The last month has seen the Australian Stock Exchange (ASX) recover strongly after a disastrous start to the new financial year. Whilst we are well short of the ASX highs of mid-2007, we may start to see some stability with recent positive news from Europe and other parts of the world.
From a strategic point of view, it is important to start thinking about some key strategies that will bolster your clients' superannuation savings in a market recovery.
1. Boost the 10 per cent pension limit with a transition to retirement 'reboot'
This effectively implemented transition to retirement strategy can add tens of thousands of dollars to a member's retirement savings. For some clients who regularly take a 10 per cent maximum pension, recovering markets can provide the ability to roll back the existing income stream and reset the pension with a higher balance.
Conversely, if clients are looking to take the smallest pension possible, especially in light of the 25 per cent reduced minimum for the 2011/12 financial year, now may be an opportune time to roll back their pension to reduce the amount required to be taken for the financial year.
2. Locking in tax-free proportions
The use of recontribution strategies is still one of the most effective tools to build greater tax efficiency in income streams under age 60 and for estate planning purposes.
The creation of multiple pensions with additional contributions or recontributions allows a member to potentially benefit from a higher tax-free proportion when drawing an income stream from the fund.
Subject to the level of pension taken each financial year, you can continue to grow the higher tax-free super balance when markets rebound.
In poor markets, there are some significant tax savings that can be obtained by rolling back pension to accumulation phase to 'absorb' the negative returns against the member's taxable component, rather than proportionately against their tax-free and taxable components.
At an appropriate time in response to recovering markets, the ability to recommence the pension allows for the member to lock a higher tax-free component, saving tax on pensions taken prior to 60 and providing long-term benefits for non-dependent beneficiaries.
3. Have you considered segregation?
To further benefit the use of multiple pensions, trustees have the ability to segregate specific assets to different members, pools of members or different superannuation interests. For example, by applying the fund's growth assets to a member's super interest with a 100 per cent tax-free proportion, it can potentially:
- Accelerate the growth of the account balance;
- Provide a greater pension amount that can be withdrawn under a transition to retirement income stream; and
- Decrease the fund's potential future exposure to death benefits tax for non-dependants.
Segregation may also be useful where the fund is not 100 per cent in pension phase (ie one member in accumulation, one in pension). It could be used to assist in the realisation of a particular asset which has risen significantly off a low cost base.
By applying segregation, the particular asset(s) with a significant capital gain is fully exempt from tax, rather than partially exempt by having an unsegregated fund.
It is important that any segregation strategy is appropriately documented by the trustees to show specific assets being applied to a particular member, interest or pool of members.
4. Time to build reserves?
Reserves within a self-managed super fund can play an important current-day and longer-term estate planning role.
For the majority of self-managed superannuation funds (SMSFs), you typically see any positive returns applied towards each member's balance.
However, it is important to consider whether to capture some of these positive earnings into fund reserves to look at implementing a range of strategies including future anti-detriment payments, self-insuring members, enabling future crediting of 100 per cent tax-free pensions, etc.
Fund reserves can play an integral role in any SMSF and are typically generated by earnings over time. Planning to capitalise on recovering markets allows for SMSFs to implement many of these reserving strategies effectively.
These are just some strategies that you can start to plan with your clients to help bolster your client's superannuation savings in recovering markets.
Aaron Dunn is the managing director of The SMSF Academy and author of thedunnthing blog.
