OLD AGE PLAN

 

Summary plan

Target income: $40,000 for a couple (in 2002) or at least $75,000 in 2024

Target: AS AT TODAY’S VALUE, and keeping in mind age pension rules, you need personal income after retirement = $23,616 through investments/ earnings/ superannuation pension (super that gives this amount @5% will be worth $472,320. This can be facilitated by selling this house and moving to a small house. (Note these are today’s values).

 

It is important to keep a superannuation target of about $700,000 in 2024 to ensure that a reasonable amount at 2024 value and beyond is accrued.

 

Crucial reason to increase super and purchase a complying pension. Usual allocated pensions are COUNTED for the assets test. Complying pensions are not counted in the assets test applied by Centrelink when assessing eligibility for the age pension. This market-linked income stream is exempt to 50 per cent only, though. There is no way to save meaningfully in any other way (ie. outside complying annuities) without seriously affecting age pension (assets MUST remain below $217 500 excluding house.

 

Balancing income streams. Income from the pension would be taxed as usual. Therefore by building super funds for BOTH partners, both deductions can apply, reducing tax paid out, rather than by keeping super only in one account.

 

Co-contribution

Employees on incomes up to $28,000 who make their own voluntary super contributions receive $1.50 per dollar of voluntary contributions up to a maximum co-contribution of $1,500 per annum.

 

Strategy:

a) SM to make contribution of $1,000 and receive $1,500. Distribute to ensure both partners have equal balances. Start by using all incentives for this purpose.

b) Salary sacrifice upto $5,000

c) rest into mortgage.

 

DIVERSIFY BUT DO NOT BE DEFENSIVE.

DO NOT USE THE SAME SUPER FUND. Super is risky. Use two different super funds. Use an aggressive stock based option, despite cycles, to gain exposure to growth.

 

AGE PENSION TODAY = max. $26,000 with your own income stream of $6,000. Pension declines to 0 if your own combined income is $114,116

See Detailed chart on pension as a function of income (assuming assets test is met)

 

http://www.centrelink.gov.au/internet/internet.nsf/payments/age_pension.htm

 

Value

Actuarially a full age pension over 20 years (65-85) is worth about $200,000 (ALL values in black in 2004 values).

 

Eligibility

10 years in Australia ie. December 2010 AND age 65 ie. 2023 /2024

 

FULL PENSION -  the lower of the eligibility of

a) assets  partnered (combined) up to $217 500 excluding house and

b) combined income < $5,616 per year

ELSE PART PENSION/ none

 

Note: if one partner dies, then the assets and income test can adversely affect the other partner

 

Amount:

MAXIMUM OF $393.00* (for each member of the couple) per fortnight ie. $20,436 for the two

 

Payable in India?

Yes, indefinitely, rate reduced after 26 weeks. All other tests apply.

 

SUPERANNUATION

http://www.ato.gov.au/super/

 

http://www.vicsuper.com.au/faq.asp

 

Eligibility to withdraw

We can withdraw super funds if age 55 AND have retired. (Usually superannuation cannot be paid out until you retire, (ie. you have a present intention to never again become gainfully employed for 10 hours or more per week).

 

You may also access your superannuation savings in any of the following circumstances:

  • you reach age 60 and cease employment with all employers who have made contributions to VicSuper on your behalf (even if you have not permanently retired)
  • you turn age 65
  • you die and benefits become payable to your dependants or estate.
  • you become permanently incapacitated
  • you meet the criteria for early release on the grounds of severe financial hardship
  • on compassionate grounds as approved by the Australian Prudential Regulatory Authority (APRA)

 

If you die and a benefit is paid directly to your dependants,

 

·       no tax is payable provided they take their benefit as a lump sum within 3 months.

  • Tax is payable on lump sum benefits paid to non-dependants (e.g. adult children). This tax is generally deducted up to a maximum rate of 16.5% (including the Medicare levy) on the whole of the Post 30/6/1983 component. This rate applies even if the recipient of the benefit is over age 55.
  • When benefits are paid direct to the member's estate no tax is deducted by the Fund. Instead, the estate pays tax as appropriate.

 

Option? Can take back lump sum at 55 to India, live off it till 65? Then get the age pension - must retain permanent residency?

 

Current funds ~ $20,000

Expected by 2014: $120,000. Also expected that mortgage should be mostly paid off by then. Super by age 65 around $333,000. (target $700,000!!)

 

What can be done with that money?

When you retire this money is paid to you either as a lump sum or a superannuation pension.

 

a) Lump sum

Least tax effective strategy if super balance > $200,000

Tax on lump sum withdrawals

For tax purposes, superannuation benefits are split into several components. Each of these components is taxed in different ways:

 

  1. Undeducted contributions  - this is made up of your own contributions from 1/7/83. No tax is payable on this part of your benefit.
  2. Post 1/7/1983 taxed component-

·       if you are under age 55, this component is taxed at 21.5% (including the Medicare levy).

·       If you are over age 55, the first $117,576.00 (for the 2003/2004 year and indexed annually) of this component is not taxed and amounts over the threshold are taxed at 16.5% (including the Medicare levy).

 

Note: RBL

When you receive a superannuation payment, you are taxed at a favourable rate. There is, however, a limit to how much money you can receive at these low rates of tax. This is called the Reasonable Benefit limit or RBL.

 

·       If you take your superannuation benefit as a lump sum, the RBL will be $619,223 (from 1 July 2004) or, if you take at least 50% of your benefit as a complying pension such as the SERF Fixed Term Income, you can take advantage of a higher RBL ($1,238,440 from 1 July 2004).

 

·       These amounts do not include your own after-tax contributions such as voluntary savings or lump sum contributions.

 

b) Pension

Usually tax effective if super funds >$200,000. Some of these pensions are EXEMPT from the assets test.

Allocated pensions are designed for people who have retired, or are approaching retirement age and want to leave their money in a super fund so that they can draw a regular income stream rather than withdrawing their money as a lump sum. With an allocated pension you can choose:

  • how much you receive as income (within the minimum and maximum limits that apply under current Federal legislation)
  • to have your income credited to your account either monthly, quarterly, half-yearly or yearly.

 

You continue to receive income payments until your super savings and investment returns run out.

 

What are the tax advantages of allocated pensions?

  • Tax-free investment returns within the fund
  • 15% tax offset (rebate) on your income payments if you have no excess benefits, and are either over age 55 or permanently incapacitated

·       Annual tax free amount if you have undeducted personal (after-tax) contributions, a capital gains tax-exempt component or an invalidity component.

 

Complying market-linked pension, payable for the life expectancy of the individual.

 

Pre Sept. 2004

·       Exchange Lump Sum for Fixed (annuity) income

·       Must be For Your Lifetime or Fixed Term of at least 15 Years for 65+

·       Gamble on Life Expectancy?

·       Conservative Investment

·       Non-Commutable

·       Not Popular

·       Asset Test Exempt for Centrelink

 

·       The advantages of a complying pension paid by these providers were offset by the low rate at which these pensions were paid and the gamble on how long the person receiving the pension would live.

 

·       The amount of complying pension a person receives depends on the amount invested in the fund, the life expectancy of the member, and an earning rate applied. As the earning rate used for these pensions is a fixed interest rate, the amount of complying pension paid has been a lot less than other income streams because of low interest rates.

 

·       In addition, if a member died before their estimated life expectancy, and there was no guaranteed minimum period, the fund manager or life company benefited from any funds remaining in the member's account.

 

·       Self-managed super funds became a popular method of providing complying pensions when the gamble over the member dying before they had reached their expected life expectancy was removed. This was achieved by other family members joining the self-managed super fund, so if there was still a balance in the fund when a member died it was not lost to the family.

 

·       In effect a complying pension paid by a self-managed super fund then had all of the benefits of the new market-linked income stream pension.

 

Reverse Mortgage

A reverse mortgage allows people aged 65 years and over to borrow against the equity in their home and access cash without making repayments on the mortgage during their lifetime. A reverse loan is typically repaid when the borrower dies or sells the property to move elsewhere. Two major banks offer reverse mortgages, the Commonwealth Bank and St George Bank.

 

The interest-rate charged on reverse mortgages is slightly higher than the big banks' standard variable rates of lending. The interest rates are, however, lower than those charged on personal loans.

 

Super as an investment option

From 1 July 2005 employees will have the right to choose the super fund into which their employer pays their super contributions.  Removal of the work test allows those under age 65 to make contributions to a superannuation fund, regardless of whether they are currently working or have ever worked. From 1 July 2005 people who have reached their preservation age will be allowed to access their superannuation in the form of a non-commutable income stream without the need to retire. This will give people the option of continuing to work for their employer on a part-time basis and use part of their superannuation to supplement their income, ensuring they can retire when they are ready.

 

Salary sacrifice. types of contributions you can salary sacrifice include:

  • your regular salary
  • any bonuses you may receive from your employer
  • any allowances you may receive from your employer.

 

Set up an agreement with your employer before you become entitled to the amount you want to salary sacrifice. You should discuss:

  • the amount of salary you want to sacrifice
  • where the contribution is going to come from. Your regular salary? Bonuses? Allowances?
  • whether your pre-sacrificed salary will be used to calculate any defined benefit fund entitlement you may have.

 

There may be no advantage to salary sacrifice if you’re:

·       a low-income earner (ie. earning less than $21,600 p.a.) as your income tax rates are the same as those paid on super contributions. If this applies to you, you may be better off making after-tax contributions, as you may qualify for a government co-contribution of up to $1,500 a year, or

 

·       a high-income earner (ie. earning over $99,710 p.a. in the 2004–2005 financial year) where the combined effect of the 15% tax on contributions, the 12.5% superannuation surcharge (for the 2004–2005 financial year) and taxes on benefits on payout may mean that the tax saving is limited.

 

Spouse rebate