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Understanding super & money
By Stuart Sheary, Senior Technical Manager
Recognising the financial cost of people living longer in retirement, the Government has implemented policy changes to encourage people to delay retirement. These include the gradual increase in the preservation age from 55 to 60, the recent increase in Age Pension age from 65 to 67 and linking the age at which someone can receive tax concessions on their genuine redundancy to the Age Pension age.
On 13 May 2020, the Government introduced Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 to extend the bring-forward rule to people under age 67 at the start of the financial year. This Bill follows the 2019/20 Federal Budget proposal to increase the age at which people can make a voluntary contribution to super without satisfying the ‘work test’ which would create greater consistency and cohesion around eligibility ages and rules.
Increases in age-based rules present many opportunities and pitfalls for your clients and may require you to adjust the retirement advice you give them.
Preservation age is generally the age at which a client can first access their super. Upon attaining preservation age, a client who has not yet satisfied a full condition of release, such as retirement, may access their super as a transition to retirement income stream. Attaining preservation age is necessary to satisfy the retirement condition of release which allows clients to access their super in full as a lump sum or as an account-based pension.
Preservation age started rising from age 55 on 1 July 2015 and will reach age 60 from 1 July 2024 onwards. When this change was announced in the 1997 Federal Budget, the Government noted that the increase in preservation age was intended to allow for the accumulation of a larger retirement benefit which would improve people’s retirement incomes and reduce their dependency on the Age Pension.
An increase in preservation age will not only impact accessibility to super but may also affect taxation on super withdrawals, particularly for those who have satisfied a condition of release, such as permanent incapacity, prior to attaining preservation age. Clients who are aged between preservation age and age 60 can use the low rate cap to effectively reduce any tax on a lump sum (taxed element) withdrawn within the cap to nil.
Occasionally, clients below preservation age have unrestricted non-preserved amounts (UNP) in super that are accessible. Younger clients wishing to access any UNP amount should be cautioned about the potential tax consequences of withdrawing such amounts and may wish to delay withdrawing benefits until attaining preservation age or even reaching age 60 when super withdrawals are tax-free (taxed element).
The Age Pension age has increased from 65 to 66 and will gradually increase to 67 by 1 July 2023. The table below shows how the Age Pension age changes through to 1 July 2023.
Clients approaching Age Pension age who expect to require an Age Pension to meet their expenses may need to adjust their financial strategy to account for the changes. There are several strategies you may wish to discuss with your clients.
Clients expecting at least a part Age Pension may prefer to delay retirement until Age Pension age but for others an ‘early’ retirement can be an effective asset-test reduction strategy and more desirable than other asset reduction strategies, such as gifting. Eroding wealth is never economic but when asset-tested part-age pensioners can get an extra $78 per year on every $1,000 of assets reduced, an earlier retirement can be tempting.
Delay commencing an income stream
Super held in accumulation phase by clients below Age Pension age is not means tested by Centrelink. Account-based pensions and transition to retirement pensions are means tested by Centrelink. When one member of a couple has attained Age Pension age and the other has not there may be an incentive to delay commencing a pension for the younger spouse until they attain Age Pension age. This might mean delaying commencing the pension until age 67. Clients who wish to access their super and have satisfied a full condition of release, such as retirement or attaining age 65, may choose to draw a lump sum from their super in accumulation as an alternative.
Gift sooner rather than later
If your client is intending to gift assets, they should consider gifting sooner rather than later. A gifted amount exceeding $10,000 in a financial year or gifted amounts that cumulatively exceed $30,000 over a rolling five-year period is treated as a deprived asset. A deprived asset is assessed against the income test (deemed) and asset tested for five anniversary years against the client and their spouse. The increase in the Age Pension age means clients may have more time to gift within allowable limits and reduce their assessable assets before attaining Age Pension age. Ideally, clients should consider gifting five years prior to attaining Age Pension age, for example, prior to age 62 for those clients whose Age Pension age is 67.
For clients approaching retirement with many years of service behind them, a genuine redundancy payment with tax concessions can be very generous. Genuine redundancy payments are tax-free up to a base amount of $10,638 plus $5,320 for each completed year of service (2019/20 financial year).
Before 1 July 2019, for a redundancy payment to be treated as a genuine redundancy and eligible for tax concessions, it was necessary (among other things) for the dismissal to have occurred before the earlier of the employee:
From 1 July 2019, clients below Age Pension age may qualify for a genuine redundancy payment.
Confirm appropriate withholding tax with the employer and complete tax return early
The alignment of the maximum age before which clients are eligible for tax concessions on redundancy payments did not become law until late October 2019 meaning some employers may not have recognised the redundancy payment as a genuine redundancy and withheld too much PAYG tax. If this has occurred, clients should firstly ask their employer to recalculate the appropriate withholding tax on the payment. If this is not possible there may be an incentive for these clients to submit their 2019/20 tax return promptly as they may be eligible for a generous tax refund.
Accepting a redundancy package
Contrived redundancy arrangements are not eligible for tax concessions. For example, an employee who is about to retire cannot arrange with their employer to be made redundant. However, there may be circumstances where an employer is genuinely terminating a position and allows employees to volunteer to accept a redundancy package. This might encourage some employees to bring-forward their retirement. While there may be some flexibility permitted for such an agreement, the Australian Taxation Office’s Tax Ruling 2009/2 notes that it is assumed that the employer initiates the termination process and has the final say in whose employment will be terminated.
Clients may decide to bring forward their retirement should a voluntary redundancy package be available. Linking the maximum age that someone is eligible for a genuine redundancy to the Age Pension age means older people may now qualify for a genuine redundancy payment.
On 13 May 2020, the Government introduced Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 to extend the bring forward rule to people under age 67 at the start of the financial year, subject to their total super balance. Currently, only people under age 65 at the start of the financial year can trigger the bring-forward rule, subject to their total super balance.
This Bill follows the 2019/20 Federal Budget proposal to increase the:
The Bill seeks to achieve the last of the three proposals. The Government intends to amend Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) to implement the increase in the age at which the work test applies and the cut-off age for spouse contributions.
At the time of writing, the proposals have not been legislated. The Government hopes to pass legislation when they sit again in June 2020.
Currently, people between age 65 and 74 must satisfy the work test or work test exemption before making a voluntary super contribution.
Voluntary super contributions include all contributions except mandated employer contributions, such as the superannuation guarantee. To satisfy the work test it is necessary to work a minimum of 40 hours over a 30-day period. To satisfy the work test exemption, the work test must have been satisfied in the previous financial year and the member must have had a total super balance of less than $300,000 at the end of the last financial year. The work test exemption can only be used in one financial year.
Voluntary contributions include:
Clients age 65 and 66 who are not otherwise eligible to contribute to super, due to failing the work test or work test exemption, will have an opportunity to make a voluntary contribution in the next financial year. This may facilitate a few strategic advice opportunities, which include:
Implementing a re-contribution strategy
Clients who have reached age 65 have full access to their super benefits even if they have not retired. Drawing a tax-free lump sum and recontributing it back into super as a non-concessional contribution can increase the tax-free component of the fund and reduce any tax on death benefits paid to non-tax dependants such as adult children.
A withdrawal and recontribution into a spouse’s super fund may assist with managing their total super balance and transfer balance cap.
Contribute to younger spouse’s super
As mentioned previously, super held in accumulation phase by clients below Age Pension age is not assessed by Centrelink. This means when an older spouse is eligible for the Age Pension, their younger spouse’s super will be not be means tested until they reach their Age Pension age which could be up to 67.
Reduce personal income tax by making a deductible contribution to super
Realising a capital gain during your client’s retirement can reduce the tax payable compared to when they’re working. This can be very advantageous when realising larger capital gains, for example, those generated by property or shares held for a long time. Extending the work test age will allow clients aged 65 and 66 who would not otherwise be eligible to contribute to super to be able to reduce their taxable income by making a personal deductible super contribution. Furthermore, the catch-up concessional contribution measure may enhance the benefits.
Clients age 64 or less at the beginning of the financial year may trigger the bring-forward rule at any time during the financial year if they are not already in a bring-forward period. Upon attaining age 65 they must satisfy the work test or work test exemption to make a voluntary contribution. This means once a client who was age 64 at the start of the financial year reaches 65, they will need to satisfy the work test or the work test exemption to make a non-concessional contribution and utilise the three year bring-forward rule.
If the age at which a client can utilise the three year bring-forward rule increases from 64 to 66 at 1 July, upon turning 67 the three-year bring-forward amount would still be available in that financial year, subject to meeting the work test or work test exemption.
Retired clients approaching age 65 who want to maximise their contributions to super have a choice between triggering the three year bring-forward rule in the current financial year or a later financial year.
Harry is age 64 and retired. He turns 65 on 1 June 2020 and had a total super balance of $800,000 at 30 June 2019. He wants to maximise his non-concessional contributions (NCCs) to super and has a few choices.
Option 1: Based on current legislation, Harry can choose to maximise his contributions to super by utilising the bring-forward rule in the current financial year and contributing $300,000 as an NCC before 1 June 2020. Having exhausted the three year bring-forward amount his NCC cap space for the 2020/21 and 2021/22 financial years will be nil.
Option 2 (a): He may decide not to trigger the bring-forward rule in the current financial year and limit his NCCs to $100,000. Assuming the proposals are legislated, he may contribute a further NCC of $100,000 in the 2020/21 financial year followed by a $300,000 NCC in the 2021/22 financial year before he reaches age 67 on 1 June 2022. In total he will have contributed $500,000 in NCCs.
Option 2 (b): If Harry decides not to trigger the bring-forward rule and limits his NCC to $100,000 in the 2019/2020 financial year and the proposals are not legislated he will have missed the opportunity to utilise the bring-forward rule because he has retired and does not satisfy the work test exemption. Also, he will need to have made this $100,000 NCC prior to 1 June 2020 as this is when he reaches age 65. In total he will have only contributed $100,000 to super.
It is important to remember that the removal of the work test for individuals below age 67, as well as extending the age at which a client can utilise the three year bring-forward rule, has not yet been legislated. This adds an element of uncertainty when advising affected clients. Advisers with affected clients should review the progress of this legislation in June to decide on the timing of contributions to super. Increases in the Age Pension age and the alignment of the maximum age one may qualify for a genuine redundancy are already law and should be considered when providing advice.
The trend towards rules which are based on age relating to retirement is likely to continue. Advice for both pre and post retirees will continue to evolve as Government policy shifts in response to increased longevity.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
DisclaimerThe information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.