Good retirement advice helps our clients reach their retirement goals.
Firstly, concerns around having enough money to fund a desired retirement lifestyle is our biggest conversation with our clients. Similarly, eligibility for the aged pension, downsizing, and aged care planning are other aspects covered in good retirement advice and a good retirement plan. For that reason, managing the many risks associated with living in retirement is essential (longevity, market and inflation risks). These all demonstrate that a good retirement is something that you have to plan for.
4 Common concerns of people seeking good retirement advice
Not having enough to live on, or to have the lifestyle they want.
Cost of living and economic uncertainty affecting their buying power.
Volatile market performance eating into their nest egg.
Pension eligibility and government changes.
Australians over 45 are looking for advice and support in their retirement planning.
Most importantly, they’d like to know:
– How long their money will last.
– What options are available, so they can make informed decisions.
– Ways to maintain their current lifestyle while saving for retirement.
This is particularly true for those aged 55–64, and in the midst of transitioning to retirement.
Essential income needs
To meet their everyday needs like food, housing costs, bills, health, transport and clothes.
To be able to live the lifestyle they want, like taking holidays, doing renovations or buying a new car.
Legacy & other
To be able to leave an inheritance, have an estate plan and be able to support their grandchildren’s future.
Good Retirement Advice and Retirement Objectives
– How to manage excess funds in super
– Funding travel in early retirement
– How to meet essential income needs
– Estate planning considerations
– How to maximize the money they can invest in a tax exempt retirement phase pension
Good Retirement Advice – CASE STUDY ONE
Lyndall and her two daughters
Lyndall’s just retired. She’s 65, single, with two financially independent adult daughters.
She’s never received financial planning advice before, and needs some help working out how she can spend the first five years of her retirement travelling, plus maintain her lifestyle throughout her retirement.
– Lyndall would like $100,000 pa for the first five years of retirement so she can travel.
– She has $1.9 million in super (all taxable) and is exploring options to manage the $300,000 excess (over $1.6 million).
– Also receives approximately $10,000 pa of income from an investment.
Good Retirement Advice – QUESTION ONE
Assuming Lyndall uses $1.6m of her super to start a retirement phase account-based pension. What options could be considered for investing the other $300k?
When deciding whether to keep the $300k in super, or cash it out to invest elsewhere, the client will need to consider:
1. Tax implications
2. Her investment strategy
3. Her estate plans
1. Tax implications
The underlying tax rate will vary depending on how it gets invested.
Asset income invested outside super – will be taxed according to the chosen investment and whether:
– Income is taxed through the investor – in which case it will be taxed at the individual’s marginal tax rates and will take SAPTO into account.
– Income is taxed within the investment – eg via an insurance bond where income/capital gains are taxed at up to 30%.
In Lyndall’s case:
Lyndall already receives $10k from other investments. The income from $1.6m pension is tax-free and ignored when determining SAPTO.
– If it invested the $300k outside super, it could still earn a further $22,913 pa in assessable income and (ignoring other credits/offsets) qualify for the full SAPTO tax offset of $2,230. The offset will then reduce by 12.5c for every $1 earned above $32,279 – cutting out completely at $50,119.
– If investments are kept in super, the withdrawals would also be ignored when determining SAPTO.
Good Retirement Advice – General rule of thumb for personal tax
Withdrawing from super and investing outside tends to be more appropriate when the individual’s average tax rate is less than 15%.
Keeping money in super tends to be more appropriate where the individual’s average tax rate is more than 15%.
2. Lyndall’s investment strategy
When considering investment strategies, it might be worth remembering the earnings in the retirement phase account-based
pension (once started) are tax-free. That way they won’t be counted towards the Pension Transfer Balance Cap.
Consequently, there could be an argument for directing growth assets into the pension phase to grow within the tax-free environment. More defensive assets could then be held in a super accumulation phase and/or an investment outside super. Especially if additional income beyond the minimum pension from the retirement account-based pension is required.
Good Retirement Advice – Cont
3. Lyndall’s estate plans
It is wise to consider an estate plan – some of the things to think about could be:
1. Beneficiaries – eg the two children
2. The tax impacts of receiving funds from either inside or outside super
– Inside super – lump sum death benefits paid to children are subject to up to 15% tax (plus Medicare levy) on the taxable taxed element, and up to 30% (plus Medicare levy) on the untaxed taxable element (if any).
– Outside super – if property is transferred to children as a gift under the will, capital gains tax will be postponed until they then sell the asset. At the time of sale, the cost of the asset will be determined on:
– So what if the asset was purchased before 20 September 1985>
Here, the cost base is the asset value as at the date of death.
– If the asset was bought after 20 September 1985. Then the cost base will be that of the deceased.
– And if the asset is sold after being held for at least 12 months, then the 50% discount will generally apply.
Also the estate may be contested, in which case it may be preferable to have money in non-estate assets like superannuation.
– Assets held in superannuation are held in trust for the member, and don’t form part of the estate. So death benefits may be paid
directly to their nominated beneficiaries (binding or non-binding), without waiting for the estate to be finalized.
– Assets invested outside super will generally form part of the deceased’s estate, and will require the finalization of the estate before proceeds are paid to beneficiaries. Also, the estate may be challenged, delaying the payment of the proceeds, and increasing the costs of finalization.
Good Retirement Advice – QUESTION TWO
If Lyndall keeps the $300k in super, how could the structure of income draw-downs get $100k pa for five years
– The minimum pension withdrawal on $1.6m retirement phase account-based pension is $80k (5%).
– $10k of income from other sources.
– Income shortfall is $10k.
In this case, Lyndall could take the extra $10k from her super. Therefore, that way she can keep as much money in the tax-free retirement phase account-based pension as possible.
Good Retirement Advice – General rule of thumb
Finally, clients may benefit from only drawing the minimum income levels from their tax exempt retirement phase ‘account-based pensions’. Supplementing their income needs from either:
– their accumulation account (if they have one)
– other non-super investments
– lump sum commutations from a pension (if they don’t have an accumulation account or other investments).
Need good retirement advice? Remember, it’s never too EARLY, but don’t leave it too late!
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Disclaimer: This article is factual information only. It is not intended to imply any recommendation about any financial product(s) or to constitute tax advice. If you need financial or tax advice please consult us or another licensed financial or tax adviser. The information in the article is reliable at the time of distribution, but may not be complete or accurate in the future. For information about advice that may be suitable for you, call us on 711 0022.
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