Retirement Planning and Superannuation Notes PDF

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ACCUMULATING SUPERANNUATION Superannuation – Australia’s official pension and retirement scheme • Superannuation is a tax-effective structure that has been established to allow for a person to save and invest during a working life in order to accumulate funds for retirement • Regulated by the govern...

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ACC ACCUM UM UMULAT ULAT ULATING ING SUPE SUPERA RA RANNUAT NNUAT NNUATION ION Superannuation – Australia’s official pension and retirement scheme • Superannuation is a tax-effective structure that has been established to allow for a person to save and invest during a working life in order to accumulate funds for retirement • Regulated by the government but funds are largely held within private superannuation funds • Australia’s compulsory system of superannuation aims to ensure more people can have a comfortable retirement and, as the population ages, take the pressure off the government-funded age pension • The superannuation system provides a great deal of member choice in terms of the super fund they wish to invest into and the type of investments undertaken • Involves mandatory superannuation guarantees scheme by employers on behalf of employees Superannuation Guarantee Scheme (SGS) • Current rate = 9.5% • In some cases, more is paid o University pays 14% employer superannuation contribution of salary o University pays 3% award contribution • Company specific policies (rare) o To improve gender gap, a handful of companies pay 12% during paternal leave and for 5 years of part-time employment upon return The current system: • The current superannuation system in Australia is very complex and the average person has little understand or engagement: o Complex rules o Complex products o Lack of financial literacy by members o Wide choice Where is SGS accumulation likely to get you? • Expected accumulated value (EAV) provides a ballpark figure making certain assumptions: EAV = SS x CP x (1-t) x (1+r)n-(1+g)n x r r-g r(p) (p) 1/p note that: r = p[(1+r) -1] • SS = starting salary • CR = contribution rate or contribution proportion (CP), i.e. proportion of annual gross salary contributed to fund • tc = tax on contributions • r = expected net annual compound earning rate of the fund o note that implicit in r is tax on fund earnings and realised capital gains, as well as management fees

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g = expected annual compound rate of salary growth p = number of times per year the fund adds contribution to the fund n = the number of years of accumulation

Step 1: know what superannuation is about • No SGS payable where: o Earnings < $450 a month o Part-time employees under 18 years (working < 30 hrs/week) • ‘Concessional’ means favourable tax treatment (15% contributions tax, 15% earnings tax and 10% capital gains tax) • Employers can claim a tax deduction for superannuation contributions made or employees as they are deferred income payments • Regulators (APRA, ATO, ASIC) and Legislation (Superannuation industry (supervision) Act 1993 (SISA), Tax and Corporations Acts Preservation: • Funds must have a trust deed, trustees have fiduciary responsibilities and fund must meet the ‘sole purpose’ test • Contributions preserved until condition of release is met DATE OF BIRTH PRESERVATION AGE Before 1 July 1960 55 1 July 1960 – 30 June 1961 56 1 July 1961 – 30 June 1962 57 1 July 1962 – 30 June 1963 58 1 July 1963 – 30 June 1964 59 After 30 June 1964 60 Exceptions: • Permanent incapacity, permanent departure from Australia (non-resident) • Severe financial hardship o E.g. received income continuously for 26 weeks, unable to meet reasonable family expenses, max $10,000 • Compassionate grounds o E.g. life threatening illness, preventing foreclosure Step 2: choose/be assigned to a fund type • Australian superannuation industry (over $2 trillion) • Institutional funds (APRA regulated) approx. 242 funds Fund types: • Retail superannuation funds e.g. AXA or AMP which anyone can be a member of (e.g. public offer) • Industry superannuation funds where membership was traditionally restricted to employees who are in a certain industry (HESTA, CARE) but most are public offer these days • Corporate superannuation funds where membership is restricted to employees of a particular employee (BHP, ANZ) and sometimes their spouses (non-public offer)

Public sector funds where membership is restricted to public servants (non-public offer) Apart from membership how else do funds differ? • Performance • Fees • Governance structures •

Step 3: be assigned to a plan type • Defined benefit plan (not very common in Aus. These days, but still very popular elsewhere around the world) o At retirement, you get a payout which depends on: ▪ Period contributed to pension und and terminating income. If you die, reduced pension is generally transferred to partner o Smoothed income stream over your entire life (salary for work + pension once retired) • Defined contribution plan (most common in Aus.) o Contributor takes on the investment risk and has choice of investment asset allocation o At retirement, you get a payout which depends on ▪ Level of contributions, duration and the performance of the funds ▪ No guaranteed series of pension payments on retirement, unlike with defined benefit Step 4: choose an investment option • Based on your risk tolerance (conservative, balanced, growth, high growth) MySuper • The cooper review recommended that superannuation should be made a lot simpler and cheaper for the average member • MySuper is predicated on providing members with a simple cost-effective and diversified superannuation product • The vast majority of Australian workers have no engagement with their superannuation and don’t need expensive choice options: o Majority of workers leave it up to their employer to select a superannuation fund and investment option on their behalf o This is generally called a ‘default option; Adviser’s duty (RG84): • When switching there may be charges incurred by the client • The following must be made clear (e.g. disclosed in an SOA): o Any and all pecuniary benefits the client will lose by following switching advice, and o Any other likely significant consequences for your client if they follow your advice (e.g. will they lose their insurance coverage?) Step 5: know how to contribute to your superfund (and how you will be taxed) • Types of contributions o Concessional contributions (aka ‘before tax’) ▪ Compulsory employer under SGS

▪ Voluntary employer – salary sacrifice o Non-concessional contributions (voluntary – after tax) ▪ After-tax contributions ▪ Personal deductible contributions for self employed ▪ Government co-contribution ▪ Spouse Acceptance of contribution types AGE of member FUND MAY ACCEPT CONTRIBUTIONS THAT ARE: Under 65 Made by or on behalf of member at any time 65 to 69 Mandated contributions; or made by or on behalf of the members provided member meets work test 70 to 74 Mandated contributions; or made by the member or voluntary employer contributions (including salary sacrifice) provided member meets the work test and contributions are received within 28 days of the end of the month in which the member reaches age 75 75 and over Mandated contributions Work test to be eligible to make contributions to your super, if you are aged 65 to 74, you must have worked for at least 40 hours over 30 consecutive days in the financial year you wish to make a contribution

Concessional contributions • If under 50 years, the contribution limit (cap) is $25,000 p.a. as of 1 July 2017 • If turning 50 years old or older in 2016-17, contribution limit (cap) is $25,000 p.a.as of 1 July 2017 • From july 2018 onwards, if you fail to use your annual concessional contributions cap of $25,000 pa, then you can carry forward the unused portion for up to 5 years, but only if your TOTAL superannuation balance is less than $500,000 • Once in your fund concessional contributions are taxed 15% Contributions tax • Once in your fund, concessional contributions are taxed at 15% o Which means making such contributions is only tax effective if you pay more than 15 cents in the dollar tax on your personal income (the lowest marginal tax rate is now 19% plus Medicare levy) o This 15% contributions tax rate applies for those with income a certain threshold, the division 293 tax applies • The purpose: o The average income earner’s marginal tax income tax rate is 32.5% (excluding the Medicare levy) o Superannuation contributions are taxed at 15% o Effectively, a 17.5% tax concession

o By contrast, very high income earners pay 45% tax on income over $180,000 o Effectively, a 30% tax concession o Division 293 tax reduces the higher tax concession or contributions of very high income earners Division 293 tax • An additional 15% tax on concessional contributions = ‘double contributions tax’ o From 1 July 2017, this will apply for those with income >$250,000 p.a. o Div 293 tax can be paid out of pocket or from super fund o Tax rate is 15% tax payable on the lesser of excess over threshold or concessional contributions Excess contributions tax • There is no limit to the amount of concessional contributions that can be made to a fund; however, there are consequences • Excess concessional contributions are taxed at: o Your MTR + shortfall interest charge (AKA ‘excess concessional contributions charge’) (=90 day bank accepted bill + 3%) o If you are already on the top marginal tax rate, then only an interest charge applies o Excess contributions are eligible for a 15% tax offset, to allow for the 15% contributions tax already paid • You can have your excess contribution refunded to you up to 85% which takes into account the concessional contribution to the fund • Or you can leave it in the fund and pay the extra tax out of your pocket • If left inside the fund, excess concessional contributions count towards the nonconcessional cap .Excess contributions tax: • There is no limit to the amount of concessional contributions that can be made to a fund; however, there are consequences. • Excess concessional contributions are taxed at: o Your marginal tax rate + shortfall interest charge(aka ‘excess concessional contributions charge’) (= 90 day bank accepted bill + 3%) o If you are already on the top marginal tax rate, then only an interest charge applies o Excess contributions are eligible for a 15% tax offset, to allow for the 15% tax offset, to allow for the 15% contributions tax already paid • You can have your excess contribution refunded to you up to 85% which takes into account the concessional contribution to the fund • Or you can leave it in the fund and pay the extra tax out of pocket • If left inside the fund, excess concessional contributions count towards the nonconcessional cap Salary Sacrifice;

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SS is a concessional contribution thus subject to contributions tax of 15% Payments are made by arrangement between an employee and employer BUYT the employer doesn’t have to agree to make salary sacrifice payments

Non-Concessional Contributions: • Are not subject to contributions tax (as long as you provide your TFN) since they are made with after tax dollars o From July 2017, the cap is $100,000 p.a. or $300,000 over 3 years (‘bring forward cap’) if...