If you want to repay your mortgage quickly and still have easy access to your additional repayments, an offset account may be worth using.
What’s an offset account?
An offset account is a transaction account that is linked to your home loan and the money you deposit in it offsets the loan balance before interest is calculated. For example, if you owe $400,000 on your home loan and have accumulated $50,000 in an offset account, interest will be calculated on $350,000.
Benefits over regular savings accounts
If you hold your surplus cash in an offset account you can save interest at home loan rates, and no tax is payable on the interest savings. This is effectively like ‘earning’ the home loan interest rate tax-free. Alternatively, you could hold your surplus cash in a regular savings account but the interest rate you earn is usually much lower than what you pay on your home loan. Plus, every dollar in interest you earn is taxable at your marginal rate, which could be up to 49%1.
Benefits over direct loan repayments
When you make additional repayments directly into the loan you can achieve similar benefits to having an offset account. However, limits often apply to the frequency and amount of withdrawals you can make and withdrawal fees are usually charged. With offset accounts, you typically have ready access to the money via an ATM, cheque book and internet, and withdrawal fees are generally not charged.
The best of both worlds
You may even want to have your salary paid directly into an offset account and withdraw money as needed to meet your living expenses. This can enable you to make the interest savings available with direct loan repayments and have easy access to your money.
While as a nation we collectively face a large retirement savings gap, there are a number of smart things you could consider doing to help make sure your future financial security isn’t at risk.
The savings gap
Most Australians are financially unprepared for retirement, partly because we are living longer than ever before and we have higher expectations of our retirement lifestyle.
Research conducted by Rice Warner Actuaries reveals that Australia has a shortfall in super of close to $1 trillion1.
What’s more, the Association of Superannuation Funds of Australia (ASFA) says the average couple needs at least $510,000 to fund a comfortable retirement, while a single person needs at least $430,000 (both calculations assume receipt of part Age Pension)2.
If you’re relying on your employer compulsory super contributions alone to meet this retirement goal, you could be in for a nasty surprise. According to ASFA, if you’re earning $50,000 a year, your lump sum benefit after 30 years of employer contributions would be just $183,000 (assuming 9% super guarantee contributions, investment earnings of 7% and current tax rates).2
While the gradual increase in the super guarantee rate to 12% by 2025 will go some way towards closing this gap, it’s unlikely to be enough2.
Strategies to help close the gap
1. Set your target
The first step in closing the super gap is to understand how much you will need to create the retirement you want. While this may seem obvious, research by Investment Trends shows that 68% of Australians haven’t set a target for their retirement savings or income3. Your adviser can help you identify your retirement target and recommend strategies to close your super gap.
Over the coming months you will begin to see changes at LBW as we roll out our new brand. It is our intention to see this period of transition completed by the end of this financial year. Next week we will celebrate the launch of our new name and logo - LBW Business + Wealth Advisors.
The reasoning behind the new name is to recognize the shift in services we provide to our clients and to align to the future direction of the Firm. We remain a Chartered Accounting Firm and will continue with our traditional compliance and tax return services. The new name recognizes the growth in our offerings over the last 3-4 years and reflects all that LBW offers – more than just accounting. Our services include business advice and overall wealth creation and retirement planning advice.
The new logo, sees the introduction of the plus symbol +++. The plus symbol is reflective of what we offer to all our clients, our staff and our community connections. Represents partnerships, working together and collaboratively to identify and meet the individual needs of all our connections.
The Staff and Principals are extremely excited by the opportunities the fresh new look and direction offers LBW and we look forward to bringing this to life with you.