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22 NEWCASTLE HERALD Thursday, April 23, 2015
business PERSONALFINANCE
TheproblemwithpensionsNOELWHITTAKER
There’s a big move against
linking the age pension to
the cost of living.
It’s not the amount but the ability to get the prized pensioner card that attracts retirees.
Noel Whittaker is the author ofMaking Money Made Simple andnumerous other books on personalfinance. His advice is general innature and readers should seek theirown professional advice beforemaking any financial decisions.Email: [email protected].
AUSTRALIA has one of the mostgenerous superannuation systemson the planet. There is just oneproblem – it’s unsustainable. Underthe current rules, a couple can haveup to $1,151,500 of assets, plus afamily home of unlimited value,before losing access to at least a partpension. The cut-off point for theincome test is $74,818 a year.
Granted, at these levels, thepension paid is minuscule, but it’snot the amount that attracts retirees.It’s the ability to get the prizedpensioner health card, which isavailable to anyone who is receivinga part age pension.
Pension eligibility is under attackfrom all sides. Pension increases arecurrently linked to average weeklyearnings – about 4 per cent a year.The government wants to linkincreases to the cost of livinginstead. The full pension for acouple is now $33,717 a year. Underthe existing arrangements, it wouldbe $75,000 a year in 20 years – if theincrease was reduced to theconsumer price index, it would bejust $55,500 in 20 years.
It’s not unreasonable to think thatlinking the age pension to the cost ofliving is fair, but there is already agroundswell of feeling that this is abridge too far. If that is so, the onlyviable alternative strategy will beadjusting the taper rate – this is therate at which the pension reduces asassets or income rise.
Social Services Minister ScottMorrison is open to tightening thetaper rate, the Greens are happy toconsider it, and some cross-benchers like Nick Xenophon can’twait to see it happen.
But changing the taper rate isfraught with difficulties. If you makethe taper too steep, pensioners areplaced in the invidious position thatit’s not worth earning extra incomebecause of the effect on the pension.If you make it too shallow, as it isnow, you push out eligibility so far
that even a person earning $74,000 ayear is eligible for a part pension.
Currently, under the income test,every additional dollar earnedabove the threshold causes areduction of 50¢ in pension. Underthe assets test, the full pension isreduced by $1.50 per fortnight foreach $1000 above the threshold.Pension eligibility is then assessedusing the test that produces thelowest pension. Because of the waythe numbers work, almosteverybody with financial assets inexcess of $350,000 is assessed underthe assets test.
Those who are advocating achange in the taper rate are seekinga return to the Howard governmentyears, when the asset test taper was
$3 for each $1000 above thethreshold. This might be a simpleconcept to toss around in thecloistered atmosphere of the cabinetroom, but it’s a very different matterin the real world.
Case study: Mick and Mary areaged 70, and have $450,000 infinancial assets such as super, and$50,000 in lifestyle assets like a carand furniture. They own their ownhome and are assessed under theassets test. Their current pension is$25,390 a year. If the taper rate waschanged, as foreshadowed above,their pension would drop by $8327a year, or $160 a week. That’s badenough, but now think about theirneighbours who have $720,000 inassessable assets. They would
lose the entire pension and theconcessions that go with it.
Do you really think either coupleare going to give without a battle?
Yes, the current pension system isunsustainable – the problem is thatany government who tries to changethe system will be saddling up forthe fight of their lives.
Q My parents own their homeand will soon move into an
aged care facility. Hopefully theywill live long enough to sell thehouse and finance the costs oftheir care. They won’t have to sellwithin two years because I havebeen caring for them and living intheir home for more than that time.If I inherit the money remainingfrom the proceeds of selling thehouse, is it taxed and if so, in whatway?
A If the property was yourparents’ residence before they
moved to aged care, it will be aCGT (capital gains tax) exemptasset, and will be deemed to havepassed to you on their death at itsmarket value then, assuming youdo not rent it out for more thansix years. If it is sold before theirdeaths, it will be CGT exemptprovided it has not been rented outfor more than six years. There is nodeath duty, but of course normalpersonal taxation could be payableon any investments you make withthe proceeds.
Q I am 20 and earn $60,000 ayear. I bought an investment
property 12 months ago, andmoved in six months ago to makeminor renovations. The house isvalued at $380,000 with amortgage of $290,000. Am I ableto claim the CGT exemption for thenext six years now that I have beenliving in the house for over sixmonths, even though it was initiallybought as an investment? Withinterest rates dropping, is it betterto concentrate on paying off themortgage, or should I reduce thedebt by half and buy shares oranother type of investment?
A Because it was an investmentproperty before you moved in,
you are not eligible for the CGTexemption from the date youbought it. However, if you moveout and don’t claim any otherproperty as your principalresidence, you will be entitled to asix-year exemption from the dateyou moved in. I suggest youdiversify into shares in a small wayto get the compounding effectworking at an early an age aspossible.
Twenty small tips that can add up to huge savingsBy MELISSA BROWNE
I LOVE life hacks. Those tips that seem sostrange are often so sensible that you cannotbelieve you haven’t already tried them.
Generally these life hacks are based onfitness, wellness, technology or cleaning, butwhat about finance and money hacks?Following are 20 of my favourite money hacksthat, if adopted, could potentially save youthousands of dollars every year. None of themare rocket science but if you adopt even a fewof them, you will notice a big impact on yourbank account by the end of the year.
1. Take your cards out of your wallet. All ofthem. Instead bring cash for your lunch oryour coffee. That way you cannot be temptedto buy anything else in your lunch hourbecause you cannot pay for it.
2. Shop your loans around. Each year, shopyour loans around for a better interest rateand if you find one, take it to your bank andask them to match it.
3. Pay yourself first. You have probablyheard this one before but are you doing it? Ifnot, set up an automatic transfer to make surethe money for your savings is the first thingthat is paid.
4. Keep your savings in an offset account. Ifyou have a mortgage, you will save moreinterest by keeping your money in an offset
account than you will in a savings account.Plus you will not pay tax on it.
5. Pay for tax deductions on your card. Thatway if you lose your receipt, the bankstatement is proof of the deduction.
6. Pay down debt using a zero-interest creditcard. If you are not paying off your balance atthe end of the month then apply for a zerointerest card and transfer your debt. Then doyourself a favour and cut up both cards.
7. Buy property in a self-managedsuperannuation fund. When you retire, the rentmay be tax-free and when you sell theproperty after retirement the capital gainsmay be tax-free. A win-win.
8. Pay down your bad debt first. Maximiseyour tax deduction by keeping your good debt(investment loans) as interest-only loans andpay the extra amount on to your bad debt(home mortgage).
9. Unsubscribe from online shopping sitesand delete your credit card information.Nothing destroys your willpower faster thanhaving a sale pop up in your inbox and yourcredit card details are saved and ready to go.Instead, start shopping on your terms.
10. Do a financial detox – 30 days with nospending. This is designed to break yoursubconscious spending and help you set upgreat saving and spending patterns. It worksbest if it is done twice a year.
11. Cook. I once heard a nutritionist say thatmore time in the kitchen means less time atthe doctor, dentist and therapist. I would addthat it also means more money in your bankaccount.
12. Shop at farmers’ markets and online witha grocery list. Cut out the middle man, pay lessand watch how much longer your fruit andvegetables last when you buy them directlyfrom the farmer. Plus, shopping online with alist saves you from impulse buys.
13. Share and rent. For anything that is notgoing to increase in value, do not buy – shareinstead. There are many sites online whereyou can do this now and there are many waysto do it – sharing everything from holidays toclothes to cars to lawnmowers.
14. Teach your kids about money and say no.Teaching your kids great money habits nowwill save you money because you are notalways giving in, and you are also setting themup for a great relationship with money for thelong term.
15. Embrace the cloud. There are so manycheap or free sites to help you with yourfinances. From the free Money Smart sitethrough to banks giving you details on yourspending patterns via internet banking. If youhave a business make sure you don’t miss out:check out Xero, Commonwealth Bank’s Albertapp, or for a great, cheap, one-stop solution
head to St George’s My Business Connect.16. Renegotiate monthly payments. It is the
regular small monthly amounts that add up toan annual large amount. Negotiate paymentswhere possible or cancel them completely ifthey are unnecessary.
17. Buy a quantity surveyor report for yourrental property. If your investment property isless than 40 years old, you could be missing outon thousands of dollars every year by notorganising this report.
18. Travel in the off-season. There is a reasonwhy it is more expensive to go away at Easterand Christmas, so do not travel during peaktimes and if you do not have to travel duringschool holidays – then don’t.
19. Build multiple streams of income. Thisdoes not mean a second job any more. Insteadit might be share trading, properties, onlinebusinesses, consulting, blogging or importingand selling products.
20. Manage electricity costs. This is one of thebiggest bills and there are so many ways toreduce it. Drop your airconditioning to20 degrees, turn off machines not used, switchto energy-efficient light bulbs and air-dryclothes instead of using a clothes dryer.
Life hacks – they are simply creating betterhabits. After all, it is the small changes thatare the easiest to make and, combined withothers, make the biggest impact.