Planning for an inheritance

Australia is one of the most generous nations in the world when comparing our desire to leave behind an inheritance. When a group of retirees were surveyed, 69% were intending to leave an inheritance compared to 64% in the UK and only 56% in the US. Australians also plan to leave the most to their heirs with the average expected inheritance in Australia being in excess of $500,000 (USD) compared to $284,000 in the UK and $176,000 in the US. Given the Australian attitude towards leaving an inheritance It is unsurprising then that nearly one in five Australians intend to rely on an inheritance to pay off their mortgage or ensure their financial security. This article will look to compare the alternative ways that you could use and inheritance or other unexpected lump sum to improve your financial security.

Alternatives to consider If you were to receive an inheritance there are many things you may choose to do with it. You may have been dreaming of traveling the world and these funds would finally allow you to do that. This article however will seek to limit the considerations to improving your financial position.

One goal that nearly everyone shares is repaying their mortgage and so an inheritance could be directed straight to this. Alternatively you could look to invest the funds or contribute them to super. This article will look to determine how to best use an inheritance to improve your financial position As such we will evaluate 4 different alternative strategies:

  1. Repay your mortgage

  2. Invest the funds into a portfolio of diversified assets

  3. Repay your mortgage, re-borrow the funds and invest as before

  4. Contribute the funds to super

Example background To compare these scenarios let us use an average South Australian couple. John and Jane Doe are 50 years of age when John’s Father passes away and leave John and his sister $250,000 each. They both work full time and plan to do so until they are eligible for the age pension (67). They earn the average full time wage for a male and female in SA of $76,596, and $67,860 pa respectively. Their current superannuation balances are the average for a 45-55 year old male and female of $151,473 and $90,847 respectively. Their house is worth the median price of $495,000 and they have the average mortgage of $278,000 with fifteen year remaining on the term. Like most people they spend everything they earn and any surplus goes towards holidays and work around the home.

Based on their existing position when they retire at 67 their net assets will be worth $687,000 (in todays terms) and would provide for 14 years at their current standard of living. However with a life expectancy of 86 this leaves them with 5 years (if not more) after their funds have run out where they are completely reliant on the pension.

Strategy 1: Repaying the mortgage Under the Doe’s current mortgage arrangements their loan will take 15 years to be repaid based on their current loan repayments of $25,320 pa at 4.5%. Where they direct the $250,000 inheritance to the mortgage this will reduce the balance to $28,000 and will be repaid completely in 14 months.

To evaluate this scenario once the loan is repaid the additional surplus income is to be saved in the bank.

Strategy 2: Investing the funds into a portfolio of diversified assets. Where the intention of investing the funds is to provide for their financial security the Doe’s are comfortable investing for the long term and as such will allocate 70% of their funds to growth assets such as shares and property with the remaining 30% invested in bonds and fixed interest providing additional diversification. In addition to this future surplus income is also directed towards the investment portfolio.

Strategy 3: Repay the mortgage and then proceed to borrow $250,000 to invest into a portfolio of diversified assets. This strategy combines the two that we have considered so far. Where they immediately direct the funds to the mortgage this has the benefit of reducing the Doe’s personal non-deductible debt. They then look to re-borrow the $250,000 to invest, the overall debt position remains constant however $250,000 out of the total $278,000 is related to the investment and the associated interest will be tax deductible.

In this scenario the current loan arrangement is unchanged and as in strategy 2 any additional future surplus income is directed towards the investment portfolio.

Strategy 4: Contribute the funds to superannuation invested in a comparable portfolio of diversified assets. Note: this is based on the most recent proposed changes to superannuation (yet to be legislated) There are two ways to contribute funds to superannuation: Concessionally you can contribute up to $25,000 including any employer contributions for which you can claim a tax deduction Non-concessionally You can contribute up to $100,000 per year or $300,000 over a three year period. In any case the effective tax rate in superannuation is significantly less than their personal rate allowing their funds to grow at an accelerated rate. For simplicity the contribution is a one off non-concessional lump sum. (There would be a benefit in considering contributing a portion concessionally.) Any future surplus income will be concessionally contributed to super


Based on the financial modelling projected above Strategy 3 had the greatest initial impact on the Doe’s expected financial position. At retirement (age 67) They would see an increase in their net wealth of $627,500 taking them to a total in todays terms of $1,314,000 at retirement. If they had chosen to contribute the funds to super the difference at retirement would be approximately $7,700 however moving forward the benefits of contributing to super extend past retirement where a tax free income stream can be drawn putting the Superannuation contribution strategy ahead nearly immediately after retirement If this has raised any questions about your own financial plans or estate planning needs do not hesitate to contact Hart Wealth Management for a personalised discussion.

#Inheritance #Investing #mortgage #gearing #superannuation

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