News 05/06

Super Concepts e-SuperUpdate provides you with technical tips and updates on Self Managed Superannuation Fund topics of interest.

During the past year the government has made a number of significant changes to the superannuation rules. Many of these changes are able to assist you in building wealth for a person's retirement. During 2005 some of the changes that took place were:

• introduction of transition to retirement pensions;
• abolition of the superannuation surcharge for high income earners;
• a reinvigoration of the use of salary sacrifice to superannuation;
• superannuation contributions splitting;
• choice of superannuation fund; and
• changes to market linked income stream and allocated pensions.

Individual strategies introduced by these changes can be very useful for building wealth in retirement. However, a combination of these strategies can result in a significant increase in the amount a person has during their retirement.

To illustrate the benefits available due to these changes we will provide you with a series of e-SuperUpdates to show you the benefits available. In this e-SuperUpdate we will introduce our two characters, Fred and Wilma, and their Self Managed Superannuation Fund, The Stonyrock Superannuation Fund, to take you through the various strategies. In this edition we discuss the advantages of transition to retirement pensions.

In future editions we will cover the use of salary sacrifice now that the superannuation contributions surcharge has been abolished, superannuation contributions splitting and the changes to market linked income streams and allocated pensions.

Let’s introduce our characters for the next few months, Fred, Wilma and The Stonyrock Superannuation Fund. Here’s their details:

Fred (age 57)

• Receives salary of $60,000 from his own manufacturing company
• Tax on salary (excl. Medicare) $13,860
• Value of superannuation fund $600,000

Wilma (age 53)

• Receives salary of $65,000 p.a.
• Tax on salary (excl. Medicare) $ 15,600
• Value of superannuation fund $170,000

Transition to Retirement Pensions

From 1 July 2005 once a person reaches their preservation age they are able to commence a non-commutable income stream even though they haven’t retired from work. Preservation age is 55 for those born before 1 July 1960, however, it can be up to age 60 for those born on or after 1 July 1964.

A self managed superannuation fund is able to pay a non-commutable allocated pension or a non-commutable market linked income stream for a member who is age 55 and over.

The only difference between an allocated pension and a non-commutable allocated pension is that the non-commutable pension is unable to be commuted (converted to a lump sum) and drawn out of the superannuation fund until the person retires, dies or is permanently disabled. These are referred to as ‘conditions of release’. If someone commences a non-commutable allocated pension they are able to stop the pension and return it to accumulation phase if they wish or reduce the amount of pension they receive or they may wish to roll it over to a new income stream. However, they will not be able to draw a lump sum until they meet a condition of release.

The rules for a non-commutable market linked income stream mean that during the first six months of its commencement a person is unable to commute the pension and draw it as a lump sum from the fund. Once a non-commutable market linked income stream has been going for longer than six months it is unable to be commuted to a lump sum in any case and drawn out of the fund, except on the death of the pensioner.

Let’s now look at Fred’s circumstances. Fred is over 55 and therefore he can commence a non-commutable pension if he wishes. The amount of pension he can receive is calculated in just the same way as if he had retired at age 57.

Fred's Transition to Retirement Strategy

Benefits

• Fred reduces his working hours, better quality of life
• the tax Fred pays on the income received is reduced by $4,500
• Fred has more to live on after tax and yet receives the same income as he did before the commencement of the non-commutable allocated pension
• The income and capital gains in Fred’s self managed superannuation fund on the investments used to provide the pension are tax free.

In this edition of e-SuperUpdate we have seen how Fred is able to reduce the hours he works and commence a non-commutable pension to top up the income he receives as part of a transition to retirement strategy.

In the next edition we will look at benefits of salary sacrifice now that the superannuation contributions surcharge has been abolished from 1 July 2005.