Most of us will retire one day.  However, very few really think about the impact of retirement on their financial security.  Considering we could spend a third or more of our lives as retirees, this is surprising.

Whether retirement is just around the corner or still several years away, you should be thinking about what you would like to achieve in the years following full time employment.

Your financial position will largely dictate your lifestyle in retirement.  This is why it is crucial to plan for your financial security today.

The earlier you start planning, the more you'll be able to accumulate for your retirement.

It can’t be left to chance.  With careful planning, retirement could include some of the best years of your life.

For those nearing the end of full time employment, there are a number of areas that need to be looked at in order to devise the most effective way of achieving their goals and objectives.  These include, amongst others:

• Superannuation; including:
       Salary Sacrifice
       The Government Co-Contribution
• Pre-retirement pensions
• Debt management
• Tax minimisation

By arranging an initial consultation, free of charge with one of our financial advisers, we can begin to determine whether all of these areas need to be addressed and which combination of strategies will provide you with the best chance of achieving your financial goals and objectives.

Superannuation

Superannuation is a concessionally taxed structure and long-term savings vehicle designed to build up funds for retirement.  It is a core component of the Government’s Retirement Incomes Policy.

The Government's rules via the Superannuation Guarantee mean that most have a minimum level of super contributions made on their behalf by their employers.  In addition there are additional tax deductions and rebates available to make saving via superannuation attractive.

You can make your own super contributions, on your own behalf of or your spouse.

In the past few years there have been literally thousands of changes to the laws in relation to superannuation, making the whole topic particularly complex.  Coming to grips with the superannuation laws and keeping up to date is becoming an increasingly onerous task.

Superannuation savings are usually made through trust funds, and if these funds meet prescribed Government standards, they are eligible for tax concessions.  Retirement savings may also be made through Retirement Savings Accounts (RSAs).  The major attraction of superannuation is that there is a 15% tax on earnings and a 10% tax on capital gains made by the fund on assets held for at least 12 months.  Over the long term the compounding effect of the low tax rate is quite substantial compared with investments outside superannuation.  Balanced against this is the fact that superannuation is preserved until a condition of release, such as retirement, occurs.

Substantial changes to the laws and taxation of superannuation from 1 July 2007 saw, among other matters, the payment of superannuation benefits to members aged 60 or more being paid tax free when paid from taxed funds and concessionally taxed when paid from untaxed funds, such as constitutionally protected funds.

As already mentioned superannuation is a key element in the Government’s long-term objective of moving retired Australians off dependence on the age pension and increasing the level of national savings.

While many investors will contribute to superannuation via employer funds, industry funds or public offer funds, there is a growing trend for investors to take control of your own superannuation via a self-managed superannuation fund which can have up to 4 members all of whom must be trustees of the fund.  This latter requirement imposes responsibilities on the members that they need to consider before establishing such a fund.

Salary Sacrifice into Superannuation

The benefits of salary sacrificing are two-fold.

Firstly, salary sacrificing to super can reduce your income tax liability. Secondly, you are increasing the level of savings within your super account.

Complying super funds are taxed at a maximum rate of 15 per cent. Compare this to your own marginal tax rate, which could be considerably higher.  It makes sense to put additional money into super, ensuring a higher level of savings to draw on when you’re ready to retire.

The strategy

Salary sacrificing involves sacrificing part of your cash salary for the provision of other benefits. The most common benefit is additional super contributions.

Limitations and other considerations

There is a limit on the amount of your salary that can be sacrificed to super and be taxed concessionally at 15%.  For 2008-09 this is: 

• $50,000 if you are under 50 at 30 June 2009;or
• $100,000 if you are 50 or over at 30 June 2009

These limits also include any compulsory Superannuation Guarantee (SG) contributions your employer is required to pay. It is also important to realise that if your level of concessional contributions exceeds the relevant cap, the excess amount will be taxed at an additional 31.5%.

While you don’t have to pay income tax personally on any amount sacrificed to super, the amount sacrificed will be taxed at 15 per cent within the super fund. However, you should compare this to the tax you would personally have paid if you’d taken the same amount as salary. Also note that you cannot access the contributions until you are eligible to access your super savings.

Who benefits from salary sacrificing to super?

This strategy is available for any employee whose employer offers salary packaging arrangements.  If you’re unsure if this is available to you, contact your employer’s Human Resources department to see what salary packaging arrangements are available and what (if any) rules are in place regarding the arrangements.

The Government Co-Contribution

If you earn less than $60,342 per year, make personal contributions to superannuation and meet other eligibility criteria, the Government will assist your retirement savings by making an additional contribution on your behalf at the rate of $1.50 for every $1 you put in, up to a maximum of $1,500.

You will be eligible for the superannuation co-contribution in a financial year if:

• You make personal contributions (after-tax) to a complying superannuation fund;
• Your total income  is less than $60,342;
• At least 10% of your total income is from eligible employment, carrying on a business, or a combination of the two;
• You do not hold an eligible temporary resident visa during the financial year;
• You lodge a tax return for the financial year;
• You are less than age 71 at the end of the financial year.

Calculating the co-contribution amount

If your total income is less than $30,342 the Government will contribute $1.50 for every $1 you contribute, up to a maximum of $1,500.

However, if your total income is between $30,342 and $60,342, the following formula is used to determine the amount of the co-contribution:

$1,500 – [0.05 x (total income -$30,342)]

Note that the formula gives a maximum amount so that where the eligible contributions are less than $1,000 the co-contribution is limited to 150% of the amount of eligible contributions. This is the case whether the total income is less than the lower income threshold or above it.

How does the process work?

Assuming you are eligible, all you need to do is make the personal contribution/s and lodge a tax return at the end of the financial year. You can relax then as the Tax Office will do the rest.

The Tax Office uses the information from your tax return together with contribution details provided by your superannuation fund to determine whether you are eligible for the co-contribution – and if you are eligible, the Tax Office will lodge the co-contribution directly into your superannuation account.

In terms of timing, most superannuation funds are required to lodge contribution details with the Tax Office by the 31st October each year, so assuming you lodge you own tax return by that date, you can expect the co-contribution to arrive in your account not long after that.

In any case, the Tax Office will send you a letter confirming the amount of the co-contribution and to which superannuation fund it has been deposited. Note that the co-contribution will be paid into the same account that you made the personal contribution, unless you advise the Tax Office otherwise. 

Pre-Retirement Pensions

Once you’ve reached your preservation age, you can access your super benefits in the form of a non-commutable income stream (known as a pre-retirement pension). There’s no requirement for you to stop working. Simply reaching your preservation age is enough. This means:

• You can work fewer hours and still maintain a reasonable income without reliance on the social security system
• You can qualify for a superannuation rebate (subject to any excessive benefits). If the rebate entitlement is more than the tax payable on the assessable portion of your pension, you can offset the excess rebate against tax payable on your salary
• You can re-contribute excess income to super (and re-access it if you need to)
• Any income generated from your pension may qualify you for deductible contributions to super
• Depending on your circumstances, you may be able to recycle some of your super monies back as un-deducted contributions and qualify for the Government co-contribution

The strategy

Since 1 July 2005, simply reaching your preservation age has been a condition of release. This rule removes the uncertainty regarding when you can access your super. So when you contribute today, you can be confident you can use your super savings and continue to work if you want to.

It makes sense to contribute more to your super now, so you can take advantage of the benefits outlined above in this rule.

Who can use this strategy?

This strategy is available to anyone who is employed and approaching their superannuation preservation age. Your preservation age (or the age at which you can access your super benefits) depends on when you were born, as shown in the table:

Limitations and other considerations

It is important to understand that in general you won’t be able to withdraw a lump sum from the money placed into the pre-retirement pension until you actually retire (as defined under superannuation law) or reach age 65. 

Debt Management

When used properly, debt can be a very effective tool that may help you to achieve your financial goals.  Debt can be used to purchase a range of items that, otherwise, you would not be able to afford.  It is also important to understand the important difference between ‘good’ debt and ‘bad’ debt.

Debt can assist you to buy property, purchase a car or consumer goods and also enable you to purchase investment assets such as shares or managed funds.  By using debt smartly, you may be able to reach your financial goals sooner.

‘Good’ debt and ‘bad’ debt

Where debt is used to acquire investments such as shares or property, this is known as gearing and this is often referred to as ‘good’ debt – due to the potential to claim a tax deduction in respect of the borrowing as well as the fact that you have borrowed against an asset that can appreciate in value.

‘Bad’ debt is non-deductible debt like borrowings for consumer goods such as cars and holidays.  Even though a loan for the family home is non-deductible, it should not necessarily be viewed as ‘bad’ debt – the value of the home has the ability to grow over time.

Borrow to invest

Borrowing to invest simply allows you to access a greater asset amount than would otherwise have been possible.  Gearing is, however, not without its risks – while it may allow you to multiply your gains, similarly, it may also magnify any losses.

Tax Minimisation

No-one likes paying tax!  Unfortunately though, it is a given.  However, there are many strategies that you can utilise to minimise the amount of tax you pay.

Tax minimisation involves focusing on the practical matter of paying only the tax that is legitimately and legally required to be paid.  It involves making decisions that reflect individual circumstances and relies on solid, professional tax planning advice.

And we're talking about tax minimisation strategies, not tax avoidance schemes.

Tax effective investing

Some investments are more tax effective than others.

Growth investments such as shares and property often receive more favourable tax treatment.  For example, capital gains tax and earnings tax on shares may be lower than the tax on fixed interest investments.

Reducing tax-assessable income

Investment strategies such as negative gearing and salary sacrificing offer legitimate ways of reducing the overall amount of taxable income.

Simple solutions such as claiming every possible tax deduction or buying tax-deductible income protection insurance are often overlooked.

Selling assets

Timing the sale of assets can affect the amount of tax you pay. For example, selling shares more than 12 months after the original purchase date would incur capital gains tax at a lower rate

In some circumstances, a capital loss can be carried forward to a financial year when a capital gain applies - therefore incurring less tax on that gain.

Tax minimisation is not an "off the shelf" solution, nor is it "one-solution-fits-all'.  Minimising tax is all about sound planning and maximising opportunities that relate to unique circumstances, and can cover a number of activities.

So where to from here?

Now that you've made the first step of finding out what financial planning is about, how do you move further down the path to financial security?

All of our clients begin with an initial consultation, free of charge, where we gather together all of the information we need to understand your current situation.  This may include details about your assets and liabilities, income and expenses, superannuation, property, investments and insurances.  This helps us understand where you currently are at in a financial sense.

We then look at what your specific financial goals might be whether they be short or long term, temporary or permanent.

We also take into consideration any concerns you may have regarding your financial situation and other financial issues there may be for example - your tolerance to risk or your ethical investment concerns.

Once we have identified where you are, where you want to be, and the way you hope to get there, we then move on to preparing a Statement of Advice for you that includes any strategies that may be recommended and explains what is involved in implementing them.

Now that you have read your Statement of Advice, it's up to you to decide whether to implement the recommended strategies or not. 

Once your initial strategies have been implemented, we review the financial plan on a regular basis to ensure your strategy is in keeping up with changes in your life, work, relationships and goals.

Disclaimer

The information contained in this document is given in good faith and has been derived from sources believed to be accurate as at this date.  It contains general information only and should not be considered as a comprehensive statement on any matter and should not be relied upon as such.  Gilham Financial Management does not give any warranty of reliability or accuracy nor accepts any responsibility arising in any other way including by reason of negligence for errors or omissions.

This information doesn’t account for your investment objectives, particular needs or financial situation.  These should be considered before investing and we recommend you consult a financial adviser.  All forecasts and estimates are based on one set of assumptions which may change.  A small change in any one of the assumptions may lead to a large change in the results.

This information is based on current laws and their interpretation.  The levels and basis of taxation may change.  The application of taxation laws depends upon an investor’s individual circumstances.  You should, therefore, seek professional advice on the taxation implications of investing and should not rely on this information which should be used as a guide only.