24 Sep September Newsletter

“Wealth is the ability to fully experience life”. Henry David Thoreau

To fully experience life in retirement we need to be of good health and have the financial means to do what we want, when we want. Superannuation is the most tax effective vehicle in which to accumulate wealth for your retirement. Superannuation can provide the highest disposable income in retirement due to the attractive tax concessions it enjoys. If you are serious about having a wealthy lifestyle in retirement then you need to take your super seriously. For you and your family, SUPER MATTERS.

Critical Lending Changes

In recent weeks there have been significant changes to investor lending policies following APRA’s review of lending practices. In response to new requirements from APRA, the banks have been making major changes to their mortgage products and there have been significant changes in the SMSF lending space.

Clients seeking finance for a residential SMSF property purchase should now be prepared to:

• Contribute a 20%-30% deposit.
• Be able to demonstrate regular contributions.
• Have funds or assets in their SMSF after settlement equivalent to at least 10% of the loan they are taking. For example on a $300,000 loan, you would need $30,000 to remain in cash.
• Use Corporate Trustees for both the SMSF and the Bare Trust.

In addition, lenders are now placing a greater reliance on the expected rental return covering the mortgage repayments. As a result SMSFs may find the loan amount they can now obtain is less than what they initially had budgeted.

For a number of our clients who have purchased off the plan properties, you may be affected by the changes to lending.  To avoid any last minutes finance hiccups, which can be both stressful and potentially costly, we suggest that applying for finance now can help to protect you against further lending policy changes.

The Value of your Home in Retirement

It has always been the Australian dream to own your home.  Whether you are already enjoying retirement or retirement is still a long way off, the value of your family home could mean more cash to spend when you are no longer earning a monthly income.

There are good reasons both for and against using the family home in your retirement planning. We have discussed both why you would and would not consider your current home as part of your longer-term savings plan in this months newsletter.

The family home is the largest single asset for the majority of Australians and the case for using it to bump up retirement savings is becoming a realistic consideration.

We spend at least 25 years paying off a mortgage, even longer if we upgrade our home and refinance. Over this time we are effectively cultivating a form of savings that we may never actually use beyond providing a place to live, or as a way to leave an inheritance for our kids.

To unlock the value from your home, you can either sell up and ‘downsize’ to something cheaper (smaller or a new location) or take out a reverse mortgage.

As the bricks and mortar you live in isn’t an income-producing investment, the main reason you would consider either of these strategies is to be able to generate an income from your capital.  Given the tax concessions of the superannuation environment, for the majority of Australian’s putting the funds into super is the most effective strategy.  However, there are restrictions on how much and until what age you can contribute into super.

So while downsizing the family home might seem rational in today’s environment, is it something you could think about doing in 10 or 15 years? This does depend on property prices, but you can at least think about where you might be living (suburbs, not exact houses) in the future.

For those who face retirement in more than a decade, the argument against using the family home as your retirement cash cow comes down to the uncertainty of property prices.

House prices declined in all major Australian cities for four years until 2012, so we know they don’t only ever go up. Depending on what reliance you might have on the family home to fund your retirement, a downturn could affect your strategy.

Consideration also needs to be given to the effect that contributing the equity from your home into super will have on the Age Pension – should you also be relying on this to fund your retirement. Under today’s rules, if you put an amount into super that takes you above a maximum threshold you might not be entitled to any government assistance. As it stands the home you live in isn’t counted under the asset test, but your superannuation benefits do – however, this could very well change.

There is also a huge psychological battle when it comes to deciding to cash in the family home, often the anchor point for the wider family. The family residence is often the preferred investment to leave something for your children if it isn’t being used to fund a future retirement home or care facility.

Considering the family home as part of your retirement savings is worthwhile, but you need to consider both favourable and not so favourable property prices in the future.

 We Have a Winner!

Last wLast week Justin was finally able to present Harken Gunasti, with the bottle of Penfolds Grange he won a little while ago. Harken had the winning entry ‘Super Matters’ in the competition to name our monthly newsletter. Congratulations Harken, enjoy your wine!

Around the Grounds 

Last week all of the SMSF Coaches visited the Gold Coast office for a three day training event.  The coaches used the three days to conduct brainstorming sessions, share technical knowledge and strategies and plan for the future. They also managed it fit in a team bonding early morning paddle board session and most of them managed to stay dry!!

Happy investing,

Justin Beeton & The SMSF Club Team
E: admin@thesmsfclub.com.au
P: 1300 760 397
W: www.thesmsfclub.com.au