Money and Life
(Financial Planning Association of Australia)

With careful planning, you can give a helping hand to your adult children financially, while still enjoying a comfortable retirement.

In the past, wealth was often passed on through an inheritance. But with our longer lifespans, and the higher cost of living (especially housing), the desire to help our kids while we're alive and well is increasing.

If your children are young, you may have twenty or thirty years to save and invest on their behalf, while also saving for your own retirement. If this is the case, it pays to put a strategy in place early on.

For those nearing retirement age, or already retired, you may have a large lump sum you'd like to gift to one or more of your kids. Giving money is a wonderful thing to do, but it's not always simple. It can have tax implications, and may affect your income support payments from Centrelink. On the other hand, gifting may enable you to increase your government pension payments or benefits, if done right.

So how can you help your children without compromising your own financial security and comfort in retirement?

Ensure you're on track for a comfortable retirement

Before you give away your wealth, it's important to remember that you need to fund your own retirement for many years.

Australians are living longer than ever, with more years spent in retirement. If you were to retire at age 60, and live to 90, that's one whole third of your lifetime spent in retirement.

As well as wanting to enjoy your retirement through travel or leisure activities, older age often comes with more medical and health expenses.

So it's really important to make sure you have enough funds saved and invested to get you through. This might sound selfish, but in reality, it means you won't become a financial burden on your children later in life.

How much will you need to retire, and, how much can you afford to give away now? It's always best to seek professional financial advice to ensure you have enough put away to see you through. A financial planner will be able to give you tailored advice about the impact of your giving on your retirement plans.

Related: Super 101 Your guide to a happy retirement

What am I giving money for?

Next, consider what it is you'd like to help your son or daughter with. Are the funds for a property deposit? To pay for a wedding? Education expenses? This might offer some clue as to the right amount of support.

Following on from this, consider how many children you need to help. If you gift funds to one child, do you need to match that for others when the time comes? If you have several children, but some are doing better than others, do you need to help them all equally?

Balancing the family dynamics around money is important, as it can be a sensitive issue. The last thing you want to do is cause a rift in the family over some perceived inequality. If you do have several children you need to help, keep this in mind, as it will limit how much help you can offer each child.

Giving an incentive

Often the best way to support children financially is to match their own contribution. Rather than purchasing something outright, offer to base your assistance on their own savings. This also means they have a vested interest in the item, which means they're likely to treat it more carefully.

Related: How to help your children with buying property

How should I give money?

If you receive the Age Pension or other benefits from Centrelink, there is a limit to how much you can give away. The gifting rules allow you to give $10,000 over one financial year, or $30,000 over five years. You'll need to let Centrelink know when you're planning to give a gift of this type.

If you're considering giving your children a substantial amount of money, it's worth taking the advice of Dr Brett Davies at Legal Consolidated. He recommends always giving funds as a loan 'payable on demand', not as a gift. Creating a written loan agreement helps keep the money in your family, even if things don't go to plan.

As Dr Davies explains, a correctly worded and executed loan agreement can protect the money in case your child was to:

• divorce
• go bankrupt
• suffer from an addiction
• suffer from a mental health problem
• you run out of money and need it back.

He gives this as an example. You gift your daughter $400,000 to buy a house. Five years later, she divorces from her husband and the house is the only asset of the marriage. The Family Court awards half of the value of the house to the husband, including $200,000 of your donated funds.

If you instead had a valid loan agreement in place, the loan must be paid out before the assets are distributed. Hence, the $400,000 comes back to you, to do with as you please. You can read more examples of a loan agreement in action here.

Always seek professional legal advice when drawing up a loan agreement to ensure that it's compliant with the law, properly worded and correctly executed.

Get professional advice

If you're nearing retirement and looking to give up work, downsize your home and/or gift funds to your children, it's important to seek financial advice.

A financial planning professional will be able to give you tailored advice about the impact of your planned giving. They can also help you work out a strategy for meeting multiple goals, such as giving to several children while funding your own comfortable retirement.

Money and Life
(Financial Planning Association of Australia)

Unsure how your relationship status affects your taxes? We've made it simple with our couple's guide to tax.

If you're newly married, engaged or living with your partner, you might not be aware that there are some implications for your taxes.

In Australia, you're not required to lodge a combined tax return with your spouse each year. Instead, you need to declare your spouse's taxable income on your individual tax return.

The Australian Taxation Office (ATO) uses your joint income to work out whether:

• you're entitled to a rebate for private health insurance (and how much)
• you need to pay the Medicare levy surcharge
• you're entitled to a Medicare levy reduction
• you're entitled to the seniors and pensioners tax offset.

So, first things first, how do you know if you have a 'spouse' in the ATO's eyes?

Do I have a spouse or de facto partner?

As far as the ATO is concerned, your spouse "includes another person (of any sex) who:

• you were in a relationship with that was registered under a prescribed state or territory law
• although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple."

You must declare all of the taxable income your spouse receives in your return, including:

• salary and wages
• dividends
• interest
• rental income
• foreign source income
• pensions and child support payments.

How does this affect my tax return?

There are some implications for your taxes, especially in the following areas.

Private health insurance rebate

The amount of rebate you qualify for is based on your income, so you might receive a different level of rebate as a couple than you did as an individual. You can check the rebate rates and income thresholds here.

Medicare levy surcharge

High income earners who don't have private patient hospital cover are charged a Medicare levy surcharge.

If you have a spouse, the ATO will use your combined income to work out your Medicare levy surcharge. It's calculated as a percentage of your income (up to 1.5%) and is payable in addition to the Medicare Levy.

You may need to pay the Medicare levy surcharge if you don't have private patient hospital cover and your income is over:

• $90,000 for singles
• $180,000 for families.

If you've recently gained a spouse for tax purposes, and you don't have private patient hospital cover, make sure to check whether your combined income puts you over the income threshold. Taking out private patient hospital cover will mean you don't need to pay the surcharge and you'll be covered in case of an emergency.

Medicare levy reduction

There's also a Medicare levy reduction available to low-income earners. If you have a spouse and your family taxable income is equal to or less than $48,092, you might be eligible for a reduction.

Combining your homes?

Something that's often overlooked when moving in with a spouse is the way it affects the capital gains tax (CGT) exemption on your main residence. If you both owned and lived in your own homes before moving in together; or you're in an established relationship, but lived separately during the year; and you plan to sell one or both of the properties, there could be CGT implications. Working out your CGT obligations can be tricky, so seek advice from a tax professional when preparing your return.

If you're still not sure whether you need to include your spouse's details on your return, seek advice from a tax agent or speak to the ATO. If you leave your spouse out, the ATO could amend your tax return and there could even be financial penalties.

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

This week's release of the Intergenerational Report should be a wake-up call for Australia's politicians and the community more broadly, the Business Council of Australia says.

The five-yearly report that provides a guide for Australia's outlook projected budget deficits, slower economic growth and a smaller population over the next four decades as a result of the pandemic.

An ageing population also means that for each person in retirement there will be fewer people working, and that productivity continues to flounder a concern that was evident even before COVID-19 hit Australian shores.

In response, the Business Council has released a discussion paper, Living on borrowed time: Australia's economic future, on what is needed to lift the nation's outlook.

"Anyone who thinks we can now just stay where we are is incredibly naive," the council's chief executive Jennifer Westacott told reporters ahead of the launch of the report on Wednesday.

"What we are trying to build is a bit of consensus to what is the direction we want to head in and what the big shifts are needed to get there."

The aim is to raise the debate around issues like actively building a low carbon economy, lifting the skills of the workforce, and making sure Australia remains an open and competitive economy while diversifying its industrial base.

Ms Westacott is not expecting a "big bang" response to the Intergenerational Report, but believes even if there are a lot of small things done, it will have a big impact, and that there is a "low hanging fruit" when it comes to regulation.

"The alternative is that we end up having yet another election campaign that lists all the things we are not going to do a race to the bottom," she said.

"It would be irresponsible to just sleep walk into the slow lane."

The paper notes that Australia now ranks 22nd in the world out of the 64 countries in the IMD World Competitiveness Index.

It also found students are falling behind on education and that one in 20 children experience poverty.

It highlights that it now takes an average worker seven years to increase their pay by $100 per fortnight, when in the past they were getting that size pay rise every year or two.

"We need to drive productivity harder and we're not doing enough on reform," Ms Westacott said.

"Achieving a one per cent increase in productivity growth a year by producing goods and services more efficiently and smarter would deliver an extra $10,000 in average incomes for Australians over a decade."

BUSINESS COUNCIL'S SIX BIG SHIFTS THAT NEED TO BE MADE:

• Move to a more diversified industrial base
• Actively build a low carbon economy
• Make sure Australia remains open to the world and competitive
• Lift the skills of the workplace
• Make sure no one gets left behind
• Rebuild public finances.

(Source: BCA's Living on borrowed time: Australia's economic future discussion paper)

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

Australia's recovery marches on with the economy posting its biggest monthly trade surplus on record and skilled vacancies striking their highest level in well over a decade, pointing to a further fall in the jobless rate.

But there is little sign at this stage of the Reserve Bank of Australia changing its view on its interest rate outlook, even as a growing swell of economists believe a cash rate hike could be as early as next year.

The RBA board meets on July 6 and its assistant governor for economics Luci Ellis wasn't about to announce a change in the central bank's policy guidance.

"The board remains committed to maintaining highly supportive monetary conditions," Dr Ellis told the Australian Industry Group event in Adelaide on Wednesday.

"The aim of these policy settings is to support a return to full employment and inflation consistent with the target."

Since cutting the cash rate to a record low 0.1 per cent last November, the RBA has been adamant that a lift in the rate will not happen until inflation is sustainably within the two to three per cent target.

It does not expect this to occur until 2024 at the earliest.

But Commonwealth Bank head of Australian economics Gareth Aird believes a rate rise will come earlier, saying his bank's views on the outlook for inflation and wages have differed significantly from the RBA's view for some time.

"The labour market will tighten quickly and this means wages and inflation will lift, particularly because the supply of labour is constrained," Mr Aird said.

"Our central scenario has the RBA delivering the first hike in the cash rate in November 2022."

At that time he expects an increase of 0.15 per cent which would take the cash rate to 0.25 per cent.

That would be followed by an increase of 0.25 in December 2022, and further moves will see the cash rate at 1.25 per cent by the September quarter 2023.

Other economists also believe last week's labour force figures that showed the jobless rate unexpectedly falling to 5.1 per cent and back to its pre-pandemic level was a "game changer" in regard to interest rates.

Job advertising figures suggest the strong recovery in employment from last year's recession has much further to run.

The National Skills Commission's final vacancy report for May confirmed earlier preliminary figures that job advertisements on the internet rose by a further 1.9 per cent in May.

This was the 13th consecutive monthly rise to stand at the highest level in 12 years and 46 per cent higher than their pre-pandemic level.

Separate data showed that while the relationship between Australia and China may be rapidly declining, demand from the Asian giant for iron ore continues unabated, even at over $US200 per tonne.

This helped Australia's merchandise trade surplus to a record $13.3 billion in May, preliminary figures from the Australian Bureau of Statistics showed.

"Iron ore exports continued their strength in May with both value and quantity increasing in the month," ABS head of international statistics Andrew Tomadini said.

Exports rose 11 per cent in May to a record $39.2 billion, while imports increased by one per cent to $25.9 billion.

Iron ore exports to China rose 20 per cent to $12.7 billion, the third consecutive monthly record.

MoneySmart
(ASIC)

Income protection insurance pays up to 85% of your pre-tax income for a specified time if you're unable to work due to partial or total disability.

Each income protection policy has its own definition of partial or total disability that must be met before a claim is made. Check the insurer's website or the product disclosure statement (PDS) for the definition and any exclusions.

Your income protection policy will have a waiting period before payments start due to loss of income through injury or illness.

Income protection insurance doesn't cover you for lost income because you are stood down or become unemployed.

Deciding if you need income protection insurance

Income protection insurance can be important if you:

• are self-employed or a small business owner, as you may not have sick or annual leave
• have family members or dependents that rely on the income you earn
• have debt, such as a mortgage, you'll need to make payments on even if you're unable to work

To work out how much income protection you need, prepare a budget. This will help you see your monthly expenses and the income you'll need to replace. You may want to factor in making payments to your super as well.

Also consider:

• if you have total or permanent disability or permanent disability or trauma insurance, that can help replace lost income
• if you have private health insurance that could help pay for any medical expenses
• what help or support from family or friends may be available

If you need help deciding if you need income protection insurance and how much, speak to a financial adviser.

Choosing an income protection policy

Some of the things you'll need to consider when choosing an income protection policy are:

Policy type

Income protection policies are provided as either an:

• Indemnity value policy - the amount you're insured for is a percentage of your salary when you make a claim. If your salary has decreased since you bought the policy, you'll get a smaller monthly insurance payment. Indemnity value policies are generally cheaper and can be useful for people with a stable income.
• Agreed value policy - the amount you're insured for is a percentage of an agreed amount when you sign up for the policy. These are generally more expensive but can be useful if you have income that changes from year-to-year.

Waiting period

This is the amount of time you must wait before your payments start. Most income protection policies offer a waiting period between 14 days and two years.

In general, the longer the waiting period, the cheaper the policy. When you're choosing the waiting period, think about how much you have in sick and annual leave, savings and emergency funds.

Benefit period

The benefit period is how long the monthly payments will last. Most income protection policies offer two or five years, or up to a specific age (such as 65). The longer the benefit period, the more expensive the policy. But it also means greater protection if you're unable to work for a longer time.

Stepped or level premiums

You can generally choose to pay for income protection insurance with either:

• Stepped premiums - recalculated at each policy renewal, usually increasing each year based on the higher chance of a claim as you age
• Level premiums - charge a higher premium at the start of the policy, but changes to cost aren't based on your age so increases happen more slowly over time

Your choice of stepped or level premiums has a large impact on how much your premiums will cost now and in the future.

Use our Life insurance claims comparison tool

Compare how long it takes different insurers to pay an income protection claim and the percentage of claims they pay out.

How to buy income protection insurance

Check if you already have income protection insurance through super. Most super funds offer default income protection insurance that's cheaper than buying it directly. You can increase your level of cover through your super fund if you need to.

You can also buy income protection insurance from:

• an insurance broker
• a financial adviser
• an insurance company

Premiums you pay for income protection insurance held outside of super are generally tax deductible. Policies outside of super usually allow a higher amount of cover and have more features and benefits available.

What you need to tell your insurer

You need to tell your insurer anything that could affect their decision to provide you with insurance. You need to give them this information when you apply, renew or change your insurance.

This can include your:

• age
• job
• income (salary, wage, commissions)
• medical history
• lifestyle (for example, if you're a smoker)
• hobbies or activities that are high risk (for example, skydiving)

The information you provide will help the insurer to decide:

• if they should insure you
• how much your premiums will be
• terms and conditions for your policy

It is important that you answer the questions honestly. Providing misleading answers could lead an insurer to deny a claim you make.

Who to contact to make a claim

To make a claim on your insurance, speak to the person or company you bought the policy from.

• an insurer - contact the insurance company
• an insurance broker or financial adviser - speak to them first
• a superannuation fund - contact your fund
• an employment arrangement - speak to your employer