Week 9

Question 1

Purpose of retirement planning?

Answer 1

Strategies and initiatives undertaken by government to support retirement income
Superannuation
SG
preservation
tax concessions
Co-contribution
Age pension
approx. 25% of average weekly earnings
Voluntary savings
Henry  & Cooper Reviews 2010– Retirement age , SG and Compulsory contributions

Question 2

Adequacy of retirement planning

Answer 2

Statistics show:

It is estimated that only about 4% of today’s retirees have
an annual income of >$40,000

rapid advances in medical science and greater awareness
of health living leading to higher life expectancy - at
age 65 men will live on average for 18 years and women
for another 23 years

Will compulsory superannuation of 9.50% be sufficient? Or,
should people have to contribute an extra 6% or more?

Question 3

The three phases of retirement

Answer 3

The average Australian retiring today might reasonably expect a retirement period of 20 to 30 years.
Over that period, the individual might go through a number of phases.
The phases can be categorised in a number of ways, including as active, passive and support phases.
There are no clear boundaries.

Question 4

The passive phase of retirement:

Answer 4

The individual will no longer be working in paid employment.
May involve voluntary work.
Hobby and sporting interests are less energetic.
May need some support.
E.g. Meals on Wheels or home nursing care.

Question 5

The support phase of retirement:

Answer 5

The individual is no longer able to care for themselves in their own home, even with support services.
May need to move into an aged-care facility or nursing home.
Provision needs to be made in any retirement plant to cover the costs of moving into alternate accommodation.

Question 6

The following are some of the retirement considerations that need to be addressed:

Answer 6

setting retirement goals e.g. change of residence
determining the expected age of retirement
determining the expected size of the retirement fund
will there be other sources of income available?
is there expected to be any outstanding debt?
how to fund any shortfall in projected income
determining the estate to be left to the family
addressing insurance and health issues

Question 7

PRE-RETIREMENT STRATEGIES

Answer 7

Maximising saving and starting early to take advantage of compounding
Topping up and making additional non concessional contribution (NCC)
Investing in growth products Not Cash Fixed interest which are low risk/return funds
Timing - When to retire?
Negative gearing
Spouse contributions
Salary sacrifice
Reverse Mortgages: Housing (Reverse mortgages allow people from the age of 60 to convert the equity in their property into cash for any worthwhile purpose)

Question 8

Government Inquiry into under 40’s - Putting More into Superannuation

Answer 8

In May 2006, the Federal Government held an inquiry into reasons which inhibit Under 40’s from contributing more to superannuation. The focus of the inquiry was to encourage Under 40’s to put more into superannuation.
Recently introduced an initiative to use super for your first house purchase.

Question 9

What are the options with superannuation funds upon retirement?

Answer 9

If funds are not needed at the immediate time of retirement (eg. part-time employment for a while): leaving the funds within the superannuation system indefinitely.
If funds are needed at the time of retirement:
take a lump sum (subject to tax provisions if aged 57 -59); or
3. Purchase a product that produces an income stream (pension or annuity); or take a combination of both.

Question 10

Taxation Treatment of lump sum payment drawn from a superannuation fund

Answer 10

From 1 July 2007- Superannuation funds are required to reclassify the components according to the two components: tax free and taxable.

The taxation implications of lump sum withdrawals as cash from 1 July 2007 depends:
The person’s age – whether the person is under or over 57, between 57 and 59 or aged 60 or over.
The tax free and taxable components of the superannuation fund.

Question 11

Transition to Retirement

Answer 11

From July 2005, people over the age of 56 (Preservation age) can access their money
Can begin an income stream and continue with work.
The account based income stream (allocated pension) is non-commutable.
At age 65 or when retire from work have option to commute.

Question 12

TTRs for individuals 55 to 59 years old:

Answer 12

For individuals under 60 years of age who have passed their preservation age and commence a TTR:
any income received as part of that TTR will have its assessable component reduced by a deductible amount.
The assessable component will also be entitled to a 15% tax rebate.

Question 13

TTRs for individuals 60 years and over:

Answer 13

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.
Individuals easing into retirement may find the extra cash provided by a TTR assists them in this process.
Individuals who are below the concessional cap but do not have sufficient spare cash to top-up their concessional contributions may use the TTR to reduce their marginal tax rate.

Question 14

Account‐based income stream:

Answer 14

places the individual in charge of their retirement account

most popular type of income stream for Australians who convert their accumulated superannuation.

Question 15

Non‐account based income streams:

Answer 15

involve contracting with either a superannuation fund or a life office to provide an income stream
often referred to as pensions or annuities.

Question 16

What Retirement Product choice your client makes may depend upon:

Answer 16

Life expectancy and health
 Goals and objectives
 Current rates on offer
 Estate planning requirements
 Accessible fund amounts

Question 17

Income stream products

Answer 17

Purpose – to use a capital sum to pay a pension
Size of market
has grown from $13b in 1996; $45b+ currently
Account based pensions account for 74% of all income stream products
Reasons for rolling super money into income stream product – no lump sum tax (if between 57 and 59 and other tax concessions; no tax if over 60)
Choices of income streams: Market/Product Changes

Question 18

Two main types of retirement income stream products:

Answer 18

Pensions (paid by superannuation fund); and Annuities (paid by life insurance companies) – the 2 terms are interchangeable
There are four main types of income stream products: 1. Fixed term
2. Lifetime
3. Account based (Allocated)
4. Term Allocated

Question 19

Fixed Term Annuities

Answer 19

Payable for a set period of time
Income and period guaranteed
Purchased with ordinary or superannuation money
Term from 1 - 25 years
Payments monthly, annually etc
Payments can be indexed
Reversionary option
 (i.e. your pension will continue after death)

Question 20

Fixed Term Annuities

Advantages

Answer 20

Secure income for a known period of time.
No risk to capital base.
Upon death, payments / lump sum can be paid to a
beneficiary.
Taxation benefits – tax free amount.

Question 21

Fixed Term Annuities

Disadvantages

Answer 21

Mortality risk – living too long.
Inflexible once income stream 
   commenced.
Limited access to invested funds.
Income payments ‘locked in”.
On death, balance paid to estate.

Question 22

2. Lifetime Pensions/Annuities

Answer 22

Regular income for life.
Purchased with ordinary or superannuation money.
Payments monthly, quarterly or annually based on
the member’s life expectancy.
Guarantee period - minimum payment period.
Payments can be indexed.
Reversionary income stream option.
payments continue for lifetime of another person eg spouse

Question 23

Lifetime Pensions/Annuities

Advantages

Answer 23

Secure income for life.
Eliminates mortality risk.
No investment risk.
May ‘gain’ if live a long time!

Question 24

Lifetime Pensions/Annuities

Disadvantages

Answer 24

Inflexible once income stream 
  commences.
Client loses access to capital.
Income payments ‘locked’ away.
   (earnings rates set at time of contract)
May lose if premature death.

Question 25

3. Account Based Pension

Answer 25

Market linked account
Payments continue until balance exhausted.
Can only be purchased with superannuation money.
Payments quarterly, annually, etc.
Range of investment options.
Some flexibility to determine the amount of income
each year.
No loss of capital upon death

Question 26

Account based Pensions advantages

Answer 26

Receive regular income.
Flexibility in the amount of income received
from year to year.
Access to money at any time.
Range of investment options.
No loss of capital on death.
Taxation concessions – assessable income however receive a 15% tax offset (if 57 – 59); nil tax if over 60
=>ability of an account-based pension to continue to pay these amounts will depend on the performance of the underlying investments.

Question 27

Account based Pensions disadvantages

Answer 27

Mortality risk
Subject to market fluctuations.
Yearly decision making process.
Can only use superannuation money to acquire them.

Question 28

Term Allocated Pensions

Answer 28

Term Allocated Pensions (TAP) were created from 20 Sept 2004 to provide more choice to retirees. (Basically, to provide a means to make the funds last longer by having a more diverse mix of assets available in the fund).
An amount is allocated to the TAP and based on a new set of Payment Factors (PFs) which reflect the life expectancy of the member.
They are non-commutable.
On death the balance is payable to the estate or to a beneficiary.
The Term Allocated Pension is designed to try to last as long as you selected at outset. You can choose a prescribed term or select the prescribed life expectancy assumptions for your age. Typically the longer the term you select, the lower the income payment you will receive. This enables your pension to last longer whilst keeping your assets in a tax free environment.
Vary your pension payments +/- 10% of the prescribed amount
Vary between monthly, quarterly, six-monthly or annual payments
Specify how much and to whom benefits are to be paid upon your death
Choose from a range of investment options.

Question 29

Determining the amount of income from Account Based Pensions/Annuities

Answer 29

Income rules
must pay a minimum each year based on age and account balance. No maximum!
can be changed 1 July each year

Formula
Account Balance X Percentage according to age.
eg. Ken aged 60 has $400,000 in his fund. He must receive 4% of the fund when he starts his pension i.e. $16,000 p.a.

Question 30

Tax Free Portion of Pension/Annuities

Answer 30

Depends on whether income stream started before or after 1 July 2007 – Treated differently for tax free portion
Income before 1 July 2007- has different treatment.

Income after 1 July 2007- Tax free portion is the Tax Free component.
Superannuation benefits after 1 July 2007 have 2 Components:
Taxable
Tax Free

Earnings derived by income stream provider are “Tax Exempt” if person is 60 years and over.

Earnings in Pension Phase are not subject to tax while in the fund.

Income from Pension is included in a person’s assessable income unless they are over age 60 yrs.

Question 31

TAXATION OF PENSIONS/ANNUITIES

Answer 31

The income received by recipient aged 57-59 is classified as either tax-free OR taxable components

These amount reflect the relevant proportions of each in the superannuation accumulation benefit. ie $20,000 super with $10,000 tax free and $10,000 taxable component will have their income payments classified as 50% taxable and 50% tax free amounts.

Taxable portion of income streams calculated as:
Income payment - tax free amount

Taxable income is also entitled to a tax offset of 15% for persons between 56 and 59 years of age. Also applies if below 60 years of age and receiving a death benefit pension.

15% tax offset does not apply to the tax free portion.

Question 32

How is the Tax Free amount determined?

Answer 32

Superannuation Money( old rules). The following components are “crystallised” into the tax free component from 1 July 2007:
			- Pre 83 amount
			- Undeducted Contributions
			- Post June 1994 Invalidity Component
					:terminated employment due to
    	  			permanent invalidity
			- CGT Exempt Component
					:capital gain from disposal of small business