News 07/08

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

This year we have seen some huge changes to superannuation with the introduction of Simple Super. In the last e-SuperUpdate for 2007 let's review some of those changes and provide ideas that you may like to take advantage of during 2008. You may find that sound planning earlier in the year will allow you to reap the greatest rewards.

1. Salary sacrifice to super

Salary sacrifice can provide a number of advantages for your retirement savings in a tax effective way. An effective salary sacrifice arrangement is where you forgo some or all of your salary and your employer makes an equivalent amount as a contribution to superannuation for you. The earlier you commence your salary sacrifice the greater the amount you can expect to accumulate for your retirement.

From a planning point of view this leads us to transition to retirement pensions.

2. Transition to retirement pensions

You can commence a transition to retirement pension once you reach your preservation age, currently 55. It allows you to continue to work and recieve a tax effective pension at the same time. If you commence a transition to retirement pension as an account based pension you will have a very flexible pension which is eligible for tax offsets equal to 15% of the taxed part of the pension. Of course, once you reach 60 your pension is totally tax free.

Before you commence your transition to retirement pension it is critical to make your plans early. The trend now is to look at getting larger amounts into super well before reaching 55. Employer contributions combined with salary sacrifice and an ability to make non-deductible contributions to super will grow benefits quicker.

Remembering the maximum draw down is 10% of your balance. Therefore planning your needs early is crucial.

3. Tax free pensions from age 60

One of the great benefits of Simple Super is that pensions you receive from most superannuation funds, such as self-managed superannuation funds, are tax free once you reach age 60. When combined with the advantages of salary sacrifice and transition to retirement pensions you can use many of the superannuation changes to your advantage.

4. Recontributions strategy

One way of maximising the tax free amount of your pension is to use the recontributions strategy. This comes in handy if you have non-preserved super and are under 60 and or, for estate planning purposes, if you are 60 or older and your death benefits will be paid to non-dependant adult children causing a possible tax liability of 16.5% on the taxable component.

The recontribution strategy involves withdrawing a non-preserved lump sum, which includes a taxable component, from your superannuation fund. As the name suggests you recontribute the amount you have withdrawn back to the fund as a non-deductible contribution. The advantage is that if your pension is taxable it will result in a greater tax free amount or if your death benefit from superannuation is paid to a non-dependant adult child then the payment will include a higher tax free amount. You need to ensure that any amount recontributed to superannuation does not exceed the contribution caps for non-deductible contributions.

It is worthwhile to obtain planning advice to ensure you do not get caught by any hidden traps when using a recontribution strategy.

5. Pensions from 20 September 2007

From 20 September 2007 you can start an account based pension and a term allocated pension from your self-managed superannuation fund.

An account based pension requires you to draw a minimum amount each year from your account balance. There is no limit to the maximum you can recieve as an account based pension. This means that if you have retired after age 55 or reached age 65, whichever occurs first you can draw down the whole amount if you wish. However, if you commence the pension as a transition to retirement pension there is a maximum limit equal to 10% of your pension account balance. When the balance of your account based pension is exhausted your pension ceases.

A term allocated pension provides you with a pension that is planned to last for a fixed period. This can range from your life expectancy to age 100. When the calculation of your term allocated pension is made under the rules you are ableto choose a pension which is within plus or minus 10% of the calculated amount. When the balance of your term allocated pension is exhausted your pension ceases.

6. No compulsory withdrawal rules

From 10 May 2007 the superannuation rules were changed so that there is no compulsory requirement to draw down all of your superannuation savings at any time, except on your death. You can leave your superannuation savings in your fund for as long as you like or can draw it down as a lump sum or pension when you qualify. This means your retirement savings can remain in a tax concessional environment until you really need them.

7. Concessional and non-concessional contributions

The superannuation changes have meant that there is no limit to the amount of tax deductible (concessional) or non-deductible (non-concessional) contributions that can be made to superannuation. However, there is a limit placed on the amount of contributions that are taxed at concessional rates in the fund.

Where a person is under age 50, the first $50,000 of the concessional contribution is taxed at 15% in the superannuation fund. For anyone 50 or older the amount is $100,000. If concessional contributions greater than the cap are made then any excess is taxed at penalty rates.

If non-deductible contributions are made to the fund then the first $150,000 is tax free in the fund. However, for anyone who is under age 65 non-deductible contributions of $450,000 can be made to the fund tax free over a three year set period.

8. Co-contributions

Co-contributions are a great idea for any employee or self-employed person who qualifies and earns a total income of less than $58,980, including reportable fringe benefits. To be eligible you must earn at least 10% of your income from employment as an employee and/or self-employment. If you earn less than 10% of your income from employment and/or self-employment you will not qualify for the co-contribution. For example, you would not qualify if you earn nearly all of your income from investments or as a pension.

The compounding effect of earnings can mean that if you qualify for the maximum co-contribution when you are age 20 then by the time you are age 60 it may accumulate to about $37,500. This assumes the net return on your investment is 7% p.a.

The earlier you take advantage of the co-contribution the greater the amount you may have in retirement because of the effect of compound interest.

9. Binding death benefit nominations

A binding death benefit nomination is an important document as it allows you to direct all or part of your superannuation benefit to one or more of your dependants or your estate. You are able to have a lapsing or non-lapsing binding death benefit nomination which provides a number of advantages.

10. Commonwealth Seniors Health Care Card

One of the greatest surprises from the simpler super changes is that you may qualify for a Commonwealth Seniors Health Care Card and be receiving an income which is in excess of the relevant thresholds of $50,000 for a single person and $80,000 for a couple. The reason is that the Health Care Card is determined by the taxable income of you or your partner and not the amount you receive. Because the pension you receive from your self-managed superannuation fund is tax free once you reach age 60 it is not included in your taxable income.

11. Segregated and Unsegregated Pension Assets

When you start a pension in a superannuation fund the income and capital gains on investments that support a pension are tax free. There are two methods that can be used to calculate the amount of the fund's tax free income and capital gains. The methods are the unsegregated, or pooled method, and segregated pension assets method. The unsegregated method requires an actuary to calculate the tax free component of the fund's income. The segregated method requires the investments that support pensions paid from the fund or member's balances in accumulation phase to be clearly identified. The fund's accountant can then calculate the income and capital gains on the investments that are tax free and taxable.

Each method has its own advantages. For tax purposes the segregated pension asset method can provide benefits where there are large capital gains on investments which support the pension. If the segregated pension method is used then there is usually no need to obtain the actuarial certificate but the fund administration is usually more expensive than the unsegregated pension asset method. If the unsegregated method is used then it is usual the administration of the fund is simpler and therefore may be less costly then the segregated pension asset method. However, as an actuarial certificate is required there is an additional cost involved.

Don't forget that it is worthwhile to seek the help of a professional to ensure that you are maximising the advantages available under these new rules.