Key year-end strategies for retirement clients
Michael McLean looks at key year-end strategies clients can apply to manage tax effectively and boost savings in light of the 2016 Federal Budget.
As we approach the end of the financial year, implementing specific strategies to help clients achieve their goals and objectives can become time critical.
Where clients are looking to increase their retirement income, boost their retirement savings and/or manage tax effectively, then the following strategies can be considered.
1) Superannuation contributions
As part of the Federal Budget, the Government has proposed to remove the annual non-concessional contribution (NCC) cap and bring-forward rule, and replace them with a $500,000 lifetime cap.
If this proposal is legislated, those who have made NCCs totalling $500,000 or more since 1 July, 2007 will not be eligible to make any further NCCs without breaching the cap.
Those who have already reached the proposed lifetime NCC cap and want to boost their retirement savings should consider concessional contributions (CCs) this financial year. Any client who has not fully utilised their CC cap for the year and is looking to boost their retirement savings may also want to consider further CCs. The CC caps for 2015/16 are shown in Table 1.
These amounts will remain the same in 2016/17, with those aged 49 or over on 30 June, 2016 eligible for the higher $35,000 cap. As part of the Federal Budget, the Government has proposed to reduce the CC cap to $25,000 from 1 July, 2017.
The Government has also proposed to reduce the Division 293 tax threshold from $300,000 to $250,000 from 1 July, 2017. This means that anyone above the $250,000 threshold1 will be subject to an additional 15 per cent tax on superannuation contributions above this threshold.
Considering these proposals, maximising CCs this and next financial year should be considered by clients looking to maximise their retirement savings.
This will be particularly relevant for those who are eligible to claim a personal deduction for contributions in this financial year, i.e. those who have met age requirements and are self-employed2, unemployed or retired, because they may have more flexibility to make the necessary contributions before 30 June, 2016.
2) Contribution splitting
Contribution splitting is a strategy that can help couples:
- Equalise their superannuation benefits;
- Keep the high income earner with a super balance under $500,000 to retain eligibility for the proposed catch-up concessional contributions from the Federal Budget;
- Access superannuation benefits sooner; and/or
- Reduce Centrelink/DVA assessable assets by splitting contributions to a younger spouse.
A client can split up to 85 per cent of CCs (up to the CC cap) where their spouse has not met a condition of release for their superannuation benefits, by applying to their fund by the earlier of:
- The day they request their entire account balance to be rolled over, transferred or cashed in for the financial year in which the contribution was made; or
- The end of the following financial year after the year in which the contribution was made.
Clients wishing to utilise this strategy for CCs made during the 2014/15 financial year must apply to do so before 1 July, 2016.
Note: This strategy may become more significant for clients if the proposed lifetime NCC cap is legislated, as this may restrict those wanting to recontribute superannuation benefits as an NCC to their spouse.
Example
John (64) is married to Angela (54). John is working but planning to retire when he turns 65 on 1 October, 2016 and looking to maximise his Age Pension benefits.
They have each previously used the proposed lifetime NCC cap. John made $35,000 CCs to superannuation during 2013/14 and 2014/15. Angela is retired.
John does not want to risk making a NCC to Angela's superannuation given the recent Federal Budget proposal. He decides to split $29,750 (85 per cent of $35,000) of his 2014/15 CCs to Angela. John makes an election to his superannuation fund before 1 July, 2016. The result is that John is able to reduce his assessable assets by $29,750, and also reduce his deemed income by up to $967.
3) Assets Test changes
Changes to the Assets Test thresholds and taper rate from 1 January, 2017 can affect the pension entitlements of your retiree clients (see Table 2).
For those impacted, there can be other important implications, including:
- Pensioners who lose their entitlement will also lose their Pensioner Concession Card (but will be eligible for a Commonwealth Seniors Health Card);
- A reduced pension bonus (for those who are registered) as the amount of the pension bonus is based on the retiree's means-tested Age Pension entitlement at the time of claim;
- A grandfathered account-based pension (ABP) becoming deemed where the client's Age Pension entitlement reduces to nil and that client subsequently becomes entitled to an Age Pension at a later time.
To help enhance outcomes for pensioner clients, you can consider a range of strategies including:
- Gifting within allowable limits;
- Bringing forward home renovations;
- Investment in funeral bonds up to $12,250 or prepaying funeral expenses;
- Superannuation contributions to a spouse under Age Pension age; and/or
- Lifetime annuities.
When considering these strategies, it is worth noting the following as we approach the end of the financial year:
- Where gifting is an appropriate strategy, using the $10,000 allowable limit this financial year and $10,000 next financial year (subject to the rolling five-year cap4) can help minimise assessable assets before the changes take effect;
- Starting an annuity before the end of the financial year can allow the annuity's assessable asset value to be reduced by half its deduction amount (where available) prior to 1 January, 2017; and
- Contributions to a spouse's superannuation fund (where the spouse is under Age Pension age) must comply with the relevant contribution caps with consideration given to the proposed lifetime NCC cap (discussed under ‘superannuation contributions' on page 40.)
Example
Bob (68) and Jane (65) are homeowners, currently receiving $465 per fortnight Age Pension, and have two adult children. They have the following assets:
- $10,000 personal effects;
- $50,000 cash; and
- $400,000 ABP each drawing $20,000 per anum (Bob is grandfathered with a deduction amount of $25,000).
They have the following goals:
- Maintain Age Pension to continue their Pensioner Concession Card eligibility, retain Bob's grandfathered ABP and receive income;
- Assist each child with their mortgage; and
- Cover the cost of their funeral.
Their current Age Pension projection is shown in Chart 1.
They could consider gifting $5,000 to each child before 1 July, 2016, then gifting another $5,000 each after 30 June, 2016 and investing $12,250 each into separate funeral bonds.
Even after implementing these strategies, they are projected to lose their Age Pension on 1 January, 2017 (shown by the current portfolio).
They could also consider investing $120,000 each into a lifetime annuity6 before 1 July, 2016. By implementing this strategy they are projected to continue receiving the Age Pension beyond 1 January, 2017 (shown by the new portfolio) (see Chart 2).
By investing in the lifetime annuity, their assessable assets will reduce by half the deduction amount before 1 January, 2017. This will assist them to continue to maintain Age Pension. Given the assumptions used for Chart 1 and Chart 2, they are projected to continue to receive Age Pension beyond 1 January, 2017.
Michael McLean is the technical services analyst at Challenger Limited.
FOOTNOTES
1) Income for surcharge purposes plus low-tax contributions.
2) During the income year the total of assessable income, reportable fringe benefits and total reportable employer superannuation contributions as an employee are less than 10 per cent.
3) Source: Scott Morrison press release (7 May 2015), ‘Fairer access to a more sustainable pension'.
4) $30,000 over five financial years.
5) Centrelink rates and thresholds as at 20 March 2016; Based on ABP returning seven per cent per annum with income drawdown of five per cent.
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