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

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

Pre-Christmas Sale!

We have really enjoyed helping administrators and trustees with defined pension actuarial reports this year.  We have our systems and procedures fine tuned and have decided to pass that efficiency on in the form of a permanent reduction of the fee to $275 (inclusive of GST) per report.  However, there is one final period up to the Centrelink end of year cut off to finish any remaining outstanding adequacy and tax-exempt percentage reports for these legacy pensions.  Until the end of December 2018 we offer what we believe is the lowest fee for this service in Australia - $220 inclusive of GST!

There are a number of additional advantages in our service.  In the actuarial report return email we have been commenting upon issues that the client could consider which could enhance the structure and appropriateness of their retirement arrangements.  We need no data forms filled in – simply email us the previous actuarial report and the accounts trial balance.  If you would like to take up this offer, email them through and we will get the reports back to you quickly.

If you would like to discuss any aspect of this, please ‘phone Brian on (03) 6224 1145.

Legacy Pension Spring Clean Sale!!

One of the most worthwhile aspects of issuing the actuarial tax certificates again is not the primary task – but rather being able to highlight areas that are in the client’s best interest to consider.  This is particularly true of legacy pensions.  A significant proportion of these pensions could: achieve a better tax outcome; redirect resources towards producing retirement income not adequacy reserves; plan ahead for neglected reserves; consider updating reserves for new life expectancies etc.  The covering notes to our actuarial reports comment on these broader issue items.

NetActuary would like to be the SMSF legacy pension specialist.  To that aim, we would like to facilitate a “Spring Clean” of legacy pensions with a Springtime sale.  All legacy pension
report requests received before 9^th September, 2018 will enjoy a 50% fee reduction!  Instead of our usual $396 (inclusive of GST), the fee will only be $198 (inclusive of GST).

Instead of filling in the request form, simply forward the most recent actuarial report together with this year’s draft accounts to brian@netactuary.com.au.  If there are any major non-uniform transactions, that would also be useful information.

If you would like to discuss any aspect, please feel most welcome to ‘phone Brian on (03) 6224 1145 for a chat.

The NetActuary Team

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