TRANSITIONING OR RETIRING

This presentation is brought to you by the Australian Defence Force Financial Services Consumer Centre.

The Centre provides financial education and resources (not personal advice) to all ADF members, and their families, to help them make informed decisions about their finances.

The Centre also advises the Service Chiefs and other leaders in Defence on financial services and consumer matters and liaises with Commonwealth, State and Territory consumer protection agencies and other stakeholders in the interests of ADF members.

It’s important to note that this session is about financial education and it is general in nature. It’s about giving you the information to make better financial decisions. It’s not personal advice, and will not take into account your personal circumstances or make recommendations on the best course of action for you.

You will need to consider how this information relates to you personally and decide whether you want to take action.

Transition from a life in the ADF is a time of change. This presentation focusses on the financial aspects of transition; some of the key things to consider and decisions you’ll need to make. 

For example, you’ll need to think about where you want to live, what your healthcare needs are, and what personal insurances you currently have, that you may want to replace.

We‘ll talk about strategies for managing the changes to income and expenses and setting up yourself and your family for success financially post-transition.

It’s important to understand how your superannuation works and what your post-ADF super choices are.

We‘ll talk about how you can invest for the future and how to make sure any debts stay under control.

Finally we’ll talk about updating your will and where to get professional financial advice.

Here’s a short video to introduce our session today. Following the film, we’ll discuss the main themes in more detail.

Whatever your reasons for transitioning from full-time service, or thinking about doing so, there are a some financial aspects to consider so that your transition is as smooth as possible. As a full-time ADF member, you receive a range of benefits. These include: a reliable source of income, generous superannuation entitlements, subsidised housing, workplace education, training and career development, medical and dental cover, so you haven’t had to pay the Medicare levy and surcharge or needed private health insurance; and statutory death, invalidity and compensation schemes, so you most likely haven’t needed personal insurance.

If you’re in subsidised housing, you’ll need to think about where you’re going to live and how much it will cost. It’s also probably a good time to redo your budget, taking into account expected changes to your income and expenses. If you separate from full time service and move into civilian employment you’ll start to pay the Medicare levy, which is usually 2% of your income. Your employer will deduct this from your pay when they deduct income tax. If you become self-employed you’ll need to set aside some money from your income to meet your tax obligations. And if you wish to make personal superannuation contributions. Previously nearly all your medical expenses were covered by Defence. After you leave, you may want to consider taking out private health insurance for some costs not covered by Medicare, such as a choice of doctor, private hospital expenses and ancillary services like dental, optical, physio and chiro. Taking out private health insurance will also mean you avoid having to pay the Medicare levy surcharge. You may also want to consider whether you should have personal insurance, such as death and invalidity cover or income protection. This type of insurance is usually taken out to make sure you, and those people who depend on you financially, are supported if you die, suffer an accident, or are unable to earn an income. Leaving Defence will have implications for your superannuation entitlements. Will you be receiving a retirement or invalidity pension, or will your benefits be preserved until you retire at a later date? You’ll find more information about super on the ADF consumer website or contact the Commonwealth Superannuation Corporation. If you’re moving on to civilian employment, you will probably need to join a new super fund. Information on choosing a super fund is available on the MoneySmart website. If you’re receiving a lump sum payout, you’ll want to make the most of it, so take the time to consider what you really need or want. Do you use it to set yourself up financially? Does it need to provide you an income now? Or should you invest it for use in the future? Everyone’s needs are different so take your time and seek professional advice if you need it. If you look at all these changes and think “I’m not ready to deal with all of that yet”, consider staying on for a bit longer if that’s possible, so you don’t leave unprepared. If this is not possible; here’s a few things you’ll need to take care of sooner rather than later:

Work out where you’re going to live and what this will cost. Update your budget based on expected changes to income and expenses. Register for a Medicare card if you’re single, or get yourself added to the family card. Decide whether you want private health insurance and set it up if you do. Decide whether you want personal insurance such as death, invalidity and income protection, and apply for cover, either within or outside of super. Make sure you are mentally prepared to leave the ADF and contact appropriate support services if you’re not. You’ll find more information on all of these topics on the transition page of the ADF Consumer website.

One of the first things to consider when you are thinking about leaving full time service is where you are going to live.

If you are currently in Defence housing, you will need to make other accommodation arrangements.

Will you be moving to a different location? Will you be renting or moving into your own home?

If you’ve purchased a property or are thinking about buying a home after you leave the ADF, find out whether you are eligible for the Defence Home Ownership Assistance Scheme.

DHOAS is a scheme to help Defence members own their own home by paying you a subsidy into your qualifying home loan. The longer your service, the higher your potential subsidy. You can still access your entitlement after you leave the ADF.

There are a limited number of approved lenders who participate in the scheme so it’s recommended you compare what DHOAS may offer you with the cost of obtaining a loan from other lenders. You can find more information on the DHOAS website. 

When you leave the ADF you’ll need to sign up for Medicare and consider private health insurance.

Medicare covers public hospital costs, some of the fees charged by GP’s and other medical professionals and subsidises the cost of most prescription medicines.

If you are moving on to civilian employment you will start paying the Medicare levy. For most people, this is 2% of your taxable income, and will be deducted from your pay along with income tax.

You may also want to consider private health insurance to cover some of the things that Medicare doesn’t, such as the ability to be treated sooner, at a private hospital, by the doctor of your choice, and cover for a range of ancillary services such as dental, optical and physio.

If you’re a high income earner and don’t have private hospital cover, you may have to pay an additional Medicare levy surcharge.

As an ADF member, you currently have statutory death and invalidity cover through either ADF Cover, MSBS or DFRDB.

For information on your current death and invalidity cover read the personal insurance guide on the ADF Consumer website.

This cover will cease on your separation date. If you decide you still want personal insurance cover, you will need to source this from a life insurance provider.

Civilian super funds usually provide a basic level of death & disability cover, which you may be able to increase if it’s not sufficient to meet your needs. Personal insurance is also available outside of super, but these policies are often subject to health declarations and examinations.

Most life insurance and personal accident insurance policies contain war zone, war-like activity and notice of deployment exclusions so they may not cover you if you are moving to the Reserves. Always read the product disclosure statement carefully.

Comparison websites often have tools to help you work out how much cover you need and compare different products. Just be aware that most comparison sites do not cover the whole market so you may want to try more than one before you make a decision.

Read the fine print carefully, especially in relation to pre-existing conditions, so you understand what you’ll be covered for.

And it’s a good idea to have your insurance in place before your separation date so that there is no period during which you won’t be covered.

When you leave Defence it’s likely your income and expenses will change. To manage these changes effectively you may want to revisit your budget so you know where you stand and can see if you’re still on track to reach your goals.

This will also help you make decisions around what to spend your money on and what’s important to you.

Preparing a budget can be as simple or as complex as you like – you don’t need to be an expert, you just need to be methodical.

The ADF Consumer website has an easy to use budget calculator that will allow you to add multiple sources of income and all of your expenses. You can use it online and email it to yourself, or you can download an excel version to your own device.

Once you have a better idea of where you stand financially you can start to think about what your future will look like after transition. Have your priorities changed? Do you need to set new financial goals?

Setting goals will inform your savings plan and help you choose the right investment to reach each goal.

Try breaking your goals down into short, medium and long-term. If you don’t already have an emergency fund, a good short-term goal might be to set aside 3-6 months’ worth of expenses to act as a safety net for when life doesn’t go according to plan

You’re more likely to achieve a goal if you write it down, work out how much you need to save each pay, and how long it will take achieve.

When you transition out of the ADF, you’ll need to make some decisions about your super.

Your choices will depend on why you are leaving. Generally you can’t access your super until you retire or meet a so called ‘condition of release’.

Superannuation can be a complex subject. You’ll find information and videos explaining your choices at adfconsumer.gov.au and at csc.gov.au.

You’ll need to talk to the Commonwealth Superannuation Corporation to find out your exact entitlements because everyone is different.

If you’re looking for a civilian superannuation fund there are essentially three types of funds to choose from – Industry, retail or self-managed funds

Questions to ask yourself include:

• How much time and money am I prepared to spend managing my super?
• How many investment options do I really need?
• If I had a greater choice of investment options, how would I choose which ones are right for me?
• How much do I know about different types of investments?

Super comparison websites and financial advisers can help you choose a fund to suit your needs. However, please be aware that websites and advisers don’t necessarily serve your best interests. We’ll have more to say about that later.

If you’re leaving the ADF with a lump sum of money, take some time to think through your options so that you make the best possible use of the money.

Don’t rush to make important financial decisions, especially at a time of change in your life.

If you choose to invest your money in assets like shares or a property, watch our video: Invest for Your Future, and read the Investing Guide, both available on our website. These resources will give you some things to think about and tips on getting it right.

Never invest in something you don’t fully understand; and remember, if something looks too good to be true, it probably is.

The most important aspect of managing money well is keeping debt under control. Some of you may be thinking about buying a home or starting a small business, and borrowing to fund it.

Not all debt is bad, but too much of it can put a strain on your finances and create stress in other areas of your life.

Keep in mind that financial institutions sell debt, it’s how they make their money.

Before taking on debt, think about what you are comfortable with and don’t get in over your head.

If you are borrowing for a business venture, ask yourself, can I repay this if the business doesn’t generate the income we think it will?

It’s smart to have a fallback position of say 3-6 months’ worth of expenses in a savings account you can access in an emergency. The riskier your borrowings, the larger your fallback position should be.

If you ever find yourself with serious debt problems, contact the ADF Consumer Centre so that we can put you in touch with a free financial counsellor.

Your will is a legal document that dictates how your assets should be distributed when you die.

This short video will explain the importance of having a valid will, and what it means to grant someone a Power of Attorney.

Having a valid will is essential. It’s the best way of ensuring your assets get passed on according to your wishes when you die. If you don’t have a will, a court might decide who gets what, which may not match your wishes. Use a qualified legal professional to make sure your will is written and executed correctly.

Full-time ADF members can have a simple will prepared free of charge by an ADF legal officer. They can also update your will when your life circumstances change, such as getting married or divorced.

Although they can be useful, think carefully before granting someone a Power of Attorney which allows that person to deal with your money and your assets as if they were you. This means they can access your bank accounts, borrow money on your behalf, and sell your assets.

A power of attorney can be limited, for example, an ADF member who’s being deployed might give his or her spouse a general power of attorney that starts on the day of departure and ends the day of return. It could be limited, say, to transactions up to $5,000 which allows the spouse to pay bills and manage day-to-day finances but not sell the house!

A simple alternative may be to have a joint bank account with your partner that can be topped up from time to time.

Power of Attorney requirements vary from State to State, so always see a lawyer for advice. 

Give yourself peace of mind by having up-to-date and valid legal documents. But don’t forget to review them whenever your circumstances change.

If you are looking for a professional adviser, here are some tips on finding an adviser near you.

For financial advice, we recommend choosing an adviser who works on a genuine fee-for-service basis. That is they charge a flat fee for the job they do and do not charge any form of commissions or asset-based fees that may influence them to put their interests ahead of yours.

Our financial advice referral program is a list of advisers who operate on a fee-for-service basis. It’s not an exhaustive list but it could be a good place to start. Be aware that these advisers are not engaged or endorsed by Defence, and any relationship is strictly a private one between you and the adviser. You should also watch our video: ‘Financial advisers: the facts & the fiction’, which will give you a good idea of what to expect when you see a financial adviser and what to look out for.

If you need help with a simple tax return, a registered tax agent may be all you need. However if your financial affairs are more complex, you may be better off speaking to a university qualified accountant who has completed additional professional training. You can find a list of appropriately qualified accountants on the websites of professional associations such as Chartered Accountants Australia New Zealand or CPA Australia.

The Government collects income tax to pay for things like healthcare, education, roads, railways, and Defence!

In Australia, income tax is levied on a progressive scale, which means the more you earn, the higher your top rate of tax. This is called your marginal tax rate. You can find out more about individual income tax rates on the Australian Tax Office website.

Tax time can seem like a bit of a chore, but it doesn’t have to be if you’re organised.

You can complete your own tax return via the myGov portal. You must lodge your return by October 31 each year. If you are using a registered tax agent or accountant you will have longer to lodge your return.

By August, most of your income details such as salary and wages, interest and investment income, will be pre-filled on your online form, so all you’ll need to do is check that the details are correct, add your deductions and submit the form.

Most income you earn has to be declared. This includes your salary and allowances, interest, rental income, dividends and other investment income, including any capital gains or losses. If you’re not sure what income must be included, visit the ATO website and search for income guides.

You do not have to declare income earned for reserve service except for periods of continuous full-time service. Income from some deployments are also tax-exempt. You’ll learn more about this during your Force Preparation Course.

Deductions are certain work or investment-related expenses that reduce your taxable income, which in turn reduces the amount of tax you have to pay. To claim a deduction for a work-related expense, it must directly relate to earning your income, you must have spent the money and must not have been reimbursed, and you must be able to prove it.

The ATO’s tax guide for ADF members also explains what you can and can’t claim. Let’s look at a few examples.

ACW Smith spent $546 on compulsory work uniforms, including stockings, which are required by the Air Force Manual of Dress. She can claim these costs as legitimate deductions as well as the costs of cleaning her uniform.

ACW Smith also pays a gym membership so she can keep fit when at home. Even though, as an ADF member, she is expected to maintain a high standard of physical fitness, this expense is considered personal, and is not deductible.

Corporal Cross on the other hand, is a member of the Special Forces. He is required to maintain a level of fitness well above the regular Army standard. Corporal Cross needs the gym to maintain the peak physical condition his job requires, so his gym membership is deductible.

Some ADF members make deduction claims which are excessive or are not able to be proven. Deductions work on an ‘honour system’ but be warned, if you make fraudulent claims, you will be caught. It’s only a matter of time. These members receive fines, are charged interest and are required to pay the amounts back to the ATO.

For help completing your tax return, find a registered tax agent on the Tax Practitioners’ Board website. Registered tax agents will lodge your return for you.

If your situation is more complex or you want specialist tax advice on areas such as investment properties or shares, you might need an accountant, who should also be a registered tax agent.

To find a qualified accountant in your area, we suggest using the search function available on professional association websites, such as CPA Australia or Chartered Accountants Australia New Zealand.

Being organised will save you time and money, but remember, you are responsible for your tax return, so make sure you include all your income, and that your deductions are legitimate before your tax return is lodged.

A final word of warning. Some tax agents and accountants sell investment products, insurance and real estate, often as their main business, from which they earn commissions and other sales incentives. Therefore, they may not act in your best interests. To learn more about this, watch our video, ‘Financial Advisers: The facts and the fiction’.

Before choosing a licensed professional, check they are qualified to give the kind of advice you are after and that they have experience in dealing with circumstances like yours. Make sure you understand and agree the scope of the job and the fees before proceeding, these should be outlined in an Engagement Letter.

For more detailed information on these topics, to see your transition checklist or to contact us, go to our publicly available website adfconsumer.gov.au. You can also sign up to our free financial newsletter.

We want your transition from the ADF to be as seamless as possible. There are a number of services available to help you transition smoothly into civilian life.

However, in the end, it’s up to you to understand your financial options.

This is best achieved by taking your time, by self-education, and by consulting trusted professional advisers, as the need arises.

But be aware – no one will look after your financial affairs like you.