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Is Transition to Retirement Still Viable?

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Superannuation law was amended in 2005 to allow people to access their super from preservation age, currently 55, but progressively increasing to 60, without having to retire. It became affectionately known as ‘transition to retirement’ but it actually has nothing to do with retiring.

Once a person reaches their preservation age, they are able to access their super even though they might continue to work on a part-time or even a full-time basis.

There are some restrictions that apply, including:

1. Superannuation can only be accessed as an income stream or pension. That is, the amount of super being drawn cannot be paid out as a lump sum, however the annual income may be paid as a single annual instalment. The investment product that pays the pension is often referred to as a transition to retirement pension (TTR), or transition to retirement income stream (TRIS).

2. The income that may be drawn each year is based on the TRIS account balance. The minimum income that can be drawn is 4% of the account balance, while the maximum is 10% of the account balance.

3. During the life of a TRIS, lump sums cannot be withdrawn from the account, apart from the annualised annual income payment.

In the past, one of the attractions of a TRIS was that the investment earnings achieved by the super fund on the investments supporting the TRIS were exempt from tax at the super fund level. Because the super fund did not have to pay tax, this translated to a higher investment return for the investor.

Unfortunately, this concession was withdrawn for TRISs from 1 July 2017. They are now taxed on the same basis as a superannuation accumulation account. That is, fund earnings are taxed at a rate of 15%, with a 331/3% discount available for capital gains.

Once a person reaches the age of 60, the income they personally receive from their TRIS is tax free in their hands, even though their super fund is still paying tax on the underlying investment earnings.

One of the very popular strategies adopted in the past was for people to commence drawing income from their TRIS and simply enter into a salary sacrifice arrangement with their employer. It was a highly tax advantaged strategy, particularly for high income earners when the superannuation contribution limits were much higher than they are today.

However, not all is lost.

Even though a TRIS does not offer the same tax advantages as it did in the past, they may still play an important part in personal financial planning.

Drawing income from TRIS, particularly if age over 60, may still provide some tax advantages when coupled with a salary sacrifice arrangement or making personal tax-deductible contributions. The general concept of transition to retirement is still relevant where an individual needs to supplement their existing income. This may occur when unexpected expenses arise, a job is lost, or a person chooses to reduce their working hours in order to ‘transition into retirement’ – the original intention for introducing transition to retirement.

Of course, transition to retirement has a downside, the earlier we start drawing down on our super, the greater the risk that we will outlive it.

 

Source: Peter Kelly | Centrepoint Alliance

Time for a quick check-up – Superannuation & Insurance

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Superannuation is not something we usually give a great deal of thought to, particularly if retirement is 10 years or more away. But perhaps it is worth investing a few moments to consider some recent changes, particularly if you have one or more super accounts that have become inactive.

 

When the government talks about a super account being inactive, they are generally referring to an account that has not received contributions or rollovers from another super fund in the previous 16 months. That is an important number to keep in mind.

 

If you have a close look at your super account statement, you may notice that insurance premiums are being deducted. This happens because many superannuation funds are required to provide a level of default life insurance cover.

 

In last year’s Federal Budget, the government announced changes to super that were designed to stop the erosion of super balances by fees, charges and unnecessary insurance premiums.

 

One important change that is due to take effect from 1 July 2019 relates to insurance for inactive account holders.

 

Where a member of a superannuation fund has an inactive account, that is, the account has not received contributions or rollovers from other super funds within the previous 16 months, the fund will be prevented from offering or maintaining insurance for the member.

 

This means that super fund members may lose valuable insurance protection.

 

The legislation places some onerous conditions on trustees of super funds.

 

Firstly, where insurance is already in place within a choice or MySuper product, the trustees of the fund are required to identify, as at 1 April 2019, member accounts that have been inactive for a period of more than 6 months. They must write to each member before 1 May 2019 advising the insurance will be discontinued from 1 July 2019, but that cover may be continued if the member wishes, and setting out the manner in which the member can opt-in to retain their insurance.

Secondly, trustees must inform members of their fund on an ongoing basis when an account has been inactive for nine months, then again at 12 months and 15 months.  

 

If a member wishes to maintain their insurance cover within their super fund, they will need to take proactive steps to ensure it is retained. This may be done by making a contribution, rolling over a benefit from another super fund, or simply instructing the super fund, in writing, that they wish to retain their insurance cover. This is referred to as ‘opting-in’. Insurance is vitally important for many people.

 

It is worth taking time to review the various super accounts you have with particular reference to the insurance that you may have. If you no longer need the insurance, then asking your super fund to cancel it may help prevent the erosion of your super balance. However, if you need the insurance, taking steps to ensure it is maintained.

 

Source:  Peter Kelly | Centrepoint Alliance

What does the election result mean for our super?

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With the return of a Coalition government, we can expect to see some of the super initiatives announced in the 2019 Budget, and in legislation that lapsed when the election was called, being reintroduced to the Parliament.

So, we can expect to see:

Increase in contribution age limits

The 2019 Budget included a proposal for people aged 65 and 66 to be able to make super contributions without having to meet the current “work test”. This proposal is now expected to be introduced to Parliament in the near future. It is due to take effect from 1 July 2020.

 

Extending the age limit for the three-year bring forward

Under current law, an eligible person may bring forward up to three year’s non-concessional contributions and contribute up to $300,000 in one year, provided they were aged 64 or younger at the start of the financial year in which they make their contribution. This age limit is to be extended to 66 from 1 July 2020.

 

Extending the age limit for spouse contributions from 69 to 74

People who make contributions for an eligible spouse up to 74 years of age will be able to claim a tax offset of up to $540. The age limit is being increased from the current 69 years. This will apply from 1 July 2020, however, a receiving spouse aged 67 or older will need to have met the work test.

 

Insurance opt-in

While legislation affecting insurance held inside super for people with an inactive account (haven’t made contributions for 16 months) has already been enacted. We can expect to see the measures extended to those with account balances less than $6,000 and for members under 25 years of age.

In each case, members will need to opt-in if they wish to have insurance cover through super.

 

SMSF membership to extend to 6 members

The legislation relating to the increase of SMSF membership to 6 people (up from 4) lapsed when the election was called. We can expect to see this legislation being re-introduced into the new Parliament.

 

Opting out of Superannuation Guarantee

Where high-income earners work for more than one employer, their superannuation guarantee contributions often result in a breach of the concessional contribution cap. The Government has plans to allow affected employees to opt-out of superannuation guarantee for all but one employer so as to avoid breaching the concessional contribution cap of $25,000.

 

Salary sacrifice arrangements

Integrity measures covering aspects of salary sacrifice contributions to super and their potential impact on superannuation guarantee contributions lapsed when the election was called. We can expect to see these measures reintroduced by the new Coalition government.

 

If you have questions about these proposed measures, and opportunities they present, you should consider meeting with a qualified financial planner.

 

Source:  Peter Kelly | Centrepoint Alliance

Federal Budget Overview – 2019

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On 2 April 2019, The Hon Josh Frydenberg delivered his first Budget as Federal Treasurer.

The good news is that the Budget has forecasted a return to surplus of around $7.1bn in 2019-20. Australian will earn more than it spends!

Ten million low and middle-income earners are the winners as they will receive an immediate tax cut, which is being delivered by way of an increase in the Low and Middle-Income Tax Offset (LMITO). The increase will be available for the next three years and will see the LIMITO more than double. An amount of $1,080 for Australians with taxable income of between $48,000 and $90,000. A more modest offset is available for those on lower incomes, and the offset cuts out when taxable income reaches $126,000.

It has been estimated that by 2024, 94% of Australians will have a marginal tax rate of 30% or less.

By contrast, the top 5% of income earners will pay a third of all taxes collected.

Australians who receive a range of government income support benefits will receive a one-off payment of $75 for singles, and $125 for couples, to help with their energy bills. This payment is planned to be made before 30 June 2019.

Superannuation was largely untouched in this year’s Budget, however, from 1 July 2020, people aged 65 and 66 will be able to make super contributions without having to meet the work test and the maximum age spouse contributions can be made is to be extended from 69 to 74.

Infrastructure and health received injections of cash.

Expect to see the skyline silhouetted with cranes. The Government has announced further significant spending on roads, rails, airports and the like.

Included in the Budget was an allocation of $500m to get cars off the roads by building more commuter car parks, therefore encouraging people to travel by train. For anyone who tries to navigate capital city peak hour traffic, this will be welcome news.

Small to medium businesses will benefit from the planned increase in the instant asset write-off for purchases of up to $30,000.

Older Australians have not been ignored with an additional 10,000 aged care home care packages being announced and a further 13,500 residential aged care places being made available. With the aged care system being strained with the increasing demand for services and support this is welcome news but sadly is nowhere near enough.

Additional funding has also been directed towards the delivery of primary and frontline health care.

Legislation will need to be passed in order for the changes to be implemented.

 

Source:  Peter Kelly | Centrepoint Alliance

Is it time to apply for the aged pension? Pt. 2

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We posted Part 1 of this topic on 25th October, which looked at the complexities and frustration of the application process.

The question has been asked regarding when should a person look at whether they would qualify for an age pension?

For many people, applying for the age pension is not something they think about until they are close to the qualifying age.

I believe that rather than waiting 13 weeks before you reach the necessary age, you should be looking at your situation five years before your qualifying age.

The qualifying age, depends on your date of birth and can vary between 65 and 67. As an example, a person born on 20 August 1956, would qualify at the age of 66 and a half. Those born after 1 January 1957, will need to wait until they turn 67.

So, for all those people who turn 62 after 1 January 2019, next year is the year you should review your circumstances and determine whether you may qualify for an age pension.

Why five years you may ask? For those people who see the age pension as a very important component of their retirement income, five years is an extremely important period.

As an example, consider the following situation;
The husband is turning 62 and his wife is 60. They own their own home, a couple of cars, have $85,000 in bank accounts and term deposits. Due to of a lifetime of work, they currently have a total of $650,000 in superannuation. Over the next five years through the strategy of salary sacrifice and investment growth, their super is expected to grow to around $800,000.

Their assets assessed for age pension purposes in five years could be close to $900,000, including their cars household contents and cash. Based on today’s upper asset threshold for a home-owner couple, which is $848,000, they would not qualify for an age pension. However, given the annual adjustment in the age pension and the thresholds at the age of 67 he may qualify for a small pension.

Of course, this all sounds very reasonable and based on their financial assets they should be able to achieve the comfortable lifestyle that they hope for when he retires at the age of 67.

The missing factors in this scenario are their children!

Their children are adults, they are married, have children of their own, but are struggling financially.

The couple have promised that when they retire, they will help them out by gifting them $100,000 each, three children a total of $300,000.

The downside to this plan is that in five years when they gift $300,000 to their children, and the husband applies for his age pension, Centrelink will maintain a gift of $290,000 for five years as an asset and deem income on this $290,000 when assessing his entitlement to an age pension.

This process will also affect her age pension entitlement when she applies two years later, on turning 67.

As this couple had not reviewed their situation in respect of their plans to gift money to their children, or the age pension legislation, they will find themselves in a less than comfortable position as their age pension entitlement is significantly less than what they had factored into their budget.

It is extremely difficult to ask for the money back once you have gifted the funds to children.

Believe it or not this situation occurs on a regular basis. The number of people who gift money to their children, for very good reasons, and then expect their age pension to increase to compensate for the funds that they have gifted, is a lot more common than we think.

Now, I am not saying that what this couple intends to do is wrong. What I am saying is that they need to review their position and make some decisions now.

If they do not have the funds to gift to their children at this moment and they still plan on giving $300,000 to the children in five years when they retire, they are at least aware of the consequences and are able to make plans.

Always remember to talk to someone and for the purposes of any age pension entitlement, do not leave it until just before reaching age pension age. If you do plan on gifting money to your children, make sure you do so five years before you turn age pension age, because, the deprivation rules don’t apply to the money or things you have given away more than five years previously.

 

Source: Mark Teale | Centrepoint Alliance