Strategies for clients
5 years from retirement
Yvonne Chu
Senior Technical Manager - FirstTech
September 2015
Disclaimer
This presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352 (Colonial First
State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in
FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer
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the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial First State
Pooled Superannuation Trust ABN 51 982 884 624.
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on 13 13 36.
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What we’ll cover...
Implications of 1 January 2017 Centrelink assets test changes
Pre-emptive Centrelink action
Planning ahead to increase retirement funding / income
Small business owners – planning for retirement
Implications of Centrelink assets test
changes
Social security changes
Legislation passed to give effect to the following changes from
1 January 2017
Taper rate increased from $1.50 to $3.00 pf per $1,000 of assets
Assets free thresholds increased
Lower threshold
Current
(1/07/2015)
Legislated 1/01/2017
Single H.O
$205,500
$250,000
Single N.H.O
$354,500
$450,000
Couple H.O
$291,500
$375,000
Couple N.H.O
$440,500
$575,000
Cut-off limit
$779,000
Estimated
(1/01/2017)
$547,000
$922,000
$747,000
$1,151,500
$823,000
$1,298,000
$1,023,000
Current
Assets test changes – single homeowner
Financial Assets
Reduction in pension pa
$2,000
$0
-$2,000
-$4,000
-$6,000
-$8,000
-$10,000
-$12,000
Financial assets only ie. ABPs
$0
$40,000
$80,000
$120,000
$160,000
$200,000
$240,000
$280,000
$320,000
$360,000
$400,000
$440,000
$480,000
$520,000
$560,000
$600,000
$640,000
$680,000
$720,000
$760,000
$800,000
$840,000
$880,000
$920,000
$960,000
$1,000,000
$1,040,000
$1,080,000
$1,120,000
$1,160,000
$1,200,000
$1,240,000
$1,280,000
$1,320,000
$1,360,000
$1,400,000
$1,440,000
$1,480,000
Combined reduction in age pension pa
Assets test changes – Couple homeowner
$2,000
$0
-$2,000
-$4,000
-$6,000
-$8,000
-$10,000
-$12,000
-$14,000
-$16,000
Financial assets only ie. ABPs
Strategy considerations
Reducing assessable assets will become much more valuable
•
Currently, reducing by $1 can save 3.9%
•
Proposed, reducing by $1 can save 7.8%
Limited scope to reduce assessable assets
Adviser use only
•
Younger spouse’s super
•
Principal home improvements
•
Gifting within limits
•
Annuity (depleted purchase price instead of balance)
•
Pre-paid burial plot & funeral bond
Retirement savings – couple homeowner
Retirement savings required to provide for 25 years for a couple
homeowner at different level of income
Income required pa
(includes Age Pension)
Current rules
Post 1 Jan 2017 rules
$55,000
$513,022
$470,293
$60,000
$602,268
$590,691
$65,000
$692,106
$726,299
$70,000
$782,369
$867,925
Assumptions: all figures shown in today’s dollar; based on a single pensioner on the age pension; at the end of 25 years all
capital will be exhausted; capital exhausts at end of 25 years; income indexed at 3% pa, net growth of 7% pa on financial
investments; Age Pension indexed at MWATA of 3.5% pa; rates and thresholds indexed at CPI of 3%; home and contents of
$10,000; everything else in ABPs subject to deeming; deeming thresholds indexed at 3% pa. current deeming rate of 1.75% and
3.25%.
Retirement savings – single homeowner
Retirement savings required to provide for 25 years for a couple
homeowner at different level of income
Income required pa
(includes Age Pension)
Value of ABP - Current
rules
Value of ABP - Post 1
Jan 2017 rules
$40,000
$270,193
$406,480
$45,000
$371,245
$545,024
$50,000
$480,506
$665,844
$55,000
$593,634
$766,505
Assumptions: all figures shown in today’s dollar; based on retiree couples both on the age pension; at the end of 25 years capital
will be exhausted; capital exhausts at end of 25 years; income indexed at 3% pa, net growth of 7% pa on financial investments;
Age Pension indexed at MWATA of 3.5% pa; rates and thresholds indexed at CPI of 3%; home and contents of $10,000;
everything else in ABPs subject to deeming. deeming thresholds indexed at 3% pa. current deeming rate of 1.75% and 3.25%.
Centrelink pre-emptive actions
Gifting
Gifts over $10,000 per financial year (also capped at $30,000 per 5
financial year rolling period) will be:
Assets tested for 5 years
Deemed under the income test for 5 years
Many clients may want to gift some wealth to children / grandchildren
in later life
Strategy
Understand and inform whether intended gift is affordable, then:
Gift within allowable limits, or
Gift more than 5 years from reaching age pension age
Outstanding loans
Clients approaching retirement may have:
Home mortgage
Investment property loan
Margin loan
Unsecured debt (credit card)
Centrelink treatment of loans varies:
Does the loan reduce assessable assets?
Do the interest repayments reduce assessable income?
Critical consideration – what is the loan secured against?
Outstanding loans
Scenario
Assets test
Income test
Loan secured against principal
home
Does not reduce assessable assets
Interest payments do not reduce
assessable income
Loan secured against
investment property
Loan reduces investment property
value
Interest payments reduce net
rental income of property
Margin loan (secured against
financial assets)
Loan reduces value of financial
assets
Interest payments do not reduce
assessable income
Unsecured loan (e.g, credit card
debt)
Generally does not reduce
assessable assets
Generally does not reduce
assessable income
Strategy
Unsecured debt should be repaid first
Consider repaying mortgage before loan secured against investment
property
Example
Col and Cassandra have:
Home worth $500,000
($200,000 debt1)
Investment property2 worth
$400,000 ($200,000 debt1)
$150,000 each in super
$20,000 home contents
Retiring at age pension age
in 5 years
Have enough cash flow to
repay one loan only
1 Interest rate of 5% on loans
2 Investment property rental income 3.5% pa
At age pension
age
Pay off
investment loan
Pay off
mortgage
Assessable
assets
IP: $440,373
ABP: $414,533
IP: $440,373
IL: -$200,000
ABP: $414,533
TOTAL: $874,906
TOTAL: $674,906
Assets test
result
$0 pa combined
$10,324 pa
combined
Assessable
income
Rent: $15,413
ABP: $12,263
Rent: $15,413
IL: -$10,000
ABP: $12,263
TOTAL: $27,676
TOTAL: $17,676
$23,623 pa
combined
$28,571 pa
combined
Income test
result
Other Centrelink considerations
Preparing to take advantage of Work Bonus
Targeting at least some age pension
Pensioner concession card
Energy supplement
Pension supplement
Maximise younger spouse’s super
Spouse contribution splitting
Cash-out re-contribute super from one spouse to another
Example
Pete (age 60):
Salary of $80,000 p.a.
Super: $500,000
Salary sacrificing up to CC cap
At age
pension age
- Pete
No spouse
contribution
splitting
Spouse
contribution
splitting
Assessable
assets
Pete ABP: $184,640
Maggie’s super:
$563,033
Other asset: $420,000
Pete ABP: $35,823
Maggie’s super:
$711,851
Other asset: $420,000
TOTAL: $604,640
TOTAL: $455,823
Assets test
result
$7,902 pa
(Pete’s
entitlement)
$13,706 pa
(Pete’s
entitlement)
Assessable
income
Deeming: $4,792
Deeming: $627
Income test
result
$16,858
$16,858 pa
Maggie (age 52):
Homemaker
Super: $20,000
Together they have:
Home worth $700,000
$20,000 home contents
Holiday house: $400,000
Pete retiring at age pension age
in 5 years, at such time Pete will
cash-out $540k of super and
contribute into Maggie’s super
Retirement funding / income
Revisiting insurance arrangements
Clients who do not revisit life and TPD as they age may become overinsured as they get closer to retirement:
Lower or no debt
Proceeds don’t need to fund an income stream for as long
Greater wealth overall
Strategy
Revisit insurance and reduce cover if not needed. Use income from
reduced premiums to:
Make concessional contributions to super (eg, increase salary sacrifice)
Pay off debt
Make after tax contributions to super
Best use of a lump sum
Clients saving for retirement may receive a lump sum
Inheritance
Termination payment when changing jobs
Sale proceeds when selling a property
Natural action of “getting into super ASAP” may not be best
Strategy
Depending on client’s income tax position...
Keep lump sum invested outside super, and
Increase salary sacrifice to make full use of concessional cap, and
Use non-super funds to meet income deficit
Example
Wants to retire at age 60
Salary $90,000
No spare income available
$100,000 in super
Receives $250,000
inheritance
Should Kim:
Make $250,000 nonconcessional contribution?
Keep outside super to
maximise concessional cap
$700,000
Super balance at retirement
Kim (age 50)
$49,624
more
$650,000
$600,000
$550,000
$500,000
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
50
51
Salary sacrifice
52
53 54 55 56 57
Age at start of year
58
Immediate after tax contribution
Assumptions: balanced return of 7% pa both inside and outside of super (3% income), 2015-16 tax
rates, figures in today’s dollar, SG as per legislation.
59
Example
Extra $10,752 retirement
balance added
$700,000
Super balance at retirement
What about if only half of
$250,000 inheritance retained
outside super to allow for
salary sacrifice?
$60,376
more
$650,000
$600,000
$550,000
$500,000
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
50
51
Salary sacrifice
52
53 54 55 56 57
Age at start of year
58
Immediate after tax contribution
Assumptions: balanced return of 7% pa both inside and outside of super (3% income), 2015-16 tax
rates, figures in today’s dollar, SG as per legislation.
59
Planning around age 65
Plan use of bring forward rule if looking to maximise non-concessional
contributions and retiring at age 65
Where asset sale will fund contribution
Contribution better in “age 65 year” (may not be eligible in next year)
Asset sale better in following year (less CGT)
Depending on CGT difference, could consider short-term borrowing to fund
contribution
Trigger the bring forward provision to “buy” more time
Small business owners –
planning for retirement
Importance of business succession plan
Financial and tax plan to ensure:
Orderly transition of ownership when one owner exits the business (eg,
through buy / sell agreement)
Exiting owners receive the full value of their share of the business
Voluntary (eg retirement) and involuntary (eg, death) events are covered
Appropriate insurance arrangements are in place where an owner dies or is
permanently incapacitated
Certainty around business value / ownership critical as owners get
closer to retirement
Planning when retiring from business
Understand the CGT concessions that may apply on the eventual sale
of the business
Meeting the basic conditions (depends on business structure)
15 year exemption
Active asset reduction
Small business retirement exemption
Maximise super contributions from small business asset sales
Lifetime CGT cap
Non-concessional / concessional cap
Lifetime CGT cap ($1.395 million)
Allows small business owners to direct eligible proceeds of their
business to super without counting against NCC or CC
Lifetime CGT Cap
Proceeds from asset eligible for 15 year exemption
Proceeds from asset that would have been eligible, but pre-CGT, no CGT
or sold within 15 years due to permanent incapacity
Capital gain exempt under the small business retirement exemption
Maximising concessions - example
Glenda (age 55) is looking to sell her business and retire* in the near
future. Business consists of:
$2,000,000 commercial property (bought in 2001 for $1,000,000)
$1,800,000 other business CGT assets (cost base $100,000, business
started in 2001)
Glenda meets the basic conditions to qualify for small business CGT
relief
How can Glenda:
Maximise her relief from CGT?
Maximise her contribution to super
* Glenda would be willing to work as an employee for any new business owner for a couple of years
Option 1: Sell everything now
Property and other assets sold for $3,800,000
Gross capital gain of $2,700,000
Not eligible for 15 year exemption
General 50% discount reduces gain to $1,350,000
Active asset reduction (50%) further reduces gain to $625,000
Retirement exemption ($500,000) reduces assessable gain to $125,000
Option 2: Hold property for 15 years
Other business assets sold now for $1,800,000
Gross capital gain of $1,700,000
Not eligible for 15 year exemption
General 50% discount reduces gain to $850,000
Active asset reduction further reduces gain to $425,000
Retirement exemption reduces assessable gain to Nil
Continues to work for in the business for the new buyer at reduced
capacity
Property 1 sold in 3 years for $2,000,000 (gain $1,000,000)
15 year exemption applies, disregard entire gain
Comparison
CGT
Option 1:
Sell all assets now
Option 2:
Sell as 15 year exemption
becomes available
Assessable capital gain
$125,000 (reduced to $90,000 if
personal concessional contribution
made)
Nil
Super contributions
Option 1:
Sell all assets now
Option 2:
Sell as 15 year exemption
becomes available
Lifetime CGT cap contribution
$500,000
$1,395,000
Concessional contributions
(over 10 years)
Up to $350,000
Up to $350,000
Non-concessional contributions
(over 10 years)
Up to $2,070,000
Up to $2,070,000
Proceeds remaining outside
super
$880,000
$0
Lifetime CGT cap considerations
Contribution timeframes
Lifetime CGT cap form – no later than contribution
Certainty of proceeds qualifying for small business concessions
Electing not to claim the active asset reduction
50% general discount for individuals or indexed cost base
FirstTech
: 13 18 36
firsttech@colonialfirststate.com.au