NetActuary

Understanding and Caring for Retirees

In July 2009, A Treasury Capital Index Bond was issued with a real yield of 3.10%. Ten years later, in July 2019 the yield is a miserly 0.23%. The same has happened to normal term deposit rates. Things are really tough for retirees living off cash-linked income. Why can’t we as a society do more to help our senior citizens? Centrelink charge 5.25% compounding fortnightly on Pension Loan Scheme outstanding balances. If inflation is 2%, that is 3% real. It could be funded by term deposits from retirees. I would be interested in any papers about economic distortions. This may be introduced. Maybe it is worth it in order to look after our senior citizens.

We also don’t recognize that not all retirees think in an analytical manner like financial planners and actuaries.  Many of the people we deal with are pragmatic thinkers rather than analytical thinkers. They look to the immediate payoff rather than the long term grand plan. These people are swayed more by their next planned overseas holiday than sustainable income.

Another group are idealists. Their actions will be governed more by how their work should be rather than what is a cold analytical plan. I find this group hard to knock. They are likely to be spending resources on helping children rather than their own long term plan.

Then there are the argumentative thinkers. They are either aggrieved or think they know better.

The fifth group of thinkers I like are realists. These are great people who will rise to the challenge and get on with implementing the solution you suggest. They work on what they sense about you rather than with the charts and maths.

I think we can make better tools to help engage the various types of thinkers. We need to show rebalancing retirement plans by way of an application that allows you to “play a movie” to the client. Rather than messy scenario generators, just good, expected and poor scenarios would probably suffice.

In the meantime, NetActuary is enjoying working on legacy pension actuarial reports and fixups (reserve allocation/terms running out). At $220 inclusive of GST we are about half the going rate – but the area is still profitable!

 

Brian Bendzulla

Transfer Balance Cap Fixups

Since 01/07/2017 there has been a limit on the total amount of superannuation assets that can be transferred into retirement phase – the transfer balance cap.  Until indexed, this cap is $1.6 million.  A transfer balance account is maintained by the ATO to record events that count towards an individual’s transfer balance cap.  A transfer into retirement phase is a credit and certain transfers out (such as commutations) are debits.

If one had retirement phase assets of more than $1.6 million at 01/07/2017, the excess would normally be rolled back into an accumulation account or withdrawn.  However, things are more complex with legacy defined benefit pensions that can’t be commuted except to start new equivalent income streams.  These “capped defined benefit income streams” have additional tax liabilities instead of retirement phase asset removal.  For example, a lifetime income stream over $100,000 p.a. has 50% of the annual income stream over $100,000 taxed at the person’s marginal tax rate.  PAYG withholding and summary obligations apply to the fund trustees.

For reasons that are hard to understand, a pre-existing market-linked pension (TAP) at 01/07/2017 was classified as a capped defined benefit income stream.  Its’ TBC debit is the annual next pension amount multiplied by the remaining term of the pension in whole years.  This debit is more than the account balance.  Any market linked pension started after 1 July is not a capped defined benefit income stream and has a TBC credit based on the purchase price.  However, the legislation was deficient resulting in a double count for TBC purposes on a market linked pension rollover.  As a stop gap measure via CRT Alert 066/2018 the ATO announced they would not take compliance action if the fund does not report the transfer balance account events of the commutation or the commencement of the new market linked pension.  The permanent fix will be via legislation and it will have a retrospective 01/07/2017 effective date.

Based on lapsed draft legislation before the Federal election, the following is how the new legislation is likely to operate.  The transfer balance account debit will be the debit value of the superannuation interest that supported the superannuation income stream just before the commutation takes place.  This is:

• The original transfer credit; less
  
  
• The amount of any transfer balance debits that have arisen in respect of the pension; less
  
  
• The total amount of superannuation income stream benefits the person was entitled to receive before the start of the financial year in which the commutation takes place; less
  
  
• The greater of the superannuation income received in the financial year in which the commutation takes place or the minimum amount required to be paid to them under the regulations.

For a partial commutation, the transfer account debit is the lesser of the full commutation debit value or the amount of the superannuation lump sum that results from the partial commutation.

Caution is still needed as it may not be possible to commence a new market linked pension without causing an excess transfer balance which can’t be removed due to the non-commutable nature of market linked pensions.

As we did last year with actuarial exempt pension income percentage and adequacy end of year certificates, we will keep an eye open for situations where a better client outcome exists.  NetActuary is keen to be the legacy pension specialist.

Brian Bendzulla

Family Law Factors Need Updating

Recently there have been public comments about how items such as the Centrelink deeming rates need to be updated for current economic conditions.  The same applies to the prescribed Family Law factors used to calculate the present value of defined benefit superannuation entitlements for matrimonial property pool purposes.  These factors have not been updated since formulated in 2002.  A clear example is provided by the closed NSW State Super Scheme.  If you compare the Family Law value on the legislated special methods and factors, it often can be 20% less than the immediate cash benefit available.

It may not simply be the economic factors that need updating.  The present value of entitlements with a pension component has mortality and economic assumptions.  If one was putting aside a lump sum to fund a series of payments, the mortality assumption sets the number of expected payments.  The payments would be met from capital and associated investment earnings.  The lower the expected investment earning, the more the capital is required.  In other words, the present value of future payments is higher for lower discount rates.  The current mortality and economic assumptions can (for a single life aged 65) produce a 12-13 factor.  It’s too low for current conditions.

Whilst the methods and factors are being updated, the issue of invalidity payments can be clarified.  His Honour, Justice Kent’s decision in Burge & Burge [2015] FamCA 178 raises the issue about whether an invalidity pension is a superannuation interest – even though it is included by Trustees in Form 6 responses as such a benefit.

As a general comment – and not just restricted to family law legislation – regulation that involves an economic factor component is not reviewed sufficiently frequently by the regulators!

 

Brian Bendzulla

 

Simple and Low Cost 2019/20

It’s good to have a simple, known fee that will not vary – even if the requirements of the task become more complex. NetActuary is happy to run a simple system so that advisers/administrators/lawyers don’t have to keep checking what the fee will be - the standard fee always applies.  More than that, we will follow whatever the practitioner needs for a particular case that may require a reduced fee/no fee treatment. Being a long-term, useful service provider is far more important to us than the fee received.

The fees (all inclusive of GST) that apply in 2019/20 are:

Actuarial Services
	ABP Tax Exempt % Certificate   Defined Pension Adequacy Report	$55 $220
Services for Advisors
	QROPS Tax Reports   QROPS Application including Deed   Retirement & Property Calculators   White Labelled Web Calculators	$396 $495 $132 $198
Services for Lawyers
	Family Law DB Valuations   Earnings/Super Loss Calculations   Life Interests	$385 $440 $440

Of course, we undertake many other exercises and actuarial calculations, however the above covers the bulk of requests from practitioners. We undertake no financial planning work so there are no potential (actual or perceived) conflicts of interest. All work will be undertaken by a fully qualified actuary. We invite and encourage users of our services to feel most welcome to discuss with us any esoteric aspects to ensure a good outcome for clients.

Brian Bendzulla

 

Let The Projections Begin!

The new Centrelink Thresholds that apply from 1^st July, 2019 are available.  We can now update all the calculators.  New calculator will be required for the partial asset test exempt income streams and the pensioner loan scheme.

The increases and new thresholds are as follows:

 

Allowable Income for Full Age Pension

Item	From 01/07/2019	Previously	Increase
Single	$174.00 p.f.	$172.00 p.f.	$2.00 p.f.
Couple – both eligible	$308.00 p.f.	$304.00 p.f.	$4.00 p.f.
Couple – One Eligible	$308.00 p.f.	$304.00 p.f.	$4.00 p.f.
Couple – Illness Separated	$308.00 p.f.	$304.00 p.f.	$4.00 p.f.

 

The deeming thresholds are as follows (the deeming rates have not changed):

Item	From 01/07/2019	Previously	Increase
Single	$51,800	$51,200	$   600
Couple	$86,200	$85,000	$1,200

The allowable asset thresholds for full Age Pension are:

Item	From 01/07/2019	Previously	Increase
Homeowners - Single	$263,250	$258,500	$4,750
Homeowners - Couple (both eligible)	$394,500	$387,500	$7,000
Homeowners - Couple (One Eligible)	$394,500	$387,500	$7,000
Homeowners - Couple (Illness Separated)	$394,500	$387,500	$7,000

Item	From 01/07/2019	Previously	Increase
Non-Homeowners - Single	$473,750	$465,500	$ 8,250
Non-Homeowners - Couple (both eligible)	$605,000	$594,500	$10,500
Non-Homeowners - Couple (One Eligible)	$605,000	$594,500	$10,500
Non-Homeowners - Couple (Illness Separated)	$605,000	$594,500	$10,500

In the NetActuary website "Technical Support" tab, this (and many other items) have been updated.

Brian Bendzulla

Family Law Superannuation Information

NetActuary has been building a database of information that will be useful for practitioners (there is a link under the Lawyer services tab_. A big thank you to people who have supplied information – either via the comments box on the database application or separately by email.

At times, the situation can be quite complex. Take UniSuper (for example). Special valuation methods and factors apply for certain deferred pensions and disability benefits, but not for other defined benefits. The member may have pure accumulation benefits or a mixture of a defined benefit and accumulation component. The administrator may supply the value that can be used for the matrimonial property pool – or simply the information for a valuation. Also, where there is a value shown, it could be the value of a voluntary withdrawal and not the prescribed Family Law value. The database helps with issues such as this, besides fees; which form to request information; addresses etc.

Another thing we are working on is a generic calculator which will assist people to understand the impact of a splitting agreement. Further benefits continue to accrue as normal and eventual Age Pension entitlements may be larger due to reduced assets. One is tempted to say: “settle first and work out the future after that”, however, some people’s willingness to settle seems to need a knowledge beforehand of the future financial impact.

Brian Bendzulla

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