It’s June which means winter has officially arrived. As we rug up and spend more time indoors, it’s a perfect time to get your financial house in order as another financial year draws to a close. And what a year it has been!
The local economic news in May was dominated by the federal Budget, and better-than-expected economic data. Australia’s budget deficit is smaller than expected just six months ago, at $177.1 billion in April. This was underpinned by rising iron ore prices and higher tax receipts from more confident businesses and consumers.
The NAB business confidence and business conditions ratings hit record highs in April of +26 points and +32 points respectively. New business investment rose 6.3% in the March quarter, the biggest quarterly lift in nine years. Housing construction is also going gangbusters, up 5.1% in the March quarter while renovations were up 10.8% thanks to low interest rates and government incentives. Retail spending is also recovering, up 1.1% in April and 25.1% on a year ago. The ANZ-Roy Morgan weekly consumer confidence index rose steadily during May to a 19-month high of 114.2 points, well above the long-term average. As a result of the pick-up in economic activity, unemployment fell from 5.7% to 5.5% in April.
In response to all this, the Reserve Bank lifted its economic growth forecast to 9.25% for the year to June and 4.75% for calendar 2021. If realised, this would be the strongest growth in 30 years, albeit rising out of last year’s COVID recession. The major sticking point remains wages. Wage growth was 0.6% in the March quarter but just 1.5% on an annual basis, below inflation. The Aussie dollar finished May at around US77c after nudging US79c earlier in the month.
Time to review your income protection cover
If you’ve owned an individual income protection or salary continuance policy in recent years, you may have seen your premiums increase as insurers struggled to cover their large losses on these products.i
Given the ongoing competition and generous features in some products, the Australian Prudential Regulation Authority (APRA) has decided it’s time for some new rules to ensure income protection cover remains sustainable and affordable for customers.
This will result in sweeping changes to these types of policies from 1 October 2021, so it’s essential to review your insurance protection cover before insurers start altering their product offerings.
What is income protection?
Income protection cover protects your most valuable asset – your ability to earn an income. It acts as a replacement income if you are injured or disabled and will help support your family and current lifestyle while you recover.
What’s more, your premiums are generally tax-deductible, so they can potentially help reduce your tax bill.
Major changes to income protection
Reform of income protection policies started back on 1 April 2020, when insurers were no longer permitted to offer customers Agreed Value income protection policies. Agreed value income protection provided more certainty about the amount you would be paid if you claimed and was based on your best 12 months earnings over a three-year period.
Following this initial change, APRA is implementing further changes from 1 October 2021 that will make new income protection policies much less generous. The reforms mean insurers will be offering new policies that base insurance payments on your annual income at the time you make a claim (or the previous 12 months), not on an agreed earnings amount.ii
For people with a fluctuating income, insurance payments will be based on your average annual earnings over a period appropriate for your occupation and will reflect future earnings lost due to the disability.
To further reduce costs, new policies will no longer offer supplementary benefits like specified injury benefits.
Limits on income payments
Other changes include a requirement for the maximum income replacement payment for the first six months to be capped at 90 per cent of earnings, reducing to 70 per cent after six months.ii If your insured income amount excludes superannuation, the Superannuation Guarantee can be paid in addition to the 90 per cent cap.
One of the most significant changes is that the terms and conditions of an existing income protection policy will no longer be guaranteed until age 65. Policies will no longer be offered for longer than five years, so your policy and its terms will be reviewed every five years.
You won’t need to undergo medical review, but any changes to your occupation, financial circumstances or taking up a dangerous pastime will need to be updated in the policy. Even if your circumstances remain the same, you will still be required to review the policy.
If your policy has a long benefit period, you are also likely to face a tighter definition of disability, rather than the previous definition of simply being unable to perform your ‘normal job’. APRA is keen to ensure claimants who are able to return to some form of paid employment do so, rather than remaining at home and receiving a payment.
Impact on existing and new policies
So what does this mean for you?
If you currently have an income protection policy outside your super, you will not be immediately affected by these changes, but it would be wise to check your policy is still appropriate for your circumstances.
Given the extent of the changes to income protection cover, if you have let your insurance lapse or don’t currently have income protection, it could make sense to consider signing up before 1 October 2021 to take advantage of the more generous current arrangements.
Income protection is often overlooked because of a perception that it’s too costly or not essential, but like all insurance, the cost of not being insured can be far greater. This type of cover offers valuable benefits that should be a key component in your wealth creation – and preservation – strategy.
If you would like help reviewing or selecting appropriate income protection cover, call our office today.
ii https://www.apra.gov.au/final-individual-disability-income-insurance-sustainability-measures
End of Financial Year Super Strategies
The end of the financial year is the ideal time to think about how to get your super working harder for you.
Firstly, a recap on what is changing from 1 July:
- The rate of Superannuation Guarantee payable for employees is set to increase from 9.5% to 10% from 1 July 2021
- The concessional contribution cap is set to increase to $27,500 from $25,000 presently
- The non-concessional contribution cap is set to increase to $110,000 from $100,000 presently
- The transfer balance cap is set to increase to $1,700,000 from $1,600,000 presently
- *UPDATE* The temporary measure to halve the minimum pension income draw-down for individuals with an account based pension has been extended by 1 year with minimum income requirements now set to revert back to normal levels from 1 July 2022
Here are seven superannuation strategies to help your super work harder for you this end of financial year.
Superannuation strategy 1: Maximise your tax-deductible super contributions
In addition to the Superannuation Guarantee contributions your employer makes into your super, you can make personal super contributions. You might even be able to claim a tax deduction for them too. To claim a deduction, you must give a notice to the Trustee of your super fund and have it acknowledged by them.
Your age, sources of income, any salary sacrifice and certain other employer contributions can all affect your eligibility, so it’s worth having all this information to hand at tax time. It may be a great way to pay less tax while saving more for your future.
Keep in mind that personal deductible super contributions count towards your annual before-tax (or concessional) contributions cap. This is currently $25,000 for the 2020/21 financial year.
Superannuation strategy 2: Use salary sacrifice to top up your super
Salary sacrifice is an arrangement you make with your employer to effectively ‘give up’ part of your before-tax salary and have it paid into your super account instead. Not only is this an effective way to boost your super and help you save for retirement but there may also be additional tax advantages for you, depending on how much you earn.
As with all contributions into super, there’s a limit on how much you can pay into your super and still receive favourable tax treatment. Salary sacrifice contributions count towards your concessional contributions cap each financial year so be careful not to exceed the overall limit.
Superannuation strategy 3: Consider making a once-off after-tax contribution
After-tax, or non-concessional, super contributions are those you make from money you’ve already paid income tax on and therefore won’t be claiming a tax deduction for. The advantage of this strategy is in the way your investment earnings are taxed. Within super, you’ll pay up to 15% tax on any investment growth rather than your marginal tax rate, which applies to any investments you hold outside of super. You should be aware, depending on your income level, your marginal tax rate may be less than 15%.
The annual limit for after-tax contributions is currently $100,000, provided your total superannuation balance is below $1.6 million at the start of the financial year. In certain circumstances, you may be able to bring forward three years of after-tax contributions into one year. This would allow you to contribute up to $300,000 if you haven’t triggered the rule in the previous two years and your total superannuation balance is below $1.6 million on 30 June at the end of the previous financial year.
Superannuation strategy 4: Check your eligibility for a Government co-contribution
Investing in super isn’t just a strategy for the wealthy to enjoy tax benefits. The Government is keen to ensure middle to low-income earners also benefit. In the 2020/21 financial year, adding to your super from after-tax money could see you entitled to a government co-contribution worth up to $500 if you earn less than $54,837 and are aged below 71 at 30 June 2021. You must also have a total superannuation balance of less than $1.6 million at the start of the financial year to be eligible.
Superannuation strategy 5: Investigate the spouse super contribution tax offset
If your spouse or partner is a middle or low-income earner and their assessable income is less than $40,000 in a financial year, you could make super contributions on their behalf and potentially claim a tax offset for yourself. For spouse or partners who earn less than $37,000, the maximum tax offset is $540 in the 2020/21 financial year. This amount progressively reduces until it reaches zero where the spouse/partner earns over $40,000 in a year.
Superannuation strategy 6: Capitalise on tax efficiencies to save for your first home
Younger generations have the potential to benefit from super before they reach retirement age.
If you’re saving for your first home, the First Home Super Saver Scheme (FHSSS), which started on 1 July 2017, enables you to make voluntary superannuation contributions to help save for a deposit on your first home. These contributions, and any associated investment growth, can be accessed subject to eligibility criteria. The total you can contribute and save towards the FHSSS is capped at $15,000 a year, and the maximum you can access is presently capped at $30,000 however is slated to increase to $50,000 from 1 July 2022 under the recent budget announcement.
Superannuation strategy 7: Take advantage of the downsizing opportunity
If you’re aged 65 or over and you’re thinking about downsizing the family home you’ve lived in for 10 years or more, you (and your spouse or partner) may both be able to contribute up to $300,000 from the sale proceeds to your superannuation.
Don’t get caught out
While these strategies can be an effective way to grow your super, always remember the Government imposes strict annual limits on the amount you can contribute to your super each year.
Market movements & review video – June 2021
Stay up to date with what’s happened in Australian and global markets over the past month.
Our June update video takes you through key economic indicators so you can understand how the Australian economy is faring as we recover from the COVID-19 induced recession of 2020.
Please get in touch if you’d like assistance with your personal financial situation.
Authorised Representative | Professional Wealth Services Pty Ltd | PWS ABN: 58 174 609 776 | AFS Licence Number 312047 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
