Insurance in Super. Is it Super?

I was reading this week the ask an expert section in the Brisbane Times and a question was put forward of a sad situation, but highlighting a significant issue with group insurance policies (typically those in industry funds, employer superannuation funds and sometimes direct employer funded policies).

The link to the article is here.

The situation is that the person originally had income protection insurance cover within their industry superannuation fund that had a benefit period until age 65, but at some point along the way, the policy was changed to a 5 year benefit period. Now she is on claim and nearing the end of the 5 years without being able to return to work, it's a problem.

She would have been notified at the time the change was made and perhaps ignored it (as many probably do). But what happens a lot is that we have medical issues along the way such as: back problems (insurers hate back problems as it is a common area of claim), perhaps you have had to take some time off work due to mental illness and have been taking some medication (again, mental illness is a big area of claim). So if your group policy is now changed so that it no longer suits, then you wouldn't be able to get new policy elsewhere, even if you wanted to. So they are just stuck with the fact their policy covering them to age 65 has just been slashed to 5 years.

The same thing happened to the definition of what is total and permanent disablement for those covered within AustralianSuper many years ago which negatively impacted millions of members (Link)

What you want in an insurance policy is guaranteed or non cancellable. This means that providing you keep paying the premium, they have to cover you for what is listed on your policy schedule and as per the terms in the product disclosure statement at the time you took out your policy.

The other thing is that when you are in a group insurance policy, you need to stay within that group. So, if that is in a superannuation fund, that means to keep getting than cover, you need to stay within that superannuation fund - so if some health issue occurs that prevents you from getting new cover elsewhere, you are handcuffed to that superannuation fund. The same is true with group policies provided by your employer, if you leave that employer, that cover is gone too.

The thing is, for most people, the premiums for a quality non cancellable, retail policy is usually just as good, or thereabouts, compared to the group policies I've been speaking about. You are still able to fund these policies from superannuation, but they aren't linked to one specific fund so you can in the future change fund or start a SMSF, and maintain your insurance policy which can be so valuable for so many people.

If you've got a retail policy and it feels like it's very expensive, it could well be, but that is probably because it's got too many bells and whistles (the group policies are always bare bones) or the sum insured is to high or you're a smoker (that really puts the premiums up).

So, to answer the question of this blog - is it Super? Well, for those group policies - No! They kind of suck.

Do you want to review your insurances? Give me a call on 1300 200 012 or email enquiries@precisionwm.com.au

Glenn Hilber is a Certified Financial Planner with over 10 years experience and the owner of Precision Wealth Management.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

World Cup Predictions

Well, the world cup is on again and so is all the psychic animals that move towards a team logo/flag to predict the winners.

I do hope that everyone realises that no animal possesses the ability to see the future results of football games or are really good sports tippers, and it's all just a little bit of fun. But, how is it that we actually got here and how does this relate to investing?

Well, if I got 100 dogs to go towards a winning team for a match, then, just like tossing a coin, you would expect roughly half of them to go towards the correct one. So, 50 have got it wrong and just go back to being good boys, but the other 50 are right, and continue on predicting for the next match. Again, about 50% of them get it right, and so on and so forth.

After 6 matches (3 group stages, round of 16, quarter finals, semi finals) you would likely end up with 1 or 2 (100 - 50 - 25 - 12 - 6 - 3 - 1) that have got it right throughout the whole world cup just through shear numbers and random chance. So, on the days leading up to the grand final, this 1 dog winds up on The Project, Sunrise, Today Show about how it can predict the games because they've done it the whole world cup (there might even be video's of it doing it before each game). To someone external, it seems pretty amazing but to the person who's been able to view the whole thing and has seen it's just been a game of numbers and random chance and there's 99 dogs just off to the side wagging their tail, still being good boys, but having failed at some point along the way, then the feat doesn't seem so impressive.

So, how does this relate to the world of investing?

Well, a couple of ways.

1. Occasionally news.com.au or some other media outlet who's desperately trying to create new content every day will bring out a news story about how we're heading for recession this year. The stock market is about to crash this year. Property prices are set to fall - or whatever it might be - some prediction - usually negative. And the basis for listening to 'expert' predicting this is because they predicted the GFC or some other major financial event. The thing is, these people are predicting things all the time AND there is a whole raft of these types of people making predictions, that, just through numbers and chance, someone will nail it. What we do wrong, is we then attribute skill or the power of foretelling the future to that person, rather than seeing it for what it is - the 1 lucky dog.

2. In the world of investing in shares - outperforming the stock market as a whole is the goal. A very low cost way to invest in shares is to purchase an index fund - be diversified across all stocks in that market, and simply achieve the market returns so no stock specific risk. But the problem with outperforming the market is markets are very efficient (meaning that prices reflect all information at hand) which makes it very very difficult to outperform the market and also because it costs more money to try outperform the market too. But, some people do outperform the market (Refer to prediction dog on sunrise) and again, we think this out performance is based on their skill rather than just luck. It is very very difficult to say without a doubt that it isn't based on skill, and that's why this idea of investing remains. On top of that our inbuilt desire to do better than the next guy, our neighbour etc means it very hard for us to accept "Just the index return" even if statistically, trying to do better will likely mean you'll do worse.

It's so much more complex than just asking every stock picker to pick a stock that will out perform or under perform or some very clear choice, so we can track and determine if the outcomes are any different to random chance. HOWEVER, if you look back at the massive population of funds and data, it does suggest that outcomes and chances of outperforming aren't any different to winning at the roulette table by picking red or black (0 or 00 is like the fees charged by the people trying to outperform the market - you actually need to beat it by a bit so you're still in front after fees - after 0 or 00 comes up every now and then).

So, next time you see a prediction in the paper or a fund that has outperformed the market, just think - is there 99 dogs off to the side, and this is just the lucky one - no more likely to get it right this time than all the other dogs.

But, if I see a dog predicting Australia beating Denmark, then they are definitely a good boy.

Glenn Hilber is a Certified Financial Planner with over 10 years experience and the owner of Precision Wealth Management and is also a lover of dogs.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

Should you bring forward tax deductions?

Well, the end of the financial year is almost here and that brings along with it all the reasons to spend money now, because you know....end of financial year...Duh!

I actually had a meeting yesterday about paying for advertising (which I have no intention of doing) and they were telling me paying the expense now would be a great time because I would "get it back on tax". But hang on - if an expense is good at the end of the financial year because of tax planning, why on earth would they want additional income right at the end of the year. Aren't they going to feel like suckers paying tax on that extra profit....?

So, I would hope we all know, that incurring an unnecessary expense is just silly. But there is some benefit to pushing income/expenses around. On the advertisers point of view, they would much prefer to get the sale and have the extra profit at the end of the financial year rather than not have the sale at all.

Paying for something on 30 June rather than 1 July, gives you the tax benefit 1 year sooner and you've only incurred the cost 1 day sooner - so a no brainer really. But how far forward should we pay a genuine expense so that it's worthwhile?

The answer is quite simple. As a general rule it's the proportion of the year of your tax rate. So, if you are on the 34.5% marginal tax rate, then any genuine expenses that you would pay within the first 126 days of the financial year it's worthwhile bringing forward and paying on 30 June. If you are on a lower marginal tax rate, then a bit less, a high tax rate, a bit more. Realistically though, you won't pay right on 30 June, it'll be a few days before, and when you get around that period of 126 days it's very line ball - so lets just say up to a maximum of 4 months or any expense that would come up before end of October.

The big thing though is - Do you expect to be on a different tax rate next financial year? If your income is going up and you're likely going to be on a higher tax rate next FY, then leave as many expenses as you can for next FY where you will get a bigger tax benefit, alternatively, visa versa if your income is going down.

What about a monthly cost that you can prepay for a full financial year? Like interest on a loan, or monthly insurance premiums that are deductible to you. Well, the answer is don't do it unless you get a discount (which you often can) but if there is no discount on offer for paying annually in advance, then it isn't worth it (well, the numbers state that if you pay the monthly cost at the start of every month so the first month would be 1 July and so forth, and you are on the top marginal tax rate, then there is a small benefit but as a general rule, don't prepay a monthly cost unless you're getting a discount).

How to make the most of the First Home Super Saver Scheme

Well the First Home Super Saver Scheme is about to reach the point where we could see our first withdrawals from superannuation as a deposit for a house. However, I don't think there'll be too many happening as I don't believe there's been a huge uptake so far. Which is a shame as it will be a really great tool for building a house deposit for first home buyers. Who doesn't like free money from the government (free money as in just paying less tax)?

So, how big is the benefit and how do you work it to maximise the benefit?

Well, firstly, someone who right now who has a deposit, or part of a deposit saved, they can immediately use those funds to make a tax deductible contribution to superannuation (which they can later withdrawal for their deposit), and then get a large tax refund when they do their tax return and in total boost their deposit by a couple of thousand $'s over a very short space of time.

Example (someone on the 34.5% marginal tax rate):
Contribute $15,000 to superannuation. Tax on entry is 15%, so net contribution is $12,750.
Then on withdrawal, they will pay tax at their marginal tax rate, less a 30% tax offset, so essentially 4.5% of $12,750 = $573.75 so the net withdrawal is $12,176.25.

BUT!!

You've got a tax deduction of $15,000, so you'll get $5,175 back in your tax return which means you've essentially turned $15,000 into $17,351 over the space of a couple of months. If you've got $30,000 saved as a deposit now and a spouse on the same tax rate as you, you can't boost your deposit by $4,700 pretty easily over a short space of time.

So, how to you maximise the benefit of the FHSSS?

Well, there are a number of points:

• The cap is $15,000 per year (per person) and $30,000 (per person) in total. So use it! For both you and your spouse. If 2 people put in $15,000 each per year for 2 years, they'll be able to boost their deposit by over $9,000 above what they would otherwise have.
• If you don't have any deposit at the moment but want to build one, ask your employer to salary sacrifice. If you can spare $100/week, then remember to gross that up to a pre tax amount, so that would be roughly $150/week salary sacrifice. Then it's gone before you get your pay. You'll very soon not even notice it's missing.
• If you haven't been salary sacrificing all year and want to use the scheme, then make a lump sum tax deductible contribution to super. Otherwise, it's probably best to just salary sacrifice to superannuation as you get the tax benefits immediately rather than waiting for a big tax refund.
• For a lot of first home buyers, they generally have less than 20% deposit so they need to pay Lenders Mortgage Insurance which is a complete was of money for you and protects they bank (but you pay), so every extra bit of deposit reduces this cost. So take an extra month, 2 months, 12 months to maximise the benefit of the scheme which also minimises your LMI. A double free kick.
• When you withdrawal the funds, the money is added to your taxable income (and a 30% offset applied), so if your income sits near the top of a tax bracket, the withdrawal could push you into the next marginal tax rate, reducing the benefit of the scheme - so if that applies to you - try to do the withdrawal in the same year you are making the contributions so your taxable income that year is lower

Example: If someone earns $80,000, then when they contribute, they are getting a deduction at the 34.5% marginal tax rate. But, if they make a $20,000 withdrawal in a financial year which they haven't made any tax deductible contributions to super, then $7,000 will be taxed at 4.5% (34.5% less the 30% offset) and $13,000 will be taxed at 9% (39% less 30% tax offset) which would reduce the benefit of the scheme by $585. What they would be better off doing is timing it so they apply and make the withdrawal in the same year they've salary sacrificed at least $13,000 so their taxable income is low enough so they aren't pushed into the higher tax bracket on the withdrawal. The way that would work in practice would be that you salary sacrifice the $13,000 between say July and December, then in January apply for your determination and release, withdrawal the funds between January and June, then purchase your house.

Remember though, there is a limit to the scheme of $15,000 per annum. And you always need to keep your concessional contributions under the cap of $25,000. So if your employer's superannuation contributions are more than $10,000 per annum, then you won't be able to fully utilise the $15,000 per annum so it will take more than 2 financial years to fully utilise the scheme.

Glenn Hilber is a Certified Financial Planner with over 10 years experience and the owner of Precision Wealth Management.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

Marginal tax rate or average tax rate?

I had a meeting with a prospect client a week or so ago and we discussed at what point they should look at making tax deductible contributions.

I said above taxable earnings of $37,000 you are on the 34.5% marginal tax rate so contributing to super has significant tax advantages at that point he said, "but our average tax rate doesn't get to 15% until earnings of $45,000 so wouldn't we contribute until we're above that point." or something to that effect.

I thought that was an interesting point he brings up and others may have a misconception on this when making these sorts of decisions. When we have our marginal tax rates, our average tax rate is always going to be different than our marginal tax rate (unless you earn less than $18,200 then it's just 0%) whereas superannuation and a company has flat tax rates (15% and 30%).

Well, obviously (to me anyway) looking at the average tax rate is wrong. For those earnings between $37,000 and $45,000, you are paying 34.5% tax where you could be paying just 15% tax you can see in the example below:

Tax on earnings up to $37,000 = $3,867
Tax on earnings $37,000 - $45,000 = $2,880 (note this is more than 34.5% of $8,000 and that is because of the impact of the low income tax offset - which I'll discuss below)

Total tax $6,747 = 15% of $45,000.

On the other hand, you could choose to direct funds to superannuation:

Tax on earnings up to $37,000 = $3,867
Tax on earnings $37,000 - $45,000 when directed to superannuation = $1,200.

Total tax $5,067 = 11.26% of $45,000

So unless the rules stated "Once you contribute to superannuation, all your income will be taxed at the superannuation tax rate", then you should work off your marginal tax rates.

Just a note on the marginal tax rates, whilst we apparently just have 5, we actually have a lot more because of the impact of the low income tax offset and medicare levy, both of which aren't applied uniformly. So, really, the following is the actual marginal tax rates when that is factored in:

$0 -           $20,542 ... 0%
$20,543 -  $21655 .... 19%
$21656 -   $27068 .... 29%
$27069 -   $37000 .... 21%

$37001 -   $66667 .... 36%
$66668 -   $87000 .... 34.5%
$87001 -   $180000 .. 39%
> $180,001 .............. .47%


So, looking at those numbers, if you are earning $27,000, you might not normally think to salary sacrifice to super because you're only on the 19% marginal tax rate. But the additional boost of reducing medicare levy and increasing low income tax offset, a few thousand $ to superannuation in that band is quite attractive. 

Glenn Hilber is a Certified Financial Planner with over 10 years experience and the owner of Precision Wealth Management.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.