Macquarie Adviser Services Are TTR pensions viable for the under 60s? David Barrett & Curtis Dowel Macquarie Adviser Services November 2012

Macquarie Adviser Services

Are TTR pensions viable for the under 60s?

David Barrett & Curtis Dowel

Macquarie Adviser ServicesNovember 2012

Macquarie Adviser Services3

Agenda

1. Do TTR pension strategies still make sense for under 60s?

2. Further practical considerations in commencing a TTR pension


Do TTR pension strategies still make sense for under 60s?

David Barrett


TTR pensions for under 60s?

Recent impacts on the TTR / salary sacrifice strategy

• CC cap reduction – over 50s:

• $100k 1 July 2007 to 30 June 2009

• $50k 1 July 2009 to 30 Jun 2012

• $25k 1 July 2012 to ...

(1 July 2014 proposed re $500k threshold test)




• Tax on death benefits in pension phase:

• TR 2011/D3 – tax applicable from date of death unless dependent beneficiary is automatically entitled to an income stream

• Govt announcement 22 October 2012 in MYEFO – law to be amended from 1 July 2012 to allow tax exemption until death benefit paid




• Taxation of pension payments:

• ATO – election re form of super benefit for tax purposes not constrained by character of benefit for SIS purposes

• TTR benefits can be elected to be received as LS without causing them to be commutations for SIS purposes

• Tax Act pension phase tax exemption considerations


1. Purpose of TTR pension?

2. CC cap already full utilised? No…

$1,000 salary

Net rec’d$535

Tax at 46.5%$465

$1,000 CC

$850Accum

Acct

Pension Acct

$781

Tax $150

Tax at 46.5% less 15% = $246

Net rec’d $535

Net $69, plus

earnings tax benefit

$25k CC constraintfrom 2012/13



$850 $803 $189 $614 $46

$850 $815 $155 $660 $35

$850 $841 $46 $795 $9

• 30% conts tax for $300k+ income – impact?

MTR$1,000 salary after tax

46.5% $535

38.5% $615

34.0% $660

20.5% $795

$1,000 CC

after tax

TTR pension payment

Tax on pension payment

(15% rebate)

Net pension

rec’d

Benefit of TTR / sal sacrifice strategy *

$850 $781 $246 $535 $69

* plus impact of tax free earnings on TTR pension account balance



• 30% conts tax impact?

$1,000 salary

Net rec’d$535

Tax at 46.5%$465

$1,000 CC

$700Accum

Acct

Pension Acct

$781

Tax $300

Tax at 46.5% less 15% = $246

Net rec’d $535

Net -$81, plus

earnings tax benefit


0% tax freecomponent

(break even at 25.2% tax free)


3. CC cap already full utilised? Case 1:

Accum Acct

$500k

Pension Acct

$0

Earnings taxed:• Effective tax rate?• CGT 0%, 10%?• Asset turnover

rate?• Income/gains mix

Tax based on MAStech return assumptions (7.36% p.a.)= $2,454*

Accum Acct$0

Pension Acct

$500k

$15k pmt

Earnings tax exempt

Tax at 46.5% less 15%: $4,725

Fund member$10,275

Re-cont$10,275

NCC

0% tax free


* See Appendix 1 for return assumptions


Accum Acct

$500k

Pension Acct

$0

Accum Acct$0

Pension Acct

$500k

$15k pmt

Tax at 46.5% less 15%: $1,890

Fund member$13,110

Re-cont$13,110

NCC

60% tax free


* See Appendix 1 for return assumptions

Tax based on MAStech return assumptions (7.36% p.a.)= $2,454*

Difference $564.Note: Breakeven tax free is 48.1%

over 1 year

3. CC cap already full utilised? Case 2:


Accumulation vs TTR/re-cont strategy comparison

• Identify break-even point by varying:

1. % tax free component, and

2. gross return (after fees)

3. for each marginal tax rate: 20.5%, 34.0%, 38.5%, 46.5%



7.36% pa

Breakeven Tax Free Percentage

TTR/re-cont strategy wins above the line

Accumulation strategy wins below

the line

Accumulation or TTR/re-cont strategy46.5% MTR, 5 year analysis

See Appendix 1 and 2 for return assumptions


Case study result 1

Case study result 2


7.36% pa

Breakeven Tax Free Percentage for 38.5% MTR

TTR/re-cont strategy wins above the line

Accumulation strategy wins below

the line

Breakeven Tax Free Percentage for 34.0% MTR

See Appendix 1 for return assumptions


Accumulation or TTR/re-cont strategyVarious MTRs, 5 year analysis


Summary:

TTR pensions may still make sense for:

1. original policy purpose – i.e. phasing into retirement

2. TTR / salary sacrifice strategies to CC cap (if 15% conts tax applies)

• (if 30% conts tax applies, reliant on TFC and earnings tax break)

3. TTR / re-cont strategies depending on:

• level of tax free component

• investment return rate

• recipient’s marginal tax rate

• Consider also upfront & ongoing costs, and issues of commencing a TTR pension...



Practical considerations of implementing a TTR strategy

Curtis DowelOutplanMacquarie Adviser ServicesNovember 2012


Practical considerations for TTRs

• What to consider:

– The products

– The client

– Contributions

– The employer



• Things to watch out for:

– Product minimums & fees

– Exit fees

– Frozen assets

– Ability to refresh the pension

Products

• Minimum cash requirements



• Macquarie Wrap – pension refresh

Products

· No account details change· Account history remains· Pension re-commences for

SIS purposes



• Macquarie Wrap fee comparison – example 1

Products

Estimated fee: $4,100

Minimum fee: $369




• Macquarie Wrap fee comparison – example 2

Products


Estimated fee: $36




• SMSFs– Generally, product fees are minimised

– Administrator/accountant fees

– Audit certificates

– Segregation

– Meeting minutes & investment strategy

Products



• SMSFs – fee example– From our example earlier, we save around $564 in tax – BUT:

• $400-$800 for pension commencement paperwork• $300-$400 pa audit certificate

– An extra cost in the first year!– Savings in subsequent years reduced by $300-$400

Products



• Responsiveness

• Pay cycles

• The NCCs

Clients



• Contribution caps

• SG payments

• Existing salary sacrifice

• ‘Catch-up’ payments

Contributions

The 27 Fortnight year• eg: salary of $120k pa• SG = $10,800 pa• Recommend sal sac of

$14,200 to maximise cap• BUT if there are 27 pay

periods in the year: • SG $415.38 pf x 27• Sal sac $546.15 pf x 27• Total concessional

contributions of $25,961.31!!

Bring-forward trap• Make a $150k NCC this FY• Accidentally breach CC• Make $450,000 NCC in

2014/15• Breach of NCC cap!!

• 46.5% tax



• Treatment of salary• Where should contributions be made?

Employers

Defined benefits? Extra contributions? Employer funded insurance?

‘Matched’ contributions?


Outplan

Curtis DowelOutplanMacquarie Adviser ServicesNovember 2012


Outplan – who we are

• Small team of dedicated paraplanners

• Professional, presentable SoAs

• Fast turnaround

• Quality focused

• Fixed, transparent fees


Outplan – the process

Client meeting

Client presentation


Outplan – the process

Receive & analyse request


Why outsource your SoAs?

• You focus on what you do best

• We do what we do best

• Fixed vs variable costs

• Flexibility

• Opportunity for a 2nd opinion

• More time more clients


Are TTR pensions viable for the under 60s?

David Barrett & Curtis Dowel

Macquarie Adviser ServicesNovember 2012

Documents

Macquarie Adviser Services Are TTR pensions viable for the under 60s? David Barrett & Curtis Dowel Macquarie Adviser Services November 2012