NetActuary

RETIREMENT PLANNING IS MORE COMPLEX FROM 1st JULY 2019

From 1^st July, 2019 pooled lifetime income streams purchased on or after this date will be assessed under the new means test rules. Under the new rules, 60% of all payments from lifetime income streams will be assessed as income. For the asset test, 60% will be assessed as an asset until they reach the life expectancy for a 65 year old male (currently 84 years old) or a minimum of five years. After that, 30% of the purchase amount will be assessed for the rest of the duration of the lifetime income stream.

Deferred lifetime income streams will be assessed under the same rules as lifetime income streams that make payments immediately. The rules for account-based income streams will not change. Both the Pension Work Bonus and Pension Loan Scheme are being expanded.

It is unlikely that your retirement planning software is up to the task of evaluating “innovative” new retirement products. We are busy enhancing NetActuary modellings. Currently, longevity protection is often provided by a buffer approach. That can be enhanced by: rebalancing; some Age Pension offsets; and maybe the reverse mortgage Pensioner Loan Scheme. What is interesting is whether a client will see a smaller “insurance type” outlay for a deferred annuity as good value versus the unproductive buffer monies. It’s more about retirement income versus less estate legacy. What do you think clients will prefer?

Would you like to collaborate on the calculators needed to show clients the options? I don’t mind if you are a one person planner or the largest super fund in Australia! We are on the cusp of needing more Maths-intensive tools to make client presentations simple.

The retirement income projection calculators are not going to run on Excel. We have combinations of ABP and Deferred Lifetime Annuity allocations, different deferment periods, different asset allocations, different cost of living adjustments etc. to evaluate. The results need to be presented in a manner that shows return and (hence) income level/risk trade-offs.

Dolly Parton once made an astute comment – “It costs a lot of money to look this cheap!” We will have a similar issue. We need a lot of complex algorithms for things to look simple for the client.

 

Brian Bendzulla

 

Time To Roar Again!

I have greatly enjoyed undertaking exempt percentage and adequacy actuarial calculations over the past year. Consequently, NetActuary has decided to focus in 2019-20 on becoming the pre-eminent supplier of legacy pension actuarial reports. This blog outlines how that is going to be achieved.

Firstly, noting that the top three suppliers charge $396, $439 and $440 inclusive of GST - the NetActuary fee will be $220 inclusive of GST.

We don’t mind if you send us only the legacy pension work. I have the advantage of remembering very clearly the heighday of these pensions. NetActuary is also going to increase the number of support tools for this area. Already, there is an actuarial calculator so that you can monitor how liabilities have moved. Another calculator is about to be loaded that helps the administrator set the next year market-linked pension payment amount. This is because we notice where the remaining term is not a whole year, occasionally the wrong round up and down rule is used.

We are very happy to work with advisers to wind up these legacy arrangements – or deal with under/over appropriate reserve issues.

NetActuary needs very little information from you to undertake this work – just the most recent actuarial report and a draft set of accounts – that’s all! However, there are Excel data forms on our website if you prefer.

Please drop us a one-line email if you would like your email added to the proactive material we send out on this area. Capped defined benefit income streams have their own administrative and advice challenges.

 

Brian Bendzulla

UK Lump Sums

Occasionally, an Australian tax resident receives a UK lump sum directly from a UK pension scheme or as a deferred entitlement from the UK State Pension. As this is not directly to an Australian QROPS, it is taxed personally. The rate is often higher than other transfer options. The purpose of this article is to highlight the issues.

The Australian side of the transaction now has a number of private binding rulings. The lump sum – unless it meets the periodic nature for a pension – is assessed under section 305-70 of ITAA 1997. The applicable fund earnings (growth since tax residency) is subject to tax at the person’s marginal tax rate. The remainder of the lump sum payment is not assessable and the income is not exempt income.

Section 770-10 of the ITAA 1997 provides that a foreign income tax offset can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income. If the offset claimed is A$1,000 or less, the taxpayer does not need to work out their foreign income tax offset limit and only needs to record the actual amount of foreign income tax paid. The limit is basically the proportion of the offset that relates to the Australian assessable proportion.

It is the UK side that is so inconsistent in treatment. Some UK funds and practitioners believe that the payment should be assessed under Article 17 of the UK-Australia Tax Treaty i.e. only taxed in Australia and no withholding tax. Any tax withheld would be subject to a refund application if this was the case. Increasingly, the schemes take the view that the payment falls under Article 20(3) “income not dealt with in foregoing articles” and so can be taxed in both countries.

The UK tax under Article 20(3) depends on whether it is the 25% UK tax free component with an annuity; a Flexi-access drawdown FAD; or an Uncrystallised Funds Pension Lump Sum (UFPLS). It also depends on the “tax code” used. Some emergency tax codes are on a graduated scale and some are not. The higher the tax scale, the more money that is lost with the Australian tax scale limit. Could you please share with us any withholding tax information you may have.

A lump sum from a UK State Pension is not assessed under Section 305-70 of the ITAA 1997. The amount of deferred State Pension lump sum represents that deferred pension and is ordinary income in the year of receipt. It should consequently only be taxed in Australia. Voluntary UK National Insurance Contributions are not expenses that are deductible as they are of a private nature and therefore not deductible under Section 8-1 of ITAA 1997.

There is now a dedicated overseas pension transfer web page on the NetActuary website. Much work remains to turn it into a knowledge base. Any contributions to what is established practice would be appreciated.

Brian Bendzulla

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

 

 

QROPS Tax Calcs Reinstated

Over recent months, we have received so many requests for UK QROPS tax calculations that the data forms have been added back to the website. Commercially, this is probably a service area that would have been better to drop – the work is time consuming and each task can be very different. However, providing a good support service to our adviser clients is more 
important to us.

There are three types of tax calculations. The first is when the pension monies have already been transferred across to Australia.  The second is before the pension money transfers, where the report is needed to formulate a strategy. The third type is the “previously exempt fund earnings”. PEFE calculations are needed when monies for an Australian tax resident are moved from one overseas fund to another.

We can also help obtain ROPS registration with HMRC – including the necessary SMSF deed modifications.

We will work over the coming months to assemble information in an eBook to assist advisers in this area.

 

Brian Bendzulla

New Offices and Telephone Number

We have enjoyed the many years that NetActuary have operated from Salamanca Place, however it is becoming increasingly difficult for clients to find parking and to access the offices  –  especially during times when events such as Salamanca Market, Dark MoFo and The Taste of Tasmania are taking place.  

Consequently, we have purchased delightful offices at 4/19a Hunter Street in Hobart (on the other side of Sullivan’s Cove) in the award-winning Henry Jones IXL complex.  This area has the new cruise terminal, MACq 01, The Henry Jones Art Hotel, Hotel Grand Chancellor etc. (and the coffee is just as good “on the other side”!)

Our new telephone number is (03) 9028 5002.  These details are on the NetActuary website.

The NetActuary Team

Enhanced Retirement Income

The legislation that was passed by Parliament on 14^th February, 2019 presents opportunities to enhance retirement income and (hence) improve the living standards of many post retirement clients.  This blog summarizes the way NetActuary supports advisers with the computational aspects.

If a retiree quickly spent all their private assets, they would get maximum Age Pension.  That would be a totally inappropriate plan.  So, with the constraint that private monies must last the distance with a specified certainty, the optimal use of capital – including a step down in planned income on first death – can increase the value of Age Pension entitlements by many tens of thousands of dollars.  NetActuary has been doing many such projections for advisers.

From 1^st July, 2019 we again have a partially asset test exempt income stream.  Asset-tested income streams (lifetime) have 60% of the purchase price (later dropping to 30%) counting towards the Centrelink asset test.  This could be very useful since in the early years of retirement it is often the asset test that dominates.

The grandfathering of the current income test means that advisers should check whether this is something which is to an older client’s advantage.  This is urgent as this option is only available for the next few months.

The change that I see as having enormous potential is using a specified percentage of an equity in a house or investment real estate is the Pension Loan Scheme.  The level of income and eligibility have been made more generous.  Besides supplementation, it can be used to help manage sequence and mortality risks, allowing an enhanced standard of retirement living.

The post retirement sustainable income calculator is being enhanced to include a Pension Loan Scheme as a source of retirement income.  If you want to be included in updates on this aspect, please send an email to brian@netactuary.com.au.

Brian Bendzulla

Autumn Tidy Up SALE

As we head towards the end of the financial year, the number of tax-exempt income percentage and Legacy Pension adequacy certificates also runs down. As our encouragement to complete the remaining outstanding SMSF tasks, we offer an excellent value offer on actuarial certificates until 30^th June, 2019 – $55 (including GST) for section 283 exempt income percentage actuarial certificates and $165 (including GST) for legacy pension actuarial reports.

In the post Royal Commission world, more than just price and speed are important with these services. We have supplied additional comments in covering emails where something should be considered that would be in the client’s best interest. This may be a life expectancy term pension that needs to consider possible actions before the term runs out or where more than adequate reserves can be put to work to generate retirement income. With the normal s283 certificate, there have been numerous discussions to assist with issues such as
whether a TRIS is in retirement phase or not – besides the part year segregation aspects. NetActuary will always have the actuary signing the certificate being the person undertaking the calculations.

It has been very gratifying to see how many past clients have again used the NetActuary actuarial certificate service since we recommenced this work. As part of the certificate service, we provide a complete support role.

The links to the data forms are:

• Click here for ECPI Excel form
• Click here for ECPI pdf form
• Click here for Defined Pension adequacy reports.

Many of our clients simply provide draft accounts, the general ledger and past certificates rather than filling in forms.

Please feel very welcome to phone Brian on (03) 9028 5002 to chat about how we can make this task simple and convenient for you.

Brian Bendzulla

Secure Web Calculators

An encrypted internet connection was once only used for payment systems. One knows the connection is secure when a padlock and https:// appears in the address bar. Google Chrome has started to mark all HTTP sites as “not secure”. Google is also down-ranking unencrypted sites in the search engine. Apple Safari browser is going to follow. Consequently, NetActuary has migrated all web calculators and reference pages to a secure host.

Secure sites have an SSL certificate. This has a public and private key that work together to establish an encrypted connection. The increased processing power needed to run encryption has no noticeable response time difference for the web calculators. With the commercialization of the internet, I think we need to accept that the days of http/unsecured connections are numbered. Hopefully, some of the internet scams are driven out at the same time.

 

If you are a user of our branded calculators, what do you need to do? Nothing immediately. They have put redirects on all existing links. However, when you do a website update/maintenance you may like to point directly to the https://netactuary.support/ links. An installation note is available.

 

Brian Bendzulla

TTR Strategies Can Be Valuable

I have heard people express the view that transition to retirement strategies are finished. For certain situations, that is not the case.

Consider the person on $90,000 salary in the example below. The gain is $3,334. That is good as a percentage of the $150,000 account balance.

The NetActuary TTR calculator can be found under the new “Technical” tab on our website. It incorporates all the LMITO and LITO aspects of the new tax system.

 

 

Whilst it is true that there is no gain from investment income (no longer tax exempt), a tax free TTR pension income is better than paying marginal tax rates for many people. Another big difference to older TTR strategies is that it works better for people with lower account balances. This is because the minimum 4% drawings uses less of the currently low non-concessional contribution cap available.

If you would like to be proactive with creating a better outcome for your clients, we offer a computation bureau service. The member statement is all that is needed. A multi-year projection is also available. A fee schedule of $0 for those with less than a $2,000 p.a. gain and $33 inclusive of GST for gains above $2,000 would be acceptable.

Please contact brian@netactuary.com.au for more details.

The NetActuary Team