Chris Duke

1
SUPERANNUATION RETIREMENT ISSUES

• Presented by
• Chris Duke
• Financial Index Australia

2
Two Phases of Retirement Planning

• Accumulation Phase
• Income Phase

3
Accumulation Phase

• Historical development of the Australian
  Superannuation System
• Contribution rules Limits
• Types of funds
• Advantages Disadvantages of super

4
Historical development of Super

• What is Superannuation?
• The accumulation of a sum of money which will
  form the basis of retirement income when people
  finish their working lives.

5
Superannuation History

• 1860s
• Pensions established for long serving bank
  employees on retirement
• Early 1900s
• Some Government schemes provided a pension for
  public servants who worked in the same occupation
  until retirement
• 1960s
• Superannuation provided for senior staff by most
  employers

6
Superannuation History

• 1986/7
• Payment of superannuation was inserted into state
  federal industry awards
• 3 superannuation contribution in addition to the
  employees normal wage
• 1992/3
• Superannuation Guarantee Charge Act introduced
  which formed part of the Governments retirement
  income policy.
• Superannuation Guarantee amount was legislated to
  increase from 3 of an employees salary in
  1992/3 to the current contribution level of 9
  since 2002/3

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Superannuation History

• 2003/4
• Government Co-contributions introduced which
  encourages individuals to make a 1,000.00
  personal contribution which the government will
  match up to a maximum of 1,500.00
• 2004/5
• Introduction of Transition to Retirement (TTR)
  legislation which enables individuals to draw
  down a regular income from preserved
  superannuation prior to permanent retirement
• 2006/7
• Overhaul of superannuation system intended to
  simplify administration and encourage increased
  contributions from 1/7/07
• 2009/10
• New limits placed on concessional contributions
  which halved the rates introduced on 1/7/07

8
Australias Retirement Income Policy

• Basic structure includes
• Minimum level of government income support for
  retirees (Age Pension)
• Compulsory superannuation contributions for all
  employees (9 of salary since July 2002)
• Taxation concessions in place to encourage
  voluntary retirement savings

9
Superannuation Contributions

• When can contributions be accepted?
• Prior to age 65
• Age 65 to 69
• Age 70 to 74
• Age 75
• Spouse

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Contributions

• Under age 65
• Award or Superannuation Guarantee (SG)
  contributions may be accepted at any time.
• No work test to make personal contributions
• Age 65 - under 70
• Award or SG contributions may be accepted at any
  time
• Member must be gainfully employed for at least 40
  hours in any period of not more than 30
  consecutive days in that financial year to make a
  personal contribution.

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Contributions (cont)

• Aged 70 to 75
• Member must be gainfully employed for at least 40
  hours in any period of not more than 30
  consecutive days in that financial year.
• Superannuation Guarantee contributions not
  required for those aged 70 and above
• Award contributions (mandated Employer Conts) can
  be accepted at any time
• Aged over 75
• Award contributions (mandated Employer Conts) are
  the only contributions that will be accepted

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Spouse Contributions

• Effective 1 July 1997, a person can make after
  tax contributions to a super fund on behalf of
  their spouse, whether they are working or not.
• Spouse receiving the contribution must be under
  age 65.
• Contributing spouse may be eligible to receive an
  18 income tax rebate for contributions up to
  3,000.00 p.a. if the receiving spouses income is
  below 10,800.00
• Enables retiree couples to contribute funds into
  superannuation for the non-working or low income
  earning spouse

13
Co-Contributions

• Introduced from 1/7/2004 to encourage low income
  individuals to make personal contributions into
  superannuation which would entitle them to
  receive a co-contribution paid by the
  Government up to an initial maximum of 1,000.00
  (increased to 1,500.00 in 2005/6)
• Total income (assessable income reportable
  fringe benefits reportable super contributions
  business deductions (excl personal super
  contributions) must be below 31,920 (2009/10)
  to qualify for the maximum co-payment
• No co-payment if total income is over 61,920
• Certain conditions must be met to qualify for the
  co-contribution

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Taxation of Contributions

• Rules prior to 1 July 2007
• Tax Deductible Age Based Limits (ABLs)
• Under 35 15,260.00
• Over 35 Under 50 42,385.00
• Over 50 105,113.00
• Self Employed can claim first 5,000.00 75 of
  balance of contributions up to ABLs
• Employer contributions 100 tax deductible (up to
  ABLs)
• All tax deductible contributions are taxed at 15

15
Taxation of Contributions

• Rules post 1 July 2007
• Tax Deductible Age Based Limits Abolished
• New Limits - 50,000.00 Concessional
  Contribution Cap
• Concessional Contributions include SG Salary
  Sacrifice tax deductible contributions
• Transitional Arrangements
• Under Age 50 - 50,000.00 Limit
• Over Age 50 - 100,000.00 Limit until 30 June
  2012
• Above limits further reduced from 2009/10 by 50
• Self Employed can claim 100 of all contributions
  up to the new limits
• Employer contributions 100 tax deductible (up to
  Limits)
• All tax deductible contributions continue to be
  taxed at 15

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Types of Superannuation Funds

• Defined Benefit Fund
• Members benefit is calculated in reference to the
  amount of the members final average salary as a
  multiple of a defined number based on years of
  service and member contribution level
• End benefit is defined and the contributor
  carries the investment risk to ensure it is able
  to meet its liability
• Accumulation Fund
• Funds are accumulated in an account and the
  amount of each contribution is defined with
  earnings accruing in the fund
• Members bear the investment risk

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Advantages

• Superannuation remains one of the simplest and
  most tax effective ways to save for retirement
  because
• In most cases contributions are made
  automatically into an existing fund (ie SG Conts)
• these accumulated contributions grow with
  interest and /or capital growth
• at retirement the benefit can be withdrawn as a
  lump sum or received as a regular income stream
• funds can (since 10/5/06) remain in the fund if
  over age 65 even if the member is no longer
  employed

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Disadvantages

• There are several reasons people are reluctant to
  contribute funds into super
• access to funds is restricted until permanent
  retirement (age 60 for those born after 30/6/64)
• people are suspicious of the Government changing
  superannuation rules to restrict accessing
  accumulated benefits in a lump sum

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Investment Choices

• Following introduction of Super Choice
  Legislation in 2005 the majority of employees now
  have the freedom to choose not only the fund into
  which their SG contributions are paid but also
  the underlying investment option(s) their funds
  are invested in.
• Investments can vary from Cash options (most
  secure) to Sharemarket options (most aggressive)
• Everyone has a different risk profile and will
  choose differing investment options, one shoe
  does not fit all! If you are unsure seek
  professional advice.

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Accumulation Summary

• History of Superannuation
• Australias retirement policy
• Contributing Funds
• Tax consequences of Contributions
• Types of Superannuation funds
• Advantages
• Disadvantages
• Investment Choices

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• Short Break

22
Income Phase

• Once funds have been accumulated for
  retirement funding
• When can funds be accessed?
• What tax will be payable on withdrawal?
• How can tax be minimised?

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Access to Super

• Preservation Rules
• Preservation is defined as the retention of
  benefits within a superannuation or rollover fund
  until the attainment of a specified preservation
  age or on the occurrence of certain events.
• From 1 July 1999, preservation applies to
• - All new contributions
• - All investment earnings.

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Access to Super (cont)

• Preservation classification
• Preserved
• Restricted Non - Preserved
• Unrestricted Non Preserved

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Types of Superannuation Benefit

• Preserved benefits may be paid out of a super
  fund if the member
• Retires from gainful employment after age 55 (or
  up to age 60) with the intention of never
  becoming gainfully employed for more than 10
  hours per week
• stops their current employment between ages 60
  65
• reaches age 65

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Types of Superannuation Benefit

• Unrestricted non-preserved benefits can be
  accessed by the member at any time even if the
  member is working
• Restricted non-preserved benefits may be paid out
  of a super fund if the member
• meets any of the previous conditions of release
• terminates employment with an employer who had
  contributed to that fund

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Accessing Super

• Condition of Release
• A condition of release is a defined event which
  triggers benefits in a superannuation fund to
  become payable to the member.
• Each condition of release has its own cashing
  restriction which determines how much of the
  benefit is payable or what form the benefit must
  take.

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Conditions of Release

• Conditions of Release Cashing Restriction
• 1. Retirement Nil
• 2. Death Nil
• 3. Permanent Incapacity Nil
• 4, Severe Financial Hardship Lump sum(s)
  determined by regulations
• 5, Attaining age 65 Nil
• 6. Compassionate grounds Lump sum determined
  by APRA
• 7. Termination of gainful employment Preserved
  Benefits - Non-commutable Life
  Pension/Annuity
• Restricted
  Non-Preserved Benefits - Nil

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Taxation of Superannuation

• Prior to 1 July 2007
• An Eligible Termination Payment (ETP) from a
  superannuation fund will usually comprise a
  number of components.
• 7 different component classifications
• The most common components are
• Pre July 1983 Contribution
• Post June 1983 Contribution
• Undeducted Contribution

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Component Treatment 1. Undeducted
Contributions Tax Free 2. Concessional
Component 5 included as assessable income and
taxed at the individual's marginal tax
rate, 3. Pre July 1983 Component 5 Included as
assessable income and taxed at the
individual's marginal tax rate. 4. Post June
1983 Component Fully included in assessable
income. Tax rate depends on whether the ETP
contains Taxed Element - Payment before age
55 maximum 20 - Payment after age 55 -
Nil on first 160,000 - maximum 15 on
balance Untaxed Element - Payment before age
55 maximum 30 - Payment after age 55 -
maximum 15 on first 160,000 - maximum 30
on balance 5. Post June 1994 Invalidity Tax
Free 6. Excessive Component Taxed at the top
marginal rate of tax unless rolled over to
purchase a non-rebatable pension/annuity
income stream. 7. CGT Exempt Component Tax
Free within RBLs. Plus Medicare levy except
where Nil ETP tax rate applies. Indexed annually
by AWOTE.
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Taxation of Benefits (cont)

• From 1 July 2007
• Components reclassified into two broad
  categories
• Concessional (Taxable Component)
• Comprises former Post 83 funds and future
  SG/Salary Sacrifice Tax deductible
  contributions
• Taxable if paid as a lump sum to member depending
  upon age
• Non-Concessional (Exempt Component)
• Comprises former Pre 83, Undeducted, Invalidity,
  Concessional, CGT exempt and future Personal
  contributions into superannuation
• Always 100 Tax Free
• Lump Sum withdrawals/Transfers will be made
  proportionally from each component.

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Retirement Income

• Turning your retirement savings into an income
  producing investment.
• Investment options available
• Allocated Pension/Account Based Pension
• Term Annuity
• Lifetime Annuity

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Allocated Pension

• From 1/7/07 an Account Based Pension was
  introduced to replace an Allocated Pension
• Can only be purchased with superannuation funds
• Capital can be accessed unless a TTR pension
• Income must be at least a minimum based upon Age
  and account value no more than a maximum level
  if a TTR pension
• Various investment options are available
• No tax is paid on investment earnings
• 15 tax rebate on income portion which is not tax
  free (prior to Age 60)

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Term Annuity

• Can be purchased with superannuation funds or
  ordinary savings
• Investment time frame can be from 1 year to up to
  20 years or longer
• Payments can be paid monthly, quarterly or
  annually
• Payments are fixed and the return is guaranteed

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Lifetime Annuity

• Can also be purchased with superannuation or
  ordinary savings
• Paid for your lifetime, regardless of how long
  you live
• Payments can be indexed in line with inflation
  paid monthly, quarterly or annually
• Access to capital is restricted

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Reasonable Benefit Limits

• The maximum benefit which members of
  superannuation funds are permitted by the
  Government to receive on a concessionally taxed
  basis either as a lump sum or as a pension.
• 2006/2007 Limits
• Lump sum RBL 678,149.00
• Pension RBL 1,297,886.00
• Note RBLs were abolished from 1/7/07

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Overview

• Contributing funds into Superannuation
• Tax treatment
• Contributions types and new limits
• Withdrawals (Note tax changes from 1/7/07)
• Accessing benefits
• Retirement Income Investment options
• Allocated Pensions/Account Based Pensions
• Term Lifetime Annuities

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Are you making the most of your super?

• Most people assume that their super disappears
  into a big black hole and is slowly eaten away
  with fees.
• The reality - super is just as much your money
  as is the money in your pocket/bank account.
• Take an interest and ensure your super works for
  you and enables you to have a financially secure
  retirement.

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Thank you

• www.findex.com.au
• 40 Armstrong Street Nth., Ballarat 3350
• Ph 03 5333 8222 Fax [phone]