I remember a night out on the town with some friends many years ago. We had been out for a few beers and were looking at heading off to a restaurant. One of the guys had been on soft drinks, and he offered to drive us. Fantastic idea. Even better was that his car was a Porsche 911, one of my boyhood dream cars.
We headed off to the car, and then reality hit – there were six guys trying to get into a car that was really only built for two, and while we weren’t exactly Stormtroopers, we were all decent sizes. Being north of 6 feet tall I commandeered the front seat – unfortunately that meant getting very intimate with my knees as I tried to allow room for the people behind me. Of course I didn’t want to complain as I could have been stuck in the back, in seats that seemed to be almost an afterthought.
After a mercifully short drive we arrived at the restaurant, and in what can only be described as a clown scene from a circus, we disentangled ourselves and piled out. My first ride in a Porsche was therefore nothing like what I had imagined, because it was not suited to our needs at the time.
I was reminded of this recently when recommending a superannuation fund for Mark and Simone. They are both working in the health profession, and are members of First State Super where they have built up significant balances. They are planning on retiring within the next 5 to 7 years.
One of the drawbacks of the First State Super fund is that in the event a member who is working and contributing to the fund dies (an Accumulation Member), they can only pay out their benefits (super plus insurance) as a lump sum, not as a pension.
Why is this important?
In this case, Mark and Simone have paid down their home mortgage so the survivor (let’s assume its Mark) would have no need for a lump sum of capital – instead, he would need to invest the money to provide income to top up his earnings. In Mark’s case, if he received a lump sum and invested it in his name he would have to pay tax on the earnings at his marginal tax rate – in Marks case 49%. If the funds were to remain in super and he drew income from them, this income would be taxed at a lower rate until he turns age 60, and after this it would be tax free. With Simone having accrued just over $1 million in super, this could mean a tax saving of $20,000 per year when Mark turns 60*.
Like my trip to the restaurant, your journey could be much more comfortable if a vehicle suited to your needs is used.
If you would like a second opinion on your current financial position or just want to see if you vehicles are right for you, please contact us.
*note – this is based on an assumed income rate of 4% on a balance of $1,035,211.
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