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Lecture 7

Lecture 7 - Superannuation and Retirement

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Department
Accountancy
Course
AYB250
Professor
All Professors
Semester
Spring

Description
LECTURE 7 – SUPERANNUATION AND RETIREMENT  “Comfortable” standard of living in retirement ~ require 50-70% of pre-retirement income o But, Age Pension currently set at 25% of male average weekly earnings  Superannuation encourages people to save for retirement in an environment that has significant tax benefits o The tax advantages allow people to accumulate a greater amount than if they had invested the same amount of savings in equivalent assets in their own name  When developing a financial plan that involves superannuation, the role of a financial advisor is to establish whether the client is able to meet lifestyle needs during retirement and for surviving beneficiaries after the client’s death Reasons and Objectives of Retirement Income Policies Reasons:  Ageing population  Longer life expectancy  Greater lifestyle expectations  Fewer taxpayers Objectives:  Enable individuals to self-fund retirement  Provide benefits for individuals prevented from working due to illness/disablement  Provide death benefits for dependants of fund members The three-pillar approach to retirement policy  Mandatory contributions o Employers contributing on behalf of workers while they are employed  Compulsory Superannuation Guarantee (9%)  Voluntary contributions o Voluntary employer-sponsored superannuation schemes  In excess of compulsory SG 9% o Tax and other incentives to encourage individuals to save voluntarily  Government-provided age pension o Social security providing a safety net (means tested) COPY DOWN DIAGRAM (SLIDE 11 HERE) Contributions  Involve cash being paid into the superannuation fund for its members which may be made: o by an employer for employees o by employees; by people who do not receive superannuation support, for example, self-employed people and those who receive income solely from investments o for a person’s spouse o for children under 18 o by anyone under age 65 (or up to 75 if certain work tests are met) o by the government as a co-contribution Accumulation  During the accumulation stage, contributions are invested by the fund trustees for the benefit of members  The trustees of a superannuation fund who have the responsibility for its operation are required to invest the money in the fund Benefits  The benefits stage of superannuation occurs when contributions and the income earned by the fund are paid to the member or, if the member has died, to the member’s dependants o Benefits may also be paid from the fund in other circumstances, such as the permanent invalidity of the member  The type of benefit which may be paid from the fund depends on the fund rules and the preference of the member or his or her dependants o Benefits may be paid as a lump sum, pension, or a combination of both Superannuation Regulation  Key regulation o Superannuation Industry (Supervision) Act 1993 (SIS Act 1993) o Corporations Act 2001 o Income tax legislation (ITAA 1936 and ITAA 1997)  Key regulators o APRA o ASIC o ATO Sole Purpose Test (Reference: s62 SIS Act)  Superannuation fund must be maintained solely for at least one ‘core purpose’  Core purposes o Retirement o Attaining age 65 o Death benefits  Ancillary purpose o Termination of employment o Benefits of cessation of work due to ill-health o Death/reversionary benefits o Additional ancillary purposes approved by APRA Types of Funds  Under the SIS legislation there are five classifications: o industry funds o corporate funds (standard employer-sponsored funds) o public sector funds o retail funds o small superannuation funds (small APRA funds and self-managed superannuation funds) Self-Managed Superannuation Funds (SMSF)  A SMSF is a superannuation fund which has less than 5 members and is managed by its members  The members are required to be trustees of the fund or directors of a company which is the trustee of the fund  The trustee requirement for SMSFs contrasts with all other types of funds where trustees are required to be approved and licensed by APRA Advantages  Tax o Opportunity to reduce income tax on investment income and capital gains by the use of imputation credits o Full use of tax concessions as they apply to the particular member o Increased flexibility in the timing of investments for capital gains tax purposes  Investments o Increased investment choice and asset selection o Ability to respond quickly to new investment opportunities o Control over the total investment portfolio, with the ability to take into account the individual’s investment risk of assets held outside superannuation o Advantage to transfer particular assets as permitted by the SIS Act and owned by the member into the superannuation fund  Estate Planning o Ability to have up to 4 members in the fund to allow the pooling of resources with people with similar financial objectives such as a family o Ability to transfer reserves of the fund to other fund members o Ability to have wider death benefit choice for beneficiaries (ie. lump sum or income stream or combination) o Trust deed can include a range of death benefit nominations including binding death benefit nominations. This will provide peace of mind to the members knowing who will receive the benefit on their death o Use of contribution strategies to build up benefits for fund members Disadvantages  Investments o Lack of access to wholesale rates for investments and related costs unless significant amounts are in the fund to allow diversification across wholesale fund managers (over 1/3 of funds have total assets of less than $100,000)  Fund o lack of knowledge to administer the fund properly  Insurance o inability to have access to group cover rates; no or limited access to wholesale premium rates  Tax o When a fund is wholly in the pension phase tax deductions may not be used as efficiently as possible because the income and capital gains on the pension assets are not subject to tax  Costs o depending on the level of assets in the fund the cost of running the fund can be more expensive than a managed investment  Administration o spending excessive periods of time on fund administration due to inexperience; poor fund maintenance leading to compliance problems o failure to comprehend the complexity of the rules o failure to seek appropriate professional advice  Other o SMSFs are not required to satisfy ‘prudential’ standards under the legislation which may lead to poor stewardship in fund operations o Unable to access the Superannuation Complaints Tribunal Superannuation Guarantee  The contribution which is required to be paid on a person’s earnings by all employers in each quarter must be at least equal to 9 % of the employee’s ordinary time earnings o If SG not paid then employer must pay shortfall plus a penalty SG charge to ATO  No SG payable on earnings over $40,170 (2009/10) per quarter ($160,680 p.a.) Guarantee Exclusions  Employers are not obliged to provide super for: o An employee who earns less than $450 o Members of the Defence Reserve in a calendar month Forces o Employees
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