Four new retirement strategies for 2019/20
Superannuation, social security and retirement planning rules are constantly changing.
New measures available since 1 July 2019 have created several new strategic considerations, and in this month’s article we explore four which relate to retirement clients.
Accessing a higher concessional contributions cap
From 1 July 2019 an individual can make contributions above the general cap (currently $25,000 p.a.) by utilising any carried forward unused concessional contributions cap amounts from a prior year.
Unused concessional contributions cap amounts commenced accruing from the 2018/19 financial year, making 2019/20 financial year the first year individuals could start accessing these amounts.
To access carried forward unused amounts in a financial year, an individual will need to have a total super balance of less than $500,000 on 30 June of the prior financial year.
It is important to note that unused amounts in one year can only be carried forward for up to five years and will expire if not used within that period. Additionally, Division 293 tax can apply for those with combined income and concessional contributions that exceed $250,000.
Being able to access a higher concessional contributions cap for the financial year can help enhance many strategies including:
- The ability to make a larger one-off personal deductible contribution to help offset assessable income, such as capital gains from the sale of assets;
- Increase the amount of concessional contributions that can be split to a spouse. This can help maximise the effectiveness of sheltering strategies for social security purposes when splitting to a younger spouse. It can also help with equalisation strategies or strategies to access super earlier when splitting to an older spouse; and
- Maximising the tax efficiency of transition to retirement (TTR) strategies by making higher before tax contributions using salary sacrifice or personal deductible contributions.
Judy, aged 60, is self-employed with estimated taxable income of $70,000 p.a. for the next five years and has $250,000 in superannuation. She did not make any contributions last financial year, but is looking to maximise her retirement savings going forward.
After receiving advice, she implements a TTR strategy. As Judy did not make any concessional contributions in the 2018/19 financial year and has a total super balance of less than $500,000 on 30 June 2019, she is able to contribute up to $50,000 as a concessional contribution under the TTR strategy in 2019/20.
Alternatively, Judy could contribute $30,000 each year for five financial years (ignoring any indexation of the general concessional contributions cap) subject to her total super balance remaining below $500,000 on 30 June of each financial year.
Make super contributions without meeting the work test
Individuals who are 65 and above and under 75 will generally need to be gainfully employed for at least 40 hours over a period of 30 consecutive days (work test) during the financial year before they can make voluntary super contributions.
However, since 1 July 2019 those who are 65 and over can access an exemption to the work test.
If eligible, the exemption provides individuals with an additional 12 months from the end of the financial year in which they last met the work test to make contributions.
To be eligible, the individual will:
- need to be over age 65 but under 75;
- met the work test in the previous financial year;
- have a total superannuation balance below $300,000 on 30 June of the previous financial year; and
- have not accessed the exemption in a previous financial year.
Note that the usual contribution caps will still apply including the bring forward provisions for non-concessional contributions and any carried forward unused concessional contributions cap amounts from previous years.
Eligible individuals can use the exemption to:
- Access their unused concessional contributions cap amounts from a prior year. This can be particularly useful for those with capital gains tax (CGT) assets that are sold in the financial year after the year of their retirement;
- Make additional super contributions. Where individuals have available funds, they can use the exemption to make further contributions (subject to caps) in the year after their retirement. This can be particularly useful for those who may have funds in excess of their contribution caps in the previous year; and
- Implement a re-contribution strategy. Those who don’t have the funds to make additional super contributions can cash out their existing super and use the exemption to re-contribute funds back into super.
Tom, aged 67 and single, retired from full time work on 1 May 2019. His total super balance on 30 June 2019 was $280,000. He made a $100,000 non-concessional contribution in the 2018/19 financial year, exhausting his non-concessional contributions cap.
Although he does not satisfy the work test in the 2019/20 financial year, he could access the work test exemption to make additional super contributions up to his concessional and non-concessional contribution caps.
If Tom does not have funds to make additional super contributions, he could cash out $100,000 and use the exemption to re-contribute this back to super as a non-concessional contribution to help reduce tax from any super death benefits left to non-tax dependants.
Providing additional cash flow to pensioners
Individuals who receive the full rate of Age Pension will be able to increase their cash flow by accessing the Centrelink Pension Loan Scheme (PLS) from 1 July 2019.
The PLS allows eligible individuals to top up their fortnightly Age Pension entitlement to an amount of up to 150% of the maximum rate using a loan secured against their property.
Prior to 1 July 2019 eligible individuals were only able to top up their Age Pension up to the full rate using the PLS. This meant those already on the full rate of Age Pension were not able to access the PLS and would need to look at alternatives or other reverse mortgage providers to increase their cash flow.
Compared to other commercial reverse mortgage products, the PLS can offer a more competitive interest rate (currently 5.25% p.a. compounded fortnightly). Interest rates on commercial reverse mortgages can range from 5.81% to 6.54% p.a.1 plus an application fee. Having additional income paid from the same institution and at the same time as their regular Age Pension can also be attractive to retirees.
Unlike other reverse mortgages, individuals cannot access lump sums from the PLS, however, regular fortnightly amounts can be changed at any time.
To access the PLS, an individual:
- needs to be Age Pension age or a partner of someone who is Age Pension age;
- qualify for the Age Pension or another eligible income support payment (excluding means testing requirements);
- not be bankrupt or subject to a personal insolvency agreement;
- own real property in Australia to secure the debt against (commonly the principal home); and
- have appropriate and adequate insurance covering the asset used as security.
The security for the loan does not have to be the person’s principal place of residence and can be other real estate that the individual owns such as holiday homes and investment properties. In these situations, the assessed asset value will be reduced by the outstanding loan amount.
It is also important to note that amounts paid under the PLS are not assessed as income under the social security or aged care means tests and will generally not impact an individual’s social security entitlements or aged care fees.
The PLS can help individuals increase their cash flow and can be used as a strategy to:
- assist asset rich income poor retirees, including self-funded retirees, to fund their retirement and remain in their home which they may have an emotional attachment to;
- help fund residential aged care fees where the home is kept or during the period where the home is in the process of being sold; or
- access additional care to what can be afforded by the Government’s home care packages or while waiting for a package to become available (can be over 12 months for higher level packages2).
Ken is a long-term client and in the last annual review meeting, he discussed a recent visit he had made to see his parents. Barry and Mary are Ken’s parents and are in their 80s and living off the full rate of Age Pension. They own their home and have $30,000 in a transaction account as well as $20,000 in personal assets.
Barry’s health is not great, and his mobility is very limited. He recently received a level four home care package that provides Barry with personal care (showering, dressing, bathroom etc.) as well as help with home maintenance when it is required.
Although Mary’s health is good, she feels more comfortable if there was extra help around the home for another hour a day (Monday to Friday) when their children are not visiting. This will cost them about $13,000 p.a. (assuming $503 per hour, five hours per week).
A strategy that Barry and Mary could consider is to access additional cash flow from the PLS to fund the extra care required. They could access up to $18,151 p.a. ($698 per fortnight) from the PLS but can choose to receive $13,000 p.a. ($500 per fortnight) just to fund the additional care. Table 1 overleaf summarises their cash flow position with and without the PLS.
Table 1: Comparison of Barry and Mary's cash flow with and without PLS
A new assets test strategy to enhance Age Pension
New means testing rules that apply to certain lifetime income streams4, such as lifetime annuities, that commence from 1 July 2019 can provide individuals with a higher
Age Pension entitlement by providing an immediate reduction in assessable assets.
Lifetime income streams, such as Challenger’s Guaranteed Annuity (Liquid Lifetime) – Flexible income option, that:
- complies with the Capital Access Schedule (CAS)5 in the superannuation regulations; and
- where the individual has reached their assessment day6,
have 60% of the investment amount assessed under the assets test until age 84 (with a minimum of 5 years). The assessment reduces to 30% of the investment amount thereafter.
Under the income test, 60% of payments is assessed.
These rules provide a new strategy that can help enhance Age Pension outcomes for clients:
- Part-pensioners who have their Age Pension determined by the assets test (see the teal zone in Chart 1 overleaf) can experience an immediate increase in entitlements by investing some of their savings into a lifetime income stream.
- Those with assets above the assets test cut-off threshold may be able to access a part pension and the Pensioner Concession Card.
- In addition to enhancing Age Pension outcomes, lifetime income streams can provide an efficient strategy to manage a key risk in retirement, longevity risk. They can provide an additional source of income for life above that of the Age Pension in the later years of retirement. This can help meet essential living expenses and ensure your client is not solely reliant on the Age Pension.
Chart 1: Income and assets test zones7
Ben and Tracey, both aged 66, are a couple who own their home. They have $300,000 each in deemed account-based pensions, $50,000 in cash and $20,000 of personal assets. Ben and Tracey are drawing retirement income (from all sources) of $61,5228 p.a., including combined Age Pension of $14,812 p.a. (a part Age Pension determined by the assets test). From this income, $42,000 p.a. is being spent on their essential expenses.
If they each allocate 25% of their account-based pension ($150,000 combined) to a Challenger Guaranteed Annuity (Liquid Lifetime) – Flexible income option, their combined assessable assets would reduce by $60,000 immediately and their Age Pension would increase by $4,680 to $19,492 in the first year.
Over the long term, income from the lifetime annuity ($6,533 p.a. indexed to CPI) combined with the full rate of Age Pension (currently $36,301 p.a.) can help them meet their essential expenses in the event they’ve spent all of their savings.
Chart 2: Comparison of Ben and Tracey’s Age Pension outcomes
Chart 3: Ben and Tracey's cash flow projection under their current strategy
Chart 4: Ben and Tracey's cash flow projection after incorporating a lifetime annuity
Appendix: Assumptions used in Charts 2 to 4
- Centrelink rates and thresholds as at 1 July 2019 including the new lower and upper deeming rates of 1% and 3% respectively.
- Challenger Guaranteed Annuity (Liquid Lifetime) quote as at 05/09/2019 and based on the flexible income option, monthly payments, CPI indexation and nil adviser fees.
- Assumes lifetime annuities form part of defensive assets. To maintain an overall asset allocation of 50/50 growth/defensive (including the allocation to the defensive lifetime annuity), the asset allocation of the account-based pensions has been adjusted accordingly.
- Account-based pension growth assets return 7.70% p.a. and defensive assets, 3.70% p.a. before management fees of 0.80% and 0.60% respectively. In addition, platform fees are assumed to be 0.50%. Cash and term deposits return 4% p.a.