NetActuary

Looming 15th May

15^th May, 2019 is the last date for lodging a superannuation fund return via an accountant or tax agent without a penalty. As you can imagine, many of the ECPI and adequacy actuarial certificates at this stage are not straight forward. This blog provides background information on how the ECPI percentage will vary if one partner has passed away in the financial year.

The Federal Government’s $1.6 million transfer balance cap (TBC) limiting the amount of exempt current pension income (ECPI) applied from 01/07/2017.  It did not increase in 2018/19 financial year and so remains at $1.6m. 

The Transfer Balance Account (TBA) has credits when a retirement phase pension is started and a debit upon commutations.  The credits are created at the transaction date and not subsequently adjusted.  This means that subsequent net earnings and growth are ignored.  A reversionary pension paid to a surviving spouse or a retirement phase pension commenced with a death benefit paid to the surviving spouse will impact on their TBC amount.  This may create an excess problem because the deceased member’s TBC does not carry over to a surviving spouse.

Amounts over the TBC will be held in an accumulation account and have tax at 15% paid on assessable income.  Benefits paid out of the accumulation accounts will be tax free for persons over age 60 – this is different aspect to tax on investment earnings.  The future year exempt current pension income (ECPI) will be maximized by drawing amounts over the pension minimum from accumulation accounts.

There is special timing on death benefit transactions.  When a person automatically receives a reversionary pension, the TBA credit will not occurs until 12 months after the deceased’s death.  This provides a period of time for the surviving spouse to adjust their superannuation matters.  There is no 12-month period where a new or fresh pension is created with non-reversionary monies.  The credit occurs immediately when the new pension is started. 

The time span for reporting the TBA is determined by the total superannuation balances of an SMSF’s members.  If any member has a total superannuation balance of more than $1m, the event must be reported within 28 days after the end of the quarter in which the event occurs.  There are other rules for reporting commutation sooner or for some reporting with the date of lodging the SMSF annual return.  However, it is best to report early – basically straight away – as penalties could apply to late reporting.

From an ECPI point of view, the actuarial calculated percentage will be higher and less tax paid by getting the daily weighted average optimal.  It is not just commencing a pension from accumulation accounts soon, or utilizing the reversionary period of grace, but making pension payments late in the year.  Accumulation account payments can be taken early in the year.

The NetActuary special deal of $55 for tax exempt percentage actuarial certificates and $165 for legacy pension actuarial reports applies irrespective of how complex the case. This includes GST and applies until 30/06/2019. Please contact Brian on (03) 9028 5002 or email brian@netactuary.com.au if we can help.

Brian Bendzulla

 

 

Better ECPI Outcomes for Legacy Pensions

Mark Ellem’s presentation at the 2018 SMSF Professional Day is an excellent overview of how the tax-exempt percentage can be increased with payment timing.  NetActuary has an interest in assisting legacy pension funds.  So, here are some comments about how the ECPI percentage can vary.

With a legacy pension such as a section 1.06(2) lifetime pension, the lower the best estimate earnings rate assumed by the actuary, the higher will be the exempt proportion.  In addition, the calculations should have a deduction for investment expenses and an allowance for admin costs.  These two factors also increase the tax-exempt percentage.

It is important that these returns are not left static from past investment times.  At NetActuary, we have had a thorough review of the returns from different investment options and the margin to be set for the adequacy certification.  We have concluded that the new June 2018 Government MoneySmart assumptions are appropriate.  These are the standard rates that NetActuary will be using in 2018/19:

Investment Option	Investment Portfolio	Assumed Investment Return	Allowance for Investment Fees	Investment Adequacy Margin
Cash	100% in Deposits	2.70%	0.05%	0.05%
Conservative	Around 30% in shares & property. Rest in cash and fixed interest	3.80%	0.30%	0.125%
Moderate	Around 50% in shares & property. Rest in cash or fixed interest	4.40%	0.40%	0.25%
Balanced	Around 70% in shares & property. Rest in cash or fixed interest	4.80%	0.50%	0.375%
Growth	Around 85% in shares & property. Rest in cash or fixed interest	5.00%	0.60%	0.50%
High Growth	100% in shares & property	5.30%	0.70%	0.75%

 

A lower earnings rate could cause a problem with sufficient assets for the adequacy certification.  Fortunately, with lower current investment returns, the margin of average to lower quartile returns has narrowed.  The margin in the table is from an analysis of some 340 funds for the past decade.

Of course, while the formal report will need to be reviewed for appropriateness and signed by NetActuary, we have developed a calculator that show what the above assumptions would produce as a result.  This is a sample screen:

If you would like a copy of this Microsoft Exel pension liability calculator, please email Brian Bendzulla at brian@netactuary.com.au or call on (03) 6224 1145.

 

The NetActuary Team

Planned Retirement Income Reforms

From 01/07/2019 new Age Pension means testing rules will be introduced for pooled lifetime income streams.  The rules will assess a fixed 60% of all pooled lifetime product payments as income and 60% of the purchase price of the product as assets until age 84 – or a minimum of 5 years – and then 30% for the rest of the person’s life.  Since Treasury has made provision for a cost over the forward estimates for this change, it raises the question about how this can be used to your client’s advantage.

We need to get the tools and analysis prepared before then to handle enhanced retirement income streams, deferred annuities and the “retirement income covenant” requiring superannuation trustees to offer “Comprehensive Income Products for Retirement” (CIPRs).  NetActuary has commenced work with a financial planning firm to start work on this issue.  The challenge is that there are many different options – purchase dates, commencement dates for (say) a deferred lifetime pension, guaranteed or fluctuating payments etc.  It is a classic actuarial issue because at the heart of the objective is the desire to increase the certainty of the retirement income – but at what cost?

As usual, the grandfathering under current rules for lifetime income streams purchased prior to 01/07/2019 will lead to a rush later this financial year where the old rules are better for some clients.  The programming is messy.  The asset test actually is also subject to three tests:  the 60/30% of purchase; the value of any current or future surrender value; and the value of any current or future death benefit.  The grandfathering is also messy with (for example) a pension reverting to a spouse.  The grandfathering depends on Age Pension receipt at time of death.

Similar to the actuarial ECPI calculations, the days of straight forward financial planning analysis is over.  One needs both more sophisticated modelling tools and a depth of understanding about how to use/modify them.  If you would like to join this area being developed, please drop me an email to brian@netactuary.com.au

 

Brian Bendzulla

ECPI and Death of a Member

You will notice that the NetActuary ECPI data-form identifies situations that need careful consideration.  One of these is when a member has died.  This blog provides some background information about how ECPI will be calculated in that eventuality.

If the account-based pension is reversionary, the ECPI entitlement continues on the assessable income from the assets backing that pension in the same way that the pension continues.  In other cases where the amount for the death benefit (lump sum or new pension commenced) is only the account balance, the ECPI continues until it is “as soon as practical to pay the benefit”.  This provision was introduced in an amended definition introduced by the Income Tax Amendment (Superannuation Measures) No 1 Regulation 2013 to apply to the 2012/13 (and subsequent) income years.

We don’t need to consider anti-detriment amounts, but insurance proceeds don’t have this concession.  Income from these proceeds are not tax free in the period to payment.  No minimum pension payment is required for the period up to death.  If the pension is auto-reversionary, then the minimum payment is required by the end of financial year. 

The phrase “as soon as was practical” is not defined by law, however the ATO appears to accept a period not exceeding 6 months from the date of death as acceptable.

With legacy pensions, careful consideration is needed.  One of the instances envisaged in TR2013/5 was a superannuation income stream will cease if a provision in the governing rules provides for it to cease.  Consequently, with a section 1.06(2) lifetime pension it is likely that the pension and the ECPI will cease when the pensioner passes away if there is no reversion.  The assets backing the lifetime pension are released to reserves.  Use of those reserves would be under contribution/reserve allocation provisions, not death benefits.  On the other hand, a section 1.06(7) Life Expectancy pension has the residual benefit of remaining payments outstanding and has an arguable case for continuing ECPI.

The above shows why it would not be prudent to process actuarial certificates merely from a filled in date of death.

I am impressed with the number of trustees/advisers who took up the NetActuary $11 special.  Yes, it did cover earlier financial years.  Please give me a day or two to catch up and also launch the NetActuary property analysis toolkit and we will run another special on actuarial certificates.

Brian Bendzulla

COME CELEBRATE WITH NETACTUARY

NetActuary is back in the SMSF Actuarial certificate business! Yes, this has been a long wait!! That is even more reason for a celebration you too can share.

A number of initiatives are planned for the coming months. As an opening special all account-based pension actuarial certificates submitted in the first week of July will be processed for a fee of only $11 inclusive of gst.

The 2017-18 actuarial certificates need a different approach to previous years. It is no longer adequate to mechanically process them. Many fund circumstances have alternative possible approaches and strategies that need to be evaluated to determine which is in the client’s best interest. While NetActuary will use extensive production system support, this will be combined with a careful actuarial judgement. All calculations will be undertaken personally by the qualified actuary who signs the certificate. The turnaround will be prompt, but always subject to what needs to be done.

Will this cost more. No!! Our account-based pension actuarial certificate maximum price will be $132 inclusive of gst. There will be a guarantee of no fee increases in the next two years. Lodgement is simple – on NetActuary.com.au is a data form or simply send us the general ledger download from any of the SMSF accounting systems.

We also have a profound interest in helping with all types of legacy pension aspects including actuarial adequacy and tax exemption reports. For more information see the website or phone Brian Bendzulla on 03-6224 1145.

 

 

 

 

Centrelink Thresholds 2018-19

The 2018-19 allowable income and asset thresholds for a full Age Pension are now available.

From 1/7/2018 the allowable income threshold will increase for singles from $168.00 p.f. to $172.00 p.f.  For couples the increase is from $300.00 p.f. to $304.00 p.f.   Deeming lower limit has increased from $50,200 to $51,200 for singles and from $83,400 to $85,000 for couples.

With asset thresholds the Homeowner threshold has increased from $253,750 to $285,500 for singles and from $380,500 to $387,500 for couples.   The Non-Homeowner thresholds have increased from $456,750 to $465,500 for singles and from $583,500 to $594,500 for couples.    Funeral Investment exemption from the asset test has increased from $12,750 to $13,000.

The ATO has released SMSF News Alert 2018/3 confirming the unintended consequences of the current law with regards to the commutation of capped DB life expectancy and market-linked pensions.  These receive a nil debit on commutation.  The ATO will not take compliance action at this stage if a fund does not report the transfer balance cap events of the commutation or commencement of the new market-linked pension.   This still does not fix the problem of the lock in of a market-linked pensions that are larger than $1.6m.   There are a number of problematic areas of tax and superannuation with no clear guidance from the ATO, especially in the transfer of overseas pension monies area.

It is going to be a very interesting in a few weeks time to watch how administrators and trustees handle the new ATO interpretation for mixed segregated and unsegregated periods for exempt pension income with the 2017-18 financial year.   I have a considerable level of apprehensive about this.  If you would like to discuss issues to watch out for, please don't hesitate to call me on 03-6224 1145.

 

Brian Bendzulla 

 

 

 

Wouldn't it be “Loverly”

In a similar manner to superannuation funds needing to have an investment strategy, there will be a requirement to satisfy a “retirement income covenant”.  This basically codifies the requirements and obligations for trustees to help improve retirement outcomes.  The implementation date is likely to be 01/07/2020.  The funds will need to offer a Comprehensive
Income Product for Retirement (CIPR) that has three key objectives.  These are to maximise income; provide income for life; and flexibility to access capital.  It may (for example) be a product that is a combination of an ABP and a deferred annuity.  Now that we know the social security means test rules for new and existing pooled lifetime income products it will be
feasible to design such products.

Wouldn’t it be “loverly” if that was all that was needed to solve the retirement issues!  It is not going to be that simple – especially for financial planners who need to justify what they are suggesting is superior to the default option.  Actually, it’s default “options” as the fund can offer up to three CIPRs.

As usual, there are trade-offs that need client preferences to be taken into account.  An annuity may have certainty and handle longevity, inflation and investment risk – but those guarantees come at a considerable cost to maximizing income.  Flexibility, desire to leave an inheritance, health, organization, solvency, tax, Age Pension ramifications etc. are going to be relevant.  Luckily the methodology for assisting with these trade-offs are well developed.  NetActuary is willing to develop the analytic tools for those who are going to seize the opportunity.  First, however, we have an actuarial certificate area to relaunch in (hmmmm) … 23 days!

 

Brian Bendzulla

 

 

Good ♦ Cheap ♦ Fast Actuarial Certificates

Yesterday a person asked me what were “disregarded small funds assets” and their relevance to actuarial certificates for exempt current pension income.  In essence, where you have a complying SMSF with at least one superannuation interest in retirement phase AND just before the start of the year one person had a total superannuation balance that exceeded $1.6 million across all funds, then those assets in the SMSF are disregarded small fund assets.  Such a fund is not allowed to use the segregated approach. 

Actuarial certificates for 2017-18 are different to earlier years.  NetActuary will not be one of those certificate suppliers promising the return within minutes.  We will be returning the certificate in the time it takes to do the job properly.  That may be 2 minutes – or it may be 2 days if we see circumstances that warrant a discussion with the administrator. 

The NHS in the UK runs a strict time scale implementation.  An appointment is 10 minutes.  They are proud that a 9.22 minute average is achieved.  A person is only allowed to raise one condition per consultation.  What they don’t highlight is that one in six diagnoses are incorrect!  For many, that error is not major – but it is for the 750 NHS patients that die an avoidable death each month.  It may not even be cost efficient with malpractice settlements now exceeding £1.5 billion per year. 

NetActuary’s new actuarial certificate service – commencing at the end of next month –  will focus on achieving good quality outcomes.  We visualise working closely with users of our service.  We know that one can structure SMSFs in different ways that can result in different tax outcomes.  Leaving a small accumulation account would allow one (in some instances) to utilize an unsegregated only approach.  This may be better or worse than the alternative.  It worries me that this over emphasis on turnaround and cost will lead to fully automated processing and poor outcomes. 

It is ironic that I was instrumental in the big push to use digital processing to reduce costs and speed up processing, but now am taking a stance that more judgement and consideration is needed with the production of actuarial certificates.  The actual work and results of NetActuary’s actuarial certificates will be only undertaken by qualified signing actuaries – not junior processing staff. 

If you would like your actuarial certificates prepared on a “quality outcome” and not “time production” basis, please drop me an email and I will ensure you receive information on this topic.

 

Brian Bendzulla

Projected Retirement Benefit Illustrations.

The Actuaries Institute’s new practice guidelines for projected retirement benefit illustrations will apply from 1st January 2018. It contains some useful provisions and comments for a variety of tasks from retirement calculators to comparing benefits from different types of funds. It also provides comments upon how to help users appreciate the risks involved. These aspects are importance as planners are required by the Corporations Act not to engage in conduct in relation to a financial product or financial service that is misleading or deceptive, or likely to mislead or deceive. An unrealistic projection could fall into this category. For funds including superannuation estimates in periodic statements, they should also read ASIC Instrument 2016/207 and Class Order 11/112

Volatility can be illustrated by showing the impact of variation in the key assumptions or a stochastic analysis. Illustrations can be in real or nominal dollars. For illustrations covering the post retirement period, a price or wage deflator can be used. Fees need to be in accordance with any basis set out in the PDS or if silent, with wage growth.

The guidance note observes that an illustration of benefits at retirement age that expresses the benefit as an income, it is desirable to include an estimate of the Age Pension entitlement. My view is that for most Australian retirees, the projection is meaningless without such an inclusion.

There is a need to regularly review and update of computational tools and projections. If you would like assistance with this, please contact Brian at NetActuary (brian@NetActuary.com.au).

Brian Bendzulla

Oh Dear - Legacy Pensions!

There is a certain irony in the fact that many people overseas are struggling to come to terms with account based pensions but the opposite is true in Australia.  Admittedly, SMSFs have not been allowed to offer formula based defined pensions since 01/01/2006.  This is partially the reason why many of these pensions are….hmmmm….badly managed.  Last week seemed to be full of fixing up problems with them.  The request usually comes in for a review when the level of legacy pension funding is no longer adequate.  This gives 12 weeks from the date of the actuarial certificate to fix up a solution before Asset Test Exemption status is lost.  Often, these pensions are inadequate because the reserve backing the pension is treated like monies available for the member to take extra drawings.  It is not.  The member has a promised income stream and doesn’t have control over the assets.  Often, the defined pension is the only entitlement left with the ABP having already been depleted.  Luckily, as part of the tidy up – and despite the fact that a reserve allocated is counted against concessional contribution caps – one can normally keep the fund compliant.

The review often ends up with a tough decision.  This is the trade-off of higher income from more Age Pension by keeping the ATE via a Life Office annuity or less income via a market linked pension conversion but the likelihood of leaving an estate bequest.

The life expectancy pensions are even worse.  One can watch pensioners hurtle towards the end of the term with problems of dealing with surplus reserves.  Many other issues are involved.  I wish the Federal Government would facilitate a tidy up of these old legacy pensions.  In the absence of that, click here for a link to a fact finder for a review and tidy up...<click here>

Brian Bendzulla