July 2017

July is here and the good news is that the shortest day and longest night are behind us. It's also the start of the new financial year which is always a good time to reflect on your financial progress over the past 12 months and plan your strategy for the year ahead. We have many client reviews on the go at present and booking in for July , August and September now. If you want a meeting give us a call and we will fit you in gladly.

Australia's economic performance defied the odds in the 2016-17 financial year, notching up more than 25 years without a recession a global first. Annual economic growth eased from 2.4 per cent to 1.7 per cent in the March quarter, reflecting the unwinding of the mining boom, adverse weather events and geopolitical instability. Consumer confidence also eased as annual wages growth slowed to around 2 per cent, just above the annual inflation rate of 1.7 per cent. The ANZ/Roy Morgan consumer confidence rating fell 4.3 per cent over the year to 111.8 at the end of June. However, there are positive signs for the future with home building at record levels, infrastructure spending on the rise across the country and unemployment at 4-year lows, down from 5.7 per cent to 5.5 per cent in May.

Local investors also have reason to celebrate, with Australian shares up close to 13 per cent in the year to June, their best performance in three years. The Aussie dollar has traded within a narrow band between US72c and US78c all year, to close around US76c. The cash rate remains at a record low of 1.5 per cent and while the Reserve Bank appears content to sit on the sidelines for now, most commentators expect the next move will be a modest rate rise. in at the lower end of the Reserve Bank's 2-3 per cent target band, due to a soft jobs market and low wages growth.

Time to review transition to retirement pensions

Amid the major reforms to superannuation that took effect on July 1, some significant changes to the tax treatment of your Transition to Retirement Pension (TRIP) may have flown under the radar. Some individuals will be affected more than others, so if you have a TRIP or are thinking about starting one, now is the time to review your strategy.

The Government's super reforms were designed to improve the sustainability, flexibility and integrity of the system. According to the Tax Office, the changes to TRIPs were designed to ensure that they're not used primarily for tax purposes.i

What is a TRIP?

A TRIP allows you to access up to 10 per cent of your super in the lead-up to retirement. The idea is that you can supplement your employment income while you continue to work full or part-time. The tax benefit comes from replacing employment income taxed at your marginal rate with concessionally-taxed income from super.

When combined with salary sacrifice, a TRIP strategy also allows you to boost your super without sacrificing some or any of your after-tax income.

As you would expect with super, there are strict rules around eligibility. For starters, you must have reached preservation age; this is currently 56, rising progressively to age 60 for everyone born after June 1964. Then there are maximum (10 per cent) and minimum (4 per cent) amounts you can withdraw from your TRIP account balance each financial year. And you can't withdraw your money in a lump sum, it must be received as an income stream unless you retire, turn 65 or satisfy another condition of release.

What are the changes?

The main change relates to the taxation of earnings on investments used to fund your TRIP. From July 1, earnings on these investments are no longer tax free. Instead they are now taxed at the 15 per cent rate that applies to earnings from assets held in the accumulation phase of super.

The good news is that payments you receive from your TRIP will continue to be taxed as they were previously. That is, payments are tax free if you are aged over 60, or taxed at your marginal rate with a 15 per cent tax offset if you are aged between 56 and 60.

Another of the super reforms will limit the appeal of TRIPS for high income earners. That's because the income threshold at which individuals begin to pay contributions tax at the higher rate of 30 per cent, instead of normal super rate of 15 per cent, has been lowered from $300,000 to $250,000.

New limits on concessional (before tax) super contributions may also limit the potential benefit of the popular salary sacrifice strategy when combined with a TRIP. From 1 July, the maximum concessional contribution (including Super Guarantee payments and salary sacrifice arrangements) is $25,000 a year for everyone. Previously anyone over 49 could contribute up to $35,000 a year this way.

What should I do?

While TRIPS are still a tax effective way to manage your finances in the leadup to retirement, the new rules mean some people could be better off pursuing other strategies. In some cases, high income earners who already have a TRIP and satisfy a condition of release, such as retiring or changing jobs after turning 60, may be better switching it off or converting to a normal account-based pension.

At the very least, if you have a TRIP or are thinking of starting one and you haven't already done so, you should review whether it's still be the best option for you going forward. The new super rules are complex and their impact will depend on your overall financial situation so it's important to seek professional advice before you act. If you think you may be affected or you would simply like to discuss your options in the leadup to retirement, don't hesitate to give us a call.

i https://www.ato.gov.au/individuals/super/super-changes/change-to-transition-to-retirement-income-streams/

An insurance lifeline when you need it most

Trauma insurance is the middle child of the personal insurance family. It's overshadowed by its better-known siblings but it's a quiet achiever that will do the heavy lifting when the circumstances require it.

What trauma insurance is and isn't

Trauma insurance sometimes known as critical illness insurance provides a lump sum payment in the event of a major illness or injury, such as a cancer diagnosis, heart attack or stroke. The full list of conditions covered will be set out in your policy.

In 2013, the most recent year for which figures are available, insurers paid out $621 million to 4512 trauma policyholders. That works out to an average pay out of $137,808.i

As with other types of personal insurance, the cost of a trauma policy will vary depending on how likely you are to make a claim. This is calculated with reference to your age, gender, occupation, health status and the amount of cover you're seeking. A non-smoking 35-year-old male, for example, should be able to take out a standard trauma policy for around $300 a year. This will entitle him to $20,000 if he has a heart attack, $120,000 if he's diagnosed with cancer and $150,000 if he has a stroke.ii

Why you may need it

You may be wondering why you might need a trauma insurance policy if you have private health insurance. If you have other forms of personal insurance that provide a much larger payout if something goes wrong, you may wonder why you need to bother with trauma cover?

The answer to the first question is that trauma cover pays for rehabilitation, carers, other forms of treatment and loss of income that health insurance does not. The answer to the second question is that trauma is best seen as a complement to, rather than substitute for, these other forms of personal insurance:
  • Life insurance pays your dependants a lump sum if you die.
  • Income protection insurance replaces (most of) your salary for the period you are unable to work due to illness or injury.
  • Total and permanent disability (TPD) insurance provides you with a lump sum payment if you suffer an injury or illness that prevents you ever working again.

If you don't have any personal insurance, you would be well-advised to investigate some of the more well-known policies before considering trauma cover.

A small outlay for a lot of peace of mind

If you have superannuation you almost certainly have some life insurance, TPD cover and possibly even income-protection cover 'baked in', although the amount of cover is often low so you may need to buy a separate policy outside super. Trauma cover can only be purchased outside super, which brings us back to the issue of why bother.

Take the 35-year-old who is paying $300 a year for trauma insurance. Let's say he's diagnosed with cancer. He has a life insurance policy but it's not going to pay out anything unless it's terminal cancer. He's got TPD insurance but it's not going to pay out anything unless the cancer is going to result in a total and permanent disability. He's got income-protection insurance but that's only going to pay out, after a waiting period, once proof has been provided that the cancer is preventing him from earning an income.

With trauma insurance, there are no ifs or buts. Once the diagnosis is made, he qualifies for a lump sum of $120,000. That's not going to set him up for life by any means, but it will allow him to cover medical expenses and pay the mortgage if he needs to, or chooses to, stop working for a while to concentrate on getting well.

If, like our hypothetical 35-year-old, you have financial responsibilities and want the reassurance of a payout if you suffer an insurable health-related setback then trauma insurance may be for you.

Avoiding being under or over insured is no simple task. If you'd like us to help you work out your insurance needs, give us a call.

i Industry Stats 2013, the risk store 2014, http://www.theriskstore.com.au/resources/16/TRS_Claims_Stats_2013.pdf

ii What's the cost of trauma insurance, finder.com.au 2017, https://www.finder.com.au/cost-of-trauma-insurance

Escape the winter blues without breaking the bank!

Have you been feeling a bit sluggish as the winter weather sets in? Are you craving richer meals, sleeping in a bit more, and generally feeling a bit flat?

There could be a scientific explanation. Seasonal Affective Disorder (SAD), otherwise known as the winter blues, is a real condition. It's more common than you might think in this country as it's estimated that up to 54% have some of the symptoms.i

Even if you're not afflicted by SAD, it's pretty common at this time of year to feel a bit lacklustre as the days get shorter and the drizzle sets in. One thing guaranteed to put a spring in your step is the idea of escaping the cold weather and heading on holiday somewhere for days of endless blue sky and balmy warm nights.

Escape the grey skies by heading north

The good news is that Aussies have plenty of options when it comes to getting away to somewhere warmer. It doesn't cost much for those on the southern and eastern seaboards to head to the Northern Territory or Queensland, where it can seem like summer all year round to those from the cities in the southern half of the country. Darwin and the wider Northern Territory have plenty of natural and cultural wonders to explore. There's nothing quite like swapping out the grey palettes of city streets for the rich reds and vibrant aquamarines of the Kimberley gorges. Tropical Queensland is home to plenty of luxury resorts, not to mention national treasures like the Great Barrier Reef. A few days soaking up the sunshine can be had for well under $1,000 for a couple, all inclusive, if you take some time to do your research.

Overseas destinations

If you've got a bit more time and you're willing to go further afield, south east Asia has a plethora of budget-friendly destinations. According to the ABS, the most popular holiday spots during the winter months are Indonesia (including Bali), Thailand, and Malaysia.ii

Emerging destinations, where luxury getaways can be had for the price of a hostel stay back here in Oz, are also worth considering. For example, visitor numbers to Cambodia and Vietnam are increasing, with tourism to these countries having really opened up over the last couple of decades. Vietnam offers world famous cuisine coupled with stunningly diverse landscapes, from the balmy south to the mountainous north. Cambodia is also a unique cultural experience, home to delightful villages where you can still get that feeling of being somewhere fresh and un-explored.

Finding the best deals

To find the best deals, look at packages being offered by bigger travel companies, which can use their buying power to your advantage. Alternatively, keep an eye out for airfare sales with lower cost airlines, and build your own holiday from there. There is a 'sweet spot' in terms of timeframes for nabbing the best fares. Booking between three months and six weeks in advance and avoiding peak times like school holidays will get you the cheapest deals.ii

Many carriers also offer bargain fares in the middle of winter, when fewer people are taking time off for holidays compared to the summer months. If you prefer hotel accommodation and steering clear of questionable street food 'adventures', an all-inclusive resort deal can help you keep costs under control.

Budget for a break

Putting some money aside for upcoming travel and building up some savings can help you to avoid racking up a high credit card debt that you then have to deal with on your return.

And of course, if you can't beat 'em, why not join 'em and embrace winter? Take a leaf out of the book of European après ski culture and make a day trip to the snow, rent a cabin in the country (complete with roaring fireplace), rug up and go for long walks. Alternatively, just bunker down at home and enjoy lounging around on the couch with a hot choccie in your hand.

i http://mccrindle.com.au/the-mccrindle-blog/winter-blues-having-real-impact-in-australia

ii http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/3401.0Jul%202016?OpenDocument

iii Source: Airlines Reporting Corporation (ARC)

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Steve Culpitt is a Sub Authorised Representative ( AR 270473) of Arrow Focus on Wealth.
Arrow Focus on Wealth Pty Ltd is a Corporate Authorised Representative (CAR 270472) of of GPS Wealth Ltd AFSL 254 544 Australian Credit Licence 254 544 ABN 17 005 482 726 General Advice Warning: This communication contains general advice only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice before making any decisions regarding any products or strategies mentioned in this communication.
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