lecture 7

Question 1

 Retirement planning issues

Answer 1

o Increasing importance of being financially self-reliant in retirement due to reduced government support
o Retirees are looking for improved standards of living in retirement
 Importance of strategies to maximize accumulated super
o Increasing costs for aged care
o Longevity issues
o Entitlements to age pension
o Minimizing tax

Question 2

 Preservation age

Answer 2

o Age that benefits can be accessed
o A condition of release

o	Conditions of release include: 
	Preservation age and retiring
	Ceasing employment arrangement on or after the age of 60
	Reaching 65 years of age
	Terminal illness
	Permanent incapacity
	Death

Question 3

 3 types of benefits

Answer 3

o Different to defined benefit

o Preserved
 Any contribution to your superannuation and investment performance increase your preserved benefit

o Restricted non-preserved
 Do not have any superannuation which is restricted non-preserved now
 Amount of RNPB can either stay the same or decrease, but it cannot increase
 Can access before preservation age

o Unrestricted non-preserved
 Meet a condition of release, then your preserved benefits and restricted non-preserved benefits become unrestricted on-preserved benefits
 Can withdraw any superannuation which is unrestricted non-preserved at any time

Question 4

 2 Types of components

Answer 4

o Sources

o Tax free component
 Most commonly member contributions where a tax deduction has not been claimed by the member

o Taxable component
 Includes amounts where a fund has paid 15 tax on the contributions or earnings
 Concessional rates of tax will apply to benefits containing a taxed element

o Untaxed component
 Doesn’t apply to everybody
 A sub component of the taxable component
 Includes amounts where a fund has not paid any tax on the contributions or earnings

Question 5

 Untaxed plan cap amount

Answer 5

o Maximum amount of the untaxed elements subject to concessional tax rates
o Amounts above the untaxed plan cap are taxed at the top marginal rate
o Applies separately to each super fund you receive a super lump sum from

Question 6

 Tax on super withdrawal

Answer 6

o Depends on:
 preservation age
 Age you will be when you get the payment
 Whether the money in your super account is tax free or taxable
 Whether you will get the payment as an income stream or lump sum

o Don’t pay tax on the tax-free component of your super when you withdraw it regardless of your age or the way you withdraw it

Question 7

 Retirement income streams

Answer 7

o Australian’s have traditionally preferred to receive lump sums rather than income streams in the past because savings in super funds were quite low
o Features include:
 Payable for a fixed term or life
 Indexed in line with CPI or other measure
 Reversionary pensions, where on the death of a member, the pension is paid to the other

Question 8

 RIS

Answer 8

o Pensions
 Income payments made by super funds
 Basis for payment is defined in the super fund’s trust deed and depends on the members eligibility

o Annuities
 Income payments made by life insurance companies
 Payments arise from a specific personalized contract between a life company and the policy owner
 Can be purchased with superannuation funds or ordinary money

Question 9

 Account based income streams

Answer 9

o Amount can be paid is calculated using the members account balance
o Amount balance will fluctuate over time with market fluctuations
o Member selects the investment option
o Income continues for as long as an account balance remains
o Can only be acquired with funds from super
o Income payments can be varied each year depending on needs
o Full access to capital at any time
o No loss of capital upon death as funds transferred

Question 10

 Account based pensions

Answer 10

o After 60, no tax on investment earnings
o After 60, no tax payable on pension payments, subject to meeting minimum drawdown rules
o From 55-59, taxed at MTR – 15% tax offset
o Balance will increase as investment earnings are added to your account

o However
 Investment earnings are not guaranteed and may fluctuate in line with market
 No guarantee it will last

o Income rules
 Determined by applying a percentage factor to the current account balance at the start of each year
 Sets the lower limit
 No maximum limit
 Have to follow these rules to achieve money tax free

Question 11

 Non-account based income streams

Answer 11

o Negative, investor has no say over how the funds are invested
o Does not have an account balance once commenced
o Can be acquired with either ordinary or super money
o Generally, no access to capital
o Fixed term / life time

Question 12

 Fixed Term Annuities

Answer 12

o Pays an income stream for a set period
o Can’t cash in, no access to capital
o Generally, 1-25-year term
o Income payments can be monthly, annually
 Can be indexed to inflation or at a set rate
o Can establish a reversionary benefit option but these are expensive

Question 13

 Life-time annuities

Answer 13

o Pays an income stream for the life of the member
 Term of pension is set and is non-commutable during the time
 Terms of payment of income and repayment determined under a contract

o Regular income for life
 Income payments can be monthly, annually
 Can be indexed

o Can establish a reversionary benefit option
 Payments continue for lifetime of another person
 Normally around 60-70% of previous income

Question 14

 Pricing of annuities

Answer 14

o Periodic payments at regular intervals
o Effective rate of interest, per payment interval remains fixed over the annuity rate
o Term is a fixed number, n, of regular intervals
o Not common in practice

Question 15

 Mean-Variance efficient strategy

Answer 15

o Risk tolerant retirees would invest their entire lump sum in risky assets and take income by drawdown

o Risk averse retirees would use the entire lump sum to purchase a fixed term annuity

o Suitable for an average person, not risk tolerant but not risk averse

o MVE does a bit of both
 Split lump sum into an income component and investment component
 Retirees get the stability of retirement income and exposure to high expected long-term returns from growth assets
 Not split into two even parts

o One part is used to purchase a guaranteed term certain annuity (9-14 years)

o Works best at an indexed annuity and payable monthly

o For the invested part in the share market
 Specifically, an index fund over the guaranteed income years
 Split is designed so that the original capital used to purchase the income can be expected to be replaced at the end of the term certain annuity
 Repeat

Question 16

 Deciding between RIS options

Answer 16

o	Client should consider
	Risk tolerance
	Life expectancy
	Health
	Goals
	Objectives
	Estate planning requirements
	Current rules regarding drawdowns
	Product market / rates of return

Question 17

 Other strategies

Answer 17

o Most common drawdown strategies after retiring

o There are others you can use just prior to retirement and after reaching preservation age

o 3 types of transition to retirement strategies
 Accessing extra income before retiring
 Reducing working hours but maintaining same income
 Boosting super contributions and drawing income

o Note: not all super funds offer TTR income streams

o Conditions
 Reached preservation age
 Must take between minimum of 4% and max of 10% of balance
 Pension is non-commutable