Tomorrow is the start of a new financial year. As always, it promises to be challenging. Interest rates around the world are still dropping, with many economists forecasting that the cash rate in Australia may fall to 0.5%. Share markets in most countries are travelling well and property appears to be on the rise.
It's the perfect time to review your affairs: to optimise them for both wealth creation and tax minimisation. If you have a home loan, and your equity is more than 20% so that mortgage insurance is not an issue, you should be shopping around and at least negotiating with your lender to ensure you are getting the best deal possible. Just keep in mind that the comparison rate is the one to watch - not the headline rate.
Even if changing loans is not a viable option for you, do your best to ensure that you are repaying at least $700 a month for every $100,000 of your loan. This will keep you well ahead of the game when rates inevitably start to rise.
There were reports this week that many borrowers are rushing to fix their interest rates. In a climate where rates are dropping, this seems unwise. Remember that anybody with a fixed rate loses the flexibility to move the loan to another lender, or (usually) to make extra repayments.
Retirees are particularly threatened by falling interest rates, especially as the government is not rushing to change the deeming rates. You can defend yourselves by moving to high income producing products, and/or by changing your pension strategy.
Provided you have at least a five-year timeframe in mind, an index fund is a great income-producing product. The index has averaged 9 per cent per annum for the last 30 years, and a good index fund is currently paying around 4.3 per cent, of which 80 per cent is franked.
Keep in mind that the Centrelink treatment of lifetime income products is changing dramatically from 1 July. The official term is "asset-tested income stream (lifetime)". If you take out one of these products after 1 July, only 60 per cent of the purchase price will be assessed for the assets test up to age 84 (or for a minimum of five years) and 30 per cent thereafter.
Case study: A couple both aged 70 have $800,000 in assessable assets and receive a tiny pension. If they used $200,000 to purchase a lifetime income product their assessable assets would reduce by $80,000 and their pension would increase by $6,240 a year. Challenger advise me that this $200,000 could provide both of them an indexed, lifetime-guaranteed annuity starting at $5,274 a year for him and at $4,960 a year for her. The combination of the increased age pension and the income from the two annuities would give them additional guaranteed income of $16,474 in the first year. That could make a huge difference to their financial situation.
The start of the financial year is also the perfect time to review your will and enduring powers of attorney. If you have not yet done so, give one or more trusted persons an enduring power of attorney for financial matters, and an advance health directive, if appropriate. It's most important that your family and attorneys know the location of these documents because if they are needed, they are often needed urgently.
And keep in mind the death tax of 15 per cent plus Medicare levy, which is levied on the taxable component of your superannuation that is left to a non-dependent. The best way to avoid this tax is to ensure your attorney has instructions to withdraw all your superannuation tax-free and place it in the bank if it is obvious that death is imminent.
- Noel Whittaker is an Australian expert on personal finance and the author of Making Money Made Simple. Send your money questions to firstname.lastname@example.org.