“Aged care is a complex area and one that requires a solid understanding of how the rules impact on social security and the tax system” says Demelza Lister, Senior Financial Planner from Potts & Schnelle Financial Planning.
“The costs to enter an aged care facility can be quite high and as such, clients need financial advice that enables them to:
Manage these costs
- Maximise their social security benefits
- Manage tax
- Choose suitable investments
- Plan for the distribution of their assets
- Understand the payment options and implications available to them
- Or, simply assistance with the form filling”
The costs associated with entering and residing in an aged care facility, is summarised into four parts. These rules commenced from 1st July, 2014;
- Basic Daily Fee – This fee applies to everyone and is calculated by taking 85% of the single aged pension amount. It is currently $49.07 per day and covers daily living costs; such as nursing, personal care and meals.
- The Accommodation Payment – This may be payable if the resident’s assets are over $47,500. The accommodation payment is a lump sum payment known as a Refundable Accommodation Deposit (RAD) which is fully refundable on departure (This used to be known as a bond and was not fully refundable). The RAD is calculated on entry to the facility. The maximum that can be charged is $550,000 and is published on each facility’s website. Local RADs are usually in the order of $350,000. Rather than a RAD, the resident may instead choose to pay a Daily Accommodation Payment (DAP) which is effectively interest on the RAD amount (currently 5.73%), but enables the resident to keep their assets. The interest rate is fixed on entry.
- Means Tested Care Fee – this is based on an income and assets test undertaken by Centrelink. This test is a complex calculation and is impacted by any income of the resident, their financial investments and other assets (sometimes including their home).This test has generous concessions and cannot be more than $26,176.80pa. This fee is regularly re-assessed as the resident’s financial circumstances change.
- Extra Services Fee – this fee is charged by the facility for additional services provided, or for a higher standard of accommodation. Examples include pay TV, a larger room, extra therapies eg. Massage
“Most of the clients that meet with us have already had their health situation assessed by an aged care assessment team (ACAT) and as such are seeking assistance in completing the paperwork required by Centrelink to determine their means tested fee”, adds Paul Schnelle, Partner and Certified Financial Planner.
“Everyone’s situation is different, so the strategies end up being different for each client. That’s the nature of Aged Care advice, there is no one fits all solution!”
“I think what differentiates us from other providers is that we are dealing with people who want a financial outcome. They want you to hold their hand, walk them through the process and help them to understand the rules”.
“One of the most important questions we ask of our financial planning clients is ‘How are your parents?’” adds Demelza, “All sorts of retirement plans are often put on hold whilst clients care for their elderly parents. The financial planning process has to make allowances for these situations and they are best addressed earlier on, rather than in an emergency.”
“The early stages of care are usually non-financial. Most carers wish to look after their loved ones for as long as possible in their own home. There are all types of assistance packages available. A phone call to the My Aged Care contact centre on 1800 200 422 will get things started, or visit their website at myagedcare.gov.au”.
“It is a very tough call to place a loved one into an Aged Care Facility. It is never an easy decision and families need to work through emotions such as guilt and fear and of course the logistics of the variety of choices available. Eventually, the decision is made and that’s when we usually get involved, to help with the financial side of things.”
Should you require advice in this area please do not hesitate to contact Potts & Schnelle. Phone 02 60332233, to make an appointment to talk about your financial needs with someone who cares.
Simple strategies for your Business………What are you doing this for?
Does every day in your business feel like you are just putting out spot fires? Dealing with the next phone call. Wondering where your next customer is going to come from? Have you got enough stock? May be you have too much stock? What are your staff doing?
With the new financial year now upon us, here are a few things to review to set up your business for the next 12 months and beyond.
Review your Vision:
- Have a think about how you want your business to look in five years time.
- If that vision is substantially different to what you currently have, start taking steps to move in the new direction
- Review your expenses and determine what your overhead costs will be for the next 12 months
- Work out how much you will have to sell to pay for those overhead costs (after allowing for the direct cost of goods sold of course)
- Work out how much more you need to sell to give you an adequate return as the owner of the business
- If you’re a farmer, do you have several sources of income or are you relying on one main activity e.g. cropping. What works best for you? Is this the best/safest option?
- What external factors could affect your plan and what steps are you taking to mitigate those risks? E.g. should you be fixing interest rates? Do you have adequate business insurance? Do you need to find new customers? Where are they now? Do they need your existing product or do you need to adapt to suit them?
- If you are intending to retire in the next few years, you should be taking steps to pass the business on to the next generation now, or setting it up for sale.
Review your loans:
- You should negotiate with your banker to see if they are offering you their best interest rate
- Review your loan repayments to make sure that they align with your cash flow. Loans to purchase long-term assets (e.g. land) should be repaid over the longer term whilst loans to purchase short-term assets (e.g. motor vehicles) should be repaid over the shorter term
- Surplus cash flow should be used to minimise your interest expense, rather than sitting idly in a non-interest bearing account
- Ensure that you are paying off private debt before business/investment debt in order to maximise taxation benefits.
- Sell surplus, idle assets to provide funds to repay loans
Review your motor vehicle expenses:
- Changes introduced last year have meant that the taxation advantages on private vehicles, available to business owners and to employees who have salary packaging options, are no longer as attractive
- The available choices to determine the private use component of a packaged vehicle are now quite limited
- A logbook for 12 weeks, recording business travel, is now highly recommended.
- Motor vehicle claims to inspect rental properties are no longer deductible
Review your superannuation:
- Remember for 2017/18, the amount of superannuation contributions that you can claim as a tax deduction has been reduced to $25,000.
- Personal contributions can now be claimed to in your tax return even if you are receiving contributions from an employer
- Lower contribution caps, means that superannuation now needs to be accumulated over longer periods of time. So start early!
- Tax-free super pensions are still available to retirees. Investment income in superannuation funds is still concessionally taxed. It is a sensible tax strategy to place your savings in super.
- Self-managed super funds still provide significant advantages to those who wish to own business real estate and to those with larger balances who can minimise ongoing fees
At Potts & Schnelle, we are passionate about business. Whilst a large part of our business is focused on tax, we can’t help but get involved in the business strategies and day to day affairs of our clients.
If you would like to talk to us about your business, please give us a call 02 60332233
2 Simple Steps to Increase Your Wealth
Well, this Friday is the end of the financial year. My question to you is, was it a good one financially, or not so good? Are you in a stronger financial position than you were in 12 months ago? And if not, what steps are you taking to increase your wealth, so that in 12 months time the answer will be “yes”?
Whether you’re a business owner, an employee, or a retiree, it is not rocket science to know, that in order to become more financially secure, our income needs to be greater than our expenses. Essentially, this is the crux to all paths to financial success. The degree to which the income is greater than the expenses is the only variable that can accelerate or slow down the path to financial security.
So where to start? Like all good plans, the best place to start is to know where you are “now”. Then you can make some decisions on “where” you want to go and what changes need to happen to get you from ‘now’ to ‘where’.
Step 1 is to prepare a financial balance sheet. Whether you are looking to improve your business or your personal affairs, list down all of the things that you own that are of value and also, all of the debts that you have. This should give you a clear picture of your assets and liabilities, a starting point to compare back to in the future.
Then, looking at that list, ask yourself, do you have assets that are not producing income? Could that money be reallocated into more profitable ventures/investments? Are there any assets that you don’t need that could be sold and the funds used to pay off some debts?
Looking at your debts, ask, what interest rates are you paying on your debts? Could you get those interest rates lowered and are you paying off the most expensive debts first?
Step 2 is to review and breakdown your income and expenses for the last 12 months. If we look at your income for the last 12 months, where did it come from and how much will you receive from the same sources in the next 12 months?
Now look at your expenses. Most people, if they are honest and detailed about their analysis, are very surprised with how much they spend and where it went. To be truthful, most people, when looking at their personal spending, usually have a gaping hole of money spent that they really don’t know where it went. Then, thinking forward, do you envisage that you will have to spend the same amount in the next 12 months, or, are there opportunities to reduce that spending, or obligations to increase that spending? Perform this process on every item of expenditure.
With a detailed analysis of income and expenditure and a truthful projection of the next 12 months, we can determine where we are headed financially if we maintain the status quo. This may be a surplus or it could be a deficiency. Having come to that conclusion, we can then make a decision as to our level of comfort with that result and the impact that that result will have on our financial future. From that position, we can then make decisions on what changes, if any, we plan to make in the next 12 months to achieve a more desirable result.
This might include increasing our income. If you are an individual, you may take on a 2nd job, work additional overtime, or take on some training so that you can obtain a more valuable, higher paying position. If you are a business, you may look at ways to increase your sales, increase the number of customers and/or improve the gross profit on your sales. I’ve spoken about this in previous articles.
If you are looking to reduce your expenses, then you may choose to eliminate/reduce luxury items and/or search for discounts and reductions. Most importantly, you should implement an accurate method of monitoring expenses so that you know that you are on track.
Obviously, we are only scratching the surface here. At Potts and Schnelle, in our role as business and tax advisers, we help our business clients review these matters regularly. Also, in our role as financial planners, we help individuals do the same. This is what we are all about, not just tax and super.
If you would like to discuss your financial position with us and use our expertise to increase your wealth, call our office on 02 60332233 to make an appointment, so that in 12 months time, you can say “Yes! Our financial position has improved!”
Procrastination – don’t wait for it to stall you!
I have a book at home called “How to overcome Procrastination”, but I’ve never got around to reading it!
Procrastination usually involves putting things off even though we know it will have a negative impact. If we leave things until the last minute then generally stress levels go up, flexibility goes down and often the quality of the work is not as good as it could be.
In a recent presentation that I heard by Dermot Crowley, an adviser from “Adapt Productivity”, he shared some interesting ideas about minimising procrastination that I thought I would share with you.
Crowley advised that making a “to do” list is only the first step to minimising procrastination. He recommended taking that to another level and scheduling forward the items on the “to do” list into your calendar or diary. Essentially converting procrastination into prioritisation.
He pointed out that procrastination is, by definition, putting things forward until tomorrow. Prioritisation is also putting things off to a future time, but includes scheduling appropriate time in the future to address and complete the tasks. Prioritisation includes an additional level of organisation and planning.
We will never get rid of procrastination, but we can reduce its impact by firstly, recognising that it is happening and then calling ourselves out on it for what it is. Secondly, we need to work out why we are procrastinating. Sometimes we put things off because the task is complex, difficult, or because we don’t like it, or because it’s going to take us a long time. If you can work out why you’re procrastinating, then you can do something about it.
One solution that he recommends for a complex or difficult task that we are putting off, is to take a few minutes and create a “thumbnail sketch” of the complex task, breaking it down into smaller components. Then it’s easier to start working on one of the smaller components and then another and another, compared to thinking about the whole task and finding it all too difficult to even start.
Often people are very good at planning at an organisation or team level, but to overcome procrastination, Crowley recommends planning at a personal level. That involves connecting between your actions and your outcomes, essentially making sure you are working on the right work. He recommends taking time out to plan on a monthly, weekly and daily basis.
At the start of the month he sets aside about an hour to work out what are his top 10 priorities for the month ahead. By setting these priorities, it helps him keep focus on the important issues, in amongst all of the other matters that arise throughout the month. This monthly planning helps him keep perspective on the day to day activities and hopefully enforces him to create some space to get the tasks completed.
On a weekly basis, he spends about 30 minutes planning his week. He does this on a Friday morning because it enables him to be a step ahead on Monday morning. On a Friday, he is more aware of the next week priorities, based on what has happened in the current week. Part of this weekly planning also involves looking forward several weeks to plan ahead for upcoming tasks.
On a daily basis he spends about 10 minutes, early in the day, planning out his priorities. That is all about focus, scheduling in meetings and must do events and then honing in on what are the six or eight things that he really wants to get done today.
At the end of the day, your plans are always going to come unstuck because emergencies and interruptions will always arise that will mess things up. However, because you have been through the planning process, it will help you decide your best course of action as those interruptions come in. Essentially, the plan is the starting point and it will change and that’s OK. But if you’ve been through a planning process, you are likely to ask yourself, is this interruption more important than what I had planned to do? You will then make more informed decisions about your activities and be less likely to just react to whatever comes along during the day, even if it seems urgent!
My take on all of this is that it’s worth a try. If we keep doing the same things, we can’t expect a different outcome. If we can keep improving by one percent by trying new things then, over time, if we look back, we’ll have come along way.
If you need help organising your finances, CALL US NOW: 02 60332233
How can I reduce my tax bill?
As the month of June rapidly approaches it is topical for us all to think about what we can do to reduce our income tax bill. Of course long-term tax planning is the most appropriate way of managing our income tax costs, however, short-term measures should still be looked at each year. We strongly recommend that you meet and discuss your circumstances with your taxation adviser. Here is a brief list of items to consider:
- Consider prepaying deductible expenses such as union fees prior to 30th
- Buy some work related tools, uniforms or protective clothing and boots.
- Make tax-deductible donations to approved charities.
- Maintain records of all motor vehicle travel performed for work purposes.
- Maintain records of other travel expenses for work purposes such as e-tags, overnight accommodation and meals, bus, train and tram fares and parking costs.
- Maintain records of work clothing alterations, laundry and dry cleaning costs.
- Record all associated costs applicable to a seminar or course of self-education relating to your current employment, including course fees (not HELP fees), stationery, office expenses, computer and printer expenses, Internet, heating and power, telephone and travel.
- Maintain records and documentations of other expenses incurred partly for work including mobile telephone, home office heating and power, Internet, computer, stationery, sun protection and applicable tools and equipment.
- Take out income protection insurance outside superannuation and pay the premiums from your private funds.
- Negatively gear an investment such as a rental property or a share portfolio.
- Ensure that superannuation contributions are paid and received by the fund prior to 30th of June.
- Maximise the concessional (deductible) superannuation contributions of the owners. These are currently $30,000pa for those under 50yo and $35,000pa for those over 50yo. Note that these maximum limits are reducing from 1 July, 2017 to $25,000pa for everyone eligible.
- Consider deferring income until after 30th of June, if possible. Most businesses are taxed on income, as it is invoiced, although if you operate on a cash basis for income tax, your income will be taxable when received.
- Accelerate your deductions by purchasing (and paying, if on a cash basis) for any items which form part of your business operating expenses before 30thJune. Note that buying stock items doesn’t help. Top up your fuel tanks!
- Review your outstanding debtors and write-off any debts that you think are not collectable prior to 30thJune.
- Consider purchasing additional items of plant and equipment costing less than $20,000 each and taking advantage of the immediate write-off rule if you are a small business enterprise (SBE).
- SBE taxpayers can prepay certain expenses for a period not exceeding 12 months, such as interest, advertising, lease payments, rent, rates, subscriptions and insurance and claim them in the year of payment.
- Primary Producers can make a Farm Management Deposit (FMD) prior to 30th June.
- Review your schedule of plant and equipment (if they are not pooled) and scrap any pieces that are now obsolete.
- Review your stock items and determine if the market value of any item is less than the original cost, resulting in a lower stock on hand figure (less profit).
- Pay bonuses to deserving staff members prior to 30 June.
- Arrange your affairs to replace private loans with business/investment loans where the interest is deductible.
- Review your legal structure to ensure it is appropriate for your family, succession and income tax situation.
- Invest in assets that appreciate in value over time and provide deductible expenses over the short period.
- Optimise wage payments to family members for work performed in the business.
- Optimise/maximise deductible contributions to superannuation for all family members.
If you are looking for ways to reduce your income tax bill before the 30th June, Call Now: 02 60332233
Buying Property through a Self Managed Superannuation Fund (SMSF)
Using a Self Managed Superannuation Fund (SMSF) to buy property is becoming more and more popular, but one needs to consider a variety of factors before jumping in.
We have recently established SMSFs for several clients who are using them to own property used in their businesses. This is a relatively simple process. The business pays rent to the SMSF and the SMSF uses that rent plus regular contributions to pay off loans that were established to fund the purchase. The SMSF is able to accumulate increasing equity in the properties, establish other non-property investment portfolios with excess cash and accumulate significant wealth to fund the clients’ ultimate retirement.
If the client already owned the property, they can use the cash received from the sale of the property to the SMSF to pay off private loans, effectively replacing private debt with tax deductible debt.
Other clients are using SMSFs to set up a portfolio of residential properties, using their existing superannuation balances to fund the deposits.
These structures are very tax efficient, but do come with restrictions and cost, so personal advice is essential before going ahead. You should be aware of the restrictions on the rules relating to SMSFs to ensure you don’t breach legislation and incur substantial penalties. We understand these rules and guide you along the way.
Geared SMSF property risks include:
- Higher costs – SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
- Cash flow – Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
- Hard to cancel – If your SMSF property loan documentation and contract is not set up correctly unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
- Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
- No alterations to the property – Until the SMSF property loan is paid off alterations to a property cannot be made if they change the character of the property.
Be cautious if someone related to the property you are planning to purchase offers to arrange your loan as sometimes unscrupulous advisers work in groups and recommend each other’s services.
If you need help setting up your Self Managed Super Fund (SMSF) or would like to consider these tax efficient ideas, give us a call to make an appointment to investigate your options.
Call Us NOW: 02 60332233
Superannuation Changes in 2017
There has been significant mention in the media in recent times about superannuation changes coming into effect on 1st July, 2017. We recommend that anyone who thinks that they may be affected should contact their financial adviser as soon as possible to discuss their options.The following is a brief summary of some of the changes.
- Reduction in the maximum concessional contribution cap to $25,000pa
- Reduction in the maximum non-concessional contribution cap to $100,000pa
- Reduction in the three-year bring forward rule for non-concessional contributions from $540,000 to $300,000
- Elimination of the 10% maximum earnings condition for personal contribution deductions.
- A limit on how much of your super you can transfer from your accumulation account to the tax-free pension account. This will be known as the transfer balance and will commence at $1.6 million.
- Transition to retirement pension funds will have their earnings taxed at 15%
- From 1st July, 2018, you can carry forward any unused amount of your concessional contributions for up to 5 years effectively increasing the annual cap.
Concessional Contribution Cap
The first most significant change for non-retirees is a reduction in the maximum amount that can be contributed to superannuation each year as a tax deductible contribution. These are referred to as concessional contributions. Presently, the maximum amount that can be contributed is $35,000pa for people 49 years and older at the end of the previous financial year and $30,000pa for everyone else. This maximum, referred to as the concessional contribution cap, will reduce to $25,000pa for everyone. You should note that this limit includes contributions made by your employer. Any amount contributed above the cap will be assessed tax at the member’s marginal tax rate plus adjustments.
Non-concessional Contribution Cap
Currently an individual can also contribute non-concessional contributions to superannuation of up to $180,000pa. These usually comprise personal contributions for which you do not claim an income tax deduction and/or a spouse contribution. This limit, (cap) will change effective from 1st July, 2017, reducing to $100,000pa. Note that no non-concessional contributions will be able to be made if the member’s total balance in super exceeds $1.6 million.
Three-year bring forward rule.
If you are under 65yo, you can contribute up to 3 times the annual non-concessional contribution cap in a single year under the three-year bring forward rule. Note that because the non-concessional contribution cap is reducing to $100,000pa, the three-year bring forward maximum will therefore reduce to $300,000. Note, however, that the current limit of $540,000 still applies between now and 30th June, 2017. This represents a significant planning opportunity for approaching retirees.
10% Earnings Rule
Under the current law, you can only claim personal contributions to superannuation if you earn less than 10% of your assessable income from employment as an employee. This means that for most people who are under an employment arrangement, they cannot claim any personal contributions as a tax deduction. Salary sacrificing arrangements via their employer is their only tax effective option. This rule will change so that from 1stJuly, 2017, personal contributions will be able to be claimed as an income tax deduction by the individual, irrespective of their employment arrangements.
Transfer Balance Cap
From 1stJuly, 2017, there will be a limit of $1.6 million on how much of your superannuation you can transfer from your accumulation account to the tax-free retirement phase account to receive a pension income. This limit is known as the transfer balance cap. Currently, there is no maximum amount that can be invested into this tax-free environment and it has been a popular strategy for high wealth individuals to minimise their tax. The $1.6 million cap effectively puts a lid on this source of taxation leakage. This $1.6 million limit is per individual, so, in effect, a husband and wife couple can still have up to $3.2 million invested in this tax-free environment, if correctly organised.
Any amount that is held in addition to the transfer balance, must be transitioned to an accumulation fund and the earnings on this balance will be taxed at 15% going forward. Anyone affected by this should talk to their advisor soon to manage capital gains tax issues within the fund prior to 30th June, 2017.
Transition to retirement income streams
From 1st July, 2017, the earnings on the investments supporting a transition to retirement income stream will be taxed at 15%, similar to an accumulation account. The taxation treatment of the receipt of the pension in the hands of the recipient will remain unchanged ie. 60yo+ continue to be tax-free.
Carry forward unused concessional contributions
Individuals with a total superannuation balance of less than $500,000 at the end of the financial year, will be allowed to make catch up concessional contributions, commencing from the 2019/20 financial year based on unused cap amounts carried forward from the 2018/19 financial year onwards. This will allow individuals to increase their concessional contributions if they have unused amounts from the previous 5 financial years.
The above represents a brief overview of the main changes to be implemented on 1stJuly, 2017. If you believe that you will be affected, we recommend that you talk to your financial adviser for personal advice. At Potts and Schnelle, we offer superannuation and tax advice every day, that’s our business! We welcome you for a free, no obligation first appointment to chat about your situation.
Call us NOW: 02 6033 2233
What’s your biggest asset?
“’What’s your most valuable asset?’ is a question that we ask many clients,” said Demelza Lister, financial planner at Potts & Schnelle Financial Planning, “the answer is generally, their house, their Superannuation, or sometimes a rental property, but”, added Demelza, “the correct answer for most, that rarely comes out is, ‘me, the client!’”
“What we mean by this is that each of us has an ability to earn a wage or profit from our physical activities and if you multiply that by the time left in the workforce, you get pretty big numbers.”
Let’s look at some examples:
- Mary is 50yo and works in a factory earning $50k pa. She has 17 years to retirement so her earning capacity is $50k x 17 years = $850,000.
- John is 30yo and works as an electrician earning $60k pa. He has 37 years to retirement so his earning capacity is $60k x 37 years = $2,220,000
- Olivia is 40yo and works shift work as a nurse earning $80k pa. She has 27 years to retirement so her earning capacity is $80k x 27 years = $2,160,000.
And these examples don’t allow for wage increases!!
“I’m sure if we told John or Olivia that they are worth over $2,000,000 to their families, they would scoff at us,” added Paul Schnelle, partner and Certified Financial Planner, “but if something happened to them that forced them out of the workforce, and that could be something as simple as a bike accident or a trip on some stairs, then their family will ultimately be out of pocket big time.”
“Most people have some insurance through their Superannuation Fund, or as part of their home loan, but the reality is that in most cases it is much less than their actual financial worth to the family unit.”
Kristy Davies, manager of the Rutherglen office said, “we all know people who suffer or have died from unfortunate accidents and illnesses. It can be as simple as a bad back, or as consuming as a cancer scare. That is a real tragedy for them and their families who then have to live the rest of their lives coping with the emotion of the event. What is really sad, is when that physical tragedy is married with a financial tragedy, because they then have reduced or no income to help them adjust to the changes in their lives.”
“That is the role of income protection insurance”, added Demelza, “adequate insurance cover ensures that what is already a difficult situation for a family doesn’t become a double bunger. Insurance proceeds enable emotionally struggling families to at least enjoy some quality of life by being able to afford appropriate care and conditions going forward. Even a stay at home parent, not earning an income, is highly valuable when compared to the cost of paying someone else to do what they do around the home and then multiplying that by the remaining years to retirement.”
“Affordability of insurance is an issue for many, but it needs to be considered in the context of what you are getting,” added Paul. “It comes down to how you look at it. For instance, a $2000pa bill for income protection insurance sounds expensive for someone on $40,000pa. But if you turn it around, it sounds much more palatable as a $38,000pa wage with a built in guarantee to pay you $30,000pa until age 67yo if you are unable to work due to injury or illness.”
Potts & Schnelle are offering a free income protection insurance consultations for the months of January and February if you mention this article. To make an appointment with Demelza or Paul for a no obligation assessment.
Have you got enough Life Insurance?
The question of, how much life insurance is enough, is frequently asked in the financial planning sector. Researchers commonly find that most Australians are “chronically under-insured”. That means that they don’t have enough cover and consequently, in the event of their death they will not only leave an emotional hole in the heart of their family, they will also leave a financial hole in their future.
Most of us have no idea how much life insurance is enough so we let someone else make the decision for us. The most common amounts covered are, firstly, to pay out loans (because the bank said it was a requirement) and secondly, the default amount provided by our superannuation funds (because we didn’t make a choice).
There is nothing wrong with that, as something is better than nothing, but really, what is the right amount?
The answer is, it all depends! Answers to the following questions will help you decide how much is right for you:
- How much debt do you have?
- What is it going to cost to provide for your children’s future needs (food, clothing, care and education)?
- How much will your survivor(s) need for living costs now and into retirement?
- Will your survivors have the means to pay for all of these things?
- Can they do it comfortably or would a lump sum top up help?
- What investments and superannuation savings do you already have that will help?
- How much insurance can I afford?
When determining affordability, remember that generally, premiums get higher as you get older, so consider taking out a level premium option if you think you will need the cover for a long time. Level premiums start out more expensive, but work out cheaper over the long run. Consider splitting the policy with a level premium for long term needs and a stepped (cheaper) premium for short term needs.
Also, look at taking the insurance via superannuation. This means that you won’t have to find the cost of the premiums from your take home income, which may allow you to have a higher sum insured. Just remember that taking the premiums from your super will mean that you won’t be accumulating as much for your retirement. Another related option is to salary sacrifice extra amounts into super to cover the cost of the insurance. This effectively means that you get a tax deduction for the premiums.
Be careful using your super fund for your life insurance if the insurance proceeds are not intended to go to your spouse or dependent children. There will most likely be tax payable on the amount received by non-dependents (including adult children). Also, the Super Fund has the power to decide who gets the money, unless you have an enforceable binding death nomination in place.
Finally, and most importantly, when you commence your insurance (including joining a new super fund with default insurance), make sure that the insurance company know about any pre-existing illnesses or other circumstances that may affect your insurability. If not properly disclosed, then you may not be covered at all and your premiums will be wasted. People who short cut the application process, may think they are winning with cheaper premiums, but get a sad reality when the insurance doesn’t pay at claim time!
Of course, life insurance is only one of a handful of personal insurances. Life, total and permanent disability, income protection and critical illness insurances all fit together like fingers in a glove. It is important to review and cover your whole hand and not leave some fingers exposed.
If you want to know how much life insurance is enough for your situation or have an insurance question, give our financial planners a call on 6033 2233, or send an email to firstname.lastname@example.org
Planning for your business is like planning for a holiday
“Planning for your business is like planning for a holiday” said Paul Schnelle of Potts & Schnelle, Chartered Accountants. “The best time to consider your next holiday is just after you’ve finished one. Reflections like, will we do that again? What went well? What didn’t? What will we do next year? These questions are often easiest answered just after returning.
“This theory also applies for your business! Just after finishing the financial year it is often easy to ask questions about how your business went last year and think about what you might do differently next year.”
“Planning for a business is just like planning for a holiday. You can get really detailed, or just wing it and hope! Obviously each method gives different results. For instance, some people strap on a backpack and head off with only a general idea of where they want to go. Others won’t leave home without a detailed itinerary of planned activities and accommodation. Both methods work, and it’s horses for courses!”
Similarly, some people have a business idea, get an ABN and off they go hoping for the best! Sometimes it works and sometimes it doesn’t. Like a backpacker, it all depends on the direction they end up taking, what help they get along the way, what resources they have behind them and how they are used.”
“Others meticulously plan out every step of their business idea before they start and then go about implementing rigorously. This is like a holiday on a planned tour. Again, this works for them too!”
“At the end of the day, a business owner has to do what works for them,” adds David Potts, partner. “We recommend that every business does some sort of planning, at least for the next few months, preferably a year and hopefully a rough out of the next 5 years.”
“Like a holiday, the more planning you do the more chance you will get the result you want. That’s not to say that there won’t be detours along the way, or even a total change of direction. Most successful backpackers have a general idea of where they plan to go, even if it isn’t regimentally organised.”
“However, like running a bus tour, to run a larger successful business you need to have more detailed plans and communicate them to your staff. That way, everyone ends up on the same page heading in the same direction and hopefully at the same final destination.”
“A lot of people find it really difficult to do a budget. Often that is because they are trying too hard to get it exactly right” adds Kristy Davies, Rutherglen Office Manager, “When you plan a holiday, you first plan your destinations and then you plan the smaller details, eventually deciding on your day to day activities as the last step. The same philosophy applies to business planning. You decide on the big picture first and then you drill down to finer detail gradually as and if required. It is almost impossible to plan out every step along the way because things change as you go. So don’t get caught up in the fine detail at the start.”
“So, why are we talking about this?” finishes Paul. “Well, we see that our most successful clients do some sort of planning for their businesses and their personal lives! We think that planning, even on a broad scale, improves one’s quality of life and a business’ financial prospects.”
A new financial year gives you a clean sheet of paper to plan out the next 12 months. Have a look at how you went last year. Think about what you did well and what you would like to change. Then think about the big picture of where you want to be in 5-10 years time and how the next 12 months will contribute to that long term picture. This will open up some thoughts on what you could do towards that goal right now. Most importantly, set a time frame to do something! We all have good ideas. Successful people are generally those that get around to actually implementing some of those ideas!
“David and I have a lot of helpful resources. Give us a call if you want some help.”