strategies for clients 5 years from retirement yvonne chu senior technical manager - firsttech...
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Strategies for clients 5 years from retirement
Yvonne Chu
Senior Technical Manager - FirstTech
September 2015
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 Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and interests in the Rollover & Superannuation Fund and 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.
The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on 13 13 36.
All products are issued by Colonial First State Investments Limited. Product Disclosure Statements (PDSs) describing the products are available from Colonial First State. The relevant PDS should be considered before making a decision about any product. Stocks referred to in this presentation are not a recommendation of any securities.
The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation.
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© Colonial First State Investments Limited 2014.
Disclaimer
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
Lower threshold Cut-off limit
Current (1/07/2015)
Legislated - 1/01/2017 Current Estimated
(1/01/2017)
Single H.O $205,500 $250,000 $779,000 $547,000
Single N.H.O $354,500 $450,000 $922,000 $747,000
Couple H.O $291,500 $375,000 $1,151,500 $823,000
Couple N.H.O $440,500 $575,000 $1,298,000 $1,023,000
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 assetsAssets free thresholds increased
Assets test changes – single homeowner
$0 $95,000 $190,000 $285,000 $380,000 $475,000 $570,000 $665,000 $760,000 $855,000 $950,000-$12,000
-$10,000
-$8,000
-$6,000
-$4,000
-$2,000
$0
$2,000
Financial Assets
Reducti
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Financial assets only ie. ABPs
Assets test changes – Couple homeowner
Financial assets only ie. ABPs
$0 $175,000 $350,000 $525,000 $700,000 $875,000 $1,050,000$1,225,000$1,400,000-$16,000
-$14,000
-$12,000
-$10,000
-$8,000
-$6,000
-$4,000
-$2,000
$0
$2,000
Com
bin
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educti
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a
Strategy considerations
Adviser use only
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• 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
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 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 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%.
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
Centrelink pre-emptive actions
GiftingGifts over $10,000 per financial year (also capped at $30,000 per 5 financial year rolling period) will be:
Assets tested for 5 yearsDeemed under the income test for 5 years
Many clients may want to gift some wealth to children / grandchildren in later life
StrategyUnderstand and inform whether intended gift is affordable, then:
Gift within allowable limits, orGift more than 5 years from reaching age pension age
Outstanding loansClients approaching retirement may have:
Home mortgageInvestment property loanMargin loanUnsecured 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
StrategyUnsecured debt should be repaid firstConsider repaying mortgage before loan secured against investment property
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
ExampleCol 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: $440,373ABP: $414,533
TOTAL: $874,906
IP: $440,373IL: -$200,000ABP: $414,533
TOTAL: $674,906
Assets test result
$0 pa combined $10,324 pa combined
Assessable income
Rent: $15,413ABP: $12,263
TOTAL: $27,676
Rent: $15,413IL: -$10,000ABP: $12,263
TOTAL: $17,676
Income test result
$23,623 pa combined
$28,571 pa combined
Other Centrelink considerations
Preparing to take advantage of Work Bonus
Targeting at least some age pensionPensioner concession cardEnergy supplementPension supplement
Maximise younger spouse’s superSpouse contribution splittingCash-out re-contribute super from one spouse to another
ExamplePete (age 60):
Salary of $80,000 p.a. Super: $500,000Salary sacrificing up to CC cap
Maggie (age 52):HomemakerSuper: $20,000
Together they have: Home worth $700,000$20,000 home contentsHoliday 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
At age pension age - Pete
No spouse contribution splitting
Spouse contribution splitting
Assessable assets
Pete ABP: $184,640Maggie’s super: $563,033Other asset: $420,000
TOTAL: $604,640
Pete ABP: $35,823Maggie’s super: $711,851Other asset: $420,000
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
Retirement funding / income
Revisiting insurance arrangementsClients who do not revisit life and TPD as they age may become over-insured as they get closer to retirement:
Lower or no debtProceeds don’t need to fund an income stream for as longGreater wealth overall
StrategyRevisit insurance and reduce cover if not needed. Use income from reduced premiums to:
Make concessional contributions to super (eg, increase salary sacrifice)Pay off debtMake after tax contributions to super
Best use of a lump sumClients saving for retirement may receive a lump sum
InheritanceTermination payment when changing jobsSale proceeds when selling a property
Natural action of “getting into super ASAP” may not be best
StrategyDepending on client’s income tax position...
Keep lump sum invested outside super, andIncrease salary sacrifice to make full use of concessional cap, andUse non-super funds to meet income deficit
50 51 52 53 54 55 56 57 58 59$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
$550,000
$600,000
$650,000
$700,000
Salary sacrificeImmediate after tax contribution
Age at start of year
Su
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nc
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ExampleKim (age 50)
Wants to retire at age 60Salary $90,000No spare income available$100,000 in superReceives $250,000 inheritance
Should Kim:Make $250,000 non-concessional contribution?Keep outside super to maximise concessional cap
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.
$49,624 more
50 51 52 53 54 55 56 57 58 59$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
$550,000
$600,000
$650,000
$700,000
Salary sacrificeImmediate after tax contribution
Age at start of year
Su
pe
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ala
nc
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ExampleWhat about if only half of $250,000 inheritance retained outside super to allow for salary sacrifice?
Extra $10,752 retirement balance added
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.
$60,376 more
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 contributionContribution 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 contributionTrigger the bring forward provision to “buy” more time
Small business owners –planning for retirement
Importance of business succession planFinancial 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 businessVoluntary (eg retirement) and involuntary (eg, death) events are coveredAppropriate 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 businessUnderstand the CGT concessions that may apply on the eventual sale of the business
Meeting the basic conditions (depends on business structure)15 year exemptionActive asset reductionSmall business retirement exemption
Maximise super contributions from small business asset salesLifetime CGT capNon-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 - exampleGlenda (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 nowProperty and other assets sold for $3,800,000
Gross capital gain of $2,700,000Not eligible for 15 year exemptionGeneral 50% discount reduces gain to $1,350,000Active asset reduction (50%) further reduces gain to $625,000Retirement exemption ($500,000) reduces assessable gain to $125,000
Option 2: Hold property for 15 yearsOther business assets sold now for $1,800,000
Gross capital gain of $1,700,000Not eligible for 15 year exemptionGeneral 50% discount reduces gain to $850,000Active asset reduction further reduces gain to $425,000Retirement 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
ComparisonCGT Option 1:
Sell all assets nowOption 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
