macquarie adviser services are ttr pensions viable for the under 60s? david barrett & curtis...
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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
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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)
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TTR pensions for under 60s?
Recent impacts on the TTR / salary sacrifice strategy
• 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
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TTR pensions for under 60s?
Recent impacts on the TTR / salary sacrifice strategy
• 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
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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
TTR pensions for under 60s?
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$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
TTR pensions for under 60s?
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• 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
TTR pensions for under 60s?
0% tax freecomponent
(break even at 25.2% tax free)
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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
TTR pensions for under 60s?
* See Appendix 1 for return assumptions
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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
TTR pensions for under 60s?
* 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:
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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%
TTR pensions for under 60s?
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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
TTR pensions for under 60s?
Case study result 1
Case study result 2
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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
TTR pensions for under 60s?
Accumulation or TTR/re-cont strategyVarious MTRs, 5 year analysis
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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...
TTR pensions for under 60s?
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Practical considerations of implementing a TTR strategy
Curtis DowelOutplanMacquarie Adviser ServicesNovember 2012
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Practical considerations for TTRs
• What to consider:
– The products
– The client
– Contributions
– The employer
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Practical considerations for TTRs
• Things to watch out for:
– Product minimums & fees
– Exit fees
– Frozen assets
– Ability to refresh the pension
Products
• Minimum cash requirements
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Practical considerations for TTRs
• Macquarie Wrap – pension refresh
Products
· No account details change· Account history remains· Pension re-commences for
SIS purposes
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Practical considerations for TTRs
• Macquarie Wrap fee comparison – example 1
Products
Estimated fee: $4,100
Minimum fee: $369
Estimated fee: $4,018
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Practical considerations for TTRs
• Macquarie Wrap fee comparison – example 2
Products
Estimated fee: $4,100
Estimated fee: $36
Estimated fee: $4,059
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Practical considerations for TTRs
• SMSFs– Generally, product fees are minimised
– Administrator/accountant fees
– Audit certificates
– Segregation
– Meeting minutes & investment strategy
Products
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Practical considerations for TTRs
• 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
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Practical considerations for TTRs
• Responsiveness
• Pay cycles
• The NCCs
Clients
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Practical considerations for TTRs
• 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
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Practical considerations for TTRs
• Treatment of salary• Where should contributions be made?
Employers
Defined benefits? Extra contributions? Employer funded insurance?
‘Matched’ contributions?
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Outplan – who we are
• Small team of dedicated paraplanners
• Professional, presentable SoAs
• Fast turnaround
• Quality focused
• Fixed, transparent fees
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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