#CPACONGRESS MC3: Pension strategies: Meeting your retirement objectives Michelle Griffiths Partner, TAG Financial Services Tuesday 18 November 2014 9:00AM

#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.


Who is in Control of my Retirement Direction?


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?

http://www.123rf.com/photo_3488228.html


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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??


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Case study shows – assumes a rate of return of 2% above inflation


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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?


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Do I have enough to Retire?If we change the retirement age from 57 to 61 ....



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)


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


Superannuation as your retirement savings vehicle


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


Superannuation Alternatives

Industry Funds Continue in current Super Fund Employer Funds Retail Funds Super Wrap accounts Self Managed Super Funds


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


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!


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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


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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!!


Retirement Planning Strategies


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Retirement Planning Strategies

When pension starts

Taxation strategies with pensions

Transfer assets into Super

Multiple Pensions

Exit strategies


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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)


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.


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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


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

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Strategy #1TTR Pension Strategy

$3,840 p.a. tax benefit $8,842 p.a.

tax benefit


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).



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



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.


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


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.


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


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


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


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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


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


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)


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


Multiple Pensions

76%

24%

Pension #1

Taxable component Tax Free component

100%

Pension #2


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


Estate planning considerations with super

http://www.google.com.au/url?sa=i&rct=j&q=binding+death+benefit+nomination+form&source=images&cd=&docid=8wNJ-3PpiVFBQM&tbnid=FZ03i6J5VfzUkM:&ved=0CAUQjRw&url=http://archdioceseoftoronto.blogspot.com/2011_01_01_archive.html&ei=YQm5Ubq1C8qGkQXG4IDQCw&bvm=bv.47810305,d.aGc&psig=AFQjCNE1gGHyfYuuCOATXeCh2xwFiJwckg&ust=1371167434298546


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?


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.


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


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)


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


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


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??

http://www.google.com.au/url?sa=i&rct=j&q=contracts+and+agreements&source=images&cd=&cad=rja&docid=nKzTxa4UnvB-jM&tbnid=_ZxcV_Hyccwg9M:&ved=0CAUQjRw&url=http://blog.inajiffy.com/2011/07/business-contracts-5-things-you-should-do-and-5-to-watch-out-for/&ei=Jg25Uf-nJY-PlQXp7oGQDw&psig=AFQjCNGg0ym23BVOO1Wouqo5wXq71QSF3w&ust=1371168385537569


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


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


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


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

Documents

#CPACONGRESS MC3: Pension strategies: Meeting your retirement objectives Michelle Griffiths Partner, TAG Financial Services Tuesday 18 November 2014 9:00AM