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What is the Pension Loan Scheme?

All / 30.08.2018

What is the Pension Loan Scheme?

Currently 1.8 million Australian homeowners receive some level of age pension, with around 700,000 on a part pension.

What many of these part-age pensioners may not know is that, along with recipients of the disability support pension, carer payment and some other Centrelink payments, they are able to access some of the equity in their home through the Pension Loan Scheme (PLS).

What is the PLS?

The PLS provides a type of reverse mortgage that is aimed at supplementing retirement income.

  • It is paid in the form of a regular fortnightly payment from Centrelink. Payments are not taxable.
  • The maximum payment is the difference between the amount of actual pension received and the current rate for a full pension.
  • The interest rate is 5.25% per annum. This is significantly lower than the rates charged by most lenders and has not changed since 1997.
  • The loan can be secured against your home or an investment property.
  • A PLS loan can be partly or fully repaid at any time. Although not required, typically, the loan is only repaid when the property is sold. The value of the loan therefore increases due to the regular payments made to the pensioner and the growing interest amount.
  • The total amount the pensioner can borrow depends on the equity they have in their home; how much of this equity he or she wants to retain; and their age (or the age of the youngest member of a couple).

Pros and cons

The obvious advantage of the PLS is that it provides a supplementary ‘income stream’ to support quality of life in retirement.

The big downside is that the amount of the loan increases exponentially over its lifetime. This can significantly decrease the ultimate value of the estate passed to beneficiaries.

The PLS only provides fortnightly payments within the set limits. If you need a lump sum, say to pay for modifications to your home, a reverse mortgage may be more appropriate.

The PLS in action

Des is 67, widowed, and has no children. He owns a home valued at $750,000 and a very comfortable beach house he regularly escapes to, which hasn’t left much in the bank. He is the epitome of “asset rich, cash poor”. He receives a part pension of $250 per fortnight (pf) but he wants to enjoy life a bit more. As the maximum age pension is $908 pf (i) Des could receive up to $658 pf extra under the PLS. This is more than he needs, so he opts for payments of $500pf.

Des maintains the same rate of payment for the next ten years. Over that time he receives a total of $130,000 in additional ‘income’ from the loan. However, his outstanding loan balance after ten years is $171,594. That means he has racked up an interest bill of $41,594. If Des sold the house at this ten-year mark, he would need to repay the full $171,594 from the proceeds.

That may sound like a lot, but if his house was worth $750,000 when he took out the loan, and if it increased in value at a rate of 7% pa over the ten-year period, it could be worth just under $1.5 million.

Potential changes

In the 2018 Federal Budget the government proposed expanding the PLS to all Australians of age pension age, including self-funded retirees and full pensioners. The maximum amount of the combined pension plus the PLS income stream would be increased to 150% of the age pension rate. If these changes are legislated it will open up the scheme to many more people and allow them to take out bigger loans.

Seek advice

Taking on any type of debt, particularly later in life, needs to be approached with knowledge and caution. PLS loans are subject to a number of eligibility criteria, and both the positives and negatives must be considered.

Your financial adviser is ideally placed to help you understand how the PLS works, and if it is appropriate for you and your family.

(i) Including supplements

For more information or to speak to one of our Financial Advisers – please contact TNR Wealth Management on 02 6621 8544.

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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Lending money to friends or family – should you do it?

All / 30.08.2018

Lending money to friends or family – should you do it?

What would you do if a family member asked to borrow money – besides the less painful option of beating yourself over the head with a fence paling? You want to help, but you’re right to be wary.

It’s a difficult subject that despite everyone’s best intentions, often ends in tears.

 

You’ve worked hard, saved for retirement, paid off your home and raised your kids. You’re sitting on a nice little nest egg and expect life to be cushy. Here it comes:

  • your teenager wants to buy a car,
  • your kidult needs help getting into a first home,
  • a sibling has a brilliant start-up business idea,
  • your between-jobs best friend is struggling to make mortgage repayments.

Let’s say you agree, now what? Can you be certain you’ll see your money again? How do you preserve the relationship? Where will the money come from: Savings? Superannuation?

Stop right there!

You really should speak with your financial adviser, after all, whether you’re retired or still working, your financial strategy may be disrupted.

If you’re working, taking money from savings may adversely affect your investments or other plans, such as your annual holiday. If you’re retired, withdrawals from super or pension accounts may impact your income stream and how long your income will last.

After speaking with your adviser, if you decide to go ahead with the loan, it’s recommended that you draft a legal agreement. It should cover the following:

  • the loan amount,
  • by when it should be fully repaid,
  • how/when repayments will be made – instalments, lump sum, etc.,
  • whether interest is charged and, if so, how much,
  • what happens if the borrower’s situation changes through unemployment, divorce/separation, etc.
  • action taken if terms are not met.

Both lender and borrower agree to the terms, and once it has been checked by a legal professional, each party signs.

Other options

If you are reluctant to lend the money but still want to help, there are some alternatives but they also have their pitfalls.

Co-borrowing means the money is borrowed from a financial institution and both of you sign. If either party fails to meet their share of the loan, the other is responsible for repaying the full amount.

Guarantor allows your friend/family member to borrow the money themselves. You sign as guarantor meaning you are legally responsible for repaying the entire loan if payments are not made.
Gifting means you give the money to the borrower. If you’re receiving Centrelink benefits, gift amounts are limited and benefits may be affected. You must seek advice from your adviser and/or Centrelink.

These options may also impact your credit rating and your future borrowing eligibility. Additionally, if you forgive a loan, Centrelink may treat it as a gift and assess you accordingly.

It might seem distasteful, but you must consider your own position carefully. Seek professional advice and take steps to protect yourself.

Remember: “reality” television courtroom shows wouldn’t exist if people didn’t borrow money from one another!

For more information or to speak to one of our Financial Advisers – please contact TNR Wealth Management on 02 6621 8544.

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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Unlocking the mysteries of your super statement

All / 15.08.2018

Superannuation statements. Boring, right? But if, like many people, you toss your annual super statement in a drawer or hit delete, you could be depriving yourself of many thousands of dollars just when you need it. So it’s worth the small effort to take a closer look at your superannuation statement. If everything is in order, you’ll get a warm glow from watching your nest egg grow. Conversely, a quick check of your statement may reveal some of the common problems that occur with super; and the sooner these are fixed the quicker your savings can increase.

What to look for

The layouts of statements vary between super funds, but there is standard information that must be provided. Some items may appear in summary form, with a detailed breakdown shown elsewhere. Here are the key things to look for:

  • Contributions or funds in. This will cover employer and personal contributions, government contributions and rebates, plus any rollovers. If you’re an employee earning more than $450 per month, your employer should be paying 9.5% of your ordinary time earnings to your super fund. Payments can be made either quarterly or monthly. Calculate the contributions shown on your pay slip are at the right rate and that they match the contributions received by your super fund.
  • Funds out. Most commonly this comprises administration and investment management fees, and any insurance premiums. Excessive fees can place a real drag on the performance of your savings, so check that they are competitive with other funds.
  • Investment earnings. This covers interest and share dividends, along with any capital growth in the value of your investments. Be aware that depending on your specific investment mix and the performance of markets, this figure may sometimes be negative.
  • Insurance cover. Your super fund may provide death and/or disability insurance. If so, check that it is appropriate and adequate for your needs. Maybe you are paying for insurance cover you don’t need, or are inadequately insured.
  • Investment options. This will show what your money is invested in, and in many cases the performance of each investment. Your investment choices will be one of the main influences on the ultimate value of your retirement savings. Professional advice in this area is strongly recommended.

Other things to check

  • Have you provided your tax file number? If not, the fund will be deducting too much tax from your contributions and earnings.
  • Have you made a binding death benefit nomination? This allows you to choose, within applicable rules, who your superannuation is paid to upon your death.
  • Is your name and address up to date? Is it possible you have ‘lost super’. This occurs when a super fund can no longer contact you. The Australian Tax Office can help your find lost super. Start here https://www.ato.gov.au/forms/searching-for-lost-super/.
    More than one statement? Ideally, you should consolidate all your superannuation into one fund. This will avoid duplication of fees and insurance premiums, and make your super much easier to manage.

It may not rival the latest video game or binge-able TV series for entertainment value, but delving into your super statement can be way more rewarding.

Invaluable advice

Super is one area in life where professional advice can really pay off. If you need help with understanding investment options, consolidating multiple super funds, finding lost super, or ensuring you have the right insurance cover, talk to your financial adviser. The sooner you do, the sooner you’ll be on track to growing your super pot of gold.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6621 8544.

 

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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9 ways to manage investment risk – Info Graphic

All / 10.08.2018

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Buy now, pay later, manage carefully

All / 02.08.2018

Before heading off on an overseas holiday, Sam decided to buy an expensive new camera to document his travels. The camera store offered a ‘buy now, pay later’ option, and attracted by the ‘no interest’ promise of the credit provider, Sam signed up.

All was well to begin with. Sam had a great time on his trip – in fact, maybe a bit too much of a good time. On returning home he’d maxed out his regular credit card and, with insufficient savings, he was unable to maintain the required repayments on his separate camera debt. And while, true to the issuer’s promise, he didn’t have to pay interest on the overdue payments, he was charged late fees on the repayments he skipped. Along with the standard payment processing and account payment fees, Sam’s camera ended up costing a lot more than he anticipated.

Plenty of temptation

The number of ‘buy now, pay later’ services is increasing. Afterpay, Certegy and zipPay are three examples. Provided that payments are made on time, this type of service can be a great way to spread the cost of purchases over several months. Just make sure that the fixed fees aren’t too big a fraction of the total loan. For example, if you buy something for $1,000, and over the life of the loan, establishment and payment processing fees total $100, you’re paying 10% more than if you had paid in full at purchase.

Seeing a good opportunity, several banks now offer repayment plans on credit card purchases. These also operate more like a loan than regular credit cards, with a fixed repayment term and regular instalment amounts. Unlike the other ‘buy now, pay later’ operators they may charge interest, although initially this is usually at a much lower rate than the standard purchase rate. However, if any payments are missed and an outstanding balance remains at the end of the fixed term, interest may be charged at the purchase rate. This is often well over 20% per annum.

Sam’s options

Sam now faces a double whammy of a debt trap. While he’s meeting the minimum repayments on his credit card, the outstanding balance is accruing interest at 22% pa. Plus, his ‘buy now, pay later’ debt is accumulating ongoing late fees. What can he do?

The textbook method for managing this situation is to take out a personal loan at the lowest rate possible and use this to pay off the debts. While the camera loan may not have an interest rate as such, left too long the fixed fees can add up to a significant percentage of the outstanding loan amount. By consolidating the debts Sam is left with one regular payment, and with a much lower interest rate he can pay off the outstanding balance far more quickly.

But Sam had another idea. He rolled over his credit card balance to a new card with a zero per cent interest rate on balance transfers for 12 months. This meant all his repayments went towards reducing the balance and he was also able to afford normal repayments on his camera loan. Sam knew that if he didn’t clear the card debt during the interest-free period he would again be saddled with high interest rates, but now being more ‘debt aware’ he was able to get on top of things and was on track to be debt-free within the year.

Need help?

If you find yourself struggling with debt, have a chat with your financial adviser to help identify the best options to get back on track and be debt-free.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6621 8544.

 

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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What is responsible lending and why does it matter?

All / 25.07.2018

Whether it’s due to over-enthusiastic lenders or desperate borrowers, failure to adhere to robust lending standards can land some borrowers in serious financial distress. In many cases the difficulties experienced by these borrowers could have been avoided if the lenders had complied with their responsible lending obligations.

In brief, this means inquiring into a borrower’s financial situation and requirements, verifying the information supplied, and making an assessment as to whether or not the credit contract is suitable for the borrower. Ideally, the lender should also consider the ability of the borrower to maintain loan payments if there is an increase in interest rates. This is a common pathway into mortgage stress – the situation where loan repayments take up too large a fraction of household income.

The Inquisition

In the past, lenders often relied on loose assumptions of household expenditure when estimating a borrower’s financial commitments. That’s no longer the case, so if you’re looking for a new loan or to refinance an existing one, be prepared to provide the following information and documents:

  • The amount and source of your income, and duration and type of employment. This will need to be documented via payslips or through bank statements and tax returns if you are self-employed.
  • Your fixed expenses such as rent, other loans, credit cards, child support, insurance premiums and school fees.
  • Your variable expenditure, including food, holidays and entertainment.
  • Your age and number of dependants.
  • Details of your assets with a focus on financial assets.
  • Information on any foreseeable changes such as retirement.

You can also expect your prospective lender to delve into your credit history.

If you are using the loan to buy an investment property make sure you disclose this. You will likely face a higher interest rate, but don’t be tempted to deceive the lender. They are adept at detecting so-called ‘occupancy fraud’. You may also need to come up with a bigger deposit on an investment property purchase. This will decrease the sum you can borrow, limiting the price range in which you can buy.

Age needn’t be a barrier to taking out a home loan. However, anyone borrowing with a likelihood of retiring before the loan is paid off needs to have an exit strategy. This could be paying off the loan with superannuation, downshifting to a cheaper home, or even taking out a reverse mortgage.

Tighter adherence to responsible lending practices could likely lead to a reduction in the amount that people can borrow. However, this reduction in the amount of money flowing into the housing market should dampen down growth in house prices. Overall, more responsible lending may not have a major impact on housing affordability, but preferably see a reduction in the number of households experiencing mortgage stress.

Prepare ahead

Having answers to all the questions and the right documentation will come in handy when it’s time to apply for a loan. If a new loan or refinancing an existing one is on your radar, ask your financial adviser to help you prepare ahead of time.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6621 8544.

 

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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How much do you know about superannuation?

All / 18.07.2018

If you’re an Australian resident over 18 and earning more than $450 in a calendar month, you are probably contributing to superannuation.

In a nutshell, super is a strictly regulated, tax effective way of putting money aside for your retirement. The government sets a minimum compulsory contribution amount, which your employer calculates based on your income and pays into your nominated super fund. You are encouraged to contribute money to your super in addition to your employer’s payments.

Government policy, our changing lifestyles and extended life expectancies see the structure of superannuation and its supervisory guidelines being routinely revised. The result is a very confusing super system.

You probably have a basic understanding of how super works: you put money in and leave it there until you retire, right? But you also know it is more complex than that.

It’s your money after all, so take our quiz and find out exactly how much you know about building your retirement fund.

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Where does YOUR money go?

All / 18.07.2018

Please contact us on 02 6621 8544 to speak to a financial adviser if you have concerns about the amount you are saving, or would like assistance in saving enough.

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If I was 25 again I would… …buy a pre loved car.

All / 12.07.2018

If I was 25 again I would……buy a pre loved car.

As soon as you drive that shiny new car out of the showroom its value drops by thousands of dollars. You don’t notice it, but that’s real money down the drain. That’s why one of the great and often quoted financial tips is to buy the cheapest car your ego will allow you to.

Cars are now far more reliable than they used to be and the remainder of the new car warranty, which can be up to seven years, will often transfer to the new owner. Much of the loss in value on new cars – the depreciation – occurs in the first three years.

Going for something with a few k’s on the clock would save me thousands. I’d also check out the service costs of the car I was thinking of buying. They vary enormously with the make of the vehicle and can really add up over the years.

For more information or to speak to one of our Financial Advisers – please contact TNR Wealth Management on 02 6621 8544.

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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Downsize your home, Upsize your super

All / 12.07.2018

Downsize your home, Upsize your super

Over 65? Thinking of selling your home? From 1 July 2018 you may be able to contribute up to $300,000 ($600,000 for a couple) from the proceeds of the sale of your home to your superannuation fund.

This incentive, known as the ‘downsizer contribution’, is part of a federal government program to improve housing affordability. It offers a further opportunity for some home sellers to benefit from the tax advantages associated with superannuation. On the downside it may adversely affect eligibility for age pension.

Rules apply

Of course, it wouldn’t be a super contribution without lots of rules, and the main ones are:

  • You must be 65 or older when you make the contribution. This could affect decisions on the timing of a sale. For example, Anne (67) and Rod (63) are thinking of downsizing. As only Anne can make a downsizer contribution they may want to delay selling their home until Rod turns 65 so he can also make one.
  • You or your spouse must have owned the home for at least 10 years prior to sale; it must be your main residence; and cannot be a caravan, houseboat or mobile home.
  • You can only use this concession once. You can’t use it with subsequent home sales.
  • The contribution is limited to the lesser of $300,000 each or the total proceeds from the sale of the home. In the case of couples, contributions don’t need to be evenly split. Take Tom and Stephanie. They sold their house for $500,000. Rather than contribute $250,000 each, Stephanie contributes her $300,000 maximum. Tom’s downsizer contribution must then be no more than $200,000.
  • The contribution must be made within 90 days of receiving the proceeds, though an extension may be granted in limited cases.

Curiously, given the name of this initiative, you don’t need to physically downsize your home. If you have the funds available you could buy a bigger or more expensive abode. In fact, you don’t even need to buy a new home at all.

The effect on super

On the superannuation side, you can make a downsizer contribution if your total super balance exceeds $1.6 million. However, the contribution will count towards your transfer balance cap (i.e. the cap on the amount you can use to establish a tax-free superannuation pension). Even so, it may still be advantageous to hold these funds in the concessional (15%) tax environment applicable to the super accumulation phase.

And what about the age pension?

Anyone thinking of downsizing needs to consider the impact on eligibility for age pension. A main residence is exempt from the assets test, but if its sale frees up money – for example through buying a cheaper home or renting – those funds will be assessed under both the income and assets test even if they are used to make a downsizer contribution. This may result in a reduction or loss of age pension.

The extent to which you can benefit from making a downsizer contribution depends very much on your individual situation. And it isn’t just a financial issue; lifestyle considerations are also important. Before making a decision it’s important to consider all the angles, so talk to your financial adviser about whether a downsizer contribution is right for you.

For more information or to speak to one of our Financial Advisers – please contact TNR Wealth Management on 02 6621 8544.

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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