Analysis Retirement and Superannuation - Example

Superannuation Name Institution Superannuation Superannuation is a means of saving for retirement. The saving in form of superannuation is protected from high tax rates compared to those in normal saving accounts. Depending on the amount, some superannuation accounts are protected from excess fees. Funds in superannuation account have insurance cover and the premiums are paid as one access the savings. Either the employer or personal contributions pay savings (Super guide, 2012). Managing ones income when working and contributing to superannuation funds is important in preparation for retirement. This paper analyses scenarios of two persons and discusses the best options available when making superannuation decisions. Options of non-concessional and concessional investments, investing in business property and taking part time jobs are addressed. Below is an evaluation of Sue’s and John’s scenarios of superannuation savings. Sue From the information provided, Sue will be 50 in April 2012, she was born in April 1962 hence her preservation age is 57. Preservation age is the age at which one may access the superannuation savings. She has made a salary sacrifice contribution of $26 000 and a contribution of $ 160000 from sales of jewellery. Both of the contributions are liable to taxation at 15%, therefore the contribution from the sacrifice and jewellery is 158 100. She is employed with a gross salary of 46,000. However, this job is temporally as she is arranging for her succession and working below 30 hours a week. According to superannuation laws, an employer is liable to pay superannuation but there is an exception if the employee is working for 30 hours or less per week. Taking nine as a days working hours, she works for about 27 hours a week. The employer is therefore not liable to paying superannuation for her. Before retirement, she can invest her salary in superannuation and convert superannuation to cover for her salary. This would increase benefits before retirement and reduce taxes liable to her. From the figures given, Sue has a annual income of over300, 000. Since this exceeds the limit for non-concessional income for one year, she can contribute 300,000 to cover for two years. This means that other contributions will be made in 2014. At this point, she will have retired with a potential income of about 65,000, assuming she does not take up other work. With this amount, she can then shift from non-concessional to concessional contribution. The amount exceeds the maximum possible without taxation. The extra 15,000 can be contributed through John who after retirement does not have another source of income except rent. Assuming he contributes it to superannuation, then the total amount he would contribute is 20000, which does not exceed threshold for concessional contribution. John John is aged 67 and retired. From his age, he was born in 1945. Therefore, his preservation age is due. It is 55 years. He therefore can access superannuation fund. However, contributing for superannuation from the part time job is dependent on whether he satisfies a work test (supper guide 2012). He intends to invest one million dollars in a motel. Supper funds allow him to invest in the motel but the investment would not be regarded, as a family house hence could not be mortgaged. Investing in a motel alone is a viable investment as he will be self- employed. Therefore, he would continue contributing to superannuation. While self-employed, he enjoys the benefits of claiming tax deductions of up to $ 25,000 per year. These claims are made until the age of 75. To enjoy these claims, he must provide a tax file number (TFN) to the government. Since he is the trustee for these funds, it is possible to make the investment. He will be liable for all record keeping and management of the motel. Acquiring property from relatives is prohibitive if not listed in shares. When using superannuation funds to acquire property from relatives, membership should be less than five. Additionally, only 40% of the superannuation is used in this investment. 40% of 1.5 million is 600,000 (Kemp, 2001). This amount is not enough to buy the motel if his uncle owns it. Such investments are possible if the trustee has more than $200000. John retired in July 2011 and has not been doing any more work after that. He does not pass a work test. Superannuation contribution is allowed for retirees who were working for two years after retirement, working for 10 hours a day (FAA, 2012). He however can pass the work test by taking up the part time job he has been offered. To contribute to super, he needs to work for a consecutive of 40 hours for 30 days in the financial year of contribution (CPA Australia, 2010). At retirement John was given $ 55,000. He can roll over this amount to superannuation. Prior to retirement, he had a contribution of 2,500 in superannuation. However, he must pass a work test before the amount is rolled over. To pass this test, John has two options. He either takes the given job and works continuously for several months or use the superannuation to open up a business and become self employed. He can jungle the two together by taking up the job, working to the required duration of 40 weeks, making contributions then leaving the work to tart off the business. Rolling over only requires him to fill an application form and authorizing it. The investment is not an in house investment. In house investments exclude investments from a pooled superannuation fund and depost in financial institutions. The investment is from a pooled source because both John and Sue have shares in it (Kemp, 2001). Possible Actions Retirement in Australia means ceasing full time work. Many retirees below the age of 65 still involve in part timework. Sue, at 50 can therefore engage in part timework and continue contributing to the superannuation. However, this situation does not apply for John unless he satisfies a work test, which he does not. Since John does not pass a work test and cannot take up a part time job to contribute to superannuation, he has to make a long-term investment to accumulate wealth. Sue however can contribute for John because she is under the age of 65 as long as she is a taxpayer (FAA, 2012). After retirement, Sue should not claim superannuation funds. If John invests in the motel, funds gained from the motel can be used by Sue to continue contributing to the superannuation. This is because the law allows superannuation contributions from self-employed people who have not claimed superannuation. In addition, it allows a spouse to contribute superannuation for the partner so long as he or she is a taxpayer (FAA, 2012). Another strategy is investing in tax and social security concessions that allow investments in an income stream. Income stream is money received regularly from an investment. Fulfilling income streams draw social security assets test freedom and tax indulgence. The income stream offer an orderly draw down capital over a lifetime or life expectancy. The investor abstains from accessing the capital in exchange of the income stream (Australia’s demographic challenges, 2004). A second option is allocated income stream. This allows a client to select annual income within a specified range. Commuting income streams is also possible at any time (Australia’s demographic challenges, 2004). Since both of them are in the age bracket of 50- 75, the maximum contribution per annum is $50,000. Contributions above this are taxable. In addition, just before retiring, Sue could direct her salary to superannuation and replace the salary with super income. Doing this would make her enjoy the benefits of tax concessions. Doing this would increase the net income, reduce taxes and increase retirement benefits. Before Sue retires, John may contribute to super through her. This saves on tax as she enjoys a tax rebate. Assuming that John opens the business and Sue retires, from the age brackets, Sue can contribute to superannuation up to $ 450,000 from self-employment as long as there is a TFN while John can contribute up to $ 150 000 with conditions of TFN and work test. Contributing through the younger spouse may save a lot on taxable amounts. However, it is still possible to pay three years in advance for John but this should be done with expertise consultation. Investing in an advisory professional may be expensive but worth. Making plans is difficult when one does not have all-important information. Therefore, the two may invest in an advisory before making solid decisions in the type of investment to engage in. the Having made a decision to retire early, Sue has a variety of options for future investments. She may invest in annuities. Throughout retirement, annuities are identified with the source of money used to purchase them hence are treated differently. Those bought using savings and superannuation benefits are treated as bought using after-tax money throughout. A portion of the annuities may be invested in a bank account that is attracting interest and possible to make withdrawals annually. Such an account is assumed to expire at the age of 80. Interest calculation is made against the number of years remaining of one to get to 80. Making a decision to invest $1 million in a motel is a sure decision. If this investment is leased, it is liable to entitlement exemption of it and its entities. This is because the superannuation has less than five members (Kemp, 2001). Contributing to superannuation can be done before (concessional) or after (non-concessional) taxation. Limit contribution for the former is 50,000 for those over 50 years while for the latter the limit is 150,000. From the figures provided, after retirement, Sue will have income from rent, investment from shares and income from marginal loans. Assuming a constant income all year round, the total income is 65,000. This exceeds concessional limit. On the other hand, assuming there is no other income source for John; his income is only from rent, 5000. Sue could make the maximum non-taxable contribution of 50000 and contribute the rest through John. That way, none of them would be taxed (Power, 2011). Since Sue will be unemployed after retirement, she can use the concessional contribution and claim a tax deduction. Should however have a file tax number failure to which the contribution is liable to an additional 31.5% tax, which would be pointless to invest (Power, 2011). Another strategy used is enrolling in a transition to retirement pension (TRIP). The benefits of this are that at the age of 60 and above, one receives a tax-free pension payment. If under 60, one receives a concessional taxed pension. However, due to the cut concessional cap from 100000 to 50000, using this strategy requires a mixture of pension income and business income to effectively exempt unnecessary taxation (Power, 2011). Superannuation funds can be used to acquire business property by either buying or leasing it. However, this purchase is dependent on an agreement between both trustees. John therefore cannot just take up the money to buy the motel without consulting Sue. In cases where property is leased, a change in national policies does not affect the lease until the lease period in over. It is important then to make wise decisions when acquiring property-using superannuation (Kemp, 2001). Leasing is the least option one may go for. Where necessary, these funds can also be used to borrow. After opening the business, John is liable to pay superannuation for his employees, whether casuals or permanent according to the law of superannuation (Kemp, 2001). Superannuation is one of the best saving options for retirement. There are benefits attached to it that are not available with other saving options. Tax reductions for example enables people to save more compared to using normal saving accounts. In addition, the system presents benefits of selecting the saving system depending on the amounts being saved and the terms and conditions underlying the options. The government sets up terms and conditions for superannuation. For example, limit saving amounts per age bracket, the age at which superannuation is offered and the interest rates. In addition, superannuation can be used for investment purposes when one has reached the optimal age for getting the benefits. It is used for in house and other kinds of investments, which enable one to continue contributing to it. It limits the options from where property is acquired. For example, property for purchase cannot be obtained from relatives or members of the scheme. That is why it would not be possible to buy the motel from John’s uncle. Besides investment, one can take up pat time jobs after retirement to continue contributing to superannuation. Working in these jobs makes one pass the work test. It’s only after passing these test are retirees allowed to continue contributing to superannuation. There is a lot of options underlying superannuation as an investment and possible options for maximal gain. Making an optimum decision may not be easy and consulting experts may be better options. In addition, understanding the law enables one to make the right choices. References Supper guide (2012), Working in retirement retrieved on 8/5/2012 from http://www.superguide.com.au/superannuation-topics/working-in-retirement Financial advisors Australia FAA (2012), Superannuation Rules retrieved on 8/2012 from http://www.faa.net.au/superannuation_rules.html Australia’s demographic challenges, (2004) A More Flexible and Adaptable Retirement Income System retrieved on 8/5/2012 from http://demographics.treasury.gov.au/content/_download/flexible_retirement_income_system/HTML/retirement-02.asp CPA Australia (2010) Superannuation Guide: 2010 – 2011CPA Australia Ltd Certainty financial (2007)Super Contribution Rules - Who can contribute? Retrieved on 8/5/2012 from http://www.certainty.com.au/pdfs/Super%20Contribution%20Rules-%20who%20can%20contribute.pdf Kemp Rod (2001) New Superannuation Investment Rule the treasury, Australian government. Power Trish (2011), Super concessional contributions: 2011/2012 survival guide supper guide, retrieved on 8/5/2012 from ttp://www.superguide.com.au/superannuation-basics/super-concessional-contributions-201112-survival-guide Read More