Using income streams before and after retirement

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Using income streams before and after retirement
Speaker Sue Merriman Company BT Financial
Group Date 22 November 2006
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Agenda

• Pensions purchased post 30.6.2007
• Pensions purchased before 1.7.2007
• Combining pensions with accumulation stage super
  
• - before retirement
• - after retirement
• Strategies prior to commencing a pension
• Focus on taxed funds
• Pension is used to refer to all income streams

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Warning
Important Note The superannuation changes
discussed in this presentation are only proposed
and will be open to public and confidential
consultation and comment before final
implementation. As such, they may be subject to
change. The full details of how the changes will
work will not be available until final
legislation/regulations are available. All
changes are proposed to commence on 1.7.07,
except where otherwise stated.
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Pensions purchased post 30.6.07

• The new rules
• One set of rules
• - minimum payment amount annually
• - an amount or of the pension cannot be
  prescribed as being left over when pension
  ceases
• - pension can be transferred only on death of
  pensioner to one of their dependants or cashed
  as a lump sum to pensioners estate
• Exemption for lifetime pensions
• Based on A Plan to Simplify and Streamline
  Superannuation Outcomes of
  Consultation, 5 September 2006.

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Pensions purchased post 30.6.07
Indicative minimum annual pension
payments Age 55-64 65-74 75-84 85-94 95 of
account balance 4 5 6 10 14
Assumptions 7 return No fees NP based on
sample percentages AP minimum income
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Pensions purchased post 30.6.07

• What sort of products?
• Account based only?
• An allocated pension with no maximums?
• Could construct a guaranteed pension to fit
  with the new rules if account balance defined
  appropriately?
• Could the pension receive new contributions/rollo
  vers?
• ?

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Pensions purchased post 30.6.07

• Taxation
• 2 components for all payments pension and lump
  sum
• - exempt - taxable
• Proportional drawdown, reflecting the proportion
  each component makes up of the total benefit.
• re-calculated with every pension payment or
  based on purchase price and remains constant
  through entire pension stage (unless new money
  added)?
• Example
• Purchase price 400,000. Exempt 100,000, ie.,
  25
• Pension payment 10,000 Exempt 2,500 Taxable
  7,500

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Pensions purchased post 30.6.07
Age 55-59 Pension payment Lump sum Exempt tax
free tax free Taxable pensioners MTR Up to
140,000 tax free less 15 rebate Remainder
15 ML Q. Once the minimum is paid, if further
payments are made, are they treated as income or
as a lump sum for tax purposes? 2007/08. To be
indexed in line with AWOTE in 5,000 amounts
(rounded down)
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Pensions purchased post 30.6.07

• Age 60
• All tax free.
• No distinction between income and lump sum.
• needs to be retained for calculation of exempt
  and taxable if death benefit paid to non (tax)
  dependant.
• If commutation and rollover to new provider -
  (based on original PP) must be given to new fund.

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Pensions purchased post 30.6.07

• Social Security
• Assets test 100 counts.
• Asset value likely to grow if minimum payment
  taken.
• 50 assets test abolition from 20.9.07, but
  complying pensions (except lifetime) not
  available from 1.7.07 (SIS).

Assumptions 7 return No fees NP based on
sample percentages AP minimum income
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Pensions purchased post 30.6.07

• Social Security
• Income test The current income test treatment
  of superannuation pensions will remain
  unchanged.
• How will this work? Once the minimum is paid, if
  further payments are made, are they treated as
  income or as a lump sum (partial commutation) for
  Centrelink purposes?
• Current treatment of partial commutation
• - not included in income test - may count
  as an asset depending on where it ends up -
  re-calculate non assessable amount of continuing
  income stream

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Pensions purchased post 30.6.07

• Estate planning
• Lump sum death benefits
• To dependant tax free
• To non (tax) dependant
• Exempt - tax free. Taxable entire component
  taxed at 15 ML.
• ie., No change
• But.. Advantage in age 60 members making full
  withdrawal (tax free) before death.

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Pensions purchased post 30.6.07

• Estate planning
• Pension death benefits
• Death benefits from a pension cannot be paid as
  a continuing pension to a non (tax) dependant.
• Taxation of pensions paid to a reversionary
• If either deceased or reversionary 60 or over -
  tax free.
• If both deceased and reversionary under 60
  taxable portion taxed at recipients MTR (less
  15 rebate).

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Pensions purchased post 30.6.07

• Adding money to a pension
• Contributions (if eligible)
• Rollovers
• Will this be allowed?
• Would trigger re-calculation of exempt

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Pensions purchased pre 1.7.07

• Deemed to meet new pension standards.
• Allocated pensions continue using current rules
  (min/max PVFs), but no new APs after 30.6.07.
• Complying pensions (eg., TAPs, gteed pensions)
  continue using current rules, but no new ones
  after 30.6.07. - but 50 ATE available until
  20.9.07?
• Clients can commute and roll existing APs to
  new pension.
• Existing allocated pensioners will be allowed
  to transfer to the new pension products from 1
  July 2007 without the need to commute their
  existing pension

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Pensions purchased pre 1.7.07

• Assume APs continue using current rules
• Taxation
• Over 60 tax free. Exempt and taxable
  components established as at 30.6.07.
  maintained for death benefits to non dependants.
• 55-59 retain existing deductible amount
  calculation.
• - trigger for exempt/taxable age 60.
• - other triggers? Death commutation (cash,
  rollover)
• Death benefits
• Will rules prohibiting death benefits being paid
  as pensions to non tax dependants apply to
  existing pensions?

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Pensions purchased pre 1.7.07

• Complying pensions
• Existing complying (as at 30.6.07) cannot be
  commuted (except as per current rules).
• Start complying (eg., TAP) between now and
  30.6.07?
• - 50 assets test exempt new taper rates. -
  Client is locked in (but use 6 month rule?).
• Will income test change?
• Wait for amendments to SSA.

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Using pensions before retirement

• Transition to retirement pensions
• Allocated pensions age 55 still working -
  non-commutable for cash until condition of
  release met.
• Now min/max PVFs apply.
• From 1.7.07 new min max (proposed) 10
  balance.
• Assumptions for following scenarios 7
  earnings (before tax) tax in accum. stage 15

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Using pensions before retirement
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Using pensions before retirement
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Using pensions before retirement
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Using pensions before retirement

• T2R variables
• Amount of after tax income client needs/wants
• Amount of income drawdown from pension
• Amount of super transferred to pension
• T2R age 55-59
• Still worth doing, but do the numbers
• Use UDCs in T2R need to save UDCs for
  retirement less compelling after 1.7.07 (once
  over 60)

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Using accumulation stage super after retirement

• After retirement
• Rainy day accounts
• - discipline
• Reducing the minimum when returns are negative
  or low
• - commute part and roll back to accumulation
  stage
• Death benefit strategy
• - leave some money in accumulation stage (watch
  out for tax) - withdraw before death if
  beneficiary is non (tax) dependant!

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Strategies before starting pension

• Consolidating pre 83 service
• Pre 83 to be calculated and frozen as at
  30.6.2007.
• Consolidate super accounts to achieve earliest
  start date.
• Do withdrawal and re-contribution after
  consolidation.

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Strategies before starting pension

• Withdrawal and re-contribution Which clients and
  when?
• Taking a benefit before 1.7.07?
• - Reduce tax if taking benefit as lump sum. If
  taking pension, higher UPP, but then tax free
  from age 60 after 30.6.07.
• Taking a benefit under age 60 after 30.6.07?
• - Lump sum and pension tax may be reduced. At
  age 60 pension becomes tax free.
• Death benefits paid to non (tax) dependant
  eg., adult child.

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Strategies before starting pension

• Withdrawal and re-contribution
• Proportional withdrawals
• Limits on UDCs
• Example
• Balance 500K includes 200K UDC
• pre 1.7.07 post 30.6.07
• Withdraw 135K post Withdraw 233K (40 exempt
  
• and re-contribute 60 taxable to get 140K).
• Can client contribute 233K?

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Strategies before starting pension

• Contributions splitting
• Younger spouse?
• - Reduce amounts counting for age pension
  purposes.
• - But preservation? Split amounts cannot be
  accessed until later.
• Taking a benefit before 1.7.07?
• - RBLs still apply. If benefit is pension, short
  term disadvantage.
• Taking a benefit under age 60 after 30.6.07?
• - Lump sum and pension tax may be reduced if
  super is split. At age 60 pension becomes tax
  free.
• Estate planning death benefits to different
  beneficiaries?
• Legislative risk medium to long term? Limits on
  super benefits in future?

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Strategies before starting pension

• Contributions splitting A strategy post 1.7.07
• One spouse over 60 (or even over 55), one spouse
  younger.
• Both spouses make contributions.
• Younger splits in favour of older (older must
  not be retired).
• Older spouse starts T2R pension tax free
  earnings and income.
• How many clients in this situation?

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Strategies before starting pension

• Contributions splitting Another strategy post
  1.7.07
• Couple age 55
• X earns 100K pa, Y earns 20K
• X makes salary sacrifice contributions and
  splits in favour of Y
• Y starts T2R pension (low tax rate)
• X can salary sacrifice more cash flow
  supplemented by Ys pension

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Advice

• Now until 30.6.07
• T2R pension should be discussed with client. -
  Combine with contributions splitting for
  some? - Start before 1.7.07?
• Assess value of withdrawal and re-contribution
  strategy for particular client. - If some
  advantage consolidate accounts and do
  withdrawal and re-contribution before 1.7.07
  (where possible).
• Client retires under 60 - use non super
  assets until age 60?

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Advice

• Now until 30.6.07
• Start AP before 1.7.07? Any advantages? - DA
  vs exempt? - T2R min/max PVFs vs
  min/10? - Death benefits? - Wait for
  more information
• Start TAP before 1.7.07? - Will TAPs be
  available between 1.7.07 and 20.9.07? - Wait for
  details of Social Security rules

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Advice

• Post 1.7.07
• Wait for leg and regs too many uncertainties.
• Some issues to keep in mind - Death
  benefits cash withdrawal prior to death - Tax
  take amounts above minimum as income or lump
  sum if under 60 (if choice available)? -
  Social Security take amounts above minimum as
  income or lump sum at all ages (if choice
  available)? - Assist clients to work out how
  much income they can afford to take. -
  Retain some money in accumulation stage? -
  Commute and roll existing AP to new pension?

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presentation is current as of 13 November 2006.
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represents a summary of a regulators current
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