Five Key Financial Matters

Transcription

1 Five Key Financial Matters For Mining and Resources Professionals How to take control of your financial future Prepared by James Marshall BBus, MAppFin, CFP, JP (Qual) and its advisers are members and Authorised

2 Five Key Financial Matters for Mining and Resources Professionals 1 Table of Contents Page 2 Introduction Page 3 About the Author Page 4 Chapter 1: Superannuation What to do now to benefit later Page 7 Chapter 2: Insurance Stepped or level premiums? Page 10 Chapter 3: Cash Flow Make the most of surplus funds Page 13 Chapter 4: Home/Property Ownership Consider an offset account strategy Page 15 Chapter 5: Estate Planning Why a Will is not enough Page 17 The Solution: Your first step Disclaimer: This information is of a general nature only, and neither represents nor is intended to be personal advice on any particular matter. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions. strongly suggests that no person should act specifically on the basis of the information in this document but should obtain appropriate professional advice based on their own personal circumstances. and its advisers are members and Authorised and its advisers are members and Authorised

3 Five Key Financial Matters for Mining and Resources Professionals 2 Introduction In this strategy paper, I outline five of the key matters that demand the close attention of professionals in the mining and resources sectors when it comes to sound financial planning. I aim to highlight selected questions and to encourage you to seriously consider them as an important step in taking control of your financial future. This will enable you to implement strategies to build and protect your wealth, and that of your family. Seeking advice and taking action early on these matters will lessen the impact of economic and legislative changes on your financial security. As an example, changes such as the July 2017 reduction in the annual superannuation contributions cap to $25,000 will require many high-income earners in mining and resources to review their superannuation strategy. The matters I discuss here also arise from the complexity that is inherent in mining and resources: the challenging and ever-changing nature of your industry; the likelihood of changing work locations that may include regional Australia and overseas; and the range of inter-related factors you re required to understand and manage in order to make the most of the financial opportunities that will present themselves throughout your career. These five brief chapters consider superannuation, insurance, cash flow, home and property ownership and estate planning from the perspective of a mining and resources professional. These matters will most likely require advice from your accountant and legal advisor in addition to your financial adviser. At Resources Unearthed, this is our purpose to provide a solutions hub for executives, professionals and business owners in mining and resources who need specialised and integrated financial, legal and business advisory support. I invite you to take the opportunity to consider this document. I assure you it will be a worthwhile investment of time when planning your immediate, medium and long-term financial future. James Marshall and its advisers are members and Authorised

4 Five Key Financial Matters for Mining and Resources Professionals 3 About the Author James Marshall specialises in providing financial advice for professionals in the mining and resources sectors. He helps time-poor mining and resources professionals to implement integrated, long-term financial strategies that aim to build wealth and protect their family as they build their career in a demanding industry. In part, James has honed his specialist knowledge and understanding through a close mentoring relationship with Brett Cribb a highly qualified financial professional who has consulted to the mining and resources sectors for almost 20 years. Together with Brett, James co-founded Resources Unearthed, an online professional services and information hub that enables executives, professionals and business owners in mining and resources to easily access integrated and specialised financial, legal and business advisory support and services they require. His role at Resources Unearthed has afforded James rare exposure to a concentration of advice specifically for mining and resources professionals. James clients include geologists, engineers, metallurgists, environmental scientists and specialists in occupational health and safety, many of whom are based throughout Australia. His areas of expertise include budget and cash flow planning, investment strategies, portfolio management, superannuation, estate planning, and retirement planning and transition. He is the author of this important strategy paper Five Key Financial Matters for Mining and Resources Professionals that succinctly addresses the central financial planning needs of this audience. While understanding the importance of establishing solid foundations for a healthy financial plan, James also implements regular ongoing reviews that track achievements against a client's stated objectives. James' goal is to ensure each client experiences a sense of financial comfort and security throughout their financial journey. His firm commitment is to work with his clients to help them achieve their financial and lifestyle goals and to remove the stress from such significant life decisions in the future. Qualifications: Certified Financial Planner (CFP ) Financial Planning Association of Australia Bachelor of Business (Finance) with Distinction Queensland University of Technology Master of Applied Finance, Financial Planning Charles Stuart University SMSF Specialist KAPLAN Justice of the Peace (Qualified) and its advisers are members and Authorised

5 Five Key Financial Matters for Mining and Resources Professionals 4 Chapter 1: Superannuation What to do now to benefit later Superannuation is one of the most effective wealth accumulation tools Australians have at their disposal; however, it can be complicated and expert financial advice is required to make the most of it. Your decisions around super are all the more important since 1 July 2017 as the lowered concessional contributions cap may affect your future super strategy. In 2017, the superannuation concessional contribution cap was reduced to $25,000 per financial year; this is much lower than previous contribution cap levels and may have implications for you. Concessional contributions include employer Superannuation Guarantee (SG) contributions and salary sacrifice contributions, as well as tax deductible contributions. Given the reduced cap, individuals of pre-retirement age may need to consider making additional super contributions earlier than planned to ensure they have the funds available in superannuation to afford a retirement lifestyle of choice. We find that many of those working in the mining and resources industry have the capacity to make additional contributions to superannuation. Salary sacrificing or making tax-deductible contributions can be an effective strategy for building your super, although it's best to seek individualised professional advice as this strategy may not suit everybody. Salary sacrificing redirects some of your pre-tax income into super, where contributions are taxed by the super fund at 15%. This is the same rate as employer contributions and is likely to be considerably lower than your marginal tax rate. It s important to note that if your income is above $250,000 pa, you may be subject to an additional 15% contributions tax. Starting salary sacrificing early and maintaining it throughout your working life will help build your super savings for your retirement. It may also help you to make tax-effective use of your surplus cash flow. The following scenarios illustrate how a mining professional can use salary sacrificing to accumulate superannuation funds. Importantly, this strategy addresses the fact that it will no longer be possible for an individual to boost their superannuation savings by salary sacrificing significant sums of money from their salary in the later stages of their working life. and its advisers are members and Authorised

6 Superannuationn Balance Five Key Financial Matters for Mining and Resources Professionals 5 SCENARIOS Here are 3 scenarios for Jane, a mining professional with an annual salary of $100,000. Scenario 1. With a good income and few financial responsibilities, Jane comfortably salary sacrifices $5,000 pa to superannuation. Scenario 2 and 3. Jane doesn't make any salary sacrifice contributions to superannuation until 5 or 10 years prior to her retirement at age 60, at which point she decides to maximise the level of taxeffective contributions she can make to superannuation each year (yellow and blue lines on chart). This approach is common: personal cash flow is used for mortgage repayments, school fees and other personal expenses in earlier years, the aim is to save more later on when these outgoings reduce in the years approaching retirement. Scenario 4. Jane is entirely reliant on the superannuation guarantee contributions from her employer and makes no salary sacrifice contributions to superannuation (orange line on chart). Impact of Salary Sacrifice Contributions to Superannuation $2,500,000 $2,000,000 $1,500,000 $2,312,000 $2,098,000 $1,905,000 $1,753,000 $1,000,000 $500,000 $ Age Salary sacrifice $5,000 pa Salary sacrifice last 5 years Salary sacrifice last 10 years Without salary sacrifice Disclaimer: This projection is for comparison purposes and is not a guarantee. The projection is not intended to be your sole source of information when making a decision. You should consider whether you should seek advice from a licensed financial adviser before making any decision about salary sacrifice contributions to superannuation. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions. and its advisers are members and Authorised

7 Five Key Financial Matters for Mining and Resources Professionals 6 Assumptions Jane is 30 years of age Super balance at commencement $80,000 Jane receives superannuation guarantee contributions from her employer Jane s salary is indexed by 4% pa Jane salary sacrifices $5,000 pa to superannuation, indexed 4% pa The net total return in superannuation is 7.40% pa The concessional contributions cap and division 293A income threshold are indexed in future years Outcomes Compounded over 30 years or more, the above demonstrates that starting regular contributions to superannuation early can amount to a very effective savings strategy. Even where Jane seeks to maximise her tax effective contributions in the 10 years prior to her retirement, she would have been better off by more than $200,000 if she had started making smaller, regular contributions to superannuation earlier. Over the life of this projection, Jane contributes by salary sacrifice an additional; o $5,000 pa $280,400 o last 5 years $179,200 o last 10 years $324,300 Key Points What you need to know about Superannuation: Superannuation is one of the most effective tools for wealth accumulation available to you. You should review your super strategy whenever superannuation legislation changes. Amounts salary sacrificed to superannuation may benefit from a lower tax rate. Contributing amounts up to your cap earlier in your career may help you accumulate the funds needed for your retirement as annual caps may prevent adequate contributions in later years. and its advisers are members and Authorised

8 Five Key Financial Matters for Mining and Resources Professionals 7 Chapter 2: Insurance Are you appropriately covered? A survey 1 conducted by PwC found that Australians have high confidence in their ability to selfmanage their finances, also believing they had adequate insurance coverage in place. In contrast, research undertaken by Rice Warner 2 shows that Australians are in fact significantly underinsured. In my experience, this is commonly the case among mining and resources professionals. It's important to understand that insurance cover is a crucial element of any wealth protection strategy. It only takes one insurable event to wipe out years of hard work and savings if you don't have the right cover in place. The range of insurable events that should be considered includes illness, injury, cancer, stroke, heart attack and being unable to work in the future. As a mining and resources professional, your most important asset is your ability to generate income. It's important to consider your income as an asset that should be protected as you would protect your home or car. Further, the earlier you arrange your insurance cover, the better, for two key reasons. 1. Insure yourself while you still can When you can obtain insurance cover, implement it straight away as there may come a time where you won t be able to. The younger you are, the likelihood of your being in good health means you can avoid higher premiums or health exclusions because of pre-existing conditions. Quality insurance policies may be guaranteed renewable which allows you to maintain coverage regardless of changes to your health in the future. It s better to seek advice early and be informed of the range of your options rather than to leave it until later when your options may be limited. 2. Benefit from long-term saving on premiums Getting advice early can save money over the longer term. Insurers offer two types of insurance premiums: stepped and level. Stepped premiums will generally cost less initially, but because the premium amount increases each year as you grow older, it can cost a significant amount in the long term. Additionally; should you delay taking out insurance until you're older, you may find the insurance cover you need is unaffordable. By contrast, level premiums will generally cost more initially, but over the longer term, they will be more affordable. This is because a level insurance premium amount does not increase each year with your age and its advisers are members and Authorised

9 Premium $ Five Key Financial Matters for Mining and Resources Professionals 8 In my experience, younger professionals can usually afford the initial higher cost of level premiums because, during the early years of their careers, they tend to have fewer financial commitments. Opting for level premiums results in a significantly lower overall cost of insurance over the long term when compared with a stepped policy. SCENARIOS Consider the following scenarios which illustrate the difference between stepped and level premiums for a 35-year-old female. While stepped premiums are initially more cost-effective, the yearly premium increases significantly when compared to the level premium option. In the example below, the cumulative cost of premiums under a stepped policy is more than twice that under a level policy. $25,000 Impact of Premium Type $20,000 $15,000 $10,000 $5,000 $ Age Stepped Premium pa Level Premium pa Disclaimer: The above is based on premium estimates for a 35-year-old female who is an office based professional who is a nonsmoker, in good health, and residing in Queensland. The projections are for a comprehensive agreed value income protection policy with a benefit of $7,500 per month, a 90 day wait and benefit period to age 65. This projection is for comparison purposes and is not a guarantee. The projection is not intended to be your sole source of information when making a decision. You should consider whether you should seek advice from a licensed financial adviser before making any decision about insurance options. This is general advice only and does not account for your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions. and its advisers are members and Authorised

10 Five Key Financial Matters for Mining and Resources Professionals 9 Seeking professional insurance advice allows you to understand the level of cover you need and the options that will suit your individual circumstances. While online insurance services may offer convenience, they often do not consider all of or the unique circumstances that may apply to some individuals. Seeking advice from an experienced and licensed personal risk adviser will personalise insurance to suit your specific requirements. Further, many online policies include basic definitions and limited upfront underwriting, which increases your chance of a claim being rejected. A common assumption is that my superannuation funds insurance will cover me. In our experience most of our Mining and Resource Professionals who complete our insurance needs analysis find that cover insufficient. Key Points What you need to know about Insurance: A significant number of Australians are underinsured you might be one of them. Insure yourself while you still can the longer you wait, the more likely health or injury issues will prevent you from securing the cover you need. Consider level or stepped premiums when choosing your insurance premium options. and its advisers are members and Authorised

11 Five Key Financial Matters for Mining and Resources Professionals 10 Chapter 3: Cash Flow Make the most of surplus funds Professionals in mining and resources who enjoy good remuneration should consider putting any unused income to work for the future. Surplus income refers to the funds that remain after you have met your expenses and taxation commitments. If your weekly surplus income is $100, then simple maths indicates your annual income surplus would be $5,200. Depending on your circumstances, your surplus income could be used in a number of ways that could positively contribute to your wealth. Here are five suggestions for you to consider: 1. Reduce your home loan Using surplus income to make additional home loan repayments could result in you paying off your mortgage faster and reducing the total amount of interest otherwise paid. 2. Pay down debts If you have a car loan, personal loan or credit card debts, paying your surplus income against these balances will lower interest and contribute to clearing the debt sooner. 3. Invest in your kids Your children are in the education system for a long time, especially if they aspire to go on to tertiary education. Using surplus income to begin saving for your children s education is a great starting point. A longer-term financial strategy may be designed to make the most of compounding interest through long-term investment strategies such as shares, managed funds, term deposits and specifically designed education funding plans. 4. Top up your super Every voluntary contribution to your superannuation fund adds to creating a valuable retirement nest egg, with the added bonus of possible tax advantages. Making direct personal contributions to your super or talking to your employer about salary sacrifice contributions may be worthwhile considerations. It s always a good idea to seek financial advice to understand the rules around extra super contributions and the most appropriate course of action for your individual circumstances 5. Deposit your surplus cash in a high-interest savings account or investment Allocating your surplus income to a high-interest savings account has two potential advantages. Firstly, as it won't be locked away, you will have the flexibility to access the funds as required; secondly, your savings have the potential to grow thanks to compounding interest earned. This strategy is easy to implement and can be helpful for individuals and families who wish to save for future large expenditures, such as an overseas holiday or new car. Similarly, investing surplus income into a long-term investment plan like shares and property can have a significant impact over the long term. This strategy can be appropriate where there's no short-term access required to funds invested and you're comfortable having some short-term variations in returns. and its advisers are members and Authorised

12 Investment Balance Five Key Financial Matters for Mining and Resources Professionals 11 Overlooking your surplus income is easy. However, these seemingly insignificant amounts of money can accumulate, and over time have the potential to make a significant difference to your financial prosperity. The benefit of compounding returns is that a small amount invested today can grow to a much larger amount in the future. SCENARIOS Consider the following situation, which provides an example of how a resources professional can use their surplus cash flow to accumulate wealth in the long term. Michael is a 30-year-old professional with accumulated savings of $20,000. With a good income and few financial responsibilities, Michael comfortably invests an additional $1,000 per month. Let s compare this to a situation where Michael doesn t commence the same investment portfolio until he reaches 40 years of age. $1,600,000 Impact of Investing Surplus Cash $1,400,000 $1,365,000 $1,200,000 $1,000,000 $800,000 $600,000 $604,000 $400,000 $200,000 $ Age Investment Amount Commenced Age 30 Investment Amount Commenced Age 40 Disclaimer: This projection is for comparison purposes and is not a guarantee. The projection is not intended to be your sole source of information when making a decision. You should consider whether you should seek advice from a licensed financial adviser before making any decision about investment options for your surplus cash flow. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions. and its advisers are members and Authorised

13 Five Key Financial Matters for Mining and Resources Professionals 12 Assumptions Michael is 30 years of age Investment portfolio at commencement $20,000 Michael contributes a total of $12,000 pa to the investment portfolio The net total after-tax return on the portfolio is 7.00% pa Outcomes Compounded over 30 years or more, the above demonstrates that starting regular investments early can amount to a very effective savings strategy. If Michael commences investing at age 30 and ceases when he reaches 60 years of age, his total contributions will amount to $380,000. The power of compounding returns allows these contributions to grow to $1,365,000 over the investment time frame. Putting off the effective use of surplus cash flow can have a significant impact in the long term. In the above example, Michael will be better off by $761,000 by commencing his investment portfolio 10 years earlier at age 30, rather than at age 40. Key Points What you need to know about Cash Flow: Put your surplus cash to work. Consider paying down debt and salary sacrificing to super. Invest and make the most of compounding interest. and its advisers are members and Authorised

14 Five Key Financial Matters for Mining and Resources Professionals 13 Chapter 4: Home/Property Ownership Consider an offset account strategy Home ownership is often a burning question for our mining and resource professional clients. Do you buy a home in the town or city you currently work in, or do you continue to rent? We frequently assist clients to step them through the pro s and con s and work out what might suit them. Homeownership, while providing a level of security, can lock you into a strategy which may become unattractive as your circumstances change. Many of our mining and resources clients find themselves moving around Australia and even the world, as they progress their careers and relocate to where the industry requires them. Particularly for younger professionals, the prospect of moving to a new town or city and furthering their careers is exciting and makes sense while they may have minimal family commitments. Those who do choose home ownership can sometimes find themselves locked into a long-term strategy which may not be ideal for them as their circumstances change. Some are left with little choice but to retain and rent their previous home, even when they have no intention to return to the town or city the home exists as the cost of selling the home can be expensive after factoring in agent's fees, stamp duty and legal costs. However, in some locations, the relative cost of a home may be reduced, and as such, it may prove a valuable investment. Where mining and resources professionals do purchase a home, we recommend they consider an offset account which provides a flexible way to accumulate wealth, especially for those that move from one location to another. Offset accounts can help to avoid the situation where you have equity in an existing property you want to retain as an investment property but have limited cash available for purchasing a new place to live. and its advisers are members and Authorised

15 Five Key Financial Matters for Mining and Resources Professionals 14 The longer you plan to live in the property the more attractive owning your own home can be; however, you need to weigh up the possibility that you may need to move for work in the future. Many of our clients consider whether to purchase an investment property as their early investment choice. Common considerations as to whether to buy an investment property are; Should I buy the property and where? If I do purchase the property, I will be tied to a large debt for some time. Do I want that illiquidity and if I do what happens if I go overseas or move further away from the investment property? Is the alternative of commencing an investment portfolio without debt more attractive? Do I remove that illiquidity concern and can I achieve my long-term objectives? We work through these issues with our clients to assist them in determining a way forward that suits their objectives. Please view our online article on offset account strategy. Key Points - What you need to know about Home/Property Ownership: Property, whether you invest in it or live in it, can form part of your wealth strategy. Should you be using property as part of your strategy? An offset account may provide a facility for accumulating wealth while you have debt. Seek financial advice that considers all aspects of your personal situation. and its advisers are members and Authorised

16 Five Key Financial Matters for Mining and Resources Professionals 15 Chapter 5: Estate Planning Why a Will is not enough Estate planning is important at every stage of your life as a young professional and when you re older. The purpose is to ensure that in the event of your death, your assets are left to the beneficiaries of your choice. These important points require your careful consideration. If you re relying on your Will to protect all your financial interests, you may be surprised to learn that a Will only covers your personal assets. Unless you have a well-considered estate plan, other assets including your super fund and any business interests could become the subject of litigation or claims from unexpected sources. While your Will is clearly important, you will need an estate plan to secure your legacy. If you don't yet have a Will, it's important to understand what happens when you die without one (i.e. to die intestate). When this occurs, your assets are distributed by the courts in accordance with the relevant state legislation. Not only does dying intestate complicate the estate planning process, but the decisions made by the court may also be contrary to wishes. An up-to-date Will is important, but just one part of a sound estate plan. Your estate plan will identify and execute an appropriate manner for holding assets for the benefit of your beneficiaries. These assets could include superannuation and assets held by companies, trusts or business entities. In the absence of assets being appropriately structured, it's possible that they have tax implications that may affect beneficiaries. Further, and depending on your circumstances, your debtors could make claims that could impact upon the future financial wellbeing of those you love most. Your estate planning should also consider what happens if you re unable to make financial or health decisions for yourself. The reality is that unexpected and serious events occur without warning and can leave you unable to make decisions about your health or finances. In Queensland, an Enduring Power of Attorney (EPOA) allows your nominated representative to make decisions on your behalf. Without an EPOA, those closest to you your family and friends would need to apply to the courts, a process that takes time and, understandably, is stressful and difficult for them to manage when a tragedy has occurred. Other states have similar documents which can be used to achieve a similar outcome. Superannuation and insurance death benefits are also assets, and they are important considerations because they do not automatically form part of your estate. If your superannuation death benefit nominations are invalid (due to a divorce, marriage, death of a beneficiary or other circumstances), that death benefit may not be paid to your intended beneficiary or meet your wishes should you die. and its advisers are members and Authorised

17 Five Key Financial Matters for Mining and Resources Professionals 16 While there are important legal matters to be observed, due to the far-reaching financial implications of managing your legacy, your financial adviser should be a key contributor if not the central coordinator responsible for project managing all aspects of your affairs. This is so your financial matters may be appropriately considered in line with your wishes. Key Points What you need to know about Estate Planning: You need both a Will and an estate plan. Assets, including your superannuation and death benefits from insurance, are not covered by your Will. Your estate plan determines how assets will be held, and/or distributed to your beneficiaries. An Enduring Power of Attorney or similar document ensures decisions can be made for you when you're unable to make them yourself. and its advisers are members and Authorised

18 Five Key Financial Matters for Mining and Resources Professionals 17 The Solution Your first step In this paper, I ve outlined five compelling reasons why, as a high-earning mining and resources professional, you should take the first step and seek advice for taking control of your financial future. It s important to understand that the sooner you take well-considered financial action to grow and protect your wealth, both now while you re earning as well as later when you re not, the more you will benefit. For many mining and resources professionals, it can be difficult when working long hours to think about your future, let alone take steps to build your wealth and protect it. Qualified advice and direct experience of the often-specialised needs and circumstances of working in the mining and resources sectors are the keys to your personal prosperity. Here are some tips that may assist you when choosing a financial adviser: Ask for recommendations from your peers Check the adviser s credentials and experience Read client testimonials Ensure their website is of a professional standard and current with regularly published blogs and articles that include topics reflecting matters important to you as a mining and resources professional Request and read case studies and strategy papers Enquire about specialisations Contact them by phone or , and ask questions about their approach, services offered and fee structure Bear in mind that you need a trusted adviser, a qualified professional with a clear vision of your requirements as a mining and resources professional, who will consider your past and current circumstances in alignment with your future financial and lifestyle direction and goals. A trusted adviser undertakes research, develops strategies and presents clear pros and cons of the various options available to you. They build your understanding and seek your approval before implementing financial solutions. A trusted adviser enables you to outsource the burden of your financial affairs. They make sense of the complexity that is the nature of working in the mining and resources sectors to provide a clear and succinct explanation. In the end, the core aim of advice is to help you reach appropriate decisions for achieving your financial and lifestyle goals. and its advisers are members and Authorised

19 Five Key Financial Matters for Mining and Resources Professionals 18 It would be my privilege to talk with you about any of the matters I have outlined here, or answer any questions you may have about how to take control of your financial future. I invite you to contact me today: Phone jmarshall@resourcesunearthed.com.au LinkedIn. Website: Disclaimer: This information is of a general nature only, and neither represents nor is intended to be personal advice on any particular matter. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions. strongly suggests that no person should act specifically on the basis of the information in this document but should obtain appropriate professional advice based on their own personal circumstances. and its advisers are members and Authorised and its advisers are members and Authorised

20 Five Key Financial Matters for Mining and Resources Professionals 19 Last updated: June 2018 and its advisers are members and Authorised