By Liz Maroney, Westlawn Wealth Adviser 12 November 2015
If you’ve received an inheritance, you may be thinking about ways to make the most of it. Perhaps you want to take a holiday, put the money towards your children’s education or pay off your home loan. You may also want to consider how you could use your inheritance to boost your retirement savings.
While you’re thinking about your options, putting the funds in a term deposit or high interest savings account may offer a higher interest rate than your everyday bank account.
Choosing what’s best will depend on your level of debt and income, appetite for risk and overall financial situation, including how close you are to retirement.
Here are some options to consider:
1. Pay off debts
Paying off debts can reduce your financial stress now and in the future. It’s wise to pay off loans which charge you the highest interest rate first, such as credit cards, car or personal loans, store cards and short term loans.
2. Build your super balance
Putting money into super can be a tax-effective way to increase your retirement savings. There are rules around super contributions that you need to be aware of, for example:
Contributing an inheritance will generally be counted as a non-concessional (after-tax) contribution, which means you can contribute up to $180,000 per year, or if you’re under age 65 any time during a financial year, you may be able to bundle 3 years’ worth of non-concessional contributions into one. This means you could contribute up to $540,000.
Excess non-concessional contributions are taxed at 49%. However, you can generally withdraw any excess contributions tax free although a deemed earning amount will apply to the excess contributions and will be taxable to you personally.
You could choose to keep the inheritance outside super and set up an arrangement with your employer to contribute more to super from your before-tax income – also known as concessional or salary sacrifice contributions. Concessional contributions don’t attract income tax and instead are generally only taxed at 15%. This means you could lower your taxable income. Money you draw from your inheritance could supplement the income you sacrifice.
It’s also important to remember that money you put into super is generally not able to be accessed until after you retire.
3. Invest in shares or property outside super
Depending on how comfortable you are with taking investment risks, you could invest some of your money in assets with the potential to grow in value, like shares or property.
Shares and property are 2 key asset classes.
Other asset classes include cash and fixed interest. All asset classes carry their own risks and benefits and if you invest in a mix of them, you may be able to minimise the chance that all your investments will perform poorly at the same time. This is what’s known as diversification. It’s important to understand the risks involved and seek advice if you’re not sure.
Investing in property
What are some of the benefits of property investment?
The rental income you receive may cover your loan repayments.
You may be able to claim a tax deduction for some of your expenses.
It can provide a lump sum payment if you decide to sell.
What do you need to consider when investing in property?
You will need to pay tax on any income you make.
There are high buying costs, including stamp duty.
If you have a variable rate loan and interest rates go up, so do your repayments.
There is a risk that your property may decrease in value.
Investing in shares
By buying shares you are buying part ownership of a company. If the company performs well, you can benefit from share price growth. Equally, if the company performs poorly, your share performance will suffer.
What are some of the benefits of shares?
They can be bought and sold quickly with relatively low transaction costs.
Potential returns from shares include an increase in the share price, also known as capital growth.
You may make a capital gain, where you sell your shares for more than you paid for them.
Some shares also pay income in the form of dividends, which are distributions paid out of the company’s profits to its shareholders.
What do you need to consider when investing in shares?
Markets can be volatile, meaning share prices can fluctuate frequently. This is why shares are considered a higher risk investment.
Brokerage fees – these are fees you pay when you buy and sell shares.
You’ll need a broker, which can be an online trading platform or a stockbroker.
Any form of investment has its benefits and risks. As your Westlawn Wealth Adviser I can help you decide what your best options are according to your individual needs and circumstances.
For assistance with investing an inheritance, please contact me:
This communication has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 3 June 2015. While all care has been taken in thepreparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.
General Advice Warning The advice on this site may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial, tax and/or legal advice prior to acting on this information.
Westlawn Wealth Management Pty Ltd ABN 32 124 861 409, Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749, Australian Financial Services Licensee, 105 -153 Miller Street North Sydney NSW 2060.