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Webinar: Strategies for Pensions & Estate Planning Presented by AARON DUNN The SMSF Academy © The SMSF Academy 2012

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  1. 1. Webinar:Strategies for Pensions & Estate PlanningPresented by AARON DUNN The SMSF Academy The SMSF Academy 2012
  2. 2. Housekeeping Attendees are muted for the session Presentation slides available in underMaterials box Also contained within session login link You can type questions to thepresenter(s) from your screen Webinar recording to be uploadedinto the SMSF Academy MemberResource Library Will also be available to purchase recording and transcript This session will be issued with SPAA& FPA CPD points once assessed
  3. 3. SMSF members will choose one of two models when reaching draw down phase: S.K.I Build a SMSF Model Pension Plan
  4. 4. http://www.spendingyourkidsinheritance.com
  5. 5. Taking minimum benefits from super up to a males life expectancy from age 60will leave the highest balance with a SMSF when their reach their life expectancyMale 60 yearsLife Expectancy of25.9 yearsMinimumpension reachesequivalent levelto Funds RoR @say 7%Structuring Income Streamsbecomes very important
  6. 6. Strategies for Pensions & Estate PlanningOpportunities with preservationcomponents
  7. 7. Impact on UNP with Transition to Retirement Proportioning rule states that tax-free & taxable componentsmust be taken in proportion to each other Accumulation: Based on component before lump sum benefit paid Pension: Proportion determined at commencement of income stream SIS or Tax Law does not impose any proportioning topreservation components Can separate unrestricted non-preserved benefits from preserved and restricted benefits Why? Priority of cashing benefits Allocation of fund earnings
  8. 8. Impact on UNP with Transition to Retirement Case Study Greg (55) has $700,000 account balance within SMSF Components include preserved $500,000, unrestricted$200,000 Target pension income of $60,000 p.a. (CPI, 3%) Access to capital is important to Greg How do we best structure the pension(s) for Greg? Do we commence one or more pensions? Two pensions will allow for Account Based Pension to becommenced with unrestricted non-preserved benefits
  9. 9. Impact on UNP with Transition to Retirement$300,000 $800,000 $700,000$250,000 $600,000$200,000 $500,000$150,000 $400,000$100,000 $300,000 $50,000 $200,000 $-$100,000 5556 5758 59 60Single TRISTRIS & ABP Balance Within 4 years, single pension has totally eroded unrestricted benefits Additional $243,331 of unrestricted benefits available after five (5) years byrunning separate income stream (ABP)
  10. 10. Strategies for Pensions & Estate PlanningMulti-pension strategies
  11. 11. Maximising benefit payments Maximise benefit of locking in the tax-free and taxablecomponents Why is this important? 1. Greater tax efficiency for pensions under 60 years of age 2. Estate planning benefits Create multi-pensions where undertaking recontributions Ability to elect which interest to draw benefits from Use them to advantage in a downward investment market Full commutation and absorb decrease in taxable component
  12. 12. Benefit of a multi-pension strategy Case Study Ted (60) has recently retired $1,000,000 balance in SMSF ($200,000 TFC) Requires $60,000 pension p.a. (CPI 3%) Fund earnings at 6% p.a. Undertakes recontribution strategy of $450,000 TC = $360,000 + TFC = $90,000 Should Ted commence one or more pensions?
  13. 13. Benefit of a multi-pension strategyOne pension Multi-pensions Original components include Original components include20% TFC 20% TFC Post recontribution includes Recontribution creates a new56% TFC (44% TC)super interest (ABP#2) with100% TFC All earnings and benefits taken ABP#1 commences withmust be applied in proportionrecontribution (20% TFC)to when the income stream All earnings and benefits to becommenced applied proportionately i.e. 56% TFC / 44% TC Choice of above minimum pension amounts After 10 years - $394,673 of After 10 years - $248,089 oftaxable componenttaxable component
  14. 14. Benefit of a multi-pension strategyChange in Tax-Free Component$650,000.00$600,000.00$550,000.00$500,000.00$450,000.00$400,000.00$350,000.00$300,000.001 2 34 5 6 7 8 9 10Single pension Multi-pension $113,636 improvement in the tax-free component byrunning a multi-pension strategy (6% net earnings)
  15. 15. Benefit of a multi-pension strategy What impact does the fund earning rate have?Strategy Benefit based on fund earning rate$140,000.00$120,000.00$100,000.00 $80,000.00 $60,000.00 $40,000.00 $20,000.00$-3% 4%5% 6% 7% 8% Strategy Benefit Multi-pensions can play a key role with market volatility
  16. 16. Strategies for Pensions & Estate PlanningPensions with volatile investmentmarkets
  17. 17. Capitalising on market volatility Investment markets can fluctuated over past five (5) years dueto Global Financial Crisis (GFC) SMSF pension plan will allow member to benefit fromopportunities in both downward and upward investmentmarkets Requires active management to provide greater tax efficiencyor longer-term estate planning benefits
  18. 18. Benefiting from a poor investment marketExample Arthur drawing an Account Based Pensionwith an account balance of $1,000,000 at30 June 2011 Includes 50% Tax-Free proportion Poor share market performance showsportfolio decreased to $800,000 dropped 20% in 2 months Do nothing = benefits reduceproportionately from commencement ofincome stream $400k TFC / $400k TC Is there an alternative solution forArthur?
  19. 19. Benefiting from a poor investment market Full commutation at 30 June 2011 = $500,000 TFC / $300k TC NB. Not 1 July otherwise, pro-rata minimum (1/365th) pension required to be withdrawn Commence new income stream from 1 September 2011 62.5% tax-free proportion Result = 12.5% improvement in tax-free component Under age 60: reduced Arthurs taxable income 60 years & over: improved tax on lump sum death benefit when paid to non-dependant Opportunity Cost = 2/12ths tax exemption for financial year @ 4% Fund income = $6,667 share of income x 15% = $1,000 tax
  20. 20. Investment Segregation Ability to segregate specific assets within an SMSF to amember or pool of members Pension Pool / Accumulation Pool / Reserve Pool Class of Membership Why segregate? Tax exemption / tax deduction (e.g. LRBAs) Members have different risk tolerances Accelerate the tax-free proportion of an income stream Improve the tax effectiveness of a TRIS (under 60) ATOs views (NTLG Super Technical Group March 2010) ATO typically expects total segregation of an asset not half a property or part of a bank account ATO to provide more information on topic, including new ATO publication on pensions in July 2012
  21. 21. Using segregation or member pools forinvestment succession Ella (55) has $420,000 and wishes to start a TRIS on 1 July 2009 Includes $20k TFC She has the ability to make in-specie share transfer of $330,000 as NCCcontribution Combine or setup two pensions (multi-pensions)? If setup two pensions: Can elect to segregate to each pension account Can assign aggressive assets (i.e. shares) to TFC pension ($330k) Share market rebounds 30%; overall fund portfolio increases 15% TRIS #1 = $420,000 x 1.032* (growth) - $42,000 (pension) = $391,500 TRIS #2 = $330,000 x 1.30 (growth) - $33,000 (pension) = $396,000 Increased balance and tax efficiency of TRIS #2 as 100% tax-free Not assessable even through