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Salary sacrifice vs personal contributions to super

All / 29.07.2021

Salary sacrifice vs personal contributions to super

If you are an employee, there are two ways in which you can optimise the tax-effectiveness of your additional super contributions:

  • opt for a salary sacrifice arrangement, whereby your employer makes additional superannuation contributions beyond the compulsory superannuation guarantee (SG) amount from your pre-tax earnings and reduces your salary accordingly; or
  • make a personal contribution and claim a tax deduction when you submit your tax return.

Generally, higher income earners gain the greatest benefit from either of these strategies. Lower income earners may be better off not claiming the tax deduction and receiving a government co-contribution if eligible.

Which option?

For starters, employers don’t have to offer salary sacrifice. If they don’t, claiming a tax deduction is the only option.

Another thing to look out for: if salary sacrifice is available, will your employer still make SG payments on your pre-sacrifice salary? Legally, employers only need to pay SG on the actual salary amount, so for every $1,000 of salary sacrifice you would lose $95 in SG contributions. In this situation, you will most likely be better off claiming a tax deduction.

Fortunately most employers do the right thing and don’t reduce their SG contributions. The federal government has also announced plans to ensure salary sacrifice does not result in a reduction in SG payments. If this happens, it will pretty much level out the playing field between salary sacrifice and tax-deductible personal contributions, but some subtle distinctions remain.

Let’s look at Jenny and Brian. They both earn $120,000 a year, and want to contribute an extra $12,000 pa ($1,000 per month) to superannuation as concessional (pre-tax) contributions. Jenny opts for salary sacrifice and will receive SG contributions based on her pre-sacrifice salary. Brian decides to make his own contributions and later claim them as a tax deduction.

Both will see their overall annual income tax bill drop by $4,680. After allowing for 15% tax on the super contributions, they are both better off by $2,880 for the year.

The key difference is that Jenny will enjoy her tax benefit each payday. Brian needs to wait until the end of the financial year and submit his tax return before he can receive any benefit from his choice.

On the other hand, Brian’s regular pay will be more than Jenny’s as his gross income remains at $120,000 pa compared to her $108,000. This gives him more flexibility. For example, he can wait to make his entire contribution just prior to the end of the financial year – if he hasn’t been tempted to spend it in the meantime. However, if he makes regular contributions to his super fund, his net disposable income each month will be lower than Jenny’s. Only when he receives any tax refund might they be back on equal terms.

Beware the rules

While the greatest benefit of extending tax deductibility on personal contributions goes to employees who are unable to access the salary sacrifice option, it’s still a positive move that provides everyone with flexibility and choice. However, whether you opt for salary sacrifice or claiming a tax deduction, there are rules to be followed. Talk to your financial planner about the best superannuation contribution strategy for you.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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Giving the gift of investing

All / 22.07.2021

Giving the gift of investing

Did you have a savings account when you were young? It wasn’t uncommon and those old Passbook accounts funded many a first car.

Now you’re a parent, are you thinking of opening an account for your kids? Record low interest rates have taken some of the fun out of watching bank accounts grow, but there are alternatives.

For example, have you considered a share portfolio?

Direct shares follow market movements, whether that be up or down, but over time, quality shares have greater growth potential than many other investment types.

For a child’s investment fund, you’re probably looking at a savings term around 15 to 20 years – ideal for riding market ups-and-downs.

When Lincoln was born, his parents discussed possible long-term investments with their financial planner, and settled on a portfolio of diverse assets suitable for a 15-20 year time horizon.

Meanwhile, Lincoln’s grandparents chose to open a traditional savings account at their preferred bank.

How did the two compare?

Consider the following example:

Initial investment: $500

Monthly contribution: $50

Investment term: 20 years

Assumptions: Savings account return calculated on 1% per annum interest. Share portfolio return 4% per annum based on a comparison of mixed Balanced Asset funds over the past three years to December 2020.

This example demonstrates how shares, year-on-year, can potentially outpace a savings account. By year 20, Lincoln’s projected Savings Account balance was $13,899 and his projected Share Portfolio balance was $19,450.

Straight-forward? Not so fast, as here are a few other points to think about.

Tax and TFNs

Your child can have a tax file number (TFN) – there’s no minimum age. All funds will request a TFN, but whether you quote the child’s TFN or your own depends on a number of factors like who is contributing to the investment, whether the money is being used, etc.

Tax is tricky too. Your child’s age and whether they’re earning their own money will determine whether they have an income tax liability and need to lodge a tax return.

Additionally, there’s Capital Gains Tax (CGT). Share portfolios are assessed for CGT if the assets are sold for more than their purchase price. The amount of CGT payable will depend on a number of elements, but your tax agent will be able to assist.

There will always be tax, but how much, what type and how it is calculated will depend on your, and your child’s, circumstances.

Do your sums to work out the most suitable tax outcome for you and your child. Remember that mistakes can be costly so it’s wise to consult a tax accountant for personalised advice.

Trusts

Many people consider setting up a trust for the children’s savings, as it helps to protect the assets in the child’s name. There are two types of trusts and they’re quite different.

Trust accounts are accounts held at a bank that you open for your child, but you retain ownership. When the child turns 18, control of the account passes to them.

Trust funds are legal arrangements, managed by trustees for the child’s benefit. They’re generally used for substantial investments and the child can access the assets once they attain a certain age.

Where trust funds are concerned, forget everything you thought you knew about tax and speak to a professional with expertise in family trust arrangements.

Everyone’s situation is different and investment types and structures are not one-size-suits-all. Before making any decisions, seek the advice of qualified professionals, and regardless of whether you choose a share portfolio or an alternative investment, you’ll be across your options and confident that your particular needs are being met.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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Ensuring your voice is heard

All / 15.07.2021

Ensuring your voice is heard

The importance of maintaining a current Will ensuring your own last instructions are followed with your insurance, superannuation and nominated beneficiaries.

When you’re here to supervise your worldly affairs, your voice, which reflects your current views, is heard, and more often than not, heeded. But when you’re not here, what voice will be heard? Will it be your most recent voice; an old voice from several years ago; or the voice of government legislation? Unfortunately, all too often, it is voice number two, or worse, three.

If your Will and other estate arrangements have not recently been reviewed, you risk your voice not being heard. If you have overlooked making a Will, the government decides how your estate is to be distributed. This reinforces the importance of keeping all of your estate arrangements current.

That said, even with the best of intentions the most up-to-date Will in the world can be challenged. There have been countless real-life court dramas involving high profile public figures engaging in claims and counter-claims following the death of a wealthy relative. Some of us have experienced similar emotional intensity, anguish, and even bitterness. We must always remember that people change, form new relationships, and take advice from different sources whose motives may not always be pure.

In ensuring your voice from the other side will be heard and heeded, the Will remains the centrepiece of estate planning, but with life insurance and binding nominations for superannuation, there are additional tools you may not have thought of.

The insurance option

A policy taken out by a person on their own life and owned by that person forms part of their estate to be distributed in accordance with their Will, and thus subject to challenge. But, and here is the feature which can make insurance such an important part of sound estate planning. A policy which nominates someone other than the life insured as the beneficiary does not form part of the estate and is quite separate from the Will – and not subject to challenge.
What this means is that if there is even the smallest possibility that your wishes may not be carried out after you’re gone, it might be a good idea to seek professional advice about the value of a life insurance policy.

The super solution

It is widely believed that superannuation is included in an estate and dealt with through a Will. Not so. The trustee of your superannuation fund determines how your super is paid upon your death. You may identify a “preferred beneficiary” however the fund trustee can override this decision at its discretion. If you don’t want this to occur, you should complete a ‘Binding Death Benefit Nomination’.

Binding Death Benefit Nominations

Superannuation legislation allows you to specifically nominate, with certainty, who will receive your super following your death.

These nominations must be in writing and clearly state the names of beneficiaries and any split details between multi-beneficiaries. Some funds offer non-lapsing binding nominations however, many binding nominations must be renewed every three years and are only valid if you nominate a dependant, eg. your current spouse (including de facto), or your child of any age, or a person financially dependent upon you at the time of death. You may also nominate your estate.

Binding nominations are still relevant if you have a self-managed super fund. Even though you have the final decision on how your super is managed whilst you are alive, it is crucial to ensure your trustee/s (who may also be family) continues to fulfil your wishes after you die.

To ensure it’s your own voice that takes final control of what you have worked hard for in this lifetime, consult an estate planning specialist or talk to your financial adviser.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

 

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Getting more out of income protection insurance

All / 08.07.2021

Getting more out of income protection insurance

If you’re working and haven’t yet reached the point of financial independence then income protection insurance should be on your radar. As the name implies, it can help you protect your greatest asset – the ability to earn an income.

At the heart of all income protection policies is the promise to pay the policy owner a regular benefit, usually 75% of their normal income, if they are unable to work due to accident or illness. Payments are made after an agreed waiting period and continue until either the policy owner is able to return to work, or until the end of the agreed benefit period.

Core and supplementary benefits

In addition to the core provision to pay a replacement income, most income protection policies also offer a wide range of supplementary benefits. These vary from policy to policy, but may include:

  • Rehabilitation benefits.
  • Travel and accommodation costs, for example to return you home if you are injured while overseas.
  • Childcare benefits.
  • Specified injury benefits that pay an additional amount if you suffer things like broken bones, loss of sight, paralysis or other stated conditions.
  • Bed confinement or nursing benefits.
  • Elective surgery benefits.
  • Family support benefit or accommodation benefit, payable if a family member needs to travel from their usual place of residence to be with you.
  • Total and permanent disability benefit.
  • Death benefits.

Adding supplementary benefits adds to the cost of cover, and the value of any supplementary benefit depends very much on individual circumstances. Someone with a good income, modest expenses and a working partner may be able to easily meet costs such as childcare, even if their income drops to 75% of its usual amount. For someone on a tighter budget, supplementary benefits may be a way of achieving greater cover at a reasonable cost.

Tailored cover

Supplementary benefits allow cover to be adjusted to suit individual needs. Take Kate. She’s a single, 29-year-old marketing manager who lives alone. Kate’s immediate family all live interstate and she regularly holidays overseas.

Not surprisingly, Kate sees no value in the childcare benefit. With no dependents she also doesn’t require death cover. However, with no close family living near her, the family support benefit and bed confinement benefit do appeal to her. Given her frequent overseas travel she also opts for the travel and accommodation benefit.

The ability to select only the relevant supplementary benefits means that Kate is able to design an income protection solution that suits both her needs and her budget.

Design your policy

Income protection insurance is one of the key foundation stones of an effective financial plan. If your income needs protecting, talk to your financial planner about designing the policy that best suits you.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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A great way to help your kids – and you

All / 01.07.2021

A great way to help your kids – and you

We are always hearing about how important it is to insure our own lives and income, but what about insuring our children’s?

How would your adult child and their family survive financially in the unfortunate event of an accident or an illness that prevented them earning an income for an extended period of time?

Income protection, TPD and trauma insurance are often not a consideration to a young family in today’s financial climate with many struggling with mortgage repayments, education spending and increased living costs.

But what would be your role if your child and their family were suddenly without an income? Without adequate insurance how would they cope?

What if you had helped your child to buy his or her first home and that child suffered a long term-illness or disability? How would that affect you if they couldn’t make the repayments?

Here’s a scenario…

Alan and Joanne’s married son Tim was involved in a car accident, sustaining a spinal injury that prevented him from working for two years.

Unfortunately, Tim did not have income protection or accident insurance.

The bank foreclosed on his mortgage and Tim and his young family were forced to move in with Alan and Joanne. Eventually, Tim recovered and was able to return to work.

Aside from the emotional impact on Tim and his family, Alan and Joanne’s retirement plans were seriously compromised. Joanne’s health deteriorated due to the extra stress of the situation and she was diagnosed with severe depression.

What could Alan and Joanne have done differently?

They could have asked Tim if his income was protected in the case of an unforeseen illness or injury, Learning that the young couple was allocating all spare cash to the mortgage, the parents might have offered to help pay for adequate insurance cover.

Even if you are not in a position to contribute to the cost of their insurance, raising the issue with your adult children and encouraging them to talk to a financial professional could be some of the best guidance you could ever give them.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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5 ‘secrets’ to share selection

All / 24.06.2021

5 ‘secrets’ to share selection

There are many reasons to invest in shares. Some of us treat it as a bit of a punt, in it for the thrill of pitting our share selection skills against other players in the market. Others look to the market as a generator of long-term wealth. Whatever the motive, with thousands of shares listed on the stock exchange, how can an investor choose which ones to buy? Let’s look at a few key considerations.

  1. Is the company growing its profits? In very simple terms the value of a company can be calculated by adding together all of it’s future profits. All else being equal, a company that consistently grows its revenue year on year will increase in value more quickly than a company with slower profit growth.
  2. How big is the company? Big companies may dominate their markets, reducing their potential for future growth. Companies with a smaller market capitalisation (share price multiplied by the number of shares on issue) may be younger and expanding into new markets and industries that support more rapid growth. However, the share price of smaller companies may be more volatile. That can be attractive to investors who use periods of share price weakness to top up their holdings, but less attractive to investors wanting more stability.
  3. How much debt does the company carry? If a company is paying lots of interest then there’s less cash available to pay dividends and to invest back into the company’s core business. While a company may be able to use debt to grow, in periods of market turmoil highly indebted companies are more likely to see their share price come under pressure than their less indebted counterparts.
  4. What does the company do with its profits? There are two things that a company can do with its profits. It can re-invest them back into the business, to boost its growth. Or it can pay dividends to its shareholders. Whether it’s best to opt for a high dividend low growth company, or a low dividend high growth one depends on individual requirements. Many investors depend in dividends for their day-to-day income. Others prefer to forgo annually taxable dividends in favour of capital growth that is only taxed – often at a discounted rate – when the profits are realised.
  5. Does a new share compliment currently held shares? The most basic risk management tool in an investor’s toolbox is diversification. Buying shares in a big bank won’t provide much of a diversification benefit if the portfolio already holds lots of shares in other big banks. Mixing financials with resource, biotech or industrial shares will deliver better diversification.

There isn’t one single magic rule to building a share portfolio. For one thing, much depends on the goals and circumstances of the individual investor, their attitude to risk, and prevailing market and economic conditions. Whatever your situation your financial planner can help you unlock the secrets of share selection.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

 

 

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EOFY is coming – have you thought about these things?

All / 17.06.2021

EOFY is coming – have you thought about these things?

The end of another financial year is looming, and with that may come thoughts about your tax return and how your wealth has tracked throughout the year.

Whether you’re nearing retirement, a high-income earner looking to reduce your taxable income, or you’re on a lower income and looking for ways to maximise your super contributions; there are a few things you can consider at tax time.

Nearing retirement? Maximise your super contributions

If you’re nearing retirement, putting as much money into your superannuation account now is a good way to make sure you build up a healthy nest egg to live off in your golden years. To maximise your super contributions, consider salary sacrificing to put more money into your super account.

Salary sacrificed super payments take money out of your pre-tax income. These are called concessional contributions and are taxed at 15%. This rate is lower than most taxpayers’ marginal tax rates, so it can be an excellent way to reduce your taxable income while increasing your superannuation savings.

The maximum employer and salary sacrificed contributions that can be made each financial year is $25,000. And remember, if you’re self-employed, your concessional contributions are a tax deduction.

Non-concessional contributions of up to $100,000 can also be made each financial year. These contributions come from your after-tax income.

Consider a one-off contribution to lower your income tax

Let’s say you’re on an income of $170,000. If you haven’t opted to salary sacrifice, your employer contributions to super will be $14,748.86 in the financial year. Therefore, your taxable income will be $155,251.14.

To lower your taxable income, you could make a one-off concessional contribution of $10,000. This will reduce your taxable income and still come in under the concessional contribution cap of $25,000.

Are you eligible for the Government co-contributions to super?

If you earn less than $54,837 per year (20/21 financial year) before tax, you could be eligible for the Government’s co-contribution on after-tax super contributions.

Those who earn under the threshold can make an after-tax contribution, and the Government will calculate your co-contribution amount when you submit your tax return. The co-contribution will be deposited directly to your superannuation account.

Taking advantage of Government co-contributions can be a great way to boost your superannuation savings, either for retirement or to save towards buying your first home.

Review your records now

It just wouldn’t be tax time without the fun of sorting through your receipts and documents. If you stay organised throughout the year, however, it doesn’t need to be a headache.

Now is the time to check you’ve been keeping good records. Have you got a record of relevant receipts and policy statements for items such as income protection policies you have outside superannuation?

Understanding the paperwork you require now to maximise your deductions will save you time when it comes to completing your tax return. If you haven’t got all of your records organised, review your spending throughout the year, identify transactions that may be a tax deduction, and put aside those receipts for tax time.

Looking for more help?

If you’re looking to maximise your tax return and get ready for a successful financial year ahead, talk to a financial adviser about your options.

It doesn’t matter your circumstances; there are options available to help you boost your super savings and get the best tax return possible.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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A good time to review your insurance

All / 10.06.2021

A good time to review your insurance

Not a year goes by without some part of Australia being devastated by a natural disaster. Bushfires, floods, storms and tropical cyclones are a part of our lives. And as we’ve witnessed in recent years, destructive weather patterns and events occur regularly throughout the year, often with little or no warning. This means that any time of the year is a good time to review your insurance cover to ensure your financial possessions are protected, as well as the security of you and your loved ones.

The pain of under-insuring

The images of families losing all of their possessions during widespread flooding, storms and bushfires over recent years should provide a constant reminder of how a lifetime of hard work can vanish in minutes. It is even worse when so many of these victims were either uninsured or under-insured.

Most people understand the consequences of being uninsured: you bear the total loss of whatever damage is suffered and property lost. On the other hand, being under-insured means that you have not insured your property for its full value, which is considered to be less than 90% of any rebuilding costs.

This may not be intentional. It’s easy to fall into this trap, particularly if you don’t review your policy in relation to the value of your home and possessions on a regular basis. How much has your property changed in value over the past three years?

This is how easy it can happen

You don’t have to lose your entire home to suffer the effects of under-insurance. Partial loss can place a challenging strain on your finances.

Take the example of Jake and Olivia whose home was valued at $500,000, but to save money on premiums they decided to insure it for only $375,000 – three-quarters of the value. An out-of-control truck ploughed through their front fence before coming to rest halfway through their master bedroom. Thankfully they were both at work and nobody was injured. Their home sustained $100,000 worth of damage but Jake was shocked when he learned that the insurance company would only cover three-quarters of the loss – just $75,000. They had to borrow the $25,000 shortfall.

If you look at it from the insurer’s perspective, when you insure for less than the real value, they are receiving less money in premiums, so they’re not likely to pay the full value in a claim.

Natural disasters and accidents are not fussy about who they affect so don’t let the next one be the catalyst to review your insurance coverage.

And while you’re doing this, make sure you have appropriate and adequate life insurance in place. You and your loved ones are far more valuable than your possessions. Now is the time to act. Give us a call.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

 

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Why does the value of my super fund go up and down?

All / 03.06.2021

Why does the value of my super fund go up and down?

If you pay close attention to the value of your superannuation fund, and if, like most people, your money is spread across the main investment classes, you would have noticed that your retirement savings can both rise – and fall – in value. This can lead to some nervous times, particularly if you are close to or already in retirement.

What causes these ups and downs and can you do anything about them?

Start with how your fund is invested

For the most part, fluctuations in the balance of your super fund can be attributed to the portion invested in shares, and to a lesser extent, property. In general, the greater the exposure to the share market, the greater the volatility (i.e. the bigger the rises and falls) in the value of your retirement savings. So, what drives share prices?

How much is an investment worth?

Let’s compare two companies, A & B, and the profit per share that they are expected to generate:

YearCompany A
Earnings per share
Company B
Earnings per share
1$1.00
$2.00
2$1.20$2.30
3$1.25$2.50
4$1.30
$2.70
5$1.40$2.85

Which company’s shares would you pay more for?

The obvious answer is Company B’s. Based on current information, it is projected to generate much higher earnings and is therefore worth substantially more per share than Company A. That’s because, in very simple terms, an investment is worth the sum total of all of its future earnings.

It’s not quite that simple

Of course, there’s a catch: the future is a very uncertain place.

What if next year Company B announces that its profit is only $1.50 per share? Suddenly it looks much less valuable, and as a result its share price should fall. But company profit announcements aren’t the only things share analysts look at. They examine all sorts of issues in an attempt to anticipate what a company’s future earnings will be. Some are specific to the company, such as a change in CEO or launch of a new technology, whereas changes in interest rates or a jump in unemployment can affect the whole share market.

Opinions matter

Aside from hard numbers, opinions count for a lot too. One investor may think that the fossil fuel era is coming to a close, that the earnings of coal and oil companies will fall and their share prices will drop. Another investor may think that the world will increase its demand for fossil fuels and expect those same companies to rise in price.

It is the collective opinion of all these analysts and share traders that set the momentary price of any given share. The combination of these collective opinions on the prices of the shares held by your super fund then determines how much your retirement nest egg changes in value.

This doesn’t mean that share price movements always appear logical. A company can report a stellar profit and still have its share price hammered if the market was expecting an even better result.

What to do?

The impact of share price volatility can be moderated by good diversification and by allocating a smaller fraction of the portfolio to shares. Just be aware that the latter can also reduce the potential long-term returns from your portfolio.

If the ups and downs in the value of your super fund are concerning you, or if you would just like to check if you are still on the right track, your licensed financial adviser will be able to assess your situation and point you in the right direction.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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DIY Insurance – is it right for you?

All / 27.05.2021

DIY Insurance – is it right for you?

Research shows that Australians are underinsured which has led to the proliferation of television advertisements promoting personal insurance cover. Are these quick and easy plans suitable for your family?

Research undertaken by Rice Warner in 2017 revealed that on average Australians had Life and Income Protection insurance meeting only 61% and 16% of their needs respectively. Cover for Total and Permanent Disability was as little as 13% of people’s needs.

The cause may be attributed to peoples’ uncertainties surrounding medical examinations, probing application forms, costly plans and persistent sales people.

Companies advertising on television attempt to eliminate some of these fears and often advertise products where:

  • cover will generally be accepted without a medical examination,
  • policies are easily arranged on-line or via a single telephone call, and
  • premiums are competitive.

For some people, these plans offer a practical solution; particularly older people, perhaps without dependents, who no longer have large financial commitments.

But if you have dependent children, a mortgage and other monetary obligations, and you wish to plan ahead for your family’s financial future, would a do-it-yourself product suit your needs?

Ask yourself the following questions:

  • How can I know how much insurance I really need?
  • How do I ensure my family won’t be financially worse off after an insurable event?
  • Would the family home need to be sold if the household income was reduced?
  • How do I ensure my children can afford the right education to start them off in life?
  • What if I became sick or injured and was unable to work for a significant period?

If these issues concern you then it’s likely that you need a more tailored risk management plan.

Discussing your circumstances with your financial adviser will ensure that your particular needs and goals are addressed. And as your situation changes, for example, welcoming a new child, your adviser can review your plan and update it as necessary.Most people recognise the importance of car or home insurance, but neglect to consider their lives or their ability to earn an income. Given this, off-the-shelf insurance products fulfil their purpose as it can be said that encouraging people to take out some insurance is better than having no insurance.

But if a risk management plan specific to your family’s future security is important to you, it might take more than a short phone call to arrange, while the peace of mind it brings will last a lot longer.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

 

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