Superannuation and Retirement Planning - Assignment Example

Assignment Superannuation and Retirement Planning: The Importance of Retirement Planning Introduction Michael and Karen are an ageing couple that has been planning so well for their retirement, according to the requirements and recommendations of the Australian government. They have joined the Superannuation and Retirement Planning system that has helped them plan adequately for their retirement. As Michael is approaching his retirement in a month’s time, and Karen is approaching her retirement in three year’s time the couple is faced with a few decisions to make so as to enjoy a fulfilling family life in their retirement period and also to be able to assist their children and grand children accordingly. Question. 1 Options Available for Payments Received after Retirement Upon termination of his employment, Michael will have different options from which he can choose in terms of the payments he will receive. He can either choose to receive superannuation lump sums or an income stream. Under superannuation lump sums, Michael will receive an accumulated amount of money from as his retirement benefits. He will hence receive a sum of all the payments from his employer and from the superannuation at the same time after his retirement. This may enable him to set up a major project that will be allowing him to get incomes through his retirement as he can use the payments as capital for the income-generating project. If he chooses this option, Michael will have a tax-free component of 20% of the funds and the remaining will be a taxable component. Michael may also choose to undertake a pension scheme in form of an income stream. This will allow him to get payments on annual basis during his retirement. He will hence have a secure and long-term source of income hence be able to properly plan his life during his retirement. He will also be able to enjoy a large reduction on the taxes incurred on the benefits. If Michael chooses this option, he will incur a tax of 2.5% on the annual pension payments Resultant Tax Treatment of the Payment Lump Sum Option Total Lump Sum of the Personal superannuation = $135,500 Taxable component = 80% * 135,000 = $108,000 Lump sum Tax = 15% up to $1,100,000 = 15% * $108,000 = $16,200 Employment Termination Payment = $22,500 Tax = 15% * $22,500 = $ 3,375 Annual Leave = $5,400 Tax = 15% * $5,400 = $ 810 Long Service Leave = $8,600 Tax = 15% * $8,600 = $ 1,290 Total Tax = $16,200 + $ 3,375 + $ 810 + $ 1,290 If Michael opts for a lump sum payment, he will incur a tax of up to $ 21,675. Income Stream Option Total Income Stream Amount of the Personal superannuation = $135,500 Taxable component = 80% * 135,000 = $108,000 Total tax = 2.5% * 135,000 = $3,375 Employment Termination Payment = $22,500 Tax = 2.5% * $22,500 = $ 562.5 Annual Leave = $5,400 Tax = 2.5% * $5,400 = $ 135 Long Service Leave = $8,600 Tax = 2.5% * $8,600 = $ 215 Total Tax = $3,375+ $ 562.5+ $ 135 + $ 215 = $ 4,287.5 If Michael takes the Income Stream Option, he will have to incur a total tax of only $ 4,287.5. The Income Stream option may be better since its taxation is much lower, though it will be determined by his choice of lifestyle after retirement. If he intends to stay free and enjoy his old age without much working, then this is the appropriate option to take. However, if he intends to start up an income-generating project where he will continue working, then he would better take the Lump Sum option and use the payments as capital for his project. Question 2 Total Capital to be Accumulated The coupler will need to accumulate a lot of capital before retirement of both of them. This is because they have set the standards for the kind of lifestyle they want to have in their post-retirement period. The couple will need capital for the following expenses: Annual spending of $50,000 plus taxes New car = $30,000 Emergency = $25,000 The couple will hence require $ 75, 000 per annum plus the taxes. In the first year after retirement, they will require an extra $ 30,000 for a new car. Gaps Between The Total Capital Requirement And Current Financial Position The couple is bound to earn $ 379.64 per fortnight which accumulates to: Per fortnight combined income = $ 379.64 * 2 = $ 759.28 Therefore, from their current investments and the current superannuation arrangements, after their retirement, the couple will receive an annual income of: Annual income superannuation = $ 759.28 * (51 / 2) = $ 19, 741.28 Shares = $ 2,096.48 Bank account = $ 327.6 Cash management trust = $13, 125 Total Annual Income = $ 19, 741.28 + $ 2,096.48 + $ 327.6 + $ 4 13, 125 = $ 35, 290.36 Hence, the couple can only earn up to $ 35, 290.36 per year from their current position. There is a large gap between their requirements and their financial position: Expense Gap = Annual Spending – Annual Income = $ 75, 000 - $ 35, 290.36 = $ 39,709.64 The couple will hence be faced with a deficit of $ 39,709.64 per annum. Increasing Superannuation Savings There are many ways available for the couple to increase their Superannuation Savings so that they are able to bridge the gap between their spending and their income. The couple has a few of these options which they can use to increase their earnings. The options include concessional and non-concessional contributions. For the concessional contributions, the couple can employ the Salary sacrifice contributions scheme. Here, the couple can sacrifice their salary into their Superannuation. In this aspect, Karen can sacrifice a part of her next three years salary which may be accumulated as increased benefits into their Superannuation. For the non-concessional contributions, the couple can register to a government co-contribution scheme. Here, since Karen is earning less than $61, 920, she can get a co-contribution from the government for the next three years. This may be a burden to the couple as their current income is reduced. However, it increases their benefits once they are retired and hence is a good scheme to follow. Rules and Restrictions of the Contributions The rule of the Salary sacrifice contributions is that the employers can use the amount sacrificed for their own uses but will compensate the same amount later when the employee retires. The rule of the government co-contribution scheme is that the scheme requires Karen to pay extra $ 1,000 personal non-concession contributions as part of the contributions so as to receive more contributions from the government. Advantages of the Contributions The Salary sacrifice contributions arrangement has various advantages. It increases Superannuation benefits even as it reduces the taxes incurred since Superannuation benefits are taxed lower than direct salaries. The couple can hence receive more at a lower cost. The government co-contribution scheme can be a source of extra income for the couple once they are retired. It will not be subject to the contribution tax and hence will save the couple some taxation burden. It can also be acquired tax free if taken as a lump-sum benefit. Disadvantages of the Contributions The Salary sacrifice contribution requires a sacrifice of a part of the salary from Karen and hence the couple would need more income for them to successfully transit into their new lifestyle. It also reduces their current income. The government co-contribution scheme also requires Karen to pay at least $ 1,000 so as to get more contribution from the government. This is a burden to the couple as it reduces their current income. Recommended Contribution Types It would be more beneficial if the couple subscribes for the non-concessional contribution, which may be in form of the government co-contribution scheme. Since Karen is the one in employment for a bit longer, and since she earns less than $ 61,920 and she meets all the other requirements, then she is eligible for this benefit. If the couple opts for this scheme, then they would expect more benefits at a lower tax, since the government contribution amount is non-taxable hence will reduce the tax burden for the couple. This method hence gives more benefits at a lower cost, unlike the other arrangements. Question 3 The Purpose and Operation of the Transition to Retirement Provisions Karen has only a few years to work before her retirement. She is faced with as situation in which she needs to prepare adequately for her retirement. This is addressed by the transition to retirement provisions. The purpose of these provisions is to prepare a member adequately for her post-retirement life. Since the lifestyle after retirement is different, then a member needs to find adaptive techniques into the new lifestyle. A member hence needs to identify the preferred lifestyle after retirement and know how much income is needed for such a lifestyle. For all the members in the superannuation schemes, the transition to retirement provisions enabler them to plan adequately for their retirement. They are able to save more for their superannuation payments or their income is increased so that they can be able to get more funds to start on new income generating projects that will increase their income after they terminate their employment. Transition to Retirement Strategy for Karen Karen has only three more years to work and then she retires. She needs to undergo a transition to retirement strategy that will help her and her husband afford their preferred lifestyle. Karen may undertake a transition to retirement pension scheme where she would first sacrifice a part of her salary into the superannuation scheme and then register for a transition to retirement (TTR) income stream. Before salary sacrifice: Gross Salary = $35,000 Tax on Taxable Income = $ 6,195 Low Income Tax Offset = ($ 550) Mature Age Worker’s Offset = ($500) Medical Levy = $ 750 Net Tax Payable = $ 5,895 Net Income after Tax = $ 29,105 Sacrificing a half of her salary and using Transition to Retirement pension allocated Gross Salary = $ 17,500 Pension Payment = $ 379.64 * (52 / 2) * 2 = $19,741.28 Total Income = $ 17,500 + $19,741.28 = $37, 241.28 Taxable Income = $ 17,500 + ($19,741.28* 50%) = $ 27,370.64 Tax on taxable income = $ 3,722.41 Low Income Tax Offset = ($1,050) Mature Age Worker’s Offset = ($500) Superannuation Pension and Annuity Offset = ($9,870.64 * 50%) * 15% = (740.30) Medical Levy = $ 562.50 Net Tax Payable = $ 1,994.61 Net Income after Tax = $ 35,246.67 Therefore, due to the reduced tax burden for the TTR pension, Karen will be able to earn more income per month in order to facilitate her transition to retirement process. The strategy is more advantageous since it reduces the taxable income in a great deal: Taxable Income before Salary Sacrifice = $35,000 Pension Scheme Taxable Income = $ 27,370.64 Difference = $ 7,629.36 This results to an increased net income from $ 29,105 to $ 35,247. Sacrificing the salary into the superannuation will hence increasing the couple’s total income. Advantaged and Disadvantages of the Strategy The strategy will ensure the couple increases their income in a great deal. It will ensure that the couple is relieved of taxes as Karen will have a less-taxable income and hence increase their earning. Also, the amount sacrificed into the superannuation scheme will still be received as benefits by the couple after their retirement. Question 4 Superannuation Beneficiaries There are many people who can be eligible for superannuation benefits upon the death of a member during the accumulation phase. The closest family members are the first to be considered as beneficiaries. Therefore, a spouse or a former spouse is usually the first beneficiary of the superannuation. Children of the deceased are also eligible for the benefits, together with the grandchildren. Others who may receive such a benefit are those who are close to the member especially those who depend on the member for any financial support or any other kind of support. Once a member dies, the trustees contact the beneficiaries and allocate the benefits as required and according to the wishes of the member. Methods of Nomination of Beneficiaries Binding death benefits nominees are nominated by the member before the member’s death in their will and a trustee has to follow all the wishes of the member on allocation of benefits. In the unbinding death benefits nomination method, a trustee can select the viable beneficiaries and allocate the benefits in the way that they deem right and fair, especially regarding the relationship between the beneficiary and the member. Advantages Disadvantages of the Methods of Nomination The Binding method of nomination ensures fair and just allocation of benefits as per the wishes of the member. The member chooses the ones to get the benefits and the amount of benefits to get. This method is the best for such nominations since the member is the one with the best knowledge on whom his beneficiaries are and how the benefits can best be allocated and shared. The unbinding method enables the trustees to analyze the situation and nominate those that deserve the benefits the most. Therefore, there may be less biased.. Disadvantages of the Methods of Nomination The drawback to Binding method of nomination is that a member may be biased in his allocations depriving those that deserve the benefits more, such as spouses and children, and preferring the benefits to be realized by a closer person who is not necessarily a dependant. The unbinding method is not very appropriate since the beneficiaries chosen by a trustee may not be more deserving the benefits and a member is the one who best knows who should benefit from their superannuation. Therefore it should always be3 avoided by encouraging members to nominate their beneficiaries at the early stages of their subscription to the superannuation scheme. Tax Treatment of Superannuation Lump Sum Death Benefits The superannuation lump sum death benefits are tax-free when paid to a tax act dependent like a spouse and a child or grandchild who qualifies as a beneficiary. For tax act non-dependent, the benefits are taxed accordingly. The Effect of Karen and Michael’s Current Beneficiary Nominations Karen has nominated her husband Michael and her children and grandchildren as the current beneficiaries. Zoe and Nicole are quite dependent on their parents for financial support and since they are closely related to Karen then they can be considered as tax act dependent beneficiaries. Her grandchildren are also tax act dependent. Therefore, for any superannuation lump sum death benefits these beneficiaries may get, the benefits may be tax free. Though Michael has not nominated anyone currently, nominations for any superannuation lump sum death benefits would be carried out by his trustees and the most qualified for the benefits would be his wife Karen, his children and his grandchildren. All these are very close to him and are dependent on him in many ways especially financially and hence they would be treated as tax act dependent beneficiaries and hence their benefits would be tax-free. Question 5 The Lockharts Investment Portfolio To determine if the couple is entitled to any Centrelink Age Pension or other Commonwealth Government benefits, considerations are made concerning the current structure of their investment portfolio at the time of Michael’s retirement. The Lockharts have the following investments as their assets: Michael = $135,500 Karen: Personal superannuation = $196,550 Shares = $ 38117.89 * 5.5% = $ 2,096.48 Jointly-Owned Investments: Bank account = $6,300 * 5.2% = $ 327.6 Cash management trust = $175,000 * 7.5% = $ 13, 125 TOTAL Investments = $334,474 Therefore, the total investments considered by the pension schemes will be the overall investments by the couple, though it’s only Michael who will be a pensioner. The total investments consider the investments belonging to Michael, those belonging to Karen and those they hold jointly. The pension schemes will determine the fortnight income from the investments for the couple and then determine if the couple deserves to get a pension. Since Michael has applied as a pensioner, then their combined investments are considered jointly using the current pensioner Couple rates and thresholds. Income per Fortnight = $334,474 / (2 people * 26 fortnights p.a.) = $ 755.44 Pension Supplement = $ 42.30 Basic rate = $ 464.20 Pension p.f. = Basic rate + Pension Supplement – ((Income – Income test Threshold) * 0.25) = $ 464.20 + $ 42.30– (($ 755.44 – $ 248) * 0.25) = $ 464.20 + 42.30 – 126.86 = $ 379.64 Under the investments held by the couple at the time of Michael’s retirement, he couple is entitled to a Centrelink Age Pension of $ 379.64 per fortnight. They can therefore apply for the pension and they will benefit in return during their retirement period. The Concession Cards The couple is also entitled to a few other benefits in form of concession cards. Once they are enrolled into the pension scheme, they will also be given medical benefits in form of Pension Concession Cards (PCC) which will enable them to have an easy and cheaper access to health care. The concession card will also benefit them with reduced fares on public transport, reduces water and land charges, reduced energy charges and reduces vehicle registration charges. These benefits will help reduce on their expenses and provide them with better services that are more convenient and easier to access. Legal Strategies for Maximizing any Centrelink Benefits There are many legal and acceptable strategies that the couple can use to maximize their benefits from the Centrelink pension scheme. These strategies may be applied so as to increase the benefits and results obtained through accessing the pension benefits. The couple can undertake a transition to retirement strategy in which they can be able to partially access their benefits sometime before their eventual retirement so as to increase their access to funds and be able to have more funds for any income generating projects they may be aiming at starting. The couple can specifically engage Karen into such a plan so that she accesses some of her retirement benefits even if she will retire in the next three years so that she can get more funds and add the to those gotten by Michael as pension payments so that they may have more funds for their projects. The couple can also employ the reverse mortgage strategy that allows them to release some of their house equity so that they can be able to increase their income and yet be able to live in their house. They may hence be able to borrow a loan that would be paid later on when they eventually sell the house, or when they get funds through other means. The couple can yet prefer to adopt a Pension Loan Scheme. Here, they may be able to borrow loans and use them as a source of more funding so as to increase their capital base for any of the projects they may be having. This way, it can be easier for the couple to plan for their income generating projects and hence increase their income after retirement. Advantages of the Strategies The transition to retirement strategy is very advantageous as the couple can enjoy an extra source of funding even before retirement of both of them so that once Michael has retired, he gets enough capital for the projects he may have planned to invest in. Also, since the couple has already attained the age of 60 years, they can receive such benefits at a non-taxable manner and hence the benefits are increased. The reverse mortgage strategy is advantageous since it would allow them to still live in their house and yet get some income out of it. The Pension Loan Scheme ensures that the borrowed loans are used as a source of more funding for the couple so as to increase their capital base for any of the projects they may be planning to invest in thus making it easier for the couple to plan for their investments and ultimately increase their income after retirement. Disadvantages of the Strategies The transition to retirement strategy has a drawback in that it increases the couple’s current income but reduces the total income that will be earned by the couple once they are eventually retired and when they don’t have any other source of income. The reverse mortgage strategy is disadvantageous since they wish to pass the house on to their children hence, unless they look for the money to repay such a reverse mortgage, they may not achieve their dream. The Pension Loan Scheme is disadvantageous since loans are a liability and always accrue interests. Hence, this scheme wouldn’t be a good decision especially if there is no major project that the couple has planned to start and which they are sure would give them enough income so that they are able to repay the loan on fortnightly basis. Question 6 Goals and Objectives The couple has many plans for their lifestyle after they eventually retire. They plan to send on the following: Annual spending of $50,000 plus taxes New car = $30,000 Emergency = $25,000 The couple therefore will require $ 75, 000 per annum plus the taxes. In the first year after retirement, they will require an extra $ 30,000 for a new car. Concerns and Issues Recommendations for the Goals/Objectives and Concerns The couple should undertake a few strategies in order to prepare adequately for their retirement. First, Karen may apply for the transition to retirement pension scheme so as to increase her income as well as reduce the amount of taxable income she is receiving. This will ensure the couple has enough capital to start up any income-generating projects that will sustain them after their retirement. The couple can also sacrifice some of their earnings into the superannuation scheme so as to increase their income once they are retired in form of superannuation payment streams. Advantages of the Recommendations The transition to retirement pension scheme will reduce the couple’s taxable income and increases their overall income. The strategy will also ensure the couple has enough capital for any income-generating investments that will increase their income after their retirement. The salary sacrifice strategy will increase their income once they are retired. Disadvantages of the Recommendations The transition to retirement pension scheme has no disadvantages. The salary sacrifice strategy may however decrease their current income in favor of the future and hence reduce their currently available funds for investment into more income generating projects. The Couple’s Financial Position The couple should retain their current investments which include superannuation, shares, a bank account and Cash management trust. The couple also has many income options. The most preferred strategy to enhance the couple’s income is the Centrelink income streams. Income from investments Michael = $135,500 Karen: Personal superannuation = $196,550 Shares = $ 38117.89 * 5.5% = $ 2,096.48 Jointly-Owned Investments: Bank account = $6,300 * 5.2% = $ 327.6 Cash management trust = $175,000 * 7.5% = $ 13, 125 TOTAL Investments = $334,474 Centrelink Annual income streams = $ 759 * (51 / 2) = $ 19, 741 Therefore, the couple will have a total annual income of: TOTAL Investments = $334,474 Centrelink Annual income streams = $ 19, 741 Total Annual Income = $ 354,215 Risk Management The couple should ensure that they have adequate funds for risk management incase a disaster strikes and affects any of them or their property. The couple should hence continue with their insurance covers for their car, home and contents. They should also acquire a comprehensive insurance cover for the new car they are planning to buy. Since the couple is very much concerned with the affairs of their children and their grandchildren, they should ensure that everyone in the family is insured. They should hence continue with their own health insurance covers and get covers for their two daughters and their grandchildren. The couple should also ensure they always have access to the amount of $25,000 set aside for emergency. Read More