Topic 10 - Retirement Planning

Question 1

Describe the three phases of retirement.

Page 396

Answer 1

Question 2

Differentiate between the active and passive phase of retirement.

Page 396

Answer 2

Question 3

Describe the support phase of retirement.

Page 396

Answer 3

Question 4

What is the number one concern of individuals funding their retirement?

Page 397

Answer 4

Question 5

How do we calculate how much an individual needs to accumulate for retirement using the present value (PV) function?

Pages 398 - 399

Answer 5

(006)

Question 6

What is ordinary money?

Page 400

Answer 6

–accumulated outside of a superannuation environment

–after‐tax money

–could be held in many forms such as cash, shares and property.

Question 7

What is superannuation money?

Pages 400-401

Answer 7

–accumulated inside a superannuation environment

–held inside the tax‐concessional superannuation environment

–money must be preserved until a minimum age

–a condition of release relates to withdrawals.

–If the condition of release is met, the amount of tax payable will be a function of three factors:

1. The type of superannuation money held in the individual’s account.
2. The age of the individual.
3. Whether the money is withdrawn as a lump sum or as an income stream.

–Superannuation money can be held in one of three forms:

• Taxed superannuation money: standard 15% contribution tax has been deducted.
• Untaxed superannuation money: standard 15% contribution tax has not been deducted.
• Non‐concessional money: after‐tax money contributed to superannuation.

Question 8

What are the tax consequences of withdrawing a lump sum from superannuation to fund retirement?

Pages 402-403

Answer 8

Question 9

Study Tables 11.5 and 11.6.

Page 403

Answer 9

Question 10

What are the superannuation death benefits payable as a lump sum?

Page 404

Answer 10

Question 11

What are tax implications of the superannuation death benefits payable as a lump sum to non-dependents?

Page 404

Answer 11

Question 12

Who has the ultimate decision about who a superannuation death benefit is payable to?

Page 404

Answer 12

Question 13

What are the implications of rolling over a superannuation lump sum?

Page 404

Answer 13

Question 14

How is a lump sum split as a result of divorce or separation?

Page 404

Answer 14

Question 15

What is a recontribution of a lump-sum withdrawal?

Pages 404-405

Answer 15

Question 16

What are employment termination payments (ETP)?

Pages 405-406

Answer 16

Question 17

Differentiate between a life benefit- and death benefit termination payment.

Page 406

Answer 17

Question 18

Differentiate between the different types of retirement income streams.

Pages 406-407

Answer 18

Question 19

Regarding sources of income streams in retirement, describe drawing down of capital and investment earnings only.

Page 407

Answer 19

Question 20

Study Table 11.7.

Page 408

Answer 20

Question 21

How is the deductible amount of an assessable income stream calculated?

Pages 408-409

Answer 21

Question 22

Contrast and compare account-based and non-account-based income streams.

Pages 409-410, including Table 11.8

Answer 22

Question 23

Describe the taxation of retirement income streams.

Pages 411-412

Answer 23

Question 24

Choosing between an account-based and non-account based income stream.

Study Table 11.12.

Page 413

Answer 24

Question 25

How are annuities used to provide retirement income? ## Footnote *Pages 414-415*

Answer 25

Question 26

Describe the transition to retirement (TTR) income stream. ## Footnote *Page 416*

Answer 26

Question 27

How does the preservation age affect the commencement of TTRs for individuals 55 to 59 years old? ## Footnote *Page 416*

Answer 27

Question 28

What are the tax implications of TTRs for individuals 55 to 59 years old? ## Footnote *Page 416*

Answer 28

Question 29

What are the tax implications of TTRs for individuals 60 years and over? ## Footnote *Page 417*

Answer 29

Question 30

Describe the age pension. ## Footnote *Pages 418-419*

Answer 30

Question 31

Describe the assets and income test for the age pension. ## Footnote *Pages 419-420*

Answer 31

Question 32

Describe reverse mortgages and the pensions loan scheme under the age pension. ## Footnote *Pages 420-424*

Answer 32

Question 33

What is an adequate retirement income? ## Footnote *Pages 424-425*

Answer 33

Question 34

Study the Illustrative Example 11.14 to calculate an adequate retirement income. ## Footnote *Page 425*

Answer 34

Question 35

What we need to concentrate on for retirement planning.

Question 36

What is the difference between superannuation money and ordinary money? ## Footnote *Page 400*

Answer 36

Superannuation money is money held **inside** the tax concessional superannuation environment and can **only** be accessed once a **condition of release** has been satisfied. Ordinary money is **after-tax** money which is held **outside** the superannuation environment. Ordinary money can be accessed at any time.

Question 37

When can money be 'released' from superannuation? ## Footnote *Page 400*

Answer 37

Conditions of release: * Upon reaching the age of **65** * Being aged between 55 and 60 and having reached preservation age. The normal employment arrangement must have **ceased** and the superannuation trustee must be convinced that the individual does _not_ intend to work more than **10 hours** per week in the future. * Being aged between 60 and 65 and having reached preservation age. The normal employment arrangement must have **ceased**. The individual must declare their intention to the superannuation trustee _not_ to work more than **10 hours** per week in the future however there is no onus on the trustee to verify the truth of this assertion. * The individual is **permanently incapacitated** or is suffering from a **terminal medical condition**. * The individual **dies**.

Question 38

Differentiate between taxed, untaxed and non-concessional superannuation money. ## Footnote *Page 401*

Answer 38

* **Taxed** superannuation money has had the **15%** contributions and earnings taxes removed. * **Untaxed** superannuation money has _not_ had the 15% contributions and earnings taxes removed. * **Non-concessional** superannuation money is **after-tax** money that has been contributed by the individual.

Question 39

For the purposes of superannuation who is considered a **dependent**? ## Footnote *Page 404*

Answer 39

· a **spouse** · a child *under* the age of **18** · a person who is **financially** dependent · a person who has an **interdependency** relationship.

Question 40

What is a binding death nomination? ## Footnote *Page 404*

Answer 40

A binding death nomination ensures that if a superannuation fund member dies the superannuation held in their account is paid to the person they have nominated. Generally, binding death nominations need to be *renewed* every **three** years. If a person dies without a binding death nomination, it is at the discretion of the trustees of the superannuation as to who will be the beneficiary of any superannuation payout as a result of death. This may or may not coincide with the deceased wishes and may result in additional tax being paid.

Question 41

For each of the different types of income stream listed below, outline the **risks** they are exposed to. a) The drawdown of capital only b) Investment earnings only c) Combination of capital drawdown and investment earnings * Page 407*

Answer 41

Question 42

The life expectancy tables demonstrate a survivor bias. What is survivor bias? How does this impact on modelling for a client? ## Footnote *Pages 407-408*

Answer 42

The longer we live, the longer we can **expect** to live. A male born in 2007 could expect to live on ‘average’ to the age of 80.06. However, having survived the risks of infantile health and having survived the sometimes dangerous behaviour of adolescence, males can expect to live beyond 80.06 years on average. A male at age 60 has a life expectancy of 23.37 years i.e. they can expect to live on ‘average’ to 83.37 years. In advising clients it is important to take this survivor bias into account – the client you saw five years ago now has an **increased** life expectancy. Advisors also need to be mindful that: · the life expectancy tables are based on *averages* – one in ten males will live to 93 · life expectancies continue to increase and could be expected to be higher than the 2010-12 figures published by the Australian Government Actuary.

Question 43

For a person under the age of 60 who is drawing a retirement income, the ATO subtracts a deductible amount from the individual's total income in order to determine their assessable income. Why does the ATO do this? ## Footnote *Pages 408-409*

Answer 43

Income is **turned** into capital by the payment of **taxes**. Having paid tax once to turn income into capital, an individual should not have to pay tax again on that capital. Some income streams are *partially* funded by capital. That part of an income stream which represents a return of capital should _not_ be taxed. The ATO determines how much of an income stream represents a return of capital and call this portion the **deductible** amount. The deductible amount is then *subtracted* from total income in order to determine the **assessable** income.

Question 44

Outline the main differences between account-based and non-account based income streams. ## Footnote *Pages 409-410*

Answer 44

In an account-based income stream, the individual manages their **own** superannuation account. The individual must **bear** the investment and longevity **risk**. In return for the tax concessions associated with being in pension mode, they *must* draw down a minimum income each year – there is _no_ limit on the maximum amount they can withdraw. Therefore, individuals who seek flexibility in the amount of income they draw down may be attracted to account-based pensions. The balance of the account is an asset of the **individual** and can be left to beneficiaries upon death. In a non-account-based income stream, the individual uses a superannuation fund or life insurance company to **manage** their superannuation. There is _no_ account as such – instead, there is an *agreement* with the provider that they will provide a particular income stream in return for the **initial** contribution by the individual. Investment risk is borne by the **provider**. For fixed-term income streams, longevity risk is *still* borne by the individual. For fixed-term income streams where the individual **dies** before the end of the term, an outstanding balance will be determined and can be passed on to beneficiaries.

Question 45

What is the difference between a lifetime income stream and a life expectancy income stream? ## Footnote *Page 409 and Table 11.8 on page 411*

Answer 45

A life expectancy income stream is a **fixed-term** income stream. The term can be determined by reference to the Australian Government Actuary *life expectancy* tables. A lifetime income stream lasts **as long as** the person lives which may be more or less than their life expectancy. Many lifetime income stream products on the market have a *guarantee* period. If the individual dies _within_ the guarantee period, then any outstanding balance will be determined and can be **passed on** to beneficiaries. If, however, the individual dies *after* the guarantee period then an outstanding balance will be **forfeited**.

Question 46

The federal government insists that individuals in pension mode must **draw** upon a minimum pension income. Why? ## Footnote *Page 411*

Answer 46

Once an individual is *over* 60 years of age and in **pension mode**, this means that _all_ earnings inside the superannuation fund are tax-free and _all_ income (except income generated from untaxed superannuation money) is tax-free. This generous tax environment is provided in the expectation that individuals will **use** this money to fund their retirement – the minimum drawdown levels **force** individuals to use this money. The generous pension mode tax concessional environment is not meant to be a place where relatively wealthy individuals can simply **park** money in order to provide larger inheritances to their beneficiaries at the expense of the general taxpayer.

Question 47

Using the present value function in Excel or a financial calculator, how much would an individual need to accumulate in superannuation in order to fund a real retirement income of $60 000 p.a. for 20 years if the real rate of return was 4%? ## Footnote *Pages 57 and 399*

Answer 47

PV = (Rate, Number of periods, payment) PV = (4%, 20, $60,000) PV = $815,419 *use the annuity formula for PV on page 57*

Question 48

Income stream: ordinary money deductible amount \*\* Murray is 59 years old and has $450 000 in ordinary money. He takes his $450 000 to an income-stream provider and the provider agrees to pay Murray $52 350 p.a. for the next 15 years. The provider will invest Murray’s $450 000 and the income stream provided to Murray will be a combination of investment earnings and a return of Murray’s capital. What will be Murray’s assessable income for tax purposes? *Page 409*

Answer 48

Capital/term = deductible amount $450,000/15 = $30,000 Total income less deductible amount equals assessable income $52,350 - $30,000 = $22,350

Question 49

Transition to retirement \*\* Paul is aged 59. He has $600 000 in his superannuation account which comprises a taxed component of $400 000 and a tax-free component of $200 000. Paul decides to commence a TTR of $60,000 per annum. (a) How much of Paul’s TTR income will be assessable? Is he entitled to any other tax advantages? * Pages 409 and 416* (b) How much of Paul’s TTR income will be assessable once he turns 60 years of age? * Page 416*

Answer 49

(a) How much of Paul’s TTR income will be assessable? Is he entitled to any other tax advantages? Any income stream he draws from his superannuation will include a deductible amount equal to 33.33% ($200,000/$600,000) of his income stream. 33.33% of 60,000 = 20,000 Assessable income = 60,000 – 20,000 = 40,000 Therefore $40,000 of his TTR income will be assessable. This $40,000 will also attract a $6,000 (15%) tax rebate. (b) How much of Paul’s TTR income will be assessable once he turns 60 years of age? All TTR income will be received tax-free. ‘When a person commences a TTR after the age of 60 or continues with a TTR and turns 60 all income is now received tax-free’.

Question 50

Retirement income streams Peter is 59 years old and has just been made redundant from his job. Peter is married to Maggie. They have two grown-up daughters who live away from home and are financially independent. Both daughters are engaged to be married with weddings likely in the next 18 months. For the past 12 years, Peter has worked as an insurance assessor. In his last year of work, he earned $100 000. Peter’s mate Dave has offered him work as a landscape gardener which would generate about $50 000 p.a. for a 5-day working week. Dave would also pay $5 000 per annum into Peter’s superannuation as part of his superannuation guarantee obligations. Dave thinks it would be a great chance for Peter and also give him the chance to build up his retirement savings, particularly if he starts a transition to a retirement income stream to supplement his lower income. Peter is not so sure — the landscape work is full-time and he was hoping to cut back on work or maybe stop altogether. Peter currently has $500 000 in superannuation which includes a tax-free component of $120 000 and a taxed component of $380 000. Peter has been looking at the various annuities on offer in the market. He is particularly attracted to the offer made by XYZ Life, which for a $100 000 purchase price offers: · a lifetime income · a guarantee period of 10 years · single life, that is, no reversion · payment of $6 500 p.a. · nil increase, that is, the payment is not indexed. Peter has also been considering the life expectancy annuity offered by XYZ Life, which for a $100 000 purchase price offers: · payment of $7 500 p.a. · nil increase, that is, the payment is not indexed. Dave thinks Peter is mad to be considering a non-account based income stream. Dave thinks if Peter will not follow his advice and join the landscaping business and commence a TTR, he should commence an account-based income stream and generate some decent returns which he will not get if he goes with the non-account-based income stream approach.

Question 51

In Australia the market for long-term annuities purchased from life insurance companies to fund the public’s retirement needs: Select one: a. is relatively small compared to other forms of annuities. b. is currently serviced by a large number of life companies. c. includes lifetime annuities. d. both a and C. * Page 414*

Answer 51

**d.** both a and C.

Question 52

Sally Sheltern, 54 years of age, commenced receiving a reversionary lifetime pension following the recent sudden death of her partner, Harry, 59 years of age, in July 2016. The pension payments were allocated into the following components; tax-free allocation of 30%, taxable (taxed) allocation of 50% and taxable (untaxed) allocation of 20%. For the 2017 year Sally received a total of $95,000 in pension payments from the reversionary income stream. Sally has a marginal tax of 32.5%. Ignoring the Medicare levy, the net tax payable by Sally on the pension payments will be: Select one: a. $0. b. $30,875. c. $24,605. d. $17,480. * Pages 412-413*

Answer 52

**d.** $17,480.

Question 53

A lower relative inflation rate for a given real rate results in: Select one: a. a lower nominal rate of return. b. a higher nominal rate of return. c. no change in the nominal rate of return. d. none of the above. * Pages 398-399*

Answer 53

**a.** a lower nominal rate of return.

Question 54

Conditions of release include where the individual has: Select one: a. died. b. reached the age of 65. c. become temporarily incapacitated. d. both a and B. * Page 400*

Answer 54

**d.** both a and B.

Question 55

Nadia Seffener, aged 57, immediately withdrew $250,000 from a taxed superannuation fund upon her retirement in May 2017. Nadia’s accumulated superannuation balance on retirement has a tax-free component of 30%. Ignoring the Medicare levy, advise Nadia how much tax will be payable. Select one: a. $37,500 b. $11,250 c. $26,250 d. Nil * Pages 402 - 403*

Answer 55

**d.** Nil

Question 56

The main difference between transition to retirement income streams (TTR) and account-based pensions relate to: Select one: a. a lower maximum annual income drawdown for TTRs. b. a lower minimum annual income drawdown for TTRs. c. the capital balance of TTRs cannot be commuted until the superannuant reaches preservation age. d. both a and C. * Page 416*

Answer 56

**a.** a lower maximum annual income drawdown for TTRs.

Question 57

Max Colbey, 58 years of age, retired on 1 August 2016 with $500,000 accumulated in his superannuation account from which he will commence an account based income stream. The superannuation administrators have advised that his superannuation balance consists of a tax-free component of 36% with the remainder comprising a taxable (untaxed) component. In the 2017 year Max received a total of $70,000 in payments from the income stream. Max has a marginal tax of 37%. Ignoring the Medicare levy, the net tax payable by Max on the income stream will be: Select one: a. $25,900. b. $159,100. c. $16,576. d. $9,324. * Page 412*

Answer 57

**c.** $16,576.

Question 58

In accordance with financial mathematics concepts, for a given nominal rate of return and present value, a larger number of periods all other things being equal will: Select one: a. increase the payment for a superannuant in pension mode. b. decrease the payment for a superannuant in pension mode. c. leave the payment unchanged for a superannuant in pension mode. d. either a or C. * Page 414*

Answer 58

**b.** decrease the payment for a superannuant in pension mode.

Question 59

Retirement planning includes consideration of: Select one: a. trade-offs between what is desirable and what is achievable. b. lifestyle issues. c. investment strategies. d. all of the above. * Pages 394-395*

Answer 59

**d.** all of the above.

Question 60

Reverse mortgages: Select one: a. may be suitable for older people with a large amount of borrowings on their family home but with little disposable income. b. may be suitable for older people with a large amount of equity in their family home but with little disposable income. c. may be suitable for older people with a large amount of equity in their family home and surplus disposable income. d. none of the above. * Page 420*

Answer 60

**b.** may be suitable for older people with a large amount of equity in their family home but with little disposable income.

Question 61

As a result of divorce or separation, splitting of superannuation money: Select one: a. is relatively straightforward for accumulation style superannuation accounts and can happen immediately. b. may result in a payment split for defined benefit style superannuation accounts where the funds remain in the defined benefit account until retirement. c. both a and b. d. can only occur for accumulated superannuation balances exceeding $250,000. * Page 404*

Answer 61

**c.** both a and b.

Question 62

The deductible amount of a life expectancy income stream purchased for $1 million will: Select one: a. increase with the greater relative age of the purchaser at commencement. b. decrease with the greater relative age of the purchaser at commencement. c. increase each year with the increasing age of the purchaser. d. decrease each year with the increasing age of the purchaser. * Page 409*

Answer 62

**a.** increase with the greater relative age of the purchaser at commencement.

Question 63

In Australia, life expectancy tables published in the last 100 years have shown a: Select one: a. significant rise in average life expectancies. b. significant fall in average life expectancies. c. survivor bias. d. both a and c. * Page 408*

Answer 63

**d.** both a and c.

Question 64

For non-account based lifetime income streams with no guarantee period: Select one: a. commutations are generally not possible. b. longevity risk is borne by the individual. c. any capital amount is forfeited upon death. d. both a and c. * Pages 410-411*

Answer 64

**d.** both a and c.

Question 65

The amount of tax payable on the release of superannuation moneys is a function of: Select one: a. the ‘type’ of superannuation money held in the superannuant’s account, the age of the individual and what the moneys will be spent on. b. the ‘type’ of superannuation money held in the superannuant’s account, the age of the individual and whether the money is withdrawn as a lump sum or income stream. c. the ‘type’ of superannuation money held in the superannuant’s account, the gender of the individual and whether the money is withdrawn as a lump sum or income stream. d. none of the above are relevant.

Answer 65

**b.** the ‘type’ of superannuation money held in the superannuant’s account, the age of the individual and whether the money is withdrawn as a lump sum or income stream.

Question 66

In general, for a lump sum withdrawal of untaxed superannuation money: Select one: a. taxes will be greater than that for taxed superannuation money. b. taxes will be lower than that for taxed superannuation money. c. taxes will be the same as that for taxed superannuation money. d. either b or c. * Page 403*

Answer 66

**a.** taxes will be greater than that for taxed superannuation money.

Question 67

The tax consequences of leaving a superannuation lump sum death benefit to a beneficiary will be if the: Select one: a. beneficiary is a dependant; any lump sum will be tax-free. b. beneficiary is a non-dependant; any lump sum will be divided into a tax-free and a taxable component. c. taxable component contains taxed superannuation money, this will be taxed at 30%. d. both a and b. * Page 404*

Answer 67

**d.** both a and b.

Question 68

Age pension entitlements in Australia are subject to a(n): Select one: a. income test up to an age of 80. b. assets test up to an age of 75. c. assets test up to an age of 80 and income test regardless of a person’s age. d. assets test and income test regardless of a person’s age. * Page 419*

Answer 68

**d.** assets test and income test regardless of a person’s age.

Question 69

For death benefit termination payments (DBTP): Select one: a. the tax payable depends on who is the recipient of the DBTP and tax will not be payable by the deceased’s estate if distributed to a dependent unless it exceeds the low-rate threshold. b. tax will be payable by the deceased’s estate regardless of whether the DBTP is distributed to a dependent. c. the payment may include both a tax-free and taxable component. d. both a and c. * Page 406*

Answer 69

**d.** both a and c.

Question 70

The more aggressive an investment strategy: Select one: a. the higher the expected nominal rate of return. b. the lower the expected nominal rate of return. c. the higher the expected inflation rate. d. none of the above. * Page 398*

Answer 70

**a.** the higher the expected nominal rate of return.