064 Money Matters WHERE INVESTORS CAN EARN LOW-TAX INCOME AND ARE WE UNDER INSURED? IN THESE DAYS OF HIGH INFLATION AND LOW WAGES GROWTH, INVESTMENTS CAN BE A VALUABLE SOURCE OF ADDITIONAL INCOME THOUGH SOME RETURNS ARE MORE TAX-FRIENDLY THAN OTHERS.
T
he upside of rising interest rates is that returns on savings accounts have improved. Savers who shop around may be able to earn 3 per
cent on their spare cash, though various
conditions may apply to earn that sort of rate.
The drawback is that interest income is fully taxable. A high-income earner can lose up to half their interest in tax.
By contrast, dividends on shares can be very lightly taxed. That’s because investors receive credit for the 30 per cent tax paid by companies on profits that dividends are paid from. It can make dividends very tax-friendly for high income earners. Investors can even claim a tax refund if the franking credits on dividends outweigh the tax they have to pay.
This explains why shares and exchange traded funds that invest in equities are often popular choices among those who rely on investment income for money to live on. To see how dividends stack up against other types of returns, investors can use a figure called the ‘dividend yield’. It’s calculated by dividing the dividend per share by the market price of the share, and multiplying the result by 100. You don’t have to crunch the numbers yourself. The dividend yield for each listed
is that they represent your share of a
company’s profits. Over the last 100 years, companies have paid out around 65 per cent of their earnings to shareholders. That’s great news for investors looking for
lightly-taxed income. The added sweetener is that shares have a healthy track record for notching up long term capital growth, which can also be tax-friendly. Meantime, as we well know life can
change fast. Who’d have thought a year ago that interest rates would jump 2.25 per cent in just five months? Or that inflation would be over 6 per cent? And let’s be honest, who predicted back at the start of 2020 that we were walking into a pandemic? The fact is, none of us knows exactly what’s around the corner. That’s why life insurance is so important. And as the cost of living climbs, it makes a lot of sense to review your cover to be sure you have the right level of protection for your needs. Here are three reasons why it’s worth giving your life insurance a check-up.
1. LIFE COVER CAN PROTECT YOU NOW Life insurance tends to be bundled with other forms of personal insurance. Typical
company can be found on the Australian Securities Exchange (ASX) website. The yield will change as the sale price of a share
add-ons include Total and Permanent
the yield would soar and vice versa. As I write, the dividend yield on some of Australia’s best-known shares include
pays a percentage of your regular income if illness or injury prevent you from working.
changes. Indeed, if the share price tanked
4.0 per cent for the Commonwealth Bank,
4.2 per cent for Telstra and 11.6 per cent for BHP. Clearly, there can be big variations in dividend yields across different companies, which highlights the value of having a diversified portfolio.
More broadly, Reserve Bank research shows dividend yields on Australian shares typically averages around 4.5 per cent, which is high by global standards.
What’s really exciting about dividends
064 www.truckandbus.net.au
Disability (TPD) insurance, which pays a lump
home loan repayments as a result of rising
interest rates. Without adequate life insurance, those challenges could become a lot harder if you were no longer around.
3. LIFE COVER IN SUPER CAN BE TOPPED UP Chances are you have life insurance through your super. If you’re unsure, ask your fund. However, it’s also a reasonable bet that you don’t have enough cover. One industry study found the level of life insurance through super can only meet 61 per cent of the basic needs of
the average household – or just 37 per cent of the needs of families with children.
It is possible to top up your level of cover through super. However, the increased
premiums come directly out of your super. Over time this can have a significant impact on your retirement savings, which is why some people choose to top up their cover through an independent insurer. The main point is to check how much cover you have in place. Life has a habit of delivering curve balls, and your future self
could be very grateful that you took the time today to review your level of protection.
sum if you become permanently disabled, and also Income Protection cover, which
In this way, a life insurance package can
provide a financial lifeline while you are very much alive.
2. LIFE COVER IS ESSENTIAL IF CHILDREN OR A PARTNER DEPEND ON YOU Life cover can prevent a tough time being even harder for the people who matter most in your life. Many families are facing serious financial challenges right now dealing with increased
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.
