#CPACONGRESS MC3: Pension strategies: Meeting your retirement objectives Michelle Griffiths Partner,...
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Transcript of #CPACONGRESS MC3: Pension strategies: Meeting your retirement objectives Michelle Griffiths Partner,...
#CPACONGRESS
MC3: Pension strategies: Meeting your retirement objectives
Michelle Griffiths
Partner, TAG Financial Services
Tuesday 18 November 2014
9:00AM - 12:30PM
MC18: Pension Strategies Meeting your retirement
objectives
Presented by:
Michelle GRIFFITHS, Partner
®
Practical Solutions to Technical Problems
Disclaimer
This presentation has been prepared by TAG Financial Services Pty Ltd and is for general
information only.
The presentation has been prepared without taking into account your personal objectives,
financial situation or needs.
You should assess whether the information is appropriate for your needs.
Practical Solutions to Technical Problems
Who is in Control of my Retirement Direction?
Practical Solutions to Technical Problems
How to Plan your Retirement Retirement – what does it mean? The importance of planning Aspects to consider:
When will I retire? Standard of living Family situation How much will I need? Where am I now?
Practical Solutions to Technical Problems
6
Do I have enough to Retire?
Your biggest risk in
retirement is not losing
your money –
it is outliving your money.
CASE STUDY Bob and Jane both 57 Have no mortgage Have Super worth
$650,000 Desire an income of
$50,000 per annum in retirement.
Can they retire NOW? If they do retire now –
how long with their money last??
Practical Solutions to Technical Problems
7
Do I have enough to Retire?
Case study shows – assumes a rate of return of 2% above inflation
Practical Solutions to Technical Problems
8
Do I have enough to Retire?
Case study shows – assumes a rate of return of 2% above inflation
Practical Solutions to Technical Problems
9
Do I have enough to Retire?
WHAT IF WE WANT TO …. Annual holiday of $20,000 p.a. for the next 10
years Update / renovate the home - $50,000 Gift to the children in a few years time of $100,000
CAN I STILL AFFORD TO RETIRE NOW?
Practical Solutions to Technical Problems
10
Do I have enough to Retire?
Case study shows – assumes a rate of return of 2% above inflation
Practical Solutions to Technical Problems
11
Do I have enough to Retire?If we change the retirement age from 57 to 61 ....
Case study shows – assumes a rate of return of 2% above inflation
Practical Solutions to Technical Problems
Questions you need to answer When do I want to retire? Will I slow down for a while first? How much do I need for normal “living
expenses”? What the “extra” things I want to allow
for – and how often? Are there gifts to children that are
important to me? How much and when?
Current situation (a balance sheet for you personally)
Practical Solutions to Technical Problems
Retirement – by DESIGN Different age groups have different
strategies that will apply Strategies must be suited to YOUR
circumstances Need to focus on the long term (but not
lose sight of the short term) Consider tax implications
Practical Solutions to Technical Problems
Superannuation as your retirement savings vehicle
Practical Solutions to Technical Problems
The Power of Superannuation as a Retirement Vehicle
Tax free income stream if over 60 15% rebate on retirement income (>60)
Salary sacrificing into superannuation – for tax benefits NOW
Asset protection Estate planning certainty
Practical Solutions to Technical Problems
Superannuation Alternatives
Industry Funds Continue in current Super Fund Employer Funds Retail Funds Super Wrap accounts Self Managed Super Funds
Practical Solutions to Technical Problems
Are SMSF’s worthwhile?
With a self managed fund you have greater:
Control over investment decisions
Range of potential investment options
Flexibility and control of who receives your benefits in the event of your death – estate planning
Practical Solutions to Technical Problems
Are SMSF’s worthwhile? With a self managed fund you:
Get your full refund for imputation credits Can provide a structure for wealth accumulation
of future generations Can pool your money with up to 3 other family
members – saving together, investing together and building wealth together
ALSO, A SMSF CAN BE MUCH CHEAPER TO RUN!
Practical Solutions to Technical Problems
19
Pre-Retirement Strategies
Maximise your Super
Contributions
Plan how much your retirement income will
be – and practice living off this – salary sacrifice
the balance into Super – put it into savings plan
Practical Solutions to Technical Problems
20
Pre-Retirement Strategies Use SMSF or alternative selected to get ready
for the investment philosophy/method that will
be used in retirement / Learn and seek to
understand
Get your spouse
involved!!
Practical Solutions to Technical Problems
Retirement Planning Strategies
Practical Solutions to Technical Problems
22
Retirement Planning Strategies
When pension starts
Taxation strategies with pensions
Transfer assets into Super
Multiple Pensions
Exit strategies
Practical Solutions to Technical Problems
23
Pension v Lump Sum
Pension Lump SumPayable > age 55 Condition of release required
Cash payments ONLY Cash OR in-specie transfer of assets required
Assets within the fund for pension – TAX FREE
Fund continues to be taxable
Taxed at MTR less 15% rebate
(between age 55 – 60)
Tax free up to threshold – then max. tax of 17% for
taxable component (between age 55 – 60)
Practical Solutions to Technical Problems
When does the pension start? When the member and the trustee
agree that it starts - Trust Deed may specify
NOT required for the first pension payment to be made for the pension to have started for tax purposes
If pension started after 1 June - then nil minimum pension for that financial year.
Practical Solutions to Technical Problems
25
Strategy #1TTR Pension Strategy
Using the Transition to Retirement (TTR) Pension and salary sacrificing…
WHY?? Salary income is in tax
effective vehicle.
Case Study Caitlin’s super
balance $521,000 Earns $152K pa Currently salary
sacrificing $nil into super
55 years old
Practical Solutions to Technical Problems
0
10,000
20,000
30,000
40,000
50,000
60,000
Current Working pension(under age 60)
Working pension(over age 60)
Personal tax Super Tax Contributions tax
26
Strategy #1TTR Pension Strategy
$3,840 p.a. tax benefit $8,842 p.a.
tax benefit
Practical Solutions to Technical Problems
Strategy #2Pension / Lump Sum Strategy
Benefits of lump sum benefits: Low Rate Cap (if available) - THEN Tax Rate – 17% if between age 55 and 60
SIS Regs. mean that “pension payments” do not exclude commutations paid in cash.
Can then elect to have pension treated as lump sum (prior to payment being made).
Practical Solutions to Technical Problems
Strategy #2Pension / Lump Sum Strategy
Example Age 57 years old Other income =
Top MTR $950,000 in
Super Min. pension is
$38,000
Tax effect if taken as pension:
$38,000 x 47% = $17,860 less $38,000 x 15% = $5,700
$17,860 – $5,700 = $12,160
Tax effect if taken as lump sum:$0 (low rate cap); or
$6,460 ($38,000 x 17%)
Save between $6,460 - $12,160
Practical Solutions to Technical Problems
Strategy #2Pension / Lump Sum Strategy
How can you use this strategy??
1. Member needs to satisfy a “condition of release” for lump sum payment;
2. Need to elect to receive the pension in the form of a lump sum for tax purposes – in ADVANCE of the payments;
3. ETP paperwork rather than Pension for PAYG purposes.
Practical Solutions to Technical Problems
Strategy #3Re-contribution StrategyTake lump sum benefit prior to commencing pension and put proceeds back as non-concessional contribution…WHY?? Create higher tax free
income stream Have income stream with
15% rebate attached to it Estate planning benefits
Case Study
Michael has $521,000 in super (22.6% tax free)
Do we pay out a lump sum benefit and re-contribute back into the fund
Practical Solutions to Technical Problems
Strategy #3Re-contribution Strategy
Without Re-contribution
Re-Contribution (1 July 2014)
Super Balance $521,000 $521,000
Account Based Pension $20,840 $20,840Other Personal Income $85,000 $85,000
$105,840 $105,8400
Less tax (net of all rebates) $24,968 $23,593
Total Income Stream $80,872 $82,247
Tax free % has increased from 22.6% to 50.1%Difference in Tax Paid $1,375 p.a.
Practical Solutions to Technical Problems
Strategy #3Re-contribution Strategy
REMEMBER – need to make sure MONEY ACTUALLY moves
Good for tax planning – but ... Don’t forget what you are trying to
achieve
When starting new pension be clear who the END beneficiary needs to be
Practical Solutions to Technical Problems
Strategy #4 Transfer Assets Prior to Commencing PensionStructure the client’s income producing assets into Super prior to starting the pension…
WHY?? Have earnings taxed at
0% Have income stream with
15% rebate attached to it
Jason - $521,000 in SMSF (22.63% tax free)
$400,000 commercial property earning $32,000 p.a.
Cost to transfer property to SMSF - $18,000 in stamp duty
No CGT on the transfer
Practical Solutions to Technical Problems
Strategy #4 Transfer Assets Prior to Commencing Pension No Transfer of
Asset Transfer Asset
Super Balance 521,000 521,000
Assets transferred into Super (less stamp duty costs)
382,000
TOTAL available for Pension
521,000 903,000
Minimum Pension Pymt 20,840 36,120
less TAX (net of rebate) (5,160) (3,870)
Income Stream from Pension
15,680 32,250
Income in Personal Name 184,000 152,000
less Tax (60,027)
(47,227)
123,973 104,773
TOTAL INCOME STREAM
139,653
137,023
TOTAL TAX PAID 65,187 51,097
Diff
eren
ce in
Tax
Pai
d -
$14,
090
Practical Solutions to Technical Problems
35
Transfer Assets Prior to Commencing Pension
The same benefits apply to using Inheritance money and putting into super as well.
Take care with contribution limits Consider stamp duty, capital gains tax, consulting
fees
Practical Solutions to Technical Problems
Contribution Limits – Concessional
Contribution limits for 2014/15: $30,000 p.a. per person $35,000 p.a. Per person (if > 50 before 30/6/2014)
Multiple employers can contribute and claim deduction – but excess contributions for member
Can claim deduction up to age 75 SCG ONLY after age 75
Practical Solutions to Technical Problems
Contribution Limits – Non-Concessional
$180,000 pa per person (from 1 July 2014)
If TFN of member not provided, cannot accept
Bring forward of 3 years worth of non-concessional contributions allowed ($540,000)
Practical Solutions to Technical Problems
Strategy #5: Multiple Pensions
Background: Proportional rule used to determine taxable / tax free % when pension started (will then apply to all pensions / withdrawals)
HOW: When a NEW pension starts – instead of just merging with existing pension – keep each pension separate
Practical Solutions to Technical Problems
Multiple Pensions
76%
24%
Pension #1
Taxable component Tax Free component
100%
Pension #2
Practical Solutions to Technical Problems
Multiple Pensions
WHY?To quarantine the tax-free benefits - in case
later lump sum benefits required (> age 60)
To preserve the tax-free components for non-dependent beneficiaries (adult children)
HOW? Make any new UDCs to new Fund Start pension with existing taxable balance B4
making UDCs
Practical Solutions to Technical Problems
Estate planning considerations with super
Practical Solutions to Technical Problems
Who gets my Super when I die? Will depend on:
What does the Trust Deed say; Do they have a Binding Nominated
Beneficiary Form; Do they have a Reversionary Pension in
place; and/or Do they have a Pension Contract in place?
Practical Solutions to Technical Problems
Binding Nominated Beneficiary Form
If Binding Nominated Beneficiary Form (BNBF):
• Trustee can comply with members’ wishes If no BNBF – or trust deed doesn’t allow it:
Refer to the Trust Deed – who does IT say the benefit needs to be paid to;
Only use the LPR as a last resort ONLY.
Practical Solutions to Technical Problems
Reversionary Pensions Reversionary pensioner takes over the
“ownership” of the pension BNBF will NOT apply to this rev. pension However:
The rev. beneficiary MUST BE a “tax dependant” Rev. notice will apply to the one pension at a time Will NOT apply to any Accumulation accounts If the rev. beneficiary is NOT a “tax dependent” –
THEN the BNBF would become relevant
Practical Solutions to Technical Problems
Reversionary Pensions
On the death of the reversionary beneficiary – the remaining balance in the reversionary pension will be dealt with in accordance with the Binding Nominated Beneficiary Form of that reversionary beneficiary (not the original deceased pensioner)
Practical Solutions to Technical Problems
Pension Contracts
What are Pension Contracts?
Simply a contract between a member and the fund trustee/s
Takes effect upon the member’s death Obligates the trustee/s of a SMSF to act in
accordance with the member’s terms set out in that contract
Practical Solutions to Technical Problems
Pension contract (example)
Pension contract put in place when pensions started
To care for children if new spouses
Conditions: Limited pension to surviving spouse No commutation of pension After death of surviving spouse, any
remaining pension split to deceased members children
Practical Solutions to Technical Problems
Managing pensions on Death of the member Exit strategies
Reversionary pensions Withdrawal from Super Leave to next generation –
in Super but HOW? Leave to next generation –
but NOT in Super
Planning prior to death??
Practical Solutions to Technical Problems
Value of Advice Industry funds, media and Govt – trying to
devalue the value of advice Who needs advice? Everyone needs advice at some point in their
lives You need to ensure that you are paying for
advice that is in your interests Professionalism, independence, ethics
Practical Solutions to Technical Problems
Classic “mistakes” Complacency Procrastination Loss of control Don’t manage your own business/finances Emotions – over riding decision making Lack of planning / budgeting Lack of Goals and Objectives
Practical Solutions to Technical Problems
Contact us at TAG ..
LinkedIn – please Connect with us
Michelle Griffiths
Join our accountant’s network for quarterly super news and tips…
www.tagfinancial.com.au
Practical Solutions to Technical Problems
TAG Financial Services Investment Advisory & Wealth Strategies Superannuation Advisory Services Property related advice Estate Planning Strategies Business Advisory & Tax Consulting
Ph: (03) 9886 0800
Fax: (03) 9886 0844
Email: [email protected]
Web: www.tagfinancial.com.au