Jacqueline Barton

Insurance is a sound investment

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Managing risk is an essential part of investment strategy to reduce the potential for losses.

Risk is not just associated with investing though – life can throw a curve ball or two and insurance is one way to manage risk in a broader context.

It’s a matter of weighing up your risks and thinking about what you would do if the worst happened. Could you afford to build a new house, buy a new car or support your family if you became too ill to work?

Various insurance products or self-insurance can help to mitigate these types of risks.

Underinsurance

While many Australians have some form of life insurance through their superannuation, the level of cover is rarely sufficient. The standard offering within the super framework is well below what your family need to live comfortably should you die or lose your ability to earn an income.

A Financial Services Council report, estimates that as many as one million Australians are underinsured for death and total permanent disability (TPD) and 3.4 million for income protection.i

Rice Warner estimates that insurance cover for a 30-year-old with dependents should equal eight times the annual family income for life insurance, four times the family income for TPD and 85 per cent of the family income for income protection. The default superannuation offering falls well short of this figure.ii

Home and contents

But it’s not just life insurance. There is also a fair amount of underinsurance in home and contents.

With the growing incidence of bushfires, floods and storms, protecting your home and possessions with insurance is more important than ever.

The biggest mistake is insufficient cover to rebuild your property particularly with the recent surge in building costs. You should also consider the costs associated with demolition and removal of debris, the cost of architects and builders and the need to find alternative accommodation while your home is being rebuilt.

It is important not to head for the cheapest policy as this may well fail to meet your needs. Read the product disclosure statement to make sure the cover delivers exactly what you need.

Health and travel

Health insurance and travel insurance are also important considerations.

You will pay a Medicare Levy surcharge if you do not take out private health insurance and have a taxable income above $93,000 for singles or $186,000 for a family, couple or a single parent (increased by $1,500 for each dependent child after the first child). This starts at 1 per cent of your taxable income and goes up to 2.5 per cent. So, it is worthwhile weighing up whether taking out private health insurance is the better option.iii

When it comes to travel insurance, if you can’t afford it, you can’t afford to travel overseas, according to the Federal Governments Smart Traveller website.iv The cost of medical care in other countries can be exorbitant and you may need to be transported back to Australia. The expenses can be enormous.

Of course, travel insurance can also help to compensate for cancelled or delayed trips and lost luggage.

Self-insurance alternative

An alternative to taking out an insurance policy is to self-insure. That means putting money aside regularly to build up a big enough fund to help keep a roof over your head or replace a vehicle.v

The upside is that these funds are yours and, properly invested, can grow over time. The downside is that you may not have enough money together when a disaster happens.

Insurance can be the difference between successfully recovering from an event and changing your life forever. If you would like to discuss your insurance needs, call us.

i https://fsc.org.au/resources/2537-fsc-australias-life-underinsurance-gap-research-report-2022/file page 18
ii https://www.ricewarner.com/life-insurance-adequacy/
iii https://www.ato.gov.au/individuals-and-families/medicare-and-private-health-insurance/medicare-levy-surcharge/medicare-levy-surcharge-income-thresholds-and-rates
iv https://www.smartraveller.gov.au/before-you-go/the-basics/insurance
v https://www.investopedia.com/terms/s/selfinsurance.asp

Binding Death Benefit Nominations

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Even if you’re not wealthy, your estate plan should be regularly reviewed to ensure it considers your changing family situation (such as divorce or a new family member), financial assets and relevant legislation.

A valid superannuation death benefit nomination is an important part of managing how your superannuation and sometimes even your Life insurance proceeds will be distributed after your passing. Death benefit nominations may be non-binding or binding. A binding death benefit nomination (BDBN) is a written direction from a member to their superannuation trustee that sets out how the member wishes their superannuation benefits to be distributed. A lapsing binding nomination is generally valid for a maximum of three years and lapses if it is not renewed. If you make a non-binding nomination or no nomination at all, the trustee of the superannuation fund will have more discretion on where your money should go.

Death benefit nominations are important for all superannuation members, whether your fund is a Self Managed Super Fund (SMSF), a retail fund or an industry fund. In fact, if your fund is an SMSF, before making or accepting a death benefit nomination you (in Trustee capacity) must check the deed of the fund and ensure the deed does not impose any limitations in members making a death benefit nomination.

A recent decision by the High Court has changed the rules in relation to using a binding death benefit nomination (BDBN) if you are a member of an SMSF[1]. A further recent court ruling has highlighted that not all superannuation trust deeds expressly terminate a Binding Death Benefit Nomination (BDBN) when a spousal relationship ends[2].

The case of Corbisieri v NM Superannuation Proprietary Limited [2023] FCA 1319 is a reminder for trustees and advisers to carefully read superannuation trust deeds. Terence Wong, a superannuation law specialist, noted, “This case reminds us to read the superannuation trust deed for the provision or obtain advice tailored to the member’s needs, objectives and circumstances, and to amend the superannuation trust deed or place a condition on the BDBN where required.”

When nominating the beneficiaries you would like to receive your super death benefit, you need to correctly fill in the necessary paperwork to ensure you provide clear instructions for the trustee of your super fund. If your nomination is not deemed valid, the decision on where your money goes will be made by the trustee.

Your benefit nomination can be renewed, changed, or revoked at any time.

[1] https://www.superguide.com.au/how-super-works/who-gets-super-die-death-benefit-nominations

[2] https://www.smsfadviser.com/news/23195-bdbn-court-ruling-highlights-relationship-status-can-be-open-to-interpretation

Essential tips to enjoy your days in retirement

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You’ve been working hard all your life and look forward to retirement. Finally, you can enjoy the freedom and the luxury of doing all the things you’ve always wanted to. But then reality hits, and you wonder, exactly how will I spend my retirement days?

Switching from busy working days to more free hours can be liberating. But after some time, you feel the need for more structure. Creating structure in your days is essential to living a more fulfilling retired life.

Whilst it’s easy to fill up your time with passive activities like watching TV, surfing the internet, and refreshing your Facebook page. You will likely want to spend your days doing more fulfilling activities. And a structured day can help you with that. It doesn’t mean that you need to continue the same structure as your working days. You can enjoy your well-deserved downtime in retirement and combine this with a structured day that fits your needs perfectly.

When you retire, you don’t get 20 years of free time, instead, you get back some extra hours in a day that you don’t have to work anymore. And that’s why it’s important to fill these hours with new and fun activities that make you feel fulfilled at the end of your retirement day. That’s why you worked hard all those years to do what you love. Here is an example of what a typical retirement day could look like:

Sample Daily Schedule

  • 7 am Wake up, drink water, stretch, or light exercise
  • 8 am Eat a healthy breakfast
  • 9 am Plan the day, set goals, and prioritize tasks
  • 10 am Attend a fitness class or go for a walk
  • Noon Have lunch and take a break
  • 1 pm Work on personal projects or hobbies
  • 3 pm Run errands or attend appointments
  • 5 pm Relax, read a book, or watch TV
  • 6 pm Prepare and have dinner
  • 7 pm Spend time with family or friends
  • 9 pm Wind down, practice mindfulness, and sleep.

Here are some ideas on structuring your day in retirement so you can make the most of it:

  • Discover or rediscover your passion[1]
  • Set goals for retirement
  • Create new routines
  • Wake up at the same time
  • Exercise regularly
  • Eat a healthy diet
  • Keep social in retirement
  • Manage your finances
  • Stay mentally active
  • Take breaks
  • Take time for self-care
  • Get a retirement hobby[2]
  • Plan ahead
  • Make a to-do list
  • Break your day into chunks
  • Limit your screen time

Balancing an overscheduled agenda and not getting bored is the trick to a happy retirement. You can enjoy your freedom, relax, and be spontaneous while having things to look forward to that make your life fun and interesting.

[1] https://retirementtipsandtricks.com/how-to-find-your-passion-in-retirement/

[2] https://retirementtipsandtricks.com/best-hobbies-in-retirement/

Understanding the new $3m super tax

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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.

Tax for higher account balances

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 Asset, Division 296 will take effect from 1 July 2025. Division 296 legislation imposes an additional 15 percent tax (on top of the existing 15 percent) 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 percent 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.

How the new rules work

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.

Strategic rethink may be needed

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.

Estate planning implications

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

Economic Update Video: March 2024

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After a summer of quite extreme weather in many places around Australia, we can hopefully look forward to the cooler, calmer weather that Autumn brings.

While economic bright spots can be found in Australia right now, there are also some less than stellar results.
On the positive, inflation has remained at a two-year low giving some commentators confidence of a rate cut in the coming months. CPI was steady at 3.4% in the 12 months to January. In other good news, business capital investment rose in the December quarter to be 7.9% higher than it was 12 months before and average weekly earnings rose by 4.5% or $81 per week.
It has been a mixed report for retail, with a 1.1% increase in sales for January but that wasn’t enough to make up for the 2.1% loss in December.The Australian dollar remains in the doldrums, weakening below 65.2 US cents after reaching a high of 69.48 near the end of 2023.
Australian shares were up by just over 1% for the month after a shaky start thanks to worries over US interest rates and China. US stocks edged higher during February with the S&P 500 and the Dow Jones Industrial Average reaching record highs during the month. February was dominated by news of the massive profit report by artificial intelligence chipmaker Nvidia, which had a massive effect on markets across the world.