Final Exam Flashcards
what is superannuation?
- tax effective structure to allow a person to save and invest while working for retirement
- regulated by government but self by private super funds
- compulsory system of super ensures people can have a comfortable retirement
what is the superannuation guarantee scheme (SGS)
- current rate 11%
- some companies pay 12% during parental leave
what are the basics of super?
- SG must be paid regardless of pay
- employees under 18yrs must be paid if they work > 30 hours a week
- concessional means favourable tax treatment (15% tax)
- Employers can claim a tax deduction for superannuation contributions
made for employees as they are deferred income payments
what is the ASFA retirement standard?
The ASFA Retirement Standard benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in the post-work years. It is updated quarterly to reflect inflation and provides detailed budgets of what singles and couples would need to spend to support their chosen lifestyle
what are the conditions of release for retirement funds?
- reaching preservation age and retiring
- reaching preservation age and beginning a transition-to-retirement income
stream - ceasing an employment arrangement on or after the age of 60
- reaching 65 years of age (even if not retired)
- Compassionate grounds (e.g. terminal illness, permanent incapacity etc.)
- Death
what are preserved benefits to super?
- Any contributions to your superannuation and investment performance since 30 June 1999, are preserved benefits.
- Including member contributions, spouse contributions, the co- contribution, low-income superannuation contribution, plus any investment earnings on those contributions.
- Preserved benefits may be cashed voluntarily only if a condition of release is met.
what are restricted non-preserved benefits of super?
- benefits not defined by preserved benefits and cannot be received until condition of release is met.
- benefits from employment related contributions before 1 July 1999.
- If you do not have any superannuation which is restricted non-preserved now, then you will never have any. The amount of your restricted non-preserved benefit can either stay the same or decrease, but it cannot increase.
what is unrestricted non-preserved benefits?
- benefits which are not required to be preserved because a condition of release has taken place. There are no restrictions on a member receiving an unrestricted non-preserved benefit from a fund, irrespective of his or her age.
- If you meet a condition of release, then your preserved benefits and restricted non-preserved benefits become unrestricted non-preserved benefits.
what are taxable component types for super funds?
- Taxed element includes amounts where a fund has paid 15% tax on the contributions or earnings. Concessional rates of tax will apply to benefits containing a taxed component.
- Untaxed element includes amounts where a fund has not paid any tax on the contributions or earnings. Untaxed super funds are generally run by Commonwealth, State or Territory government departments, and are generally either public sector super schemes or constitutionally protected funds.
what is the tax free component of super funds?
These are most commonly member contributions where a tax deduction has not been claimed by the member (e.g. non-concessional (after-tax) contributions).
what are the factors affecting tax on super withdrawal?
- your preservation age
- the age you will be when you get the payment
- whether the money in your super account is tax-free or taxable
- whether you will get the payment as an income stream or lump sum.
You don’t pay tax on the tax-free component of your super when you withdraw it regardless of your age or the way you withdraw it.
f all assessable income is known, calculate actual tax payable. If all assessable income is not known, state which rules apply.
what is the tax payable if you are under preservation age?
- taxable component: taxed element, withdrawal: income stream.
- tax payable: marginal tax rate. However, if you receive the income stream as a disability super benefit, you are entitled to a tax offset of 15% on the taxed element. - taxable component: taxed element. withdrawal: lump sum.
- tax payable: Your marginal tax rate or 22%, whichever is lower - taxable component: untaxed element. withdrawal income streams.
- tax payable: your marginal tax rate - taxable component: untaxed element. withdrawals: lump sum.
- tax payable: Your marginal tax rate or 32%, whichever is lower – unless the lump sum is more than the untaxed plan cap
what is the untaxed plan cap amount?
- The untaxed plan cap amount is the maximum amount of the untaxed element subject to concessional tax rates.
- Amounts above the untaxed plan cap are taxed at the top marginal tax rate.
- The untaxed plan cap applies separately to each super fund you receive a super lump sum from.
The untaxed plan cap is $1.65 million in 2022–23.
what is low rate cap and 15% tax offset?
- The low rate cap is a lifetime limit on the amount of the taxable component (taxed and untaxed elements) that can be taxed at a concessional rate of tax.
- The 15% tax offset is available against assessable pension income where superannuation money is used to purchase an income stream.
what are retirement income streams?
Australians have traditionally preferred to receive lump sums rather than income streams in the past because savings in super funds were quite low.
the features of income streams that can be commenced include:
- Payable for a fixed term or life
- Indexed in line with CPI or other such measure
- Reversionary pensions, where on the death of a member, the pension is paid to a
spouse, child or other dependent.
what is pensions - RIS?
– income payments made by superannuation funds
– basis for payment is defined in the super fund’s trust deed and depends on the member’s eligibility
types: account based pension and market linked pensions
what is annuities - IRS?
– income payments made by life insurance companies
– payments arise from a specific personalised contract between a life company and the policy owner
– Can be purchased with superannuation funds or ordinary money
types: lifetime income stream and fixed term income stream
what are account based income streams?
- amount paid from account based in come stream is calculated using members account balance
- balance fluctuates with market fluctuation s
- the member selects the investment option
- income continues as account balance remains
- account based pension covers account based and market linked pensions
- can only be acquired with funds from superannuation.
- income payments can be varied each year depending on needs, full access to capital anytime, no loss of capital upon death unless transferred.
what are fixed term annuities?
- pays an income stream for a set period of time
- term of pension is set
- terms of payment of income and repayment determined at the start
- term generaly 1- 25 years.
- Some or all of the original capital can be returned at the end of the contract as a ‘residual capital value’ (RCV option is not typically available for annuities purchased with superannuation money)
what is the income, flexibility and risk management aspect of account based pensions?
income:
- Difficult for retirees to decide how much to withdraw
- Payments cease when balance is exhausted
flexibility: - Complete flexibility of withdrawals (subject to statutory minimum)
- Residual balance at death available to bequests
risk management:
- Individual exposed to longevity, inflation and investment risks
what is the income, flexibility and risk management aspect of annuities?
income:
- Payments continue for fixed term or life
- Purchase price includes margins for servicing capital
flexibility:
- Non-commutable
- Generally no residual balance at death
risk management:
- Provides complete longevity risk protection
- Indexed annuities also provide inflation risk protection
what are the features of annuities?
i. periodic payments at regular intervals (e.g. ordinary annuities pay in arrears and an annuity due pays in advance of the interval)
ii. the effective rate of interest, i, per payment interval remains fixed over the annuity term
iii. the term is a fixed number, n, of regular intervals
what is the mean variance efficient strategy?
- Risk tolerant retirees would invest their entire lump sum in risky assets and take income by drawdown.
- Risk averse retirees would use the entire lump sum to purchase a fixed term annuity
MVE does a bit of both:
The lump sum is split into an income component and an investment component. Retirees get the stability of retirement income and exposure to high expected long-term returns from growth assets
what parts is the MVE split into?
– One part is used to purchase a guaranteed term certain annuity (of between 9-14 years) indexed at 3% p.a. each year and payable monthly.
– The other part is invested in the share market, specifically an index fund over the guaranteed income years.
– The split is designed so that the original capital used to purchase the income can be expected to be replaced (in real terms) at the end of the term certain annuity.
what should be considered for choosing RIS options?
- Risk tolerance
- Life expectancy
- Health
- Goals and objectives
- Estate planning requirements
- Current rules regarding drawdowns
- Product market / rates of returns
what are the types of transition to retirement strategies?
- Accessing extra income before fully retiring
- Reducing working hours but maintaining the same income
- Boosting super contributions and drawing income
what are the conditions for transition to retirement strategies?
– You must have reached your preservation age:
– You must take between a minimum of 2% and a maximum of 10%
of your balance each year
– The pension is “non-commutable” (cannot be taken as a lump sum)
what is the aim of the social security system?
- The government outlays around one-third of its expenditure towards social security and welfare.
- The overall aim is to provide a background of fairness and opportunity for all Australians.
–Provide child support services
– Provide financial assistance to those who cannot
sufficiently provide for themselves.
– Provide income and subsidised assistance to retired
persons.
The aim of government social security is to provide a minimum standard of living for all Australians.
what is financial planners responsibility for social security planning?
– Ensure the client is aware of all benefits available to them and their family.
– Consider social security strategies that can improve a client’s overall income and long term asset position.
– Consider the ancillary (extra) benefits that are provided to social security recipients. (slide 14)
– Consider the direction of policy. What might gov’t do?
what are objectives of government due to ageing population?
Encourage retirees to be self reliant in terms of their income needs
Helping to support retirees and the aged that have limited or
insufficient funds by providing a government aged pension
Helping the aged to stay at home for as long as possible with various support mechanisms
how does indexation for age pensions work
- indexed twice yearly
- The Age Pension rate is calculated on the basis of rises in the Consumer Price Index (CPI), the Pensioner and Beneficiary Living Cost Index (PBLCI) and the average income of wage and salary earners measured by Male Total Average Weekly Earnings (MTAWE)
- whichever is highest
what are some allowances for the elderly?
- veterans/war widows
- partner allowance for older partners
- aged car
- health care
- support services
- commonwealth carer respite
- pensioner concession card.
- commonwealth seniors health card
what is the eligibility for age pensions?
- reached your pension age pension
- australian resident of at least 10 years
- income and assets tests met
- amount age pension received is based on the test that delivers lowest amount
what is the pension supplement?
- assist with household bills and everyday expenses
- made fortnightly with regular pension payment
what is energy supplement?
- ongoing payment to help eligible households with any impact from the carbon price on everyday expenses
The Energy Supplement is not available to new Age Pensioners from 2018, although existing Age Pensioners as at 19 September 2016, will continue to receive the Energy Supplement.
what are examples of assessable assets?
- Household contents and personal effects
- Motor vehicles, boats and caravans
- Collections, such as stamps or coins or antiques
- Financial investments, including cash, term deposits, shares
- Superannuation assets after age pension age
- Investment property
- Business assets
- Surrender value of life insurance policies
what are examples of non assessable assets?
- Your principal home and generally up to 2 hectares of privately used, surrounding land on the same title
- All Australian superannuation and rollover investments not in the drawn down phase in an approved fund until you reach age pension age
- A cemetery plot and either a prepaid funeral or up to two funeral bonds that cost no more than the allowable limit which is currently $12,500
- Aids for people with disability
- Monies received from the National Disability Insurance Scheme to provide for the needs of people with disability
what’re the gifting rules with assets test?
- social security act is designed to prevent pensioners gifting away large sums of money so as to qualify for an age pension entitlement.
- gifting rules apply to an assets you give away 5 years before receiving pension
- Following the gifting rules means not gifting more than the allowable gifting amount in a financial year, which is $10,000 (annual limit) or $30,000 (five- year limit) over a rolling 5-year period. These rules apply for singles and couples.
- If you exceed these amounts, then the excess gifted amount will be subject to deeming (the amount of income that will be used under the income test to determine eligibility)
- It is important to note that the gifting rules apply to any gifts made in the 5 years before receiving the Age Pension
how can transferring assets to younger spouses super useful?
The benefits of ‘super splitting’ can be powerful around retirement, especially if one partner is still a few years off reaching Age Pension age.
* Super is generally ‘sheltered’ from Centrelink assessment during the accumulation phase until you hit Age Pension age. This may let a couple take advantage of the younger spouse’s ‘sheltered’ status if they haven’t yet hit Age Pension age.
* Using the ‘bring forward provisions’ could help your clients move up to $300,000 into their younger spouse’s super account. Putting $300,000 from the assessable environment into a younger spouse’s exempt super account could increase the older spouse’s Age Pension by up to $11,700 per year under the assets test until the younger spouse reaches Age Pension age.
how can renovating family home reduce assessable assets and increase age pension entitlements?
- renovating brings forward the cost to enjoy renovations sooner and get some age pension.
- cost of Reno is taken off assessable assets value.
- boost combined age pension, increased value home and reduced yearly electricity and water bills
what are examples of assessable income?
- deemed income from financial investments,
- gross employment income,
- income from sole trader or partnership businesses
- distributions or dividends from private trusts and private companies
- real estate income
- reportable superannuation contributions
- income from outside Australia
- some lump sumps
- some indigenous income Australians
- paid parental leave scheme payments
for deemed income, what do financial investments include?
- savings accounts and term deposits
- managed investments, loans and debentures
- listed shares and securities
- account-based income streams from 1 January 2015
- gifts
for deemed income, financial investments do not include?
- your home or its contents
- cars, boats and caravans
- antiques, stamp or coin collections.
