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Accurium webinar SMSF insights and updates

The information in this presentation has been prepared by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is general information only and is not intended to be financial product advice or legal advice and should not be relied upon as such. Whilst all care is taken in the preparation of this presentation, no warranty is given with respect to the information provided and Accurium is not liable for any loss arising from reliance on this information. Scenarios, examples and comparisons are shown for illustrative purposes only and should not be relied on by individuals when they make investment decisions. We recommend that individuals seek professional advice before making any financial decisions.

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Accurium SMSF Retirement Insights Volume 3

Presented by: Doug McBirnie

Doug shares some of the key findings in Accurium’s third Retirement

Insights paper bridging the prosperity gap. Our third insights is a follow

up from our first paper looking at the issues of retirement adequacy

from an SMSF trustee perspective.

SMSF technical updates

Presented by: Melanie Dunn

This session will present an update on some important changes

that have occurred over the last six months that may affect your

SMSF clients.

Agenda

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SMSF Retirement Insights Presented by: Doug McBirnie

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Agenda Accurium SMSF Retirement Insights

How have SMSF balances changed over FY14?

Do SMSF trustees have enough to fund a comfortable retirement?

Different spending patterns in retirement

Allowing for more conservative trustees

Aspiring to a more prosperous retirement

Acknowledging money held outside super

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Median SMSF transactions for couples in our database during the year ended 30 June 2014:

Median benefit payments $60,000 Median contributions $48,000 Median imputed investment returns $77,000

Changes over FY14

Year ended 30 June 2010 30 June 2011 30 June 2012 30 June 2013 30 June 2014

Median balance for two member SMSFs

$971,000 $998,000 $973,000 $1,037,000 $1,091,000

Year on year increase in balance

n/a 2.8% -2.5% 6.6% 5.2%

Median imputed investment return

6.9% 6.5% 0.6% 9.4% 8.2%

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Using Accurium’s sophisticated Retirement Adequacy Model we estimated the savings needed to support Association of Superannuation Funds of Australia (ASFA) Comfortable lifestyle with 80% confidence:

Is it enough for a comfortable retirement?

Age at retirement Capital required to support $58,444 p.a.

55 $1,196,000

60 $1,078,000

65 $897,000

70 $741,000

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Proportion of SMSF couples reasonably confident of achieving the ASFA Comfortable Retirement Standard

Is it enough for a comfortable retirement?

61%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70Age entering retirement

Proportion of SMSFs able to support ASFA Comfortable with 80% probability with no reduction in spendingat older ages

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Spending habits often change over the course of retirement:

More active in early retirement, holidays etc. Becoming less active at older ages with lower spending Medical costs can increase with age Single households may need a lower budget than couples

Can allow for these changes in our projections:

Spending reduces by 10% from age 85 Spending reduces by 30% when first spouse passes away

Changing spending needs over retirement

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Savings required for ASFA Comfortable Retirement Standard with 80% confidence and allowing for spending to reduce at older ages vs. median balance

Do SMSF trustees have enough?

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70

Savi

ngs

/ bal

ance

Age

Savings required at 80% confidence level Median Balance

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Proportion of SMSF couples reasonably confident of achieving the ASFA Comfortable Retirement Standard, allowing for spending to reduce at older ages

Do SMSF trustees have enough? cont.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70Age entering retirement

Proportion of SMSFs able to support ASFA Comfortable with 80% probability allowing for spending to reduce atolder ages

• 76%

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Estimate of the savings needed to support ASFA Comfortable lifestyle with 95% confidence:

Trustees who seek more than 80% confidence

Conservative trustees

Age at retirement Capital required to support $58,444 p.a.

55 $1,264,000

60 $1,035,000

65 $798,000

70 $609,000

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Proportion of SMSF couples who can afford ASFA Comfortable Retirement Standard with 95% confidence.

Trustees who seek more than 80% confidence

Conservative trustees cont.

65%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70Age entering retirement

Proportion of SMSFs able to support ASFA Comfortable with 95% probability allowing for spending toreduce at older ages

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Savings needed to support $100,000 p.a. in retirement with different levels of confidence vs. median SMSF balances

Aspiring to a more prosperous retirement

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70Age entering retirement

80% confidence 95% confidence Median balance

Savings gap

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Proportion of SMSF couples able to afford $100,000 p.a. in retirement with differing levels of confidence.

Aspiring to a more prosperous retirement cont.

34%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70Age entering retirement

Proportion of SMSFs able to support $100,000 p.a. with 80% probability

Proportion of SMSFs able to support $100,000 p.a. with 95% probability

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What about savings outside of super? Our data suggests SMSF trustees hold only 65% of their investable assets in their SMSF Savings needed to support $100,000 p.a. in retirement with differing levels of confidence vs. estimated median total savings.

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70Age entering retirement

80% confidence 95% confidence Median total savings for SMSF couples

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Full report available at www.accurium.com.au

Questions?

Accurium SMSF Retirement Insights

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SMSF updates to 1 July 2015 Presented by: Melanie Dunn

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Claiming ECPI with segregated method

Changes to 2015 SMSF annual return

Rising age can access superannuation benefits

New assets test rules

End of transition period for collectables and personal use assets

New treatment of excess non-concessional contributions

ATO update on documentation required when fail to meet the minimum pension standards

Rates and thresholds updated for 2015-16

Technical updates to be covered Agenda

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Claiming ECPI is optional

When you do need an actuarial certificate

Unsegregated method

When you don’t need an actuarial certificate

SMSF is fully in pension phase with only account-based type pensions for entire income year - fund is segregated

Assets segregated to account-based pension interests in place for the entire income year and want to claim ECPI using segregated method

Update on claiming ECPI

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What remains unchanged:

You can segregate assets part way through the year

You can use the segregated method when pensions commence during the year

What was under consultation:

Is a ‘segregated’ actuarial certificate required where the pension was not in place for the full income year?

E.g. Fund in accumulation phase moves into full pension phase during the income year

Result of consultation - you can continue to use the segregated method without an actuarial certificate

ATO guidance on the segregated method

Update on claiming ECPI

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ATO aim to finalise electronically lodged returns within 12 business days

Some key changes:

Supervisory levy - $259 on lodgement of 2015 return

Tax rates applied to no-TFN quoted contributions, non-arm’s length income and income of non-complying SMSFs increased

Penalty units increase to $180 from 31 July 2015

Provide different bank accounts to receive tax refunds and superannuation payments

For more information on changes to 2015 tax return see our blog on this topic: https://www.accurium.com.au/blog/tax-time-2015-%E2%80%93-changes-affecting-smsf-tax-returns

Changes to 2015 SMSF annual return

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Preservation age is the minimum age to access preserved superannuation benefits

E.g. to start a TTR pension a member must have reached preservation age.

If a member turned age 55 before 1 July 2015 there is no change, they can access super From 1 July 2015 preservation age increases and will depend on date of birth

It is important for SMSF trustees to be aware of each member’s preservation age so they don’t accidentally pay benefits to a member who is not eligible.

Accessing benefits – rise in preservation age

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New preservation ages:

Members born between 1 July 1960 and 30 June 1961 turn age 55 in 2015-16 year

– cannot access superannuation during the year as their preservation age is now 56

– will be able to access benefits when they turn age 56 in 2016-17 year

For a given target retirement age, less opportunity to employ a TTR strategy to maximise tax-free benefits

Accessing benefits – rise in preservation age

Date of birth Preservation age

Financial year will reach preservation age

Before 1 July 1960 55 Already attained

1 July 1960 – 30 June 1961 56 2016-17 1 July 1961 – 30 June 1962 57 2018-19

1 July 1962 – 30 June 1963 58 2020-21

1 July 1963 – 30 June 1964 59 2022-23

From 1 July 1964 60 1 July 2024 onwards when turns 60

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Assets test thresholds and taper rate increasing at 1 January 2017 Increase in full age pension thresholds – approximately 50,000 part-pensioners will become full pensioners

Increase in taper rate – reduction in amount of assets clients can have and still receive part-pension – Anyone affected will be guaranteed eligibility for healthcare card – for every $100,000 over the full age pension threshold entitlement will reduce by

$7,800pa instead of $3,900pa

As assets are used up in retirement clients may need to wait longer to get the age pension but then may receive a full age pension sooner. For more information and case studies view our tech hub article here: https://www.accurium.com.au/technical-hub/technical-updates/the-rebalancing-of-the-assets-test

New assets test rules

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Assets acquired pre-1 July 2011 must comply by 1 July 2016 Must meet the Sole Purpose Test with no current day benefit – Regulation 13.18AA – retain and comply – dispose of asset

If retain must: – be insured in fund name – not be leased to a related party – not be stored in private residence of related party – not be used or displayed in premised owned by a related party – decision on storage documented and written record kept for 10 years For more information read our article on the technical hub: https://www.accurium.com.au/technical-hub/technical-updates/transition-period-for-collectables-and-personal-use-assets-expires-1-july-2016

Transition for collectables and personal use assets

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SMSF owns a valuable painting purchased at auction in 1988 Currently valued at $3 million Is displayed in the trustee’s main residence and insured in their personal name Will not meet the new requirements as at 1 July 2016 1. Dispose

– can be sold to a related party including trustees on arms length basis

– paid out as in-specie payment if members meet condition of release

2. Retain – arrange for painting to be properly stored – insure in name of the fund

Often rare or valuable, high sentimental value, significant fund asset Can take time to sell or find appropriate storage and insurance – check fund assets now!

Case study Transition for collectables and personal use assets

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New rules passed 19 March 2015 that apply to contributions made in 2013-14 onwards

Excess non-concessional contributions can be released from superannuation and taxed in the hands of the member instead of remaining in fund and being taxed at top marginal rate The new process: – when caps are breached ATO issues written excess non-concessional contribution

determination identifying amount can elect to release – if election not made amounts remain in SMSF and taxed at top marginal rate – the release amount will include associated earnings based on specified formula

calculated by ATO using the general interest charge (GIC) – member will be entitled to a tax offset of 15% of the associated earnings

Treatment of excess non-concessional contributions

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James breached non-concessional cap by $50,000 in 2014-15 Received written determination 1 Nov 2015: total release amount of $55,871 Total = $50,000 excess + 85% associated earnings, associated earnings determined by ATO to be $6,907 using general interest charge formula

1. Elect to release: – ATO amends James’ tax return to include $6,907 as extra assessable income and

non-refundable tax offset of $1,036 (15% earnings). – at marginal tax rate of 37% and 2% Medicare would pay an extra $1,658 in tax.

2. Don’t release: – excess taxed at 49%, SMSF liable to pay $24,500 in tax

For all but small breaches by persons in top marginal tax bracket electing to release excess contributions will generally provide a better outcome. For more information read our blog: https://www.accurium.com.au/blog/removal-of-double-taxation-on-excess-non-concessional-contributions

Case study Treatment of excess non-concessional contributions

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Consequences of failing to meet minimum pension standards – pension ceases 1 July of that year – any payments made treated as lump sums – lose ability to claim ECPI for that pension ATO has provided confirmation that if pension standards are met in following year – a new income stream needs to be commenced including new pension

documentation – pension does not just continue and become eligible again to claim ECPI ATO’s response when asked about trustee obligations:

‘At a minimum, the trustee would be required to have new documentation evidencing the revaluation of assets at market value and the recalculation of the minimum payment amount required.

Additionally, the trustee would be required to have records reflecting the recalculation of the tax free and taxable components of the superannuation interest supporting the superannuation income

stream’.

ATO: failing to meet the minimum standards

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Contribution caps: – concessional cap $30,000 ($35,000 for persons 49 or over on 30 June 2015) – non-concessional cap $180,000, bring forward cap $540,000

Capital gains cap $1,395,000 – increase of $40,000 from 2014-15

Low rate cap $195,000 – increase of $10,000 from 2014-15

ETP cap: – life benefit termination payments $195,000 (increased $10,000) – death benefit termination payments $195,000 (increased $10,000)

Superannuation guarantee remains at 9.5% due to pause in increase until 1 July 2021

Super co-contribution: – lower income threshold $35,454 – higher income threshold $50,454

A handy guide of the latest rates and thresholds can be found in our fast facts guide: https://www.accurium.com.au/technical-hub/smsf-general/fast-facts

Rates and thresholds updated for 2015-16

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Preservation age has increased: check that your clients are aware of the age at which they can access super benefits

New pension documentation: required to restart a pension that failed to meet the minimum pension standards

Check funds for pre-1 July 2011 collectable and personal use assets:

ensure funds comply at 1 July 2016

Confirmation from the ATO on how to claim ECPI using the segregated method: No actuarial certificate required for the segregated method Visit our technical hub and blog at www.accurium.com.au

Key takeaways

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