1. Chapter 11 Retirement Planning
PowerPoint presentation by
Fariba Ahmadi-Pirshahid
©2014 John Wiley & Sons Australia, Ltd

2. Learning objectives After studying this chapter you should be able to:
explain why it is important to plan for retirement
outline the three phases of retirement
calculate how much is needed to fund a particular income stream
differentiate between ordinary money and superannuation money
outline the tax consequences of withdrawing a lump sum from superannuation to fund retirement
differentiate between the different types of retirement income streams
calculate the deductible amount of an income stream
contrast and compare account-based and non-account based income streams
explain the tax advantages associated with transition to retirement income streams
discuss what constitutes an adequate retirement income.

3. Introduction Retirement planning is a long term process
Part of retirement planning is determining how much a person needs to accumulate in order to fund their desired lifestyle in retirement
Having accumulated sufficient funds for retirement, decisions need to be made about how these funds are used
Should the individual take a lump sum or an income stream?
If the individual takes an income stream then what type of income stream should they take?

4. What is retirement planning?
Planning involves making choices. Retirement planning requires an individual to make many choices, including:
How much current consumption
am I prepared to forgo in order to
fund future consumption?
How aggressive should my
investment strategy be?
How much do I need to accumulate in order to fund my desired lifestyle in retirement?
- Having ‘retired’ there are still many choices to be made, including:
- What does retirement actually mean? Does it mean stopping work or working less? How will I know when I am retired?
- How do I access my retirement savings?

5. Individual’s needs in retirement
Retirement brings with it a change in lifestyle to satisfy the same needs
Maslow’s hierarchy of individual needs:
needs at higher levels cannot be satisfied unless lower level needs in the hierarchy are satisfied
The hierarchy starts with base level needs such as water, food, shelter and moves up to safety, love and friendship needs, self-esteem and self satisfaction needs
Funding available in retirement determines which one of the needs can be satisfied in retirement

6. The three phases of retirement
The average Australian retiring today might reasonably expect a retirement period of 20 to 30 years — over that period, the individual might go through a number of phases:
The active phase of retirement — some may continue to work part time — more time for hobbies, sport and travel
The passive phase of retirement — individual less active but continues to care for themselves
The support phase of retirement — individual moves to an aged care facility

7. Funding retirement
The level of funds available to fund retirement will be a function of:
the lump sum amassed
investment selection (risk / return trade off) — the investment strategy should be less aggressive in pension mode
the level of inflation
life expectancy / longevity risk.

8. Funding retirement continued
Male and female life expectancies
For example: at 70, male Australians will live for another years more that should be supported by retirement funding.
If a female retires at age 65, they have to have sufficient funding to support themselves for another years.
Life expectancy has been going up due to many factors such as advances in medical knowledge

9. Ordinary money vs. superannuation money
If money is accumulated outside of a superannuation environment it is known as ordinary money
after-tax money — includes cash, shares and property
If money is accumulated inside a superannuation environment, it is known as superannuation money
money held inside the tax-concessional superannuation environment and must be preserved until a condition of release is satisfied

10. Condition of release The individual has reached age 65.
The individual is aged between 55 and 60 and has reached preservation age. Also the normal employment arrangement must have ceased and the superannuation trustee must be convinced that the individual does not intend to work more than 10 hours per week in the future.
The individual is aged between 60 and 65 and has reached preservation age. Also the normal employment arrangement must have ceased. The individual must declare their intention to the superannuation trustee not to work more than 10 hours per week in the future; however, there is no onus on the trustee to verify the truth of this assertion.
The individual is permanently incapacitated or suffering from a terminal medical condition.
The individual dies.

11. Condition of release continued
If an individual wishes to withdraw some of their superannuation money to fund they must ensure that they have satisfied a condition of release from superannuation
Taxes may be payable on the release of the funds — the amount of tax payable will be a function of three factors:
1. the ‘type’ of superannuation money held in the individual’s account
2. the age of the individual
3. whether the money is withdrawn as a lump sum or as an income stream.

12. Superannuation components
Superannuation money can be held in one of three forms:
Taxed superannuation money — money held inside a superannuation environment which has been subject to the 15% contributions and earnings tax
Untaxed superannuation money — money held inside a superannuation environment which has not been subject to the 15% contributions and earnings tax
Non-concessional superannuation money — a contribution to superannuation for which a tax deduction has not been claimed

13. Withdrawing a lump sum in order to fund retirement
It is important to separate taxable superannuation money from tax free superannuation money
Non-concessional superannuation money is after tax-money that has been contributed to superannuation and forms part of the tax free component
Individuals that have a work history that extends prior to 1983 might also have some superannuation attributable to this period — this will also form part of the tax free component
All superannuation money which is not tax free is taxable

14. Withdrawing a lump sum in order to fund retirement continued
Taxed superannuation money — withdrawing a lump sum

15. Superannuation death benefits payable as a lump sum
The tax consequences of leaving a superannuation lump sum to a beneficiary depends on whether the beneficiary is a dependant or non dependant — a dependant is a person who is:
the spouse of the deceased
a child of the deceased under the age of 18
a person who was financially dependent on the deceased
a person who had an interdependency relationship with the deceased.

16. Superannuation death benefits payable as a lump sum continued
If the beneficiary is a dependant, any lump sum will be tax free
If the beneficiary is a non-dependant, any lump sum will be divided into a tax free and a taxable component
If the taxable component contains taxed superannuation money, this will be taxed at 15%
If the taxable component contains untaxed superannuation money, this will be taxed at 30%
- The trustees of a superannuation fund have discretion as to who a superannuation death benefit is payable to unless the superannuant makes a binding death nomination
- In estate planning terms, it might be wise to make a binding death nomination in favour of a dependant to reduce the amount of tax that would otherwise be payable
- If other, non dependants need to be provided for, non-superannuation assets might be distributed to non dependants via the individual’s will

17. Rolling over a superannuation lump sum
Rolling over superannuation does not constitute a lump sum withdrawal
Rollovers are normally immediate however if an amount is withdrawn and not rolled over within 30 days it might be deemed a withdrawal and lump sum withdrawal taxes might apply

18. Splitting the lump sum as a result of divorce or separation
The Family Law Act 1975 allows the Family Court to split superannuation between separating couples
Where the superannuation money is held in an accumulation style account the splitting process is relatively straightforward — the components of the old superannuation account are split proportionally into two new accounts

19. Recontribution of a lump-sum withdrawal
A strategy developed by financial planners to increase the amount of the tax free component of superannuation is called recontribution
Recontribution involves taking out a lump sum from superannuation and paying a small amount of tax or no tax and then recontributing it as a non-concessional contribution

20. Recontribution example

21. Employment termination payments (MTP)
MTPs are prescribed in the Income Tax Assessment Act 1997 (ITAA 97) and include:
payment in lieu of notice
payment for unused sick leave
golden handshakes
severance or termination payments
redundancy payments in excess of the tax free amount
individuals who receive a redundancy payout are entitled to a tax-free amount of $9246 (2013–14) plus $4624 (2013–14) for each year of service.

22. Life benefit termination payments (LBTP)
The tax free component of a LBTP is exempt from tax
The taxable component is taxed as follows:
If the recipient is above their preservation age the amount up to the low rate threshold is taxed at 15%.
If the recipient is below their preservation age the amount up to the low rate threshold is taxed at 30%.
Amounts in excess of low rate threshold are taxed at the individual’s marginal tax rate.

23. Death benefit termination payments (DBTP)
For dependants:
the tax free component of a DBTP and the taxable component up to the low rate threshold is exempt from tax
amounts in excess of the low rate threshold are taxed at the highest marginal tax rate.
For non-dependants:
the tax free component of a DBTP is exempt from tax
the taxable component up to the low rate threshold is taxed at 30%. Amounts in excess of the low rate threshold are taxed at the highest marginal tax rate.
- The tax payable on a DBTP depends on who is the recipient - dependants are treated more generously than non-dependants

24. Sources of income streams in retirement
Most Australians often seek to create an income stream in retirement
Sources of income:
part-time work
the age pension
from owning a business
the use of capital.
Income which is essentially a consumption of capital is not taxed
- Commencing an income stream means moving from accumulating wealth for retirement to using wealth in retirement
- In superannuation terms, it is often referred to as moving from accumulation mode to pension mode

25. Sources of income streams in retirement continued
Capital can be used in a number of ways:
Draw down of capital
A gradual use of the capital which earns no interest
Investment earnings only
The use of interest earned only indefinitely
Combination of capital draw down and investment earnings

26. Life expectancy
Life expectancy tables are published periodically by the Australian Government Actuary
Life expectancy at all age levels has increased over the last 100 years
The tables show evidence of survivor bias
Retirement income stream modelling has to allow for the survival bias
Life expectancies are averages so an individual may live longer or shorter than the average
- Survival bias: life expectancy will change dramatically if a certain age is reached. For example, due to high child mortality rate, life expectancy for children below 10 may be low but once a child survives the age of 10, the life expectancy multiplies.

27. Assessable income
ATO description of various components of income from capital:
deductible amount amount of an income stream which represents a return of capital
assessable income income which is assessable or recognised and measured under taxation law
life expectancy income stream a fixed-term income stream where the term is determined by the Australian Government Actuary’s life expectancy tables
lifetime income stream an income stream that will last as long as a person lives
The taxation implication of income generated from the use of capital can be very complex.

28. Assessable income continued

29. Account based vs. non-account based income streams
Account-based income stream — where an individual owns and maintains an individual account from which an income stream is drawn
Non-account based income streams — where an individual gives their retirement savings to an income-stream provider who pools those assets and promises an income stream in return

30. Account-based income streams
Payment made at least annually
Cannot make contributions to the fund in pension mode
Payments based on a minimum percentage
according to age (pro-rata if commenced
during a year) — the minimum increases with age
No maximum payment
Commutation allowable
Capital value cannot be used as security for
a loan
Balance available for estate

31. Non-account based income streams
A payment is made at least annually
Income stream payable for life of member or reversionary beneficiary or for fixed term
Payments must meet minimum standards — the purchase price is wholly converted to annuity payments
No residual value available to estate
No commutation allowed
Capital value not able to be used as security

32. Taxation of retirement income streams
If the individual uses taxed superannuation money or ordinary money to fund their retirement income stream and they are over 60 years of age, the taxation consequences are very simple: no tax is payable
For some income streams, the amount of tax otherwise payable will be reduced by a rebate which is applied to assessable income

33. Taxation of retirement income streams on death
A retirement income stream can revert only to a dependant
The amount of tax payable on the taxable component depends on:
whether the money used taxed or untaxed
age of the deceased (over or under 60)
age of the beneficiary (over or under 60).

34. Taxation of retirement income streams on death continued
Taxation of taxed death benefits
Taxation of untaxed death benefits

35. Choosing between an account-based and non-account based income stream

36. The use of annuities to provide retirement income
Superannuation money can be used to purchase an annuity from a life office which includes an insurance component
Features include:
can be as short term as 1 year or as long as lifetime
fixed or indexed income paid for agreed term or life
return of partial or full amount of capital at expiration.
Insures the individual against market movements

37. Transition to retirement pensions (TTRs)
Aim: to encourage people to continue to work for a longer time
Access to superannuation fund as an income stream
Person must be preservation age
Pension is non-commutable until reach a condition of release
Maximum payment of 10% of fund

38. TTRs for individuals 55 to 59 years old
For superannuation purposes a person born before 1 July 1960 has a preservation age of 55
If a person born before 1960 commences a TTR at the age of 55, any earnings inside superannuation are tax free and any income stream drawn from superannuation will benefit from the tax free component and a 15% rebate

39. TTRs for individuals 60 Years and Over
When a person commences a TTR after the age of 60 or continues with a TTR and turns 60 the tax advantages become more generous:
All earnings inside the superannuation fund are tax free and all TTR income is also received tax free

40. Combining salary sacrifice with a TTR – tax savings
Table Tax savings of a TTR and salary sacrificing
Item
Rate
Tax saving (cost)
Salary sacrifice (PAYG)
30% × $20 000
$6 000
Contributions tax
15% × $20 000
($3 000)
Earnings tax
15% × $50 000
$7 500
Total
$10 500
Financial planners often recommend combining salary sacrifice with a TTR in order to maximise the tax benefits
If an individual earned $20 000 more than the threshold at which the 30% marginal tax rate commences and he or she decides to salary sacrifice $20 000 at the same time as drawing down a TTR of $20 000, what are the tax savings available?

41. The age pension
Most retiring Australians will need to supplement their self-funded retirement income with a full or part pension provided by Centrelink
Individuals can access their superannuation from preservation age
Individuals cannot access the age pension until the age of 65
Individuals will continue to access and use some or all of their superannuation before being entitled to the age pension
- Preservation age is: age 55 if born before 1 July 1960 and at age 60 if born after 1 July 1964 if they have satisfied a condition of release
- Age pension age for females depends on their date of birth

42. The age pension continued
Centrelink applies both an assets and an income test to an individual to determine aged-pension entitlements
Assets test — when the individual is above the aged-pension entitlement age, superannuation is an assessable asset
Income test — income received from an income stream, whether that income stream was funded by superannuation or ordinary money, is assessable income for Centrelink purposes

43. Reverse mortgages
Older people with a large amount of equity in their family home can turn that equity into cash
A reverse mortgage allows the home owner to borrow a sum of money secured against the family home
Complex terms and conditions apply
No negative equity guarantee (NNEG) was legislated in 2012 to protect consumers
- Under a NNEG, it is guaranteed that the accrued interest and principal obligations under a reverse mortgage will not exceed the value of the real estate pledged as security

44. What is an adequate retirement income?
The average superannuation balance for males aged 60 to 64 was $ and for females of the same age was $
Assuming an average retirement age of 62 and average rate of return of 3% payout will:
Male = $ per year
Female = $6628 per year
As a result, most retiring Australians will still need to rely on a full or part payment of the age pension for many years

45. Summary There are active, passive and support phases of retirement
Retirement income can be funded by ordinary money or superannuation money or some combination of both
Most Australians withdraw their superannuation in the form of an income stream
Many Australians are unlikely to achieve an ‘adequate’ retirement income
Retirement planning should be one aspect of a comprehensive financial plan which is commenced long before retirement