By Zilla Lyons
THE Transition to Retirement strategy using an allocated pension can be set up by a worker who is at least 55 years old.
At this stage of life some workers are already salary sacrificing heavily, perhaps even optimising their concessional contribution limit – the amount of contributions to super where someone gains a tax concession, so it includes employer contributions and salary sacrifice contributions for employees or deductible contributions for the self-employed.
After commencement of the transition to retirement allocated pension, income drawn, together with after-tax salary, may result in a surplus of income for living expenses.
This excess income often sits in the bank somewhat unproductively, usually raising a tax liability on the interest, or worse still is frittered away by unnecessary spending.
Similar arrangements may occur with self-employed people using a transition to retirement strategy. In their case their concessional contribution limit refers, in the main, to their contributions where a tax deduction is claimed.
The Government says you cannot add funds to an allocated pension once commenced. As transition to retirement pensions are used by people working between the ages of 55 and 65, the worker may make an after-tax contribution to their super account, rather than leave those excess funds in the bank. Whether working or not, once the person turns 65 their super is accessible to them and their pension converts automatically to an unrestricted allocated pension – the condition on drawing an annual amount less than 10 per cent of the account balance disappears.
The downside of this birthday is that the ability to contribute to super after turning 65 is subject to a work test. More about that in a moment.
Provided contributions do not exceed the contribution limits, anyone under the age of 65 can contribute to super whether they are working or not.
It is only people aged 65 and over who must satisfy a work test prior to making super contributions. The work test says that the contributor has worked 40 hours in a consecutive 30-day period, prior to making the contributions for that particular year.
The concessional contribution limit is currently $35,000 and the after-tax or non-concessional limit is $180,000.
For every year after turning 65 and prior to age 75, the worker must satisfy the work test prior to making any super contributions.
Now excess income can be added to a super account, commonly called the super accumulation account, in the form of an after-tax or “lump sum” contribution.
Please remember that a normal super account is running concurrently with the transition to retirement allocated pension account and building up again due to ordinary employer, salary sacrifice and/or deductible contributions.
There comes a time when the funds in the super account are significant enough to warrant moving into the pension environment, as the earnings there are not subject to tax, which may provide an additional return. At this time there are two main possibilities.
Surplus Income Solutions:
1) It is possible to start another new allocated pension and you would then have two allocated pension accounts. Some people could find this a little confusing and unnecessary, unless its purpose is to segregate certain types of funds.
2) A more commonly used option is to roll back the existing allocated pension to the super environment and start a new transition to retirement pension with the new combined balance. The process is not difficult and implementation assistance, on a no-advice basis, comes at no direct cost to the user in our fund – a vital part of our member service. If still in the workforce, the user would probably want to leave a small super account open; a super account is required to receive employer contributions and those from the individual or their spouse.
Another advantage of this super account is that it usually goes hand in hand with some death and total disability insurance cover and in our Fund this cover can continue until the person reaches 70, even if the account is not receiving super contributions as a by-product of employment.
Members contemplating this roll back strategy may be affected by changes to Centrelink deeming rules from January 1, 2015. Members are encouraged to seek financial advice regarding the impact of these changes.
When an allocated pension is commenced the question arises as to how the pension will be treated in the event of the death of the user.
Various beneficiary options are available including making the pension payable on death to super beneficiaries including the estate (through the legal personal representative) or alternatively, the pension can be made reversionary to the spouse at commencement.
A reversionary pension continues to the surviving spouse virtually uninterrupted and the spouse can therefore leave the money in the pension environment and continue to draw pension income.
The reversionary option can only be chosen at the commencement of the pension. Consider a situation where the original pension was not reversionary to the spouse but later the pensioner had a change of mind and wanted a reversionary pension. In this case the original pension would need to be rolled back into super and a new pension started with the reversionary option taken.
The reversionary option does not bind the surviving spouse to continuing the allocated pension, as they can cash-out at will if they are over age 65 or have satisfied a superannuation condition of release.
What a reversionary pension does do is provide the survivor with more options.
If left to a superannuation dependant via the beneficiary nomination, rather than the reversionary option, the money would be cashed out of the super environment and the survivor may not necessarily be eligible to contribute to super at that stage.
One great benefit of an allocated pension with Australian Catholic Superannuation is that on the death of the pensioner, a superannuation dependant beneficiary can receive an anti-detriment payment.
If the pension is cashed out, this anti-detriment payment can mean extra benefits paid, in addition to the pension account balance, as it is calculated by a formula, based on the taxable component of the funds remaining in the pension.
Allocated pensions and grandfathering rules
From 1 January, 2015, when a new allocated pension is started or a person first applies for a Centrelink benefit (including a Commonwealth Seniors’ Health Card, the allocated pension income will be subject to the Centrelink deeming rules.
Based on the allocated pension assets, Centrelink will “deem” the investment to earn a certain return, irrespective of the return actually received.
This treatment will not be as Centrelink Income Test-friendly as the current treatment of allocated pensions. However, to have the current treatment grandfathered to continue in 2015, the allocated pension must be in existence by December 31 and the user must be on a Centrelink benefit at that time.
If the Centrelink benefit lapses or the allocated pensioner is not on a Centrelink benefit at year- end, then on later application the new deemed treatment of allocated pensions will apply.
Zilla Lyons is a regional manager for Australian Catholic Superannuation.
Any advice contained in this article is of a general nature only, and does not take into account your personal objectives, financial situation or needs. Prior to acting on any information in this article, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek independent financial advice if you are unsure of what action to take. Financial advice is available to members through Industry Fund Services Pty Ltd (AFSL 232514) who can be contacted on 1300 658 776.