion, but you can surely work toward it over time if that is what floats your boat.

Warren E Buffet is an exceptional long-term investor and incredible philanthropist (pledging 99% of his wealth to philanthropy) with an estimate net worth of about $80 billion. Yet, he lives in the same house that he purchased in the 1950s.

Besides the property cost, there are other costs involved in owning a property.

Assuming you buy an $800k apartment in Sydney, with a 20% deposit of $160k and a loan $640k. Additional costs include:

  • $32,000 stamp duty on purchase (state government tax: per table below taken from Revenue NSW Government)
  • $3,000 stamp duty on loan amount
  • $300 registration of title and mortgage
  • $600 loan establishment fee
  • $1,500 legal and conveyancing fee

Property costs: the miscellaneous costs of property ownership

This comes to a total of about $37,500 as a start (just shy of 5% of the $800k purchase). If you have less than 20% deposit, most lenders will require you to take out Lender’s Mortgage Insurance (LMI). The purpose of the LMI is to protect the lender. In our example, if you put down a slightly lower deposit the LMI would be around $5,500. You can find more details on LMI from Canestar:

Property costs: the miscellaneous costs of property ownership

A buyer’s advocate is someone that searches and negotiates the purchase of a property on your behalf. If you use one, the cost is around $10k to $15k or a percentage of the purchase price.

Besides cost, also consider your time spent on searching for the right property.

Once you own a property, it is not all done and dusted. You need to put money in for maintenance and capital improvements. If you rent it out, according to fair trading NSW, most agents charge a letting fee (usually 1 week’s rent = 1/52= 2%), a management fee based on a percentage of the gross weekly rental (between 5–12%) plus other fees set out in the agreement. A good quality tenant (someone that pays the rent on time, stays long-term, makes minimal complaints and looks after your place) is of great value. Don’t forget council rates, strata levies and land tax (1.6% of the land value between the threshold and the premium rate threshold, and 2% thereafter) which you need to pay regardless of whether you are renting it out or living in the property yourself.

Lastly, the lender will want consistent principal and or interest repayments from you. In our example:

  • We use a 30 years loan at 4.5%
  • Principal and interest repayment comes to $3,250 per month

Over the 30 years if interest rates stayed unchanged, the total interest paid to the lender is about $530k.

Then there are costs of selling your property at time of exit, for more details see openagent.com.au:

  • The average commission real estate agents charge varies between states and between metro vs. regional areas ranging from 1.6% to 4%
  • Marketing costs usually come on top of this and can also vary a lot, from $500 to thousands
  • legal and conveyancing fee
  • Mortgage discharge fee
  • Pre-sale renovations
  • Auction costs can be “free” or up to $1,000 depending on the agent. Marketing is the principle “hidden” cost of selling at auction. If you’re trying to sell a $700,000 house, your marketing costs can be between $6,000 and $9,000
  • Rates and taxes after settlement

Important considerations before setting up a self managed super fund

Self managed super funds (SMSFs) have gained increasing popularity in recent years. The below table from the ATO highlights how the number of self managed super funds have grown from 473,408 in 2012 to 577,236 in 2016.

Self Managed Super Funds (SMSFs): What’s involved?

There are however, some very important considerations to take into account before setting up a self managed super fund (SMSF) for yourself.

Please note, you can also find more information in my previous articles about SMSFs “An Easy Guide to Self Managed Super Funds (SMSFs)” and for SMSF returns see “Wealth creation via long-term investments“.

 1. Before setting up a self managed super fund consider your time.

Your time is precious and valuable.  Therefore factor in the cost, time and skills required for you to manage your self managed super fund (SMSF).

As the trustee of your SMSF, you need to ensure compliance within various laws as non-compliance will incur severe penalties and your fund may suffer tax consequences. Compliance requirements include:

  • accepting contributions and paying benefits
  • advising the ATO of changes in trustees, directors or members
  • appropriate record keeping for a minimum of 5 or 10 years pending on the item
  • continually assess your capacity to act as a trustee and whether the SMSF is still an appropriate option for your fund members

2. Before setting up a self managed super fund consider the added responsibility.

You are also responsible for making investment decisions for the SMSF. This includes formulating an investment strategy that you review regularly.

Ensure you understand any investment restrictions that apply to self managed super funds.

Self managed super funds have initial setup costs as well as ongoing running costs.  There will be an annual independent audit and supervisory levy. Other paid help might include preparation of annual return, valuation of assets, actuarial certificate, financial advice, legal fees in relation to trust deed, assistance with fund administration and insurance for members. For more details on insurance, see the following Goggling articles below:

Remember that the Australian Taxation Office (ATO) regulates self managed super funds whilst the Australian Prudential Regulation Authority (APRA) regulates all other superannuation funds. APRA regulated funds that suffer losses due to fraud or theft can potentially get access to financial assistance.  On the contrary, no government or industry compensation is available for members of a SMSF as it is outside APRA regulation. APRA funds have access to the Superannuation Complaints Tribunal whereas SMSF need to resolve complaints and disputes through court.  The tribunal generally deal with superannuation complaints and disputes in a fair, economical, informal and quick way.  On the other hand, court cases can be complicated and costly.

There are several ways the ATO deals with non-compliance in self managed super funds. For example:

  • Educational direction
  • Enforceable undertaking
  • Rectification direction
  • Administrative penalties – varying from 5 to 60 penalty units where a penalty unit currently is $210
  • Disqualification of a trustee
  • Civil and criminal penalties
  • Allowing the SMSF to wind up
  • Notice of non-compliance
  • Freezing an SMSF’s assets

3. Before setting up a self managed super fund consider your goals and timeline.

It is not a silver bullet and it is not about instant gratification nor overnight success.

Hence, starting your SMSF is not a decision to be made lightly.

As a self managed super fund advisor, I think there is merit with SMSFs where it is appropriate. Have a look at the SMSF information provided on the ATO website. I consider this as the minimum required knowledge for you to make an informed decision on SMSFs.

Is it just income protection that matters?

Many people seek products for income protection, but is it the only important product? How much do we understand about each of the risk management tools?

Personal insurance has been in Australia before the invention of the car (AMP was established in 1849). Yet, the general population understands car insurance much better than personal insurance.

There are four types of personal risk management tools:

  1. Death cover or life insurance (for more on life insurance see Goggling article here)
  2. Income protection or income replacement
  3. Total permanent disability
  4. Trauma cover or critical illness cover

Most people understand the basics about life insurance and income protection. However, many questions remain. Does life insurance cover suicide? Do you need to pay tax on benefits received from income protection? Total permanent disability and critical illness cover can be quiet confusing for the general public.

So, how does critical illness cover work?

The policy pays you a single lump sum when you meet a critical illness definition – such as Cancer. It is designed to cover the financial impact and costs of dealing with a critical illness.

Here is an example of types of critical illness covered by one insurance provider:

 

Here are the statistics for benefits paid in 2014 by the same insurance provider:

Total claims paid$100,156,123
Total number of claims525
Oldest claimant70
Youngest claimant12

According to the Australian Institute of Health and Welfare, 1 new cancer case is diagnosed every 4 minutes.

Cancer Council Australia reports a heavy burden of out-of-pocket costs associated with diagnosis, treatment and survival of cancer, even in the public system.

These costs include travel, hospital stays, specialist fees, parking, treatment prescriptions and over-the-counter medications. Carers and families bear cancer-related costs as much as those experiencing a diagnosis of cancer. The financial impacts of the disease also extend to reduced or lost employment, early retirement and reduced incomes.

An interesting article from the SMH reinforces this. “Cancer patients are experiencing significant out-of-pocket costs for their treatment at the same time as losing income at work”.

It also highlights the common misconception, that our free public health system will protect us when we get sick.

Whilst you cannot work because of illness or injury, income protection pays you a monthly benefit. It generally covers 75% of your pre-illness or pre-injury income. Income protection can therefore help you pay your bills and cover your ongoing living expenses. However, if your income protection benefits are subject to tax, the financial impact for you and your family will be detrimental.

Death cover, income protection, total permanent disability and critical illness cover is not about winning a lottery.

It is not an investment, but rather a safety net for unforeseeable disastrous events that can happen in life.

The aim is to dampen the financial impact for you and your family. Money buys you options and provides you with choices – nothing more.

Ensure that you understand your personal risk management tools:

  • How exactly does your income protection cover work?
  • How exactly does your critical illness cover work? For a lump sum payment to be made, specific and stringent definitions  of critical illness need to be satisfied. This prevents inappropriate payments made for benign cases with little financial impact.

Is Life Insurance Worth It?

Does death cover (better known as life insurance) really matter?

As Kerry Packer once said “I’ve been on the other side and let me tell you, son, there’s f—ing nothing there” SMH. There are also no ATMs in heaven, so why bother?

The short answer is: no, it doesn’t really matter. Provided you leave no financial mess behind for the people you care about most, should you pass away. Unfortunately, for most people this is unlikely the case.

Life insurance is not designed to protect you. It is designed to mitigate the financial impact your death will have on the people you love and care for.

In most cases, the impact is significant (see my article on forward thinking for example). Imagine you are the main bread winner with young children. You have a mortgage but insufficient assets to provide a safety net upon your permanent departure.

How would your family be able to continue without your income?

On a milder case, you may have sufficient assets or intergenerational wealth that you can rely on as a safety net. However, is this an optimal strategy? Assets may have to be liquidated at a distressed value upon an unexpected death.

A common misconception is that Life insurance only applies to the main bread winner.

It is particularly important in families with children. Usually one partner spends a considerable amount of time looking after the family so the other can focus on being the main bread winner. What happens when you are no longer around? Who will do the school runs? Life insurance can reduce some financial pressure so the remaining parent can spend more time with the kids in such an emotionally challenging environment.

Let’s not sell yourself short and think about the positive impact you have on the people you love and care for. If you are not around, is there sufficient cash flow to maintain these positive impacts?

Other things to consider about life insurance:

  1. Having it inside superannuation or outside of superannuation
  2. Long-term insurance cost structure
  3. What is a suitable amount of cover for you and your family
  4. Is it better to get it earlier or later in life
  5. Any potential tax considerations
  6. Which insurance provider to use

 

Although we all plan to live long fulfilling lives, there are many uncertainties in life. Take a look at the leading causes of death and insurance payout amounts in Australia.

Think about this common quote: “There are only two things that are inevitable in life, death and taxes”. Make an informed decision for your family, whether it is having no life insurance, some cover or a large amount of life insurance. Consider your loved ones.

Photo by freddie marriage on Unsplash

Australia: Leading causes of death by age group

Causes of death and benefits paid by insurance companies

A very interesting piece of information on an unpleasant topic, produced by the Australian Government – Australian Institute of Health and Welfare

Leading underlying causes of death in Australia by age group for the period 2012 to 2014:

The below are payout figures made by various Life insurance companies.

Death benefit paid by an insurance company:

For period Jan-2011 to Dec-2016: by Age Group
Up to 3536 to 4546 to 5555 to 65Over 65Total
$17.6m$61.2m$155.6m$169.2m$79.3m$482.9m

Causes of death and benefits paid by insurance companies

Death benefit paid by other insurance companies:

CompanyYearTotal
12014$127m
22014$98m
32016$60m

Feature Photo by gn dim on Unsplash