pensions: strategies and crucial new considerations · pre-retirement pensions –benefit...

PENSIONS:

STRATEGIES AND CRUCIAL NEW CONSIDERATIONS

Craig DayExecutive Manager – Technical ServicesDate

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Disclaimer

Adviser use only

This presentation is given by a representative of Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial

First State). It is based on its understanding of current regulatory requirements and laws as at 1 October 2019. While all care has been taken in

the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person

including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any

person arising from reliance on this information.

Colonial First State is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice

Wholesale Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and

interests in the Rollover & Superannuation Fund and 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. Colonial First State also issues interests

in managed investment funds including those made available under FirstChoice Investments and FirstChoice Wholesale Investments, other than

FirstRate Saver, FirstRate Term Deposits and FirstRate Investment Deposits which are products of the Commonwealth Bank of Australia ABN 48

123 123 124, AFS Licence 234945 (the Bank). Colonial First State is a wholly owned subsidiary of the Bank. The Bank and its subsidiaries do not

guarantee the performance of Colonial First State’s products or the repayment of capital by Colonial First State.

This document provides information for the adviser only and is not to be handed on to any investor. It does not take into account any person’s

individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) before making any

recommendations. Clients should read the PDS before making an investment decision and consider talking to a financial adviser. PDSs can be

obtained from colonialfirststate.com. au or by calling us on 13 13 36.

This presentation cannot be used or copied in whole or part without our express written consent.

© Colonial First State Investments Limited 2019.

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Agenda

Pre-retirement pensions

Retirement pensions

Death benefit pensions

Other pension issues

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Pre-retirement pensions – benefit maximisation

Transition to retirement Pensions

Lost their mojo 1 July 2017?

- Assets no longer tax free

- Concessional cap reduced to $25,000

Catch-up concessional contributions

Contribute unused CC amounts accrued in previous 5 years

- TSB at end of previous year < $500,000

- Commences 1 July 2018

Members turning 60 may have large effective concessional cap

Example

Earning $105,263 on 1 July 2018

Employer SG only

Unused cap amounts after:

- 3 years?

- 6 years?

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$10,200

$10,404

$10,000

$11,964

$12,784

$11,171

$15,536

$16,329

$14,596

$14,800

$15,000

$14,716$88,225

$71,896

$54,800

$40,000

$25,000

$103,762

SG Unused CC Effective CC

$15,000

$29,800

$44,396

$60,725

$76,262

$90,978

Cap space

2019-202018-19 2023-242022-232020-21 2021-22

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Case study

Bob – age 60

TSB: $450,000 at 30 June 2021

Salary: $100,000

Receiving employer SG

Accrued UCC: $50,000

Effective UCC 2021-22: $77,500

Options

1. Do nothing

2. Salary sacrifice to CC to age 65 + TTR so cash flow neutral

3. Salary sacrifice to $77,500 in Yr1 and then to CC to age 65 + TTR so cash flow neutral

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$615,000 $620,000 $625,000 $630,000 $635,000 $640,000 $645,000 $650,000 $655,000 $660,000 $665,000 $670,000

Strategy 1

Strategy 2

Strategy 3

TTR strategy with catch-up CCs

$662,781

$633,169

$651,817

+$18,648 +$29,612

Strategy 1: Do nothingStrategy 2: Salary sacrifice to $25K to age 65. TTR to replace lost incomeStrategy 3: Salary sacrifice to effective CC in Yr 1 then to $25K to age 65. TTR pension to replace lost income

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Pre-retirement pensions – spouse equalisation

SPOUSE EQUALISATION EXAMPLE

Julie (60)

Earns $80,000, has $400K in super

Salary sacrificing up to cap

Aaron (60)

Earns $120,000, has $1.4M in super

Not salary sacrificing

Let’s compare:

Starting TTR for Aaron with $190K and keep salary sacrificing for Julie

Total balance $2.555MAaron

$1.924M

Julie$631k

Aaron$1.518M

Julie$1.037k

Allows extra $324k to be converted to tax-free pension phase assuming TBC of $1.6M

Starting TTR for Aaron with $1M and use excess cash flow to make NCC for Julie

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Pre-retirement pensions – conversion to retirement phase

Conversion to Retirement phase

Satisfy COR for:

- retirement

- permanent incapacity

- terminal illness

And notify trustee

Turn age 65

Pension automatically reverted on death

Issues

Documentation

Take care with retirement definition

Directors and retirement

- entitled to rem

- received rem

Issues

Beware clients turning age 65

- TBAR event

- trigger excess

TTR does not convert to ABP on death

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Agenda


Retirement pensions



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Retirement pensions

Beware failing pension standards

Minimum

Commutation restrictions

Consequences

- pension ceases at start of year

- income assessable

- TBA event: debit

- time?

- value?

Commutation rules – full commutation

Pro-rata payment must be received prior to lump sum

Existing pensions in place at start of year

- Annual payment x (days in payment period / days in financial year)

New pension commenced part way through year

- Pro-rata annual payment x (days in payment period / days in financial year)

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Retirement pension

Example

Elaine (67) commences $600k ABP on 1 August 2019

Elaine’s annual minimum payment pro-rated:

$600,000 x 5% x (3351 days/366 days) = $27,460 (rounded to nearest $10)

She then decides to fully commute her pension on 1 March 2020

Prior to commutation Elaine must receive pro-rata minimum pension payment based on the number of days from commencement to date of commutation:

$27,460 x (2142 days/366 days) = $16,056

1 Days from 1 August 2019 to 30 June 2020

2 Days from 1 August 2019 to 1 March 2020

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Retirement pensions

Partial commutations

Annual minimum still applies

Option one

Received at least pro-rata pension payment prior to lump sum

Option two

Account balance immediately after commutation equal or greater than remaining minimum payment amount for the year

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Retirement pensions

ECPI

Two methods to calculate

Segregated method applies where all assets used to fund RP income streams

Issue where fund moves to being fully in pension phase during year (vice versa)

Budget announcement

Trustees can choose method

No Legislation yet

1 July 30 June Pension and accumulation

interests Pension interests only 30 Sept

Member makes contribution

30 March

Unsegregated Segregated Unsegregated

Member starts pension

Pension and accumulation

interests

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Agenda


Retirement pensions



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DEATH BENEFIT PENSIONS ASSESSED AGAINST BENEFICIARY’S TBC

DIED IN ACCUMULATION PHASE POST 30 JUNE 2017

REVERSIONARY PENSION?

DIED IN PENSION PHASE POST 30 JUNE 2017

TBC CREDIT:VALUE AT COMMENCEMENT

NO

YES

TBC CREDIT: VALUE OF PENSION AT

TIME OF DEATH (CREDIT 12 MONTHS AFTER DEATH)

Insurance proceeds?

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30 June value of:

Accumulation phase value

Amount that would become payable if member voluntarily ceased interest at that time

+ Retirement phase value -

Transfer balance account amount adjusted for market value

- Structured settlements

+ In transit rollovers

Impacts

Non-concessional cap

Concessional catch-up

Co-contribution / spouse contribution offset

SMSF ability to use segregated method

TOTAL SUPER

BALANCE

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Accum.$1.4m

Rosie’s spouse Joe died on 31 December 2018 and his $1.5m ABP auto-reverted to her.

As a result she intends to transfer her own $1.4m ABP to accumulation phase on 31 December 2019

The SMSF owns a property with large unrealised gains that she wants to sell

By when should she sell the property?

B. By 30 June 2019

A. By 31 Dec 2019

C. It makes no difference

30

Jun

----------

ABP$1.5m

Reversionary

31

Dec

ABP$1.4m

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Rosie’s TSB on 30 June 2019 = $2.9m

Fund must use unsegregated method for 2019-20 as TSB>$1.6m

A. If sell BRP between 1 July and 31 Dec 2019 apply ECPI %

- ECPI: ($1.4m x 50%) / $2.9m = 76%

- 24% of discounted gain assessable

B. If sell BRP by 30 June 2019 100% gains exempt in 2018-19

- 100% of assets supporting RP income streams

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Cashing restrictions

Death benefit must be cashed as soon as practicable

Cashing options:

- single lump sum or interim and final lump sum

- one or more pensions

Death benefit pension must continue to be paid

What if fail pension standards?

Pension ceases at start of year

Timing of TBAR debit

- as soon as reasonable for trustee to know failed standards

- debit = value of interest at that time

Can start new pension

- payments are lump sum death benefits

- breach if > 2

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Case study

$10k $10k $10k

30 June

$820k

$10k not paid

1 July $800k

TBAR debit on 30 June

Debit value = $820k

3 x $10,000 lump sum death benefits

Breach of cashing rules

5% ($40k) minimum payment

Fund fails pension standards on 30 June

Pension ceased at start of year

Pension payments

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Strategy

Death benefit paid as ABP:

- take pension payments up to minimum

- take balance as partial commutations

Commutations = TBA debit

Taxed as death benefit lump sum

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Compulsory cashing rules

Regulation 6.21

(1) Death benefit must be cashed as soon as practicable

(2) Benefit may be cashed in one or more of following forms:

a) in respect of each person to whom benefits are cashed:

i. single lump sum

ii. an interim lump sum (not exceeding the amount of the benefits ascertained at the date of the event mentioned in (1)) and a final lump sum (not exceeding the balance of the benefits as finally ascertained in relation to the event)

b) subject to (2A) and (2B):

i. 1 or more pensions , each of which is a superannuation income stream that is in the retirement phase

View

Reg 6.21(2)(a) applies to future commutations from death benefit pensions

Commutations from death benefit pensions restricted:

- maximum of two

- total value cannot exceed commencement value of pension

Current approachTrustee satisfies 6.21(1) where death benefit commenced to be cashed as pension

Lump sum requirements in 6.21(2)(a) do not apply to future commutations

- compulsory cashing rule already satisfied

- commutations arise due to member’s decision to commute pension interest not due to death

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Potential compliance / Admin issues

Commutations from death benefit pensions limited:

- maximum of two

- value not exceed commencement value of pension

Systems changes to:

- track number and value of lump sums

- notify member where death benefit pension becomes non-commutable

ATO clarification being sought

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Agenda


Retirement pensions



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TAP rollovers

TAPs in place on 30 June 2017 CDBIS

TBA Credit = annualised payment x remaining term

TAPs rolled over and recommenced on/after 1 July 2017 not CDBIS

TBA credit = account balance

Debit issue

EM = annualised payment at time of commutation x remaining term

Technical issue: payment owing after commutation is nil

Debit = Nil

Double counting

Draft legislation

Different methodology

Potential adverse outcomes

Industry feedback

Awaiting Bill

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Defined benefit pensions

Life expectancy reaching end of term

Members with lifetime getting old

If pension ceases or member dies residual assets = reserves

Allocation counts towards CC if 5%+ or not proportional

Commutation strategy

Commute and roll to TAP

CLE/Flexi - rollover amount limited to commutation value?

- balance unallocated reserve

CLT – rollover amount 100%

Residual reserves

Allocate up to 5%

Allocate up to concessional cap

- remember unused CC rules

Allocate over CC taking into account 15% offset

- effective if no other income

Don’t allocate to pension account

CLE: Complying Life Expectancy / Flexi: Non-complying lifetime and life expectancy

CLT: Complying Lifetime

Thank YouThank You

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