What is Financial Planning?
Financial planning is about developing strategies to help you manage your financial affairs and meet your life goals – and the first step is to make sure you have access to the right advice.
If you could achieve your financial goals by simply putting money away in the bank, you wouldn’t need a financial plan. However, it is hard to understand the intricacies of investment, taxation and ever-changing rules and regulations, so you need professional help.
Financial planning is a specialist profession and you should make sure that you’re getting advice from a properly qualified person.
Many resist or avoid seeking advice. Many often decide to manage their own financial affairs, or leave it to someone they know, which is akin to buying vegetables at the butcher.
A financial planner will help you reach your goals, even if they seem a lifetime away. The sooner you start planning, the more likely you’ll be to achieve peace of mind through financial independence.
At GFM Wealth Advisory, our financial planners have the skills and expertise to enable you to be secure in the knowledge that you’ve made the right decisions and that you can look forward with confidence to preserving and building your wealth.
We listen carefully to your goals and objectives so that we understand your current situation and your needs for the future. Only then do we prepare a personalised financial plan that has been specifically designed for you to help you achieve your goals.
Find out more about:
Superannuation
Superannuation is a way to save for your retirement. The money comes from contributions made into your super fund by your employer and, ideally, topped up by your own money.
Over the course of your working life, these contributions from your employer add up, or ‘accumulate’. Your super money is also invested by your super fund so it grows over time.
There are a few ways you can save money in super:
- If you’re employed, your employer should be contributing a minimum of 9.5% of your salary into super on your behalf each year. These funds are known as ‘super guarantee’ contributions (SGC).
- You can also choose to forgo some of your salary in exchange for your employer agreeing to make increased contributions into super. This is known as ‘salary sacrifice’.
- You can make additional contributions to super from your after-tax salary. These are called non concessional contributions and subject to contribution caps.
To help ensure your superannuation savings are there for you in retirement, the government places restrictions on when and how you can access your super earnings. Generally you need to wait until you retire to withdraw these funds or until you reach your preservation age.
What are the benefits of saving through super?
Certain advantages make saving through superannuation more tax-effective than other investments, which means your savings could grow faster. For example, any contributions your employer makes, as well as any returns you earn on your super, are taxed at a maximum of 15%, rather than at your marginal tax rate. If you make super contributions on your own, you could also be eligible for special tax concessions.
Having your super locked away until you reach retirement ensures your savings will be used for one purpose only – to help you achieve your financial goals and secure the retirement you’re looking forward to.
Why is super so important?
It’s unlikely that the government Age Pension alone will give you the financial independence you deserve for the 20 or more years you’re likely to spend in retirement, therefore superannuation is key.
It is critical to start saving for your retirement early. The longer you have to save, the more chance your savings have to grow.
How we can help by providing personal Superannuation Solutions
Whether you would like to add to your existing superannuation, consolidate a number of benefits in one fund, switch from one fund to another or even manage your own Self Managed Super Fund we can assist with effective superannuation solutions to achieve your retirement goals.
Superannuation and retirement planning requires specialist understanding of:
- Superannuation rules in Australia
- How the income tax system works
- Centrelink age pension entitlements
- Investment markets (and investments that are suited for retirement)
- Future economic trends (inflation, interest rates, Government policy)
- Estate planning implications
In planning for your retirement, it is very important to consider the points below:
- How do I minimise (or eliminate) personal income tax on investment earnings?
- Is there any chance of me getting Centrelink age pension entitlements?
- Can I qualify for any other Government benefits such as the Age Pension or Commonwealth Seniors’ Health card
- How do I invest the money in order to generate adequate investment returns, whilst at the same time minimising the long term investment risk?
- How do I protect myself against inflation over the long term?
- What are the estate planning implications?
Salary Sacrificing into Superannuation
In simple terms, salary sacrifice into superannuation is an arrangement under which an employee agrees to forgo part of his or her gross income, in return for which the employer makes a contribution into superannuation on the employee’s behalf.
The benefits of salary sacrificing are two-fold.
Firstly, salary sacrificing to super can reduce your income tax liability. Secondly, you are increasing the level of savings within your super account.
There is a limit on the amount of your salary that can be sacrificed to super. For 2015-16 the limits are:
- $30,000 if you are under 50 at 30 June 2015; or
- $35,000 if you are 50 or over at 30 June 2015.
These limits also include any compulsory Superannuation Guarantee (SG) contributions your employer is required to pay. It is also important to realize that if your level of concessional contributions exceeds the relevant cap, the excess amount will be taxed at an additional 31.5%.
While you don’t have to pay income tax personally on any amount sacrificed to super, the amount sacrificed will be taxed at 15% within the super fund.
The table below shows the personal marginal tax rate on various income levels, and the after tax benefit of making additional salary sacrifice superannuation contributions other than taking fully taxable salary. The additional benefits by salary sacrificing into superannuation can be significant:
Income Band $ | Personal Marginal Tax Rate | After tax benefit on $10,000 Salary | Super Contributions Tax Rate | After Tax benefit on $10,000 Super | Additional Benefits in Super |
18,201-37,000 | 21.0% | $7,900 | 15% | $8,500 | 7.59% |
37,001-66,666 | 36.0% | $6,400 | 15% | $8,500 | 32.81% |
66,667-80,000 | 34.5% | $6,550 | 15% | $8,500 | 29.77% |
80,001-180,000 | 39.0% | $6,100 | 15% | $8,500 | 39.34% |
180,001-300,000 | 49.0% | $5,100 | 15% | $8,500 | 66.67% |
Explanatory notes:
- The personal marginal tax rate includes the 2.0% Medicare Levy, and the 2% Temporary Budget Repair Levy to those with a taxable income above $180,000.
- The effective marginal tax rate on income between $37,001 and $66,666 is 36.0%, made up of the standard tax rate of 34.5%, plus a 1.5% tax offset on every dollar of taxable income above $37,000, the “Low Income Tax Offset”. The Low Income Tax Offset starts phasing out at 1.5% on each dollar above $37,000, and the offset is completely phased out at $66,666.
The final column shows the additional benefit in super which is the extra capital that you have in your superannuation fund as opposed to taking after tax salary. The tax arbitrage in favour of additional superannuation contributions is significant, especially for anyone with a taxable income above $37,000.
How does the government co-contribution work?
If you earn less than $35,454 in 2015/16 and make personal contributions to superannuation and meet other eligibility criteria, the Government will assist your retirement savings by making an additional contribution on your behalf at the rate of 50 cents for every $1 you put in, up to a maximum of $500.
What are the eligibility criteria?
You will be eligible for the superannuation co-contribution in a financial year if:
- You make personal contributions (after-tax) to a complying superannuation fund;
- Your total income* is less than $50,454;
- At least 10% of your total income is from eligible employment, carrying on a business, or a combination of the two;
- You do not hold an eligible temporary resident visa during the financial year;
- You lodge a tax return for the financial year;
- You are less than age 71 at the end of the financial year.
* Total income is your assessable income plus reportable fringe benefits plus reportable employer superannuation contributions (essentially salary sacrificed contributions in excess of the superannuation guarantee amounts)
Calculating the co-contribution amount
If your total income is less than $35,454 the Government will contribute 50 cents for every $1 you contribute, up to a maximum of $500.
However, if your total income is between $35,454 and $50,454, the following formula is used to determine the amount of the co-contribution: $500 – [0.03333 x (total income - $35,454)]
Note that the formula gives a maximum amount so that where the eligible contributions are less than $500 the co-contribution is limited to 50% of the amount of eligible contributions. This is the case whether the total income is less than the lower income threshold or above it.
How does the process work?
Assuming you are eligible, all you need to do is make the personal contribution/s and lodge a tax return at the end of the financial year. You can relax then as the Tax Office will do the rest.
The Tax Office uses the information from your tax return together with contribution details provided by your superannuation fund to determine whether you are eligible for the co-contribution – and if you are eligible, the Tax Office will lodge the co-contribution directly into your superannuation account.
In terms of timing, most superannuation funds are required to lodge contribution details with the Tax Office by the 31st October each year, so assuming you lodge you own tax return by that date, you can expect the co-contribution to arrive in your account not long after that.
In any case, the Tax Office will send you a letter confirming the amount of the co-contribution and to which superannuation fund it has been deposited. Note that the co-contribution will be paid into the same account that you made the personal contribution, unless you advise the Tax Office otherwise.
Superannuation Co-contribution | ||||
Total income | Personal contribution | |||
$1,000 | $800 | $500 | $300 | |
$35,454 or less | $500 | $400 | $250 | $150 |
$38,454 | $400 | $300 | $150 | $50 |
$41,454 | $300 | $200 | $50 | $0 |
$44,454 | $200 | $100 | $0 | |
$47,454 | $100 | $0 | ||
$50,454 | $0 |
What are eligible spouse contributions?
An eligible spouse contribution is simply a situation where a person makes a superannuation contribution on behalf of their spouse. There are rules on when a person can make an eligible spouse contribution and also who can be classified as an ‘eligible spouse’.
The spouse making the contribution can be any age, not necessarily employed, however, for the purposes of claiming a tax offset both spouses must be Australian residents at the time the contribution is made. The spouse receiving the contribution need not be working if they are aged less than 65, however, they must have been gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which the contribution is made if they are between age 65 and less than 70.
An eligible spouse includes a legal spouse and a de-facto spouse but does not include someone who lives separately and apart from the person on a permanent basis at the time the contribution is made. Those provisions also apply to same-sex couples.
Spouse contributions are counted towards the non-concessional contributions cap and are included in the calculation of the tax-free component in superannuation. They are preserved until the spouse is in a position to redeem their superannuation benefits, i.e. usually retirement from the workforce
after their preservation age (between age 55 and 60, depending on their date of birth).
A potential tax offset
The person making the contribution may be entitled to a tax offset. The offset is only payable in full where the spouse receiving the contribution has assessable income plus reportable fringe benefits and reportable employer superannuation contributions (these are basically employer superannuation contributions in excess of the Superannuation Guarantee amount) totalling less than $10,800. The offset is then 18% on the first $3,000 of contributions (i.e. a maximum offset of $540). The offset reduces $1 for every $1 by which the total of assessable income plus reportable fringe benefits and reportable employer superannuation contributions exceeds $10,800, with the offset totally phasing out at $13,800.
For example:
Jack makes a spouse contribution of $5,000 on behalf of Jill during the financial year
Jill’s assessable income plus reportable fringe benefits and reportable employer superannuation contributions for the financial year are $12,000
Jack is entitled to a spouse tax offset of $324
i.e. ($3,000 – ($12,000 – $10,800)) x 18%
Who is a spouse contribution suitable for?
For some, the key incentive is the opportunity for non-working or under-superannuated spouses to generate tax-advantaged superannuation savings for retirement. Upon retirement the spouse can then commence their own tax effective income stream.
For others, the benefit of making 18% on their spouse contribution up to a maximum of $3,000 to generate a refundable rebate of $540 is their sole intent.
Superannuation contribution caps
Typically, there are two types of contribution you can make into superannuation, a concessional contribution or non-concessional contribution. Both contribution types have different caps on how much you can contribute each year as follows:
Click here to read our case study on the non Concessional Contributions Cap
Concessional contributions
Concessional contributions generally include contributions your employer makes for you and contributions you make yourself for which you either claim a personal tax deduction or salary sacrifice from your gross pay.
The concessional contributions cap for the 2015/16 financial year is $30,000 for anyone under age 50. The concessional contribution cap for the 2015/16 financial year for anyone 50 or over is $35,000.
Non-concessional contributions
Non-concessional contributions generally include your own contributions to super for which you don’t claim a personal tax deduction and contributions made on your behalf by your spouse.
The non-concessional contributions cap is $180,000 per person for the 2015/16 financial year.
Bring forward 3 years of non-concessional contributions
People under age 65 are able to ‘bring forward’ 3 years worth of non-concessional contributions. This means that instead of the annual cap of $180,000 you would be able to contribute up to three times this amount, or up to $540,000 in that year. This $540,000 limit will apply as a total across the three years.
The ‘bring forward’ option is triggered as soon as you make non-concessional contributions in excess of the annual cap. Once that happens you may contribute up to $540,000 over the three year period starting from the financial year in which the ‘bring forward’ was triggered.
Retirement Planning
How long will my retirement savings last?
Generally the first question we get asked when a client retires is “how long will my retirement savings last?” Our clients naturally want to be confident that their retirement assets will provide adequate income for their life expectancy.
For individuals planning their retirement, lifestyle should be considered in the long-term wealth creation process. The sum of money that retirees accumulate during their working lives will drive their total retirement income and therefore influence their lifestyle choices. Once in retirement it becomes more unlikely that individuals will be able to ‘top up’ their capital base.
Significant improvements in healthcare have ensured that life expectancies are longer and all the evidence suggests that this trend will continue. The proposition that some of us will outlive our savings is not at all unrealistic. While there are many uncertainties associated with retirement, it is possible to draw some broad rules of thumb in terms of how long retirement savings will last.
The following table shows the life expectancy rates for men and women between the ages of 55 and 70 years.
Table 1 – Life Expectancy Rates | |||||
Age | Male | Female | Age | Male | Female |
55 | 27.71 | 31.02 | 63 | 20.85 | 23.80 |
56 | 26.83 | 30.10 | 64 | 20.03 | 22.92 |
57 | 25.95 | 29.19 | 65 | 19.22 | 22.05 |
58 | 25.09 | 28.28 | 66 | 18.41 | 21.18 |
59 | 24.22 | 27.37 | 67 | 17.62 | 20.33 |
60 | 23.37 | 26.47 | 68 | 16.84 | 19.48 |
61 | 22.52 | 25.57 | 69 | 16.07 | 18.64 |
62 | 21.68 | 24.68 | 70 | 15.31 | 17.80 |
Source. Australian Life Tables 2010-12
The table below illustrates, for any particular amount of retirement savings, how long this amount will last assuming a constant annual drawdown amount (left hand axis) and a constant annual effective earning rate net of taxes and fees (top axis).
Table 2 – How long before my savings run out? | |||||||||||
Earning Rate % | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
Drawdown % | |||||||||||
5 | 22.43 | 25.80 | 31.00 | 41.04 | |||||||
6 | 18.32 | 20.48 | 23.45 | 28.01 | 36.72 | ||||||
7 | 15.49 | 16.99 | 18.93 | 21.60 | 25.68 | 33.40 | |||||
8 | 13.42 | 14.53 | 15.90 | 17.67 | 20.10 | 23.79 | 30.73 | ||||
9 | 11.84 | 12.69 | 13.72 | 14.99 | 16.62 | 18.85 | 22.23 | 28.55 | |||
10 | 10.59 | 11.27 | 12.07 | 13.02 | 14.21 | 15.73 | 17.79 | 20.91 | 26.72 | ||
11 | 9.58 | 10.13 | 10.77 | 11.52 | 12.42 | 13.53 | 14.95 | 16.88 | 19.78 | 25.16 | |
12 | 8.74 | 9.21 | 9.73 | 10.34 | 11.05 | 11.90 | 12.94 | 14.27 | 16.09 | 18.80 | |
13 | 8.04 | 8.44 | 8.88 | 9.38 | 9.95 | 10.62 | 11.43 | 12.42 | 13.68 | 15.38 | |
14 | 7.45 | 7.78 | 8.16 | 8.58 | 9.06 | 9.60 | 10.24 | 11.01 | 11.95 | 13.14 | |
15 | 6.93 | 7.23 | 7.55 | 7.91 | 8.31 | 8.77 | 9.29 | 9.90 | 10.63 | 11.53 | |
16 | 6.49 | 6.74 | 7.02 | 7.33 | 7.68 | 8.07 | 8.50 | 9.01 | 9.59 | 10.29 | |
17 | 6.09 | 6.32 | 6.57 | 6.84 | 7.14 | 7.47 | 7.84 | 8.26 | 8.75 | 9.31 | |
18 | 5.74 | 5.95 | 6.17 | 6.41 | 6.67 | 6.96 | 7.28 | 7.64 | 8.04 | 8.51 | |
19 | 5.43 | 5.62 | 5.81 | 6.03 | 6.26 | 6.51 | 6.79 | 7.10 | 7.45 | 7.84 | |
20 | 5.15 | 5.32 | 5.50 | 5.69 | 5.90 | 6.12 | 6.37 | 6.64 | 6.94 | 7.27 |
For example, let’s assume that Bill has an accumulated retirement amount of $200,000 when he retires at age 65. If he starts withdrawing 10% ($20,000) per year, assuming his withdrawals remain constant and he earns 4% (effective) constantly on his money, he will run out of money early in the 13th year. Even if Bill earns 6%, the money will be fully depleted during the 15th year.
This means that a 65 year male who has a life expectancy of 19.22 years (refer to Table 1), will require an effective earning rate of at least 8.92% to have sufficient funds for his life expectancy.
The above table does not take into account price inflation nor does it take into account indexation of annual drawdown amounts. If price inflation and indexation of drawdowns are included, the money runs out even faster.
If we return to Bill and assume that instead of $200,000 he has $400,000 and his lifestyle can be accommodated by a constant drawdown of 5%, which equates with $20,000, the table indicates that even at very low earning rates, Bill will have enough money to last as long as his life expectancy even if he increases the constant draw down amount to 6% or even 7% (assuming an earnings rate of at least 3% in that case).
Clearly, having more money to start with is the desirable retirement strategy.
How does asset allocation affect things?
The above analysis assumes effective earning rates ranging from 1% – 10%. This does not address the returns associated with different asset allocations and the different marginal tax rates that apply for individuals. Instead of saying that over your retirement period you would hope for a return of 5% – 6% per annum, one could also ask what particular asset allocation which will determine an earnings rate. This asset allocation will also reflect the retiree’s tolerance for risk.
However, even if this approach is adopted there will still be occasions when an investment mix may not be able to satisfy a retiree’s expectation of income for their life expectancy (and beyond). For instance, it may be that even if all investments were in growth assets the expected rate of return may not be sufficient to provide the desired income for the person’s life expectancy, notwithstanding the level of risk that would have been assumed. It is also important to remember that the life expectancy is an average for a group of people – there is a significant chance that a particular person will outlive their life expectancy. For instance for a 60 year old male it is nearly 51%.
Once again, the moral of the story is the more money you start with; the more likely you will be able to fund your retirement throughout your life expectancy.
The above information is, of course, general in nature and many variables can affect the final outcome.
What is a Transition to Retirement pension?
Transition to retirement pensions (TTR) allow you to access your superannuation as a non-commutable income stream, after reaching preservation age (see below), but while you are still working.
The aim of these income streams is to provide you with flexibility in the lead up to retirement. For example, you may choose to reduce your working hours and at the same time access your superannuation as a transition to retirement pension that can supplement your other income. It may also allow you to salary sacrifice to give your retirement savings a boost.
Click here to read our strategy paper on Pre-Retirement Pensions
Are there any special characteristics?
These pensions are essentially like a normal account-based pension, but with two important differences.
Firstly, they are non-commutable, which means they cannot be converted into a lump sum until you satisfy a condition of release, such as retirement or age 65.
Secondly, you have a minimum pension amount you must withdraw each year but you can only withdraw up to 10% of the account balance (at 1 July). No lump sum withdrawals are allowed.
What is my preservation age?
Your preservation age is generally the date from which you can access your superannuation benefits and depends upon your date of birth.
Date of birth | Preservation Age |
Before 1 July 1960 | 55 |
1 July 1960 – 30 June 1961 | 56 |
1 July 1961 – 30 June 1962 | 57 |
1 July 1962 – 30 June 1963 | 58 |
1 July 1963 – 30 June 1964 | 59 |
After 30 June 1964 | 60 |
How are transition to retirement pensions taxed?
Transition to retirement pensions are taxed the same as regular superannuation income streams.
If you are under age 60, the taxable part of your pension will be taxed at your marginal rate, but you receive a 15% tax offset if your pension is paid from a taxed source*.
However, once you reach 60, your pension is tax-free if paid from a taxed source*.
* Most people belong to a taxed superannuation fund. Some government superannuation funds may be untaxed and you will pay higher tax on pensions.
Can you still contribute to superannuation?
As long as you are eligible to contribute, you and your employer can still contribute to superannuation for your benefit. In any case, your employer’s usual superannuation guarantee obligations would still apply. You need to have an accumulation account to pay these amounts into.
What are account-based pensions?
An account-based pension is basically an income stream that is payable from a superannuation fund.
Anyone with accessible superannuation money – that is, “unrestricted non-preserved” superannuation money – can either rollover to, or directly purchase, an account-based pension. You don’t necessarily need to be retired to start the pension but you do need to have met a condition of release so that your money becomes accessible. In some cases, you can open an account-based pension even before your superannuation money becomes unrestricted non-preserved but you should seek help from a financial planner to determine if this is appropriate for you.
How do account-based pensions work?
Account-based pensions operate quite similarly to a regular bank account. Investment earnings top up the account balance, while it is reduced by withdrawals in the form of regular pension payments.
Pension payments within a financial year must be at least equal to the legislated minimum amount but note there is no maximum so you can choose how much you want to receive. You can elect to receive payments at regular intervals, for example, monthly, quarterly, half-yearly or annually.
In addition to regular pension payments, lump sum withdrawals – known as ‘commutations’ – may be made from account-based pensions.
Account-based pensions can be invested in a broad range of investment options that can be varied to suit your needs. They allow investment in the major assets classes such as cash, bonds, shares and property in addition to alternative assets classes, if desired.
Why are account-based pensions so popular?
The popularity of account-based pensions is due to their flexibility and versatility.
Account-based pensions allow for flexibility in relation to income, access to capital, investment options and payment possibilities in the event of your death.
Whilst there is a requirement to take a minimum pension payment each year, you still have a great deal of flexibility to increase the pension payment anywhere up to 100% of the account balance. Access to lump sums by way of ‘commutations’ are also available, should you need.
In the event of your death, the account balance may be paid to your beneficiaries or estate, either as a lump sum, or a continuation of the pension to one or more of your dependants.
Investment earnings on the underlying assets of an account-based pension are entirely tax-free. If you are aged 60 or over and the pension is paid from a ‘taxed’ source, pension payments and commutations will all be received tax-free. However, if you are under age 60, pension payments and commutations will generally be taxable upon receipt, although a portion may be tax free and/or entitled to a 15% tax offset.
Illustration of an account-based pension
Consider an account-based pension purchased by a 65-year-old for $300,000. Suppose the assets earn 7% per annum and the annual pension is elected to be $20,000 indexed at 3% each year.
The following graph indicates the pension that is paid each year as well as the account balance over time.

Is an account-based pension for you?
For most retirees, account-based pensions will form a significant part of retirement income.
The attractions are undoubtedly the flexibility aspects discussed above and the tax-free environment from age 60. It makes sense to consider investing part of your retirement savings in an account-based pension to provide flexibility to meet your changing needs.
Insurance
Risk management and personal insurances are an integral part of the financial planning process. Personal insurances can help to ensure that those who depend on you will not be financially disadvantaged in the event of your death, a medical crisis or your disablement.
Most people purchase house, car, and health insurance without giving it much thought, but it is a well-known fact that most people are either underinsured or uninsured for events such as death, trauma or disablement.
There are 4 main types of personal insurances – those being life insurance, income protection, trauma insurance and total and permanent disablement insurance.
Click here to read our Strategy Paper on Risk Management: The Importance of Personal Insurances
Click here to read our Case Study on Insurance Inside Superannuation
Life insurance
Life insurance is really fairly simple – the policy owner receives the insurance proceeds if the insured dies.
A premium is paid for the selected level of cover and is based on the insurance company’s risk, eg. The older the person, the higher the risk, the higher the premium, or, if the person is a smoker or pursues hazardous leisure activities, the higher the risk and the higher the premium.
Life insurance can be taken out inside or outside of superannuation.
Among the reasons why people take out life insurance are to pay out debts, to buy the full share of a business if your business partner dies, to pay for funeral costs and to provide for your family after you have gone.
The sad fact is the majority of people are significantly underinsured or do not have any life insurance at all.
After realising you need life insurance, the question then becomes – how much? There are various formulas that can be used and most take into consideration your age and the age of your dependants, your current income and lifestyle and debts, including a mortgage.
Generally, younger people require more life insurance as older people typically have less debt and their dependants have grown up and moved out of the house.
The question of how much life insurance depends on your own circumstances and should be discussed with your adviser at GFM Wealth Advisory.
Income protection
Income protection insurance – also referred to as salary continuance – is a regular payment made to you should you become unable to work through disablement (injury) or sickness.
Similar to life insurance, premiums are affected by factors including your age and smoking habits, however, with income protection insurance premiums are also affected quite significantly by the type of work your do, eg. Blue collar versus White collar.
Premiums will also be affected by such things as a waiting period and the percentage of usual salary you want to insure, eg. The shorter the waiting period, the higher the premium – the larger percentage of salary covered, the higher the premium.
The maximum percentage of salary that insurers will cover is 75%. Waiting periods vary, but generally the shortest is 14 days. The waiting period is simply the time during which the insurer won’t pay you. Only when you have been sick or ill for this period can you make a claim.
The length of benefit period is also important and again affects the premium for a policy. The payment period can be one year, two years or a longer period but will generally cease by age 65.
Income protection insurance is most appropriate for the self-employed, those who primarily earn commission on sales and also for wage and salary earners with limited sick leave provisions under their employment.
Trauma insurance
While life insurance is very important to have, in some ways it can become obsolete. It is a fact that many people don’t die quickly, instead they are often left with an illness or injury that can last for years. Life insurance is no good to you then, as payment is only upon death.
This is exactly where trauma insurance fills the gap. This type of insurance pays a lump sum in the event that you experience one of the specified traumas in the contract. There are usually between 20 and 30 ‘trauma events’, but the vast majority pay out on the main traumas – those being cancer, heart attack and stroke.
As a general rule, trauma cover generally cannot be taken out within superannuation and the premiums are not tax deductible. However any lump sum payment is received tax free. Premiums again vary according to your own circumstances, similar to life insurance.
So why get trauma insurance? As we mentioned, life insurance is not paid until death. How would you cope if a stroke left you paralysed for a substantial period of your life? What if you could not continue to work and had debts to keep paying. It’s not something we like to think about (as is the case for life insurance generally) but that’s exactly the type of situation that trauma insurance provides for.
Total and permanent disablement insurance
Total and permanent disablement (TPD) insurance covers you for disability that stops you from ever working again. It is a lump sum payment that is generally payable when your doctor/s are able to state that, in their opinion, you will never be able to work again.
It is important to examine the details of the policy, as the definition of TPD can vary markedly from one insurer to another. For example, some provide cover for disablement that prevents you from working in your current job and others cover you where you cannot work in any job.
Premiums for TPD insurance are affected again by factors such as age, health, smoking habits and your occupation. This type of insurance can be obtained inside or outside of superannuation.
You may wonder what the difference is between TPD and trauma insurance. The key difference is the fact that trauma insurance will be paid out if you suffer a medical emergency, regardless of how well you survive. However, TPD insurance is generally only be paid if you are unable to ever work again.
Redundancy
Dealing with a redundancy
Whilst often unexpected, redundancies generally provide a substantial financial windfall, particularly for long term employees. Careful consideration needs be given to how best to use a redundancy payment and the tax implications of the payment being made.
It is also important to understand the nature of the payment being received. Payments received as part of a genuine redundancy program are concessionally taxed to help the redundancy payment last longer.
The steps to consider when dealing with a redundancy are illustrated in the table below:
Step 1: Identify payments received | ||
Employee termination payment | Other payments | |
Step 2: Determine if paid under approved early retirement or redundancy | ||
Calculate tax-free amount of payment (if yes) | ||
Step 3: Calculate tax payable | ||
Estimate the tax payable on all payments | ||
Step 4: Implement strategies | ||
Debt reduction | Buy an investment | Savings strategy |
Let’s look at these steps in more detail.
Employment termination payment
When made redundant, the lump sum paid by the employer generally comprises a number of payments. The first step is to identify which parts are included in the definition of an employment termination payment (ETP) and which are not.
Potentially included in the employment termination payment | NOT employment termination payments |
Unused rostered days off (RDOs) | Unused annual leave and/or leave loading |
Payments in lieu of notice | Unused long service leave |
Unused sick leave | Salary, wages, and allowances owing to the employee for work done or leave already taken |
A gratuity or golden handshake | Compensation for personal injury |
Compensation for loss of job | An advance or loan |
Redundancy and approved early retirement scheme payments in excess of tax-free amount | The tax-free portion of a genuine redundancy or approved early retirement scheme payment |
The next step is to calculate the tax on each payment so you can determine the net amount remaining after tax.

Taxation of employment termination payments
If you receive an employer payment under a genuine redundancy or approved early retirement scheme, part of the payment may be tax-free based on the number of years with that employer. To receive some of the payment tax-free, you need to be under age 65.
For 2015/16 the tax-free amount is:
$9,780 + [$4,891 x each completed year of employment]
The portion that is an ETP is taxable. However, if you were employed by your employer before 1 July 1983 or leave employment due to invalidity the ETP may include a further tax-free component.
The ETP must be taken in cash and lump sum tax is deducted by your employer. The tax deducted depends on your age as shown in the table below for 2015/16.
Employment termination payment | Amounts up to $195,000 | Amounts over $195,000 |
Under preservation age | 30%* | 47%* |
Over preservation age^ | 15%* | 47%* |
* Plus Medicare levy.
^ Applies if payment is received after preservation age or in the year in which preservation age will be reached.
Taxation of unused leave payments
Unused annual leave and long service leave payments are not part of the ETP but may still receive concessional tax treatment if received due to redundancy or approved early retirement.
The payments are included in your assessable income but the tax is limited to the rates shown in the tables below however, as they are included in assessable income they may impact your entitlements to other tax offsets or benefits. The following rates of tax are deducted by your employer.
Leave payment | Proportion | Tax |
Unused long service leave | Pre 16 August 1978 proportion | 5% is included in your assessable income and taxed at your marginal rate* |
Post 15 August 1978 proportion | 100% is included in your assessable income and taxed at 30%* | |
Unused annual leave | All amounts | 100% is included in your assessable income and taxed at 30%* |
* Plus Medicare levy.
What do you do with the redundancy payment?
If you plan ahead and use the redundancy payments wisely you can take some of the stress out of redundancy. Some options available include:
- Repaying debt: Use your net redundancy payment to reduce the burden of outstanding debt. This can include paying down your mortgage, personal loans and credit card debt.
- Commence a savings strategy: You can use part of your net redundancy payments to commence a savings plan to meet your medium to long term objectives.
- Buy an investment: This can be an opportunity to invest in an asset that has the potential to provide you with a combination of capital growth and income over the long term. This may include purchasing a property or a portfolio of diversified growth assets.
Redundancy can be a challenging time but don’t lose sight of the significant upside that it can also provide with careful planning and advice.
Aged Care
The importance of planning for Age Care
All too often we procrastinate over financial decisions and panic when the event occurs. Unfortunately this procrastination can limit our financial planning opportunities.
This is an all too common scenario for aged care. A move into aged care usually happens in a hurry, but planning ahead can significantly help to improve the cost of age care and can also help to avoid family conflict.
You might be thinking about your own future needs, or you may be faced with making decisions for a parent or other elderly relative. Advice is a key element of these decisions. Aged care is a growing issue for many Australians and the right financial planning in this area can significantly reduce age care costs.
The costs for aged care are increasing and with an ageing population we all need to think more carefully about how we will be affected and how to access the help we need. Currently, more than two million people in Australia are aged 70 and over and approximately 45% of these will use aged care services. The cost for Government is estimated to double by 2049/50 as a percentage of our economy (as measured by our Gross Domestic Product – GDP). This will be more money than the Government’s budget for defence or education. The increasing cost of aged care is shown in the graph below:
Planning for aged care should commence early and continue throughout your retirement. The fees to enter a residential aged care service tend to be significant amounts that require careful planning ahead of time.
Thinking ahead can give you (or older relatives) the following benefits:
- Reductions in ongoing care costs
- Better options for funding entry costs
- An improved impact on age pension entitlements
- Better estate planning outcomes
Estate Planning
What is Estate Planning?
Estate planning provides you with peace of mind that your affairs will be in order if you become incapacitated or die unexpectedly.
The components of an estate plan will vary according to your personal circumstances. But every estate plan has the same aim: to ensure your wealth is managed and transferred according to your wishes in the most financially efficient and tax efficient way.
Estate planning encompasses:
- Will preparation
- Appointing an Executor of the Will
- Determining whether a Power of Attorney is required, and who should be appointed in that role
- Establishing post death discretionary trust(s)
Consideration of an Estate Plan depends upon:
- If you have sizeable assets and the personal circumstances of your beneficiaries require the creation of more complex trusts within your Will
- You have vulnerable beneficiaries with special needs
- Your investment or business structures are complex and may include a family discretionary trust, a Self-Managed Superannuation fund or a private company
- You wish to minimise the tax liability of your estate or your beneficiaries, for example via superannuation or testamentary trusts
- Insurance policies you have in place including the ownership structure of those policies
No matter how simple or complex your family or financial affairs, we can assist to help you plan your estate. Our planners work with an estate planning specialist to devise the best strategy for you and your estate, and to help you ensure your wishes are met when you’re no longer around.
Who gets your superannuation when you die?
One of the most important decisions you make when you join a super fund has nothing at all to do with investment. It revolves around the question of who to nominate as the beneficiaries of your super when you die.
It is a critical decision – because if you don’t get it right your savings could be given to someone other than your preferred beneficiaries. When a fund member dies, subject to the trust deed, his or her superannuation may only be paid to:
- The member’s spouse (including a de facto spouse, whether same sex or not)
- The member’s children
- A person who was financially dependent on the deceased member at the date of death
- A person with whom the deceased member had an interdependency relationship at the date of death
- The member’s legal personal representative (estate)
An interdependency relationship is defined as one between two persons (whether or not related by family) where:
- They have a close personal relationship; and
- They live together; and
- One or each of them provides the other with financial support; and
- One or each of them provides the other with domestic support and personal care.
The beneficiaries you nominate when you join a fund are normally only a guide – the trustees of your fund will have the ultimate discretion as to who will receive your super. They will take into consideration any nomination of beneficiaries that you have made, but are not bound by your request.
The only exception is where your super fund allows you to make a “binding death benefit nomination”. This is a nomination that the trustees are obliged to follow. You may only nominate a spouse, child, someone who you held an interdependency relationship with, or a financial dependant.
What is a death benefit nomination?
A superannuation fund may permit a member to give a notice to the trustee of the superannuation fund requesting the member’s benefit to be paid at their death to either the member’s estate or their dependants specified in the notice. The notice may be either a binding nomination or a non-binding nomination.
A binding nomination is an instruction to the trustee by the member and the trustee must comply with it. In the absence of a binding nomination, it is the trustee of a superannuation fund who decides how and to whom superannuation benefits are paid following a member’s death.
What is required to make the nomination ‘binding’?
In a public superannuation fund, a member’s death benefit nomination is binding if each of the following conditions is met:
- The governing rules of the superannuation fund permit binding death benefit nominations
- Each death benefit nominee is a legal personal representative of the member’s estate or a dependant of the member
- The allocation of the death benefit between the nominees is clear
- The notice is in writing, and is signed and dated by the member in the presence of two witnesses aged over 18, neither of whom is a nominee
- The notice contains a declaration, signed and dated by the witnesses, stating that it was signed by the member in their presence
- No more than three years have passed since the notice was first signed, last confirmed or amended by the member.
A nomination made in this manner will also bind a trustee of a self-managed superannuation fund. However, these funds usually have the advantage that the governing rules of the fund may allow a member to bind the trustee to pay a death benefit in accordance with the fund’s rules without the requirements to renew the nomination every three years and have the nomination witnessed.
What are the advantages of a binding nomination?
A binding nomination gives you certainty that your superannuation benefit will be transferred in accordance with your wishes. If you have planned your estate to achieve particular outcomes, a binding nomination can ensure your superannuation benefits flow into your estate and allow the estate planning strategy to be carried out.
Alternatively, a binding death benefit nomination can be used to direct superannuation benefits away from your estate, reducing the likelihood of claims against your estate by disgruntled beneficiaries or creditors.
When should a binding nomination be reviewed?
Your binding death benefit nomination, like your Will, should be kept up to date so that it reflects your current estate planning strategy and takes into account changes to your circumstances and those of your intended beneficiaries.
However, unlike your Will, a binding nomination provided to the trustee of a public superannuation fund will generally lapse if it is not confirmed or amended within three years, leaving the distribution of your superannuation benefits to the discretion of the trustee of your superannuation fund.
Trusts
Trusts are a fundamental element in the planning of business, investment and family financial affairs. Although trusts are commonplace, they are frequently poorly understood.
What is a trust?
A trust is a relationship where a person (the Trustee) is under an obligation to hold assets for the benefit of other persons (the Beneficiaries). The terms of the obligation are defined by the terms of the Trust Deed entered into between the Trustee and the Settlor.
The Trustee is the legal owner of the trust property and the beneficiaries hold the beneficial interest in the trust property.
What is a Discretionary Trust or Family Trust?
The most common form of trust used is a discretionary trust or family trust.
In a discretionary trust the beneficiaries do not have a fixed entitlement or interest in the trust funds. The trustee has the discretion to determine which of the beneficiaries are to receive the capital and income of the trust and how much each beneficiary is to receive. The trustee does not have a complete discretion. The trustee can only distribute to beneficiaries within a nominated class as set out in the terms of the trust deed.
Who are the players?
There are 4 roles that need to be considered when establishing a discretionary trust:
The Settlor
The settlor is the person who creates the trust by “settling” a sum of money or item of property on trust for the beneficiaries.
The Trustee
The trustee is the legal owner of the trust property although not the beneficial owner. The trustee carries out all transactions of the trust in its own name and must sign all documents for and on behalf of the trust. The trustee’s overriding duty is to obey the terms of the trust deed and to act in the best interests of the beneficiaries.
The Appointor
The Appointor is the person named in the Trust Deed who has the power to remove and appoint trustees. This would commonly occur when:
- the trustee dies, becomes bankrupt or is incapacitated;
- in the case of a company, the company is wound up.
The Beneficiaries
The beneficiaries are the people (including entities) for whose benefit the trustee holds the trust property. A discretionary trust usually has a wide range of beneficiaries, including companies and other trusts. The beneficiaries of a discretionary trust do not have an interest in the assets of the trust. They merely have a right to be considered or a mere expectancy until such time as the trustee exercises its discretion to make a distribution.
The general beneficiaries are those beneficiaries named in the trust deed who are eligible to receive a distribution of income or capital at the discretion of the trustee (subject to the approval of the Appointor). The remainder beneficiaries are the beneficiaries automatically entitled to receive a proportionate distribution of income or capital to the extent that the trustee has not exercised its discretion otherwise.
The Trust Deed
The trust deed defines the relationship between the trustee and the beneficiaries. The parties to the trust deed are the settlor and the trustee. The trust deed specifically sets out the duties and powers of investment of the trustee, the beneficiaries, and other important stuff.
Why use a discretionary trust?
- Tax Benefits – flexible distribution of income
- Asset Protection
- Estate Planning
Flexible income distribution
As the name suggests, a discretionary trust allows the trustee discretion in determining each year, which beneficiary receives any income from the activities of the trust. This has clear benefits where there is a disparity in the income of the beneficiaries and allows for the gift of income at reduced tax rates.
Some examples where a discretionary trust may be an effective vehicle for the distribution of income:
Husband and Wife: Trust owns investment properties and receives income from those properties. The husband only works part time and earns $15,000.00 per year. The wife is a partner in Law Firm and earns squillions. It would be better to distribute the income to the husband as he will pay tax on a lower rate.
Asset Protection
A Trustee of a discretionary trust holds the property beneficially for the beneficiaries. Property held by a person as trustee cannot be taken by a creditor in bankruptcy, unless the debt relating to the creditor was a trust debt. Similarly, property held by a company, as trustee for a trust, cannot be taken by creditors in a liquidation of that company unless the debt is a debt of the trust. Any properties held in trust can only be attacked by creditors of that trust.
Estate Planning
Examples:
Mum and Dad die leaving one son who is a bankrupt. Mum and Dad leave all of their assets to their son. Their entire estate is lost to the trustee in bankruptcy.
Had Mum and Dad left their estate to a discretionary trust established for the benefit of their son and his family, the estate would have been saved. Alternatively, with proper estate planning, the assets could have been protected well before the death of Mum and Dad.
Other types of trusts
- Fixed trusts
- Unit trusts
- Bare trusts
- Hybrid trusts
- Testamentary trusts