Superannuation: Income streams

Transcription

1 Technical Services TB 31 Superannuation: Income streams Issued by Technical Services on 1 November Summary There are a number of issues to consider when selecting the appropriate superannuation income stream for your client. These include the client s: required level of income social security requirements desired flexibility We cover the various income streams available to assist you decide which income stream will best suit your client s needs. Account based pensions An account-based pension is generally purchased with unrestricted non-preserved superannuation monies. At least once a year payments are taken from the pension and the underlying account balance reflects the transactions made, fees charged and investment returns. The total payments in a year must be at least the set minimum. There is no guaranteed period for which the pension will last and the owner of the account generally has access to their capital at any time (except for transition to retirement income stream). Pension payments Account based pensions have a prescribed minimum annual payment and no maximum (unless it is a transition to retirement income stream). The minimum annual payment is calculated as follows: Where: Account balance means the value of the pension on either: o 1 July of the year; or o the date on which the pension commenced (if in the year in which the pension commenced). This amount should be less fees and charges payable on the investment. Percentage factor means the factor in the table below corresponding to the recipient s age. The applicable age is the age of the recipient on 1 July of the year or the date that the pension commenced (if in the year in which the pension commenced). Age of recipient Percentage factor Under 65 4% % % % % % 95 or more 14% Account balance x percentage factor (rounded to nearest $10) Transitional measures: Reduction in annual minimum payments for the 2009/2010 financial year The Federal Government is providing temporary relief for individuals receiving payments from income streams by halving the minimum drawdown rate payable on income streams for 2009/2010. Page 1 of 10

2 The relief applies to allocated pensions, account based pensions, market linked pensions (term allocated pensions) and transition to retirement income streams. Where an income stream is commenced part-way during the current financial year, the pro-rata minimum is based on the reduced percentages. The table below outlines the minimum payment percentages for the financial year ending 2009/2010: Age Percentage factor for 2009/10 Under 65 2% % % % % % 95 or more 7% Transition to retirement account based pensions Transition to retirement (TTR) account based pensions can be purchased by those who have reached preservation age (currently 55) irrespective of the preservation status of their superannuation funds. Refer to Technical bulletin 12 Transition to retirement for more information. Maximum annual payment Transition to retirement account based pensions are subject to a maximum annual payment. This maximum is 10% of the account balance at commencement (in the year in which the pension commenced) otherwise at 1 July in the financial year to which the payment applies. The legislation does not require the maximum payment of 10% to be pro-rated where the income stream is commenced part way through the financial year. However some income stream providers may pro rata the maximum payment. ING does not pro rata the maximum payment (10% of account balance) of TTR pensions which commence part way through the financial year. Pro rated minimum For pensions purchased after 1 July and before 1 June of a financial year, the minimum amount is pro-rated in that year for the number of days. The number of days will include the commencement date of the pension. No minimum for first year if commence 1 June to 30 June An account based pension which commences after 1 June has no minimum payment for the first financial year of the pension. Note: Allocated pensions commenced before 1 July 2007 may have different minimums or maximums applied. Whether the old minimum and maximum pension valuation factors are applied is at the discretion of the pension provider. Example calculation of minimum payment Alice (66) purchases an account based pension on 1 August 2009 for $100,000. Alice s minimum payment in that first year is calculated as follows: Annual payment: $100,000 x 5% = $5,000 Pro rated payment: $5,000 x 334 / 365 = $4,580 (rounded to nearest $10) Restricted lump sum commutations Lump sum commutations are unable to be made from transition to retirement account based pensions which consist wholly of preserved funds. However, a transition to retirement account based pension may be rolled back into accumulation phase at any time. What happens when the recipient of a TTR pension retires or meets a condition of release? Transition to retirement account based pensions become ordinary account based pensions when the recipient meets a condition of release which allows them full access to the funds. Generally, the pension provider will have to be notified that a retirement condition of release has been satisfied. Example transition to retirement account based pension Bruce, age 62, commences a transition to retirement account based pension on 1 December The purchase price of his income stream is $400,000. Bruce s minimum and maximum for the 2009/2010 year will be as follows: Pro rated minimum: $400,000 x 2% x 212/365 = $4,650 Maximum: $400,000 x 10% = $40,000 Page 2 of 10

3 Centrelink and DVA treatment of account based pensions Asset test An account based pension is fully assessable for the Centrelink asset test. The balance of an account based pension is generally reported to Centrelink twice annually (as at 1 January and 1 July) by the paying fund. Centrelink use this information to conduct reviews in February and August each year. Income test Account based pensions are assessed based on the following formula: annual payment - (purchase price commuted amounts) life expectancy The purchase price and life expectancy at the date of purchase are relevant. The lowest assessable amount for the income test is zero. Example income test Steve, 60, has an account based pension with a balance of $250,000. Steve s life expectancy is and he opts to receive an annual payment of $25,000. His assessable amount for the income test is as follows: $25,000 - ($250,000 - $0) = $13, Payments above minimum may be either income or lump sum commutation Where amounts above the annual minimum payment are taken, the pensioner can elect to receive these payments as either additional pension payments or a lump sum commutation. Consider what impact either option will have on the pensioner s Centrelink entitlements. Lump sum commutations are generally not assessed as income for the income test (for pensions and allowances). Any partial commutation from an account based pension will alter the Centrelink deductible amount, hence the amount of the pension payment included under the income test. Note: Not all Centrelink benefits are assessed against the standard income and assets tests (for pensions or allowances). For example, the Commonwealth Seniors Health Card (CSHC) is based on adjusted taxable income and, as a result, income received from an account based pension by those 60 or over is currently not assessed. Term allocated (market-linked) pensions Term allocated pensions purchased from 20 September 2004 to 19 September 2007 (inclusive) are 50% asset test exempt. These income streams provide market linked returns and are non-commutable except in very limited circumstances. Generally, there is no social security asset test exemption for income streams purchased on or after 20 September However where a TAP which commenced before 20 September 2007 is fully commuted and rolled over to purchase a new TAP, the 50% asset test exemption is retained. A TAP purchased with the proceeds of a commuted TAP will retain 50% asset test exemption provided: All the assets backing the original income stream are rolled over to the new income stream; and The new income stream meets the requirements to qualify as a 50% asset test exempt income stream pre 20 September 2007 TAPs are no longer widely available, although some providers may still offer them for persons wishing to rollover existing TAPs. A term allocated, or market-linked, pension (TAP) was generally purchased with an amount of unrestricted nonpreserved superannuation monies. At least once a year payments are taken from the pension (based on payment factors applied according to the remaining term of the pension) and the underlying account balance reflects the transactions made, fees charged and investment returns. Term allocated pension are payable for a fixed term. The term is selected at the commencement of the pension within a range of terms related to the recipient s age. Selecting a term Terms are based on life expectancy of either the owner or reversionary. Life expectancy is rounded up to the next whole number (if not a whole number). No reversionary The term of a TAP can be between the owner s life expectancy and the greater of their life expectancy if they were five years younger and the difference between their current age and 100. Page 3 of 10

4 Reversionary If the pension has a reversionary beneficiary and they have a greater life expectancy, the option to substitute the owner with the reversionary beneficiary for term purposes is available. Refer to Tax and other facts for the current life expectancy tables ( life tables are generally used for income streams which commence on or after 1 January 2005). Income payments TAPs have income payments based on payment factors. To work out the relevant payment factor, the remaining term of the TAP is: rounded up to the nearest whole year where the commencement day of the TAP was on or after 1 January; otherwise rounded down to the nearest whole year (the commencement day was on or before 31 December). Refer to Tax and other facts for term allocated pension payment factors. The annual payment is calculated as: Account balance Payment factor Annual payments are rounded to the nearest $10. Account balance is determined at the commencement date then at 1 July of each subsequent year. In the first year, the payment factor is based on the term selected and the pension payment is pro-rated. Example calculation of TAP payments Johnston has a TAP with a remaining term of 19.4 years and a balance at 1 July of $200,000. Johnston s pension payment for the current financial year is: Payment factor for 19 years (remaining term rounded down) is Pension payment is: $200,000 = $14,590 (rounded to nearest $10) Commutations from a TAP As with all complying income streams, a TAP can only be commuted in very limited circumstances. Briefly these are: Within the first six months, except where it is sourced from a direct rollover of a commuted complying income stream Upon death To acquire another complying income stream (including another TAP) To effect a family law payment split To pay a superannuation surcharge liability Before a commutation can be made, a member must have received a pro-rated income payment for the financial year. Exit fees may be payable and must be considered along with any taxation and social security implications that may apply. Centrelink and DVA treatment of TAPs Asset test TAPs purchased before 20 September 2007 are 50% asset test exempt for the Centrelink asset test. The assessable asset value is 50% of the account balance. In limited circumstances, a TAP can be commuted on or after 20 September 2007 to purchase another TAP and retain its 50% asset test exemption. The balance of a TAP is generally reported to Centrelink twice annually (as at 1 January and 1 July) by the paying fund. Centrelink use this information to conduct reviews in February and August each year Income test TAPs are assessed based on the following formula: Annual payment (purchase price commuted amounts) term Purchase price and selected term at commencement. The lowest assessable amount for the income test is zero. Pension payments may vary by + /- 10% A variation of up to 10% more or 10% less than the calculated annual payment may be taken (although not all providers may allow this functionality). Page 4 of 10

5 Example income test Johnston commenced a TAP with $200,000 and an original term of 21 years. His pension payment for the current financial year is $14,000. No commutations have been made. His assessable amount for the income test is as follows: $14,000 - ($200,000 - $0) = $4, Any partial commutation from a TAP will alter the amount assessed by Centrelink under the income test. Note: Not all Centrelink benefits are assessed against the allowance and pension income and assets tests. For example, the Commonwealth Seniors Health Card is based on adjusted taxable income and, as a result, income received from a TAP by those 60 or over is not assessed. Reversionary beneficiaries A reversionary beneficiary can only be nominated at the time the TAP is purchased. The decision to appoint a reversionary beneficiary is an important consideration. Beneficiaries are discussed in the death benefits section of this paper however an important point of consideration is shown below. If the owner of a TAP dies and they have no reversionary beneficiary, their beneficiary will be unable to have the death benefit paid in a way which will retain the 50% Centrelink asset test exemption. This, combined with the fact the surviving spouse will be assessed against single, rather than couple, thresholds may result in the surviving spouse receiving a greatly reduced Centrelink benefit. Conversely, if the owner of a TAP dies and they have a reversionary beneficiary, the reversionary beneficiary must continue the TAP until its term is exhausted. Other TAP information Insufficient account balance It remains a possibility that the account balance at any time during a given year is insufficient to meet the remaining required payment for that year. This is more likely to arise, if at all, in the TAP s final year. In these situations, the remaining account balance may be paid out in satisfaction of the annual payment requirement. Furthermore, the TAP is taken to have served out the selected term. Payments made after the TAP s term expires The payment amount in the last financial year of the income stream's term will be determined at the beginning of that financial year. During this year, it is likely that some investment earnings will accrue after the start of this year. Where this is the case, the remaining account balance must be paid within 28 days after the end of the term. Annual payment in final year received prior to anniversary date If in the final year, the annual income payment is received prior to the anniversary date, and the balance is reduced to zero as a result, then the TAP is also taken to have served out the chosen term. Maturity date brought forward or extended by 6 months Where the TAP has commenced on a day other than 1 July, SIS allows for the maturity date to be brought forward by up to 6 months (if purchased in the first half of a financial year), or extended by up to 6 months (if purchased in the second half of the financial year) Non account based pensions Since 1 July 2007, pensions with no account balance have been referred to as non account based pensions. Income streams which fall within this definition include lifetime, life expectancy and term income streams. These income streams are only able to be provided by superannuation funds with 50 or more members. This means they are not able to be provided by SMSFs or small APRA funds. Term annuities Term annuities provide a guaranteed income stream for a selected period. Payments are only provided for the annuity s term and are paid at a level set by the annuity provider and accepted by the annuitant at the time of purchase. Upon exhaustion of the term, a residual capital value may be paid to the annuitant (depending on the terms of the contract). Term annuities purchased on or after 20 September 2004 and before 20 September 2007 may be 50% asset test exempt for Centrelink purposes provided they meet certain conditions including: Having zero residual capital value Not being indexed at greater than 5% or CPI + 1% Having a term of not less than the primary beneficiary s life expectancy and not more than the greater of the beneficiary s life expectancy if they were five years younger or the difference between their current age and 100 (rounded up) Not being commutable except in limited circumstances Page 5 of 10

6 Where a reversionary s life expectancy exceeds the primary beneficiary s life expectancy, the reversionary may be substituted for the primary beneficiary when determining the allowable terms in the conditions above. Centrelink and DVA treatment of term annuities Asset test The asset test for term annuities depends on whether they are short term non-complying (a term of less than 5 years unless term is equal to or greater than life expectancy at purchase date), long term non-complying or complying. The formulas are as follows: Short term and long term non-complying PP - CA - where: (PP CA RCV) x TE Term PP is the purchase price of the annuity CA is any commuted amounts from the annuity RCV is the residual capital value (zero if complying) TE is the time elapsed rounded down to the nearest ½ year if payments are made more than once a year otherwise rounded to the nearest year Term is the original term selected Long term complying Complying annuities purchased on or after 20 September 2004 and before 20 September 2007 generally receive a 50% asset test exemption. To work out the asset value, use the formula above and multiply the result by 50%. Complying annuities purchased before 20 September 2004 are generally 100% asset test exempt. Income test The income test for term annuities depends on whether they are short term non-complying, long term noncomplying or complying. Long term non-complying and complying AP - (PP CA RCV) Term where: AP is the annual payment amount PP is the purchase price CA is any commuted amounts from the annuity RCV is the residual capital value (zero if complying) Term is the original term selected Short term non-complying Short term non-complying annuities are deemed under the income test. Lifetime annuities Lifetime annuities provide a guaranteed income stream for the lifetime of the annuitant. Payments are provided for the length of the annuitant s life or a selected guaranteed period, whichever is longer. Indexation can be applied to the payments if selected. Lifetime annuities purchased prior to 20 September 2007 which meet the conditions mentioned in the term annuities section will be complying. Centrelink and DVA treatment of lifetime annuities Asset test Complying income streams purchased before 20 September 2004 are generally 100% asset test exempt. 50% of the amount calculated using the formula below is assessed if the annuity is complying and it was purchased from 20 September 2004 to 19 September Centrelink use the following formula for asset tested lifetime annuities: PP - CA - (PP CA RCV) x TE LE where: PP is the purchase price of the annuity CA is any commuted amounts from the annuity RCV is the residual capital value (zero if complying) LE is the relevant life expectancy at purchase date TE is the time elapsed rounded down to the nearest ½ year if payments are made more than once a year otherwise rounded to the nearest year Page 6 of 10

7 Income test Lifetime annuities are assessed using the following formula: AP - (PP - CA - RCV) LE where: AP is the annual payment amount PP is the purchase price CA is any commuted amounts from the annuity RCV is the residual capital value (zero if complying) LE is the relevant life expectancy at purchase date Rules applying to non account based pensions All new non account based pensions have to fall under one of the following two categories of rules. Non account based pensions with no RCV For income streams which provide for no residual capital value, the following requirements apply: The pension is payable for the beneficiary s life or for a set term of years not greater than the difference between the beneficiary s age on the purchase date and 100. The total payments in a year cannot vary by more than 5% from the total payments in the previous year unless the variation is due to an indexation arrangement or the transfer of the pension to another person. Existing rules for pensions and annuities Pensions and annuities which comply with the pre 20 September 2007 income stream standards (such as lifetime annuities) and were purchased before 20 September 2007 will continue to meet the new standards. Non account based pensions with a RCV For income streams which provide for a residual capital value of no more than 100%, the minimum amount required to be paid is calculated as follows: Purchase price x percentage factor (Rounded down to nearest $10) Where: Purchase price means the total amount paid to purchase the income stream Percentage factor means the factor in the table in the account based pensions section corresponding to the beneficiary s age. The age of the beneficiary on the date the pension commenced is used, if in the year in which the pension commenced, otherwise on 1 July of each year. For pensions purchased after 1 July of a financial year, the minimum amount is pro-rated for the number of days including and following the commencement day of the pension. Restrictions Due to the large annual payments required to be made to older clients (for example, those aged will have to be paid at least 11% of their purchase price each year) it may be difficult for providers to offer products with substantial Residual Capital Values. Taxation of superannuation income streams Components of a superannuation income stream for a triggered or post 1 July 2007 income stream The components of superannuation income streams are established on a per payment basis. The split of the pension payments between the tax free component and the taxable component are based on their proportions when the income stream commenced. Example Proportioning rule and pension payments Carmela is aged 57 and has a superannuation benefit of $300,000 consisting of a tax free component of $100,000 and a taxable component of $200,000. She uses all of her superannuation benefits to purchase an income stream on 1 September The tax free percentage of Carmela s income stream would be: Tax free component/total interest $100,000 / $300,000 = 33.33% Carmela receives a pension payment of $2,000 on 20 September The tax free component would be: $2,000 x 33.33% = $ The taxable component would be: $2,000 x 66.67% = $1, Page 7 of 10

8 Components of an income stream commenced prior to 1 July 2007 Recipients of existing income streams as at 1 July 2007 will retain the pre 1 July 2007 (tax) deductible amount unless a trigger event occurs. The trigger events are as follows: partial or full commutation recipient is age 60 years or older on 1 July 2007 recipient turns 60 recipient dies 1 July 2007, if the income stream was purchased in June 2007 and no income payments were made nor required to be made in the 2006/07 financial year. However similar to new pensions the (tax) deductible amount will be converted from a per annum figure to a per payment figure. Once a trigger event has occurred the tax free amount will be the unused undeducted purchase price and the crystallised pre July 1983 amount (if not a pre 1 July 1994 income stream) and will be calculated at the date the trigger event occurred. Taxation of payments from income streams The tax free component is always tax free (i.e. it is not assessable income and is not exempt income). The tax treatment of the taxable component (taxed element) is outlined in the table below. The Medicare Levy is also payable upon any superannuation benefit where a tax rate greater than zero applies. Superannuation member benefit element taxed in the fund Age Aged 60 and above Preservation age to age 59 # Below preservation age # Tax on commuted lump sum(s) Tax free Up to low rate cap of $150,000* (indexed) Nil Amount above low rate cap - 15% Taxable component - 20% Tax on income stream payments Tax free Taxed at marginal tax rate and 15% offset applies Taxed at marginal tax rate (no tax offset unless disability super income stream which will receive 15% offset) *This limit applies to the 2009/10 financial year. It is reduced by concessionally received taxable (and post June 1983) components of superannuation lump sums (excluding death benefits) since turning preservation age. # The taxable component is included in the individual s taxable income and tax offsets apply to reduce total tax payable to the maximum tax rates outlined in the table above. Page 8 of 10

9 Superannuation member benefit element untaxed in the fund Age Aged 60 and above Preservation age to age 59 Below preservation age Tax on lump sum Up to untaxed capped amount of $1,100,000* (indexed) per super plan - 15% # Amount above cap taxed at 45% Up to low rate cap of $150,000*^ (indexed) 15% # tax Amount above $150,000*^ (indexed low rate cap) but within untaxed plan cap of $1,100,000* (indexed) - 30% # tax Amount above untaxed plan cap 45% Up to untaxed plan cap of $1,100,000* (indexed) 30% # Amount above untaxed plan cap 45% Tax on income stream Taxed at marginal tax rate with 10% tax offset Taxed at marginal tax rate (no tax offset) Taxed at marginal tax rate (no tax offset) Example taxation of a payment for client aged Kylie, 57, receives a pension payment of $2,000 of which $1, is the taxed element of the taxable component (there is no untaxed element). Her marginal tax rate is 30% (as she has other income). The tax payable is as follows: $1, x 30% = $400 less the 15% offset $1, x 15% = $200 Therefore, her tax payable on the payment is $200 (Medicare levy may also apply). Death benefit nominations Most pension providers will allow the pensioner to nominate either a nominated beneficiary or a reversionary beneficiary. For information regarding the taxation of superannuation death benefits, refer to Technical Bulletin 37 - Superannuation death benefits. Nominated beneficiaries Beneficiaries may be nominated to receive the residual benefit in the event of the pension recipient s death. A valid nomination of beneficiary can only be made to a dependent as defined under super law or to the estate of the pensioner. An individual or individuals with any of the following relationships with the pensioner is a dependant: spouse (including de facto but not an ex spouse). A spouse includes an opposite or same sex spouse. child (including a child of a de facto spouse, an adopted child, step-child, ex-nuptial child) any other person who is financially dependent on the pensioner at the time of their death any person with whom the pensioner has an interdependency relationship. *Applies to the 2009/10 financial year. ^Reduced by concessionally received taxable (and post June 1983) components of superannuation lump sums (excluding death benefits) since turning preservation age. # The taxable component is included in the individual s taxable income and tax offsets apply to reduce total tax payable to the maximum tax rates. Some pension providers allow binding nominations of beneficiaries to be made. A valid binding nomination obligates the provider to pay a death benefit to the nominated beneficiary upon death of the primary pensioner. Unlike non-binding nominations, which do not require regular renewal to remain in force, binding nominations have to be resubmitted every 3 years to ensure they are valid. Depending on the trust deed of the pension provider, they may offer the death benefit be paid as a pension to certain beneficiaries (see reversionary beneficiaries below) as well as, or instead of, a lump sum to nominated beneficiaries. Page 9 of 10

10 If this death benefit is paid after 19 September 2007 and even if the original pension was complying, the death benefit pension will not be complying unless it was a reversionary pension. Reversionary beneficiaries A reversionary beneficiary can only be nominated at the time the pension is purchased. Upon the death of the primary pensioner, the pension will continue to be paid to the reversionary pensioner. A reversionary pensioner cannot nominate a subsequent reversionary pensioner. Generally, a reversionary pensioner can be any of the following: the deceased s spouse or former spouse any person with whom the deceased person had an interdependency relationship just before he or she died any person who was financially dependant upon the deceased person just before he or she died In addition, the deceased s child may be a reversionary pensioner if at the time of the member s death the child: is aged less than 18 is aged 18 to 24 and financially dependent on the deceased member has a qualifying disability. When an account based pension reverts, the annual payments will be based on the age of the reversionary beneficiary from 1 July of the following financial year (or on 1 July of the financial year if that is the date of reversion). ING restricts the nominated reversionary beneficiary to the pensioner s spouse (including de facto spouse same or opposite sex) Page 10 of 10