How do retirement income options compare?
In this edition, we look at how to plan for retirement, understanding the new super tax, and the basic points to consider for life insurance.
If you are interested in discussing the topics raised in this month’s newsletter, please don’t hesitate to contact us.
In the meantime, we hope you enjoy the read.
All the best,
The Wealthy Me Team
If you’re nearing retirement age, it’s likely you’re wondering if you will have enough saved to give up work and take it easy, particularly as cost-of-living increases hit some of the basic expenses such as energy, insurance, food and health costs.
Fortunately, someone has already worked out what you might need.
The Association of Superannuation Funds in Australia (ASFA) updates its Retirement Standard every year, which provides a breakdown of expenses for two types of lifestyles: modest and comfortable.i
Based on our average life expectancy – for women it is just over 85 years and men 81 – if you are about to retire at say age 67, you will have between 14 and 18 years in retirement, on average and depending on your gender.ii
ASFA finds that a couple needs $46,944 a year to live a modest lifestyle and $72,148 to live a comfortable lifestyle. That’s equal to $902 a week and $1387 respectively. The figure is of course lower for a single person – $32,666 for a modest lifestyle ($628 a week) or $51,278 ($986) for a comfortable lifestyle.iii
What does that add up to? ASFA estimates that, for a modest lifestyle, a single person or a couple would need savings of $100,000 at retirement age, while for a modest lifestyle, a couple would need at least $690,000.iv
A modest lifestyle means being able to afford everyday expenses such as basic health insurance, communication, clothing and household goods but not going overboard. The difference between a modest and a comfortable lifestyle can be significant. For example, there is no room in a modest budget to update a kitchen or a bathroom; similarly overseas holidays are not an option.
The rule of thumb for a comfortable retirement is an estimated 70 per cent of your current annual income.v (The reason you need less is that you no longer need to commute to work and you don’t need to buy work clothes.)
So how can you build up a sufficient nest egg to provide for a good life in retirement? There are three main sources: superannuation, pension and investments/savings. Superannuation has the key advantage that the money in your pension is tax free in retirement.
Your superannuation pension can be augmented with the government’s Aged Pension either from the moment you retire or later when your original nest egg diminishes.
Your income and assets will be taken into account if you apply for the Age Pension but even if you receive a pension from your super fund, you may still be eligible for a part Age Pension. You may also be eligible for rent assistance and a Health Care Card, which provides concessions on medicines.vi
It’s also important to remember that the amount you accumulate up to retirement will still be generating an income, whether its rentals from investment properties or merely the growth in the value of your share investments and the accumulation of money from any dividends paid.
You can also continue to add to your superannuation by, for instance, selling your family home and downsizing, as long as you have lived in the home for more than 10 years.
If you are single, $300,000 can go into your super when you downsize and $600,000 if you are a couple. This figure is independent of any other superannuation caps.vii
Planning for a good life in retirement often require just that – planning. If you would like to discuss how retirement will work for you, then give us a call.
i Retirement Standard – Association of Superannuation Funds of Australia
ii Life expectancy, 2020 – 2022 | Australian Bureau of Statistics (abs.gov.au)
iii https://www.superannuation.asn.au/media-release/retiree-budgets-continue-to-face-significant-cost-pressures
iv https://www.superannuation.asn.au/resources/retirement-standard/
v https://www.gesb.wa.gov.au/members/retirement/how-retirement-works/cost-of-living-in-retirement
vi Assets test for Age Pension – Age Pension – Services Australia
vii Downsizer super contributions | Australian Taxation Office (ato.gov.au)
The much-debated tax on superannuation balances over $3 million is inching closer and those who may be affected should ensure they have considered the implications.
Although it is not yet law, the Division 296 tax should be taken into account when it comes to investment strategy and planning, particularly in relation to any end-of-financial-year contributions into super.
The new tax follows a Federal Government announcement it intended to reduce the tax concessions provided to super fund members with account balances exceeding $3 million.
Once the legislation passes through Parliament and receives Royal Assent, Division 296 will take effect from 1 July 2025. Division 296 legislation imposes an additional 15 per cent tax (on top of the existing 15 per cent) on investment earnings of a super account where your total super balance exceeds $3 million at the end of the financial year.i
The extra 15 per cent is only applied to the amount that exceeds $3 million.
Given the complexity of the new rules, it is important to seek professional advice so you can make informed decisions.
A crucial part of the new legislation is the Adjusted Total Super Balance (ATSB), which determines whether you sit above or below the $3 million threshold.
When assessing your ATSB, the ATO will consider the market value of assets regardless of whether or not this value has been realised, creating a significant impact if your super fund holds property or speculative assets. The legislation also introduces a new formula for calculating your ATSB for Division 296 purposes.
The legislation outlines how deemed earnings will be apportioned and taxed, based on the amount of your account balance over the $3 million threshold.
Negative earnings in a year where your balance is greater than $3 million may be carried forward to a future financial year to reduce Division 296 liabilities. If you are liable for Division 296 tax, you can choose to pay the liability personally or request payment from your super fund.
For many fund members, superannuation remains an attractive investment strategy due to its favourable tax treatment.ii
But those with higher account balances need to understand the potential effect of the Division 296 tax. For example, given the new rules, you may need to consider whether high-growth assets should automatically be held inside super.
Holding long-term investments that may be more difficult to liquidate, such as property, within super may be less attractive in some cases, because the new rules create the potential to be taxed on a gain that is never realised. This could occur where the value of an asset increases during a financial year but drops in value by the time it is actually sold.
For some, holding commercial property assets (such as your business premises) within your SMSF may be less attractive.
It will also be important to balance asset protection against tax effectiveness. For some people, the asset protection provided by the super system may outweigh the tax benefits of other investment vehicles, such as a family trust.
Division 296 will require more frequent and detailed asset valuations, so you will need to balance this administrative burden with the tax benefits of super.
Your estate planning will also need to be revisited once Division 296 is law.
The tax rules for super death benefits are complex and should be carefully reviewed to ensure you don’t leave an unnecessary tax bill for your beneficiaries.
If you still have many years to go before retirement and hold high-growth assets in your fund, you will need to closely monitor your super balance.
If you want to learn more about how Division 296 tax could affect your super savings, contact our office today.
i https://treasury.gov.au/sites/default/files/2023-09/c2023-443986-em.pdf
ii https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/caps-limits-and-tax-on-super-contributions/understanding-concessional-and-non-concessional-contributions
To protect your family and loved ones
If your loved ones depend on your financial support, then you should consider life insurance. It’s especially important if you have young children, or a partner or adult children who couldn’t maintain their standard of living without your income.
To leave an inheritance
Even if you don’t have any other assets, you can create an inheritance for your dependants, by buying a life insurance policy. You simply name them as beneficiaries in the policy.
To pay off debts and other expenses
It’s not just about providing income to your family to cover their everyday expenses. Life insurance policies will cover outstanding debts like mortgages, car loans, personal loans and credit card debt. You don’t want your dependants to be left with extra financial burdens. It could also cover the cost of your funeral, if you haven’t taken out funeral cover.
To bring you peace of mind
No amount of money can ever replace a person. But life insurance could provide you and your family with the peace of mind that if the unthinkable happens, they’ll be taken care of financially.
Different types of cover fall under the broad heading of life insurance. Which one you’ll need depends on your situation.
You should think about life insurance when you get married, or have children or dependants who rely on you financially. Even if you don’t yet have dependants, you should consider taking out life insurance. That’s because insurance companies usually make you get a health and medical check before quoting your premium. It’s best to get those tests done when you’re younger and more likely to be in good health.
The amount of life insurance you’ll need varies as your circumstances change. Let’s say you’re a 22-year-old with no dependants, you might only want enough insurance to cover the costs of a funeral.
But once you get married, have children and take on a mortgage; you’ll probably need more cover to provide for them. As you get older your superannuation builds up, your children become independent and you’ve paid off your mortgage, you may need less cover. You may not need any at all.
To help work out the level of insurance cover you should consider the following.
The difference between these is the amount of cover you should ideally get.
Funerals can be expensive. According to Australian Securities Investment Corporation (ASIC) funerals can range vastly. They can range from $4000 for a basic cremation to around $14 000 for a more elaborate casket and burial.
If you have life insurance, this can be used to cover your funeral expenses, but if you don’t, you may want to consider some other options. There are a few different ways you can pay for a funeral including:
Talk to us to get a broader understanding about how you can plan for the future.
Source: NAB
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/personal/life-moments/family/life-insurance
National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.
© 2022 National Australia Bank Limited (“NAB”). All rights reserved.
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