Tweaking Your Super
Nick Bruining
CFP, B Com, Dip FP, CPL(H), FFPA, FAICD, APMESA
Authorised Representative
N.C. Bruining & Associates Pty Ltd
AFSL 245514
Slides download from :www.ncba.com.au/downloads
WARNING
The information provided in today is of a general nature only.
It is not personal specific financial advice.
You should not:
Take any action
Dispose of any investment or asset
Purchase any investment or asset
Rely on the information contained in this presentation without first seeking professional
advice based on your own specific situation.
The information may contain errors or omissions which
could significantly impact your position.
SUPER
and account
based pensions
$1,800,000,000,000
Super and account based pensions
What is super ?
A series of rules which, if followed,
provide relative tax and Centrelink benefits
Rules set out in a Trust Deed
Comply with the SIS Act (and others)
Two Components
The “Box” that holds the investments
The underlying investments in the fund
Investments and how they “work”
Dealing with relatively simple structures
Extra Complexity usually means extra costs
Extra Complexity often equals extra risk
Your Super invests into these areas
Deposits
Cash, Term Deposits, Bonds
Real Estate
Residential
Commercial
Business Investments
Direct
Shares
Measuring Return
The components
Income - where a payment is received in the year
Interest
Sometimes expressed as yield
Growth – where the value of the asset grows
Gold
Vacant Land
+ 1 Year, expressed as compound return
Most investments combine both
Property
Shares
Deposits
Online Accounts
Cost Savings §
Security
Introductory Rates ∆
Getting the best deals
www.canstar.com.au
Investments and how they work
Debentures
Loans from the general public
Rates generally higher
Much higher risk
Need to understand where the money ends up
Is the loss of every last cent of your money worth an extra
percent or two?
Spread the risk
Investments and how they work
Bonds
Loans to governments and corporations
Primary and Secondary Markets
More Bonds than shares
More developed market in the US
Determinants
Coupon rate
Prevailing Rates
Duration
Risk
Investments and how they work
Real Estate
Direct
Residential
Larger Market – more customers
On costs carried by owner
Yield typically 3 – 5 %
Commercial
Smaller Market – fewer customers
On costs passed onto tenants
Longer term leases
Yield typically 7 – 9 %
Real Estate
Pros
Tangible
Easily understood
Set and forget
Highly developed support industry
Has shown good growth over time
Cons
Large Capital Outlay
Concentration Risk
Illiquid
Inefficient Market
Growth is not consistent
Investments and how they work
Investments and how they work
Business Investing/Shares
What is a share?
Pays out profits as dividends ∆
Value of share moves up and down with value of company
Many, many influences
Australian
International
Specific and Systemic Risk
Managed through diversification
Minimum 8 stocks in portfolio
Investments and how they work
Shares
Pros
Small holdings possible
Generally liquid
Efficient market
Cons
Intangible
Risks
Efficient Market
It IS a business with assets
Investments and how they work
Alternate Vehicles to invest
Trusts (or how your super invests your money)
Significant Diversification
But can have specialisation
Trustee/Manager
Open Ended ie: they issue more units
Flow through of benefits §
Active or Passive Management
Costs of Trusts
Retail
Wholesale
Investments and how they work
Cost of Trusts / Managed Investments
Equally applies to superannuation funds
Asset allocation, Fees,
Then competence determines returns
All transaction costs are immediately recoverable
Trustee Fee
0.1% – 0.3% (Usually in Invest Mgt Fee)
Investment Management fee
0.25 % (cash) – 2.5% per annum ∆
1.8% Retail 1.0% Wholesale
Investments and how they work
Cost of Super / Managed Funds
Platform Fee
Typically 0.3% - 1.5% (1.0%) ∆
Adviser Fee (can be inc above)
Typically between 0.2% - 1.0% (0.55%)
So what’s it costing ?
Platform Cost 1.0%
Investment Fee 0.8%
Adviser fee 1.0%
Total Cost 2.8%
Australian Super ? ~ 1.2 % per annum
Investments and how they work
Asset Allocation
The amount you allocate to each investment sector
Varies as your priorities and life expectancy changes
Investments and how they work
Time Frame v Risks
Short Term
0 – 2 years
Cash & TDs
Medium term
0 – 5 years
Blend of deposits and growth
Longer Term
5 years plus
Growth, shares property
Investments and how they work
Diversified Funds
Look at the underlying asset allocations
One person’s balanced is not another’s
Strategic and Tactical Asset Allocations
Strategic: Benchmark
Tactical: Ability to deviate from benchmark
Can shift your exposure dramatically
Investments and how they work
The biggest mistake....
Basing an investment decision on what’s just happened
You must assess the current and future conditions not
what’s happened. It may have an influence, but won’t
define
Markets Up?
Inflow significant
Markets down?
Out it goes!
Tricks of reporting
Measuring Returns
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Super and account based pensions
Tax explanations
The two phases of operation
Accumulation
Money goes in
Money is Parked
Earnings taxed at 15%
Pension
Money comes out
Earnings tax - nil
Super and account based pensions
Putting Money In
Contribution Rules
Eligibility
Age up to 65
Breathing
Over 65-74
40 hours in a consecutive 30 day period
Over 75
No
Super and account based pensions
Concessional
Someone’s getting a tax deduction
= 15% tax on contributions
Compulsory 9.50%, Super Guarantee
Salary Sacrifice
Redirecting pre-tax to super
eg.earning $70,000 pa
Redirect $20,000 to super
Boss calculates tax on $50,000
Not compulsory to be offered
Beware of contributions under $18,200
Non Concessional
No Tax deduction claimed
= No Contributions tax
Age Still Limits apply
Super and account based pensions
Contribution Caps
Under 50 = $30,000 concessional #
Over 50 = $35,000 concessional
Excess returned less marginal tax rates
Non Concessional $180,000
Bring forward 3 years if under 65
Super and account based pensions
Other Contribution Incentives
Co Contribution §
$34,448 for each $1, max $500
Reducing at 3.33c per dollar
$49,448 – must be non concessional
Links up with Tax Return
Spouse Offset
18% up to $3,000 =
Reduces over $10,800 to $13,800
Super and account based pensions
GETTING IT OUT
Conditions of release
Death
TPD
Severe Financial Hardship
Reaching Preservation Age
55 if born before 1/7/1960 – Taxable
Exempt – Exempt
Lifetime $185,000 #
Super and account based pensions
GETTING IT OUT (cor)
60 if job ceases - Exempt
65 if fund permits
No compulsory cashing
Transition to retirement
Account Based Pension
Super and account based pensions
Account Based Pensions
Reverse of Super- What we do at retirement
Frequency, what you want
Take out rate + earnings determines
how long it lasts.
Tax Free on Earnings
Tax Free if over 60
Tax under 60
Exempt/Taxable X Payment (at start date)
Super and account based pensions
eg. $200,000 fund, $50,000 exempt
Payment of $1,000
50/200 X $1,000 = $250 exempt
150/200 X $1,000 = $750 taxable
But 15% tax credit
Super and account based pensions
ABP Drawdown
Must Take out minimum amount
< 65 4%
65-74 5%
75-79 6%
80-84 7%
85-89 9%
90-94 11%
95 or more 14%
ABP Drawdown
Transition to Retirement
Max 10% of Account Balance
Restriction relaxed on Condition Of Release
Income from ABP effectively funds increased Salary
Sacrifice to super.
Pros
Nil Tax on ABP’s Earnings
Cons
Requires you to draw-down ABP
In Retirement
How much do you need?
Example John and Mary, both 65
Need $45,000 pa
Have $260,000 in super, $7,000 savings
$130,000 car and contents
Use Account Based Pension
$250,000 x 5% = $12,500
Under Centrelink Income test
= $250,000/18.54 (life expectancy) = $13,484
deducted from actual payment received.
$12,500 - $13,484 = NIL
How much do you need?
Below $284 per fortnight allowed
Income Test – Nil
Asset test, Under threshold of $284,000 ?
ABP = $250,000
+ Money in the Bank $7,000
+ Car and Contents $20,000 (Use Scrap value Not replacement)
Total Centrelink Assets $277,000
Asset Test - Nil
Full Pension of $33,035.60 per annum
Add ABP Payment of $12,500 per annum
Total = $1,751.37 pfn or $45,535 pa & No tax! ($55,940)
Or same as $1,138,375 @ 4%