Transition to Retirement Pensions

Transcription

1 Rio Tinto Staff Superannuation Fund Transition to Retirement Pensions

2 2 You may be able to access your super without having to leave work permanently If you are currently 55 or older, then by commencing a Transition to Retirement Pension in the Rio Tinto Staff Superannuation Fund, you can access your super without having to leave work permanently. A Transition to Retirement Pension allows you to ease into retirement and may provide you with significant tax advantages. Transition to Retirement Pensions Designed for those who have reached their preservation age and are still working, (TRAPs) allow eligible members to access their super through regular monthly pension payments. To find out your preservation age, see the What s your preservation age? table on this page. How does a TRAP work? The first step in commencing a TRAP is to nominate how much of your existing super you would like to allocate to your TRAP account. The TRAP is then used to pay you a monthly pension. You also decide how much this pension payment will be, within certain payment limits specified under superannuation law. If you are aged between 55 and 60, your TRAP payments will generally be taxed more favourably than salary or wages. If you are over 60, you won t have to pay any tax on your TRAP payments. How can a TRAP be used? You can use a TRAP in a number of ways. These include: Reducing your hours at work and supplementing your reduced income with the pension payments from your TRAP; Continuing to work full-time but directing more of your pay into your existing super through salary sacrifice, and supplementing your reduced income with the pension payments from your TRAP (this is potentially very tax-effective); and What s your preservation age? Date of birth Preservation age Before 1 July July June July June July June July June After 30 June How much can I invest? Commencing a TRAP involves a one-off transfer from the super in your existing Fund account to a new account in the Fund, i.e. the TRAP account. You decide on the amount to transfer to commence your TRAP. The minimum transfer amount is $5,000 and there is no maximum amount. You may wish to consider rolling over amounts from other funds or making an additional contribution to your existing account before establishing a TRAP, as you can t add to your TRAP once it has commenced. Of course, you can commence an additional TRAP at a later date with another transfer from your existing super account. Working out how much to transfer to your TRAP and how much to draw down each month may not be easy. We recommend that you seek advice from a licensed or appropriately authorised financial adviser before making any decisions. Continuing to work full-time and using the extra income from your TRAP for other purposes, such as financing non-super investments or lifestyle choices. Who s eligible? To commence a TRAP, you must first have reached your preservation age (see the table on this page), and have an existing account in the Rio Tinto Staff Superannuation Fund. You must also have a sufficient balance in your existing account to allow you to meet: The minimum TRAP deposit requirements (See the How much can I invest? section on this page for more information); and The minimum balance of $5,000 for maintaining your existing Fund account.

3 3 How much income does a TRAP provide? The Federal Government has set minimum and maximum limits for the annual pension income you can receive from a TRAP. The pension range applicable to you will depend on the amount you have invested and your age. You can vary the amount of income you receive annually so long as it remains within the Government s set minimum and maximum limits. The minimum and maximum limits are determined as a percentage of your TRAP account balance at the beginning of each financial year. The percentage used will depend on your age at 1 July (see the table below). Your chosen annual pension income is generally paid in monthly instalments. Minimum annual payment limits The table below shows the normal minimum percentage and the temporarily reduced minimum percentage that applies for the financial year commencing on 1 July If you are receiving a pension or your pension commences during the financial year, your minimum pension amount will be calculated based on the reduced minimum percentage below. From , the minimum drawdown amounts will return to normal. Reduced Age* Normal minimum percentage^ minimum percentage for ^ < 65 4% 3% % 3.75% % 4.5% % 5.25% % 6.75% % 8.25% % 10.5% ^ In the year in which your pension commences, the minimum payment is based on the number of days remaining in the financial year. No minimum payment is required if the pension commences after 31 May. Can my TRAP be paid to me as a lump sum? TRAPs are designed to provide a regular income stream rather than lump-sum payments. However, you can withdraw your account balance as a lump sum (known as commuting ) in the following circumstances: When you permanently retire from the workforce; When you leave Rio Tinto after age 60 (to work elsewhere); When you reach age 65, even if you are working; When you become permanently incapacitated; When you need to pay a superannuation surcharge debt; When you have to meet a Family Law payment split; or When you die (in which case your dependants and/or Estate will receive the remaining benefit). However, if you have transferred any unrestricted non-preserved component of super into your TRAP, this amount can be withdrawn at any time in part or full. How is a TRAP invested? You can choose to invest your TRAP account balance in one or more of the Fund s nine investment options. There are four diversified options and five sector-specific options. The diversified options each invest in two or more asset classes whereas the sector-specific options each invest in a single asset class. You can choose the same investment option or mix of options that applies to your existing Fund account, or you may wish to make a different selection for your TRAP account. The choice is yours. If you don t make an investment choice on the application form when you commence a TRAP, your account will be invested in the same investment option(s) that applies to your existing Fund account. You can find more information about the Fund s investment options in the Retirement Division Product Disclosure Statement (PDS), the latest Annual Report, or on the Fund website, If you have not previously made an investment choice and don t make a choice when you establish a TRAP, the Fund s default investment option will apply. This is currently the Growth option. Please note that the investment earnings on a TRAP are not subject to the tax (up to 15%) that applies to super fund earnings in the accumulation phase (e.g. earnings on your existing account). This means that even if the same investment option applies to your TRAP and existing Fund account, the returns for the two accounts over the same period would be different due to these different tax rates. If you elect to invest your TRAP account in more than one investment option, you will also have flexibility in the way your pension payments are drawn down from your chosen options. You can elect for your payments to be drawn down either in proportion to the amount held in each option at the time of payment, or from a single option. Maximum annual payment limits Age* Maximum <65 10% 65+ No maximum limit * Age is your age as at the start of the financial year or when you start a pension in the case of the first year. Defined Benefit members If you are a Defined Benefit (DB) member, you can commence a TRAP by using any accumulation-style super you have in the Fund or by converting part or all of your defined benefit. The option of converting your defined benefit into a TRAP means it becomes accumulation-style super and is then transferred. Of course, your accrued DB multiple will be reduced according to the converted value. Once implemented, the converted amount cannot be reinstated as a DB multiple. Your remaining DB multiple (if any) will continue to increase at the normal rate of accrual applicable to your future membership. More information for DB members can be found on pages 7 and 8 of this brochure.

4 4 What is the tax treatment of TRAP payments? For those aged between 55 and 60, the taxable component of income received from a TRAP is taxed in the same way as salary or wages, except that it attracts a 15% tax offset. There is no tax on TRAP income for those aged over 60. For some people, a tax-effective strategy could be to simultaneously draw down on their super via a TRAP while salary sacrificing income into their existing super in order to build up retirement savings. Salary-sacrifice contributions are taxed at 15%* on receipt by a super fund, (which is often lower than an individual s PAYG tax rate) as long as the Government s concessional contribution limits are not exceeded (see below). Please see the worked examples on pages 5 and 6 to see how a TRAP could deliver a tax advantage. *The Government has proposed that, from 1 July 2012, individuals with income greater than $300,000 will have the tax concession on their concessional contributions reduced from 30% to 15%. While the detail of the proposal is yet to be announced, it is likely that the change will result in an effective tax rate of 30% on concessional contributions for affected individuals. Contribution limits While you can t make contributions to a TRAP account once it has been established (but you can commence an additional TRAP), you might consider making salary sacrifice contributions to your existing super account as part of a transition to retirement strategy. If you decide to make salary sacrifice contributions to your existing super account as part of a transition to retirement strategy, you should be mindful that there are limits on the amount of contributions that can be made to super. Contributions in excess of these limits are subject to additional tax. The limit for concessional contributions, which include employer and salary sacrifice contributions is $25,000 p.a (indexed) #. What fees and costs apply to a TRAP? Currently, the Fund s sponsoring employers meet the administration costs associated with a TRAP. This means that presently no fees are deducted from your TRAP account to cover these costs. Investment management fees are deducted from the Fund s assets before the daily unit price is determined. The fees applicable vary depending on which investment option(s) you have selected. If you elect the same investment option(s) upon transferring super from your existing Fund account to your TRAP, no buy/sell spread will apply to the transfer. However, if you choose a different investment option(s) upon commencing a TRAP or switch options at a later date you will be subject to a buy/sell spread. A buy/sell spread is an indirect charge to cover some of the transaction costs such as brokerage and stamp duty that are incurred when buying and selling investments. You should refer to the Retirement Division PDS for full details of the fees and costs applicable to a TRAP. What if I no longer need a TRAP? If for some reason a TRAP no longer suits your needs, you can transfer the balance of your TRAP account back into accumulation super (i.e. back into the accumulation phase) at any time. Your account balance will retain the preservation components that exist at the time of transfer. How do I apply for a TRAP? If you are interested in commencing a TRAP, you should consider the full terms and conditions outlined in the Retirement Division PDS. A TRAP application form is included with the PDS, so if you would like to apply, simply complete the form and return it to the address specified. Worked examples potential tax advantages The following examples illustrate the potential tax advantages of TRAPs. Each of these examples is designed to illustrate possible scenarios only and is not intended to take the place of proper financial advice. When considering these examples, you should be mindful of the limitations described in the Important Note at the bottom of page 8 of this brochure. Before making any decisions about commencing a TRAP you should speak with a licensed or appropriately authorised financial adviser. # For members aged 50 and over, a transitional annual concessional limit of $50,000 applied until 30 June The Government s previous proposal to have a higher concessional limit for members aged 50 and over with superannuation balances below $500,000 has been deferred until 1 July Concessional contributions in excess of the limits are taxed at a rate of 31.5%. This is on top of the normal 15%* contributions tax applicable to concessional contributions and means that tax at the rate of 46.5% is payable on any concessional contributions that exceed the limits. Excess concessional contributions also count towards a person s non-concessional contributions limit. The Retirement Division PDS can be obtained from the Fund website, or by calling the Fund Member Helpline on The Trustee recommends that you speak with a licensed, or appropriately authorised, financial adviser about your personal financial circumstances before making any decisions about your super, including establishing a TRAP. Refer to the Product Disclosure Statement relevant to your existing account membership for full details about contribution limits.

5 5 Example 1 Andrew s profile Age 61 Existing accumulation account balance before commencing a TRAP: $255,000 Amount transferred to TRAP: $250,000 Salary: $75,000 (other income has been ignored) The existing super account and the TRAP account are invested in the same investment option At age 61, Andrew decides to continue working full time and to invest in a TRAP. He transfers $250,000 to a TRAP, leaving $5,000 in his existing accumulation account in line with Fund Rules. In his first year Andrew decides to salary sacrifice $18,000 into his accumulation account and draw an income of $11,880 from the TRAP, which means that he will receive the same after-tax income as he did before commencing the TRAP. Table 1 shows Andrew s income and tax position while Table 2 shows his overall super position. Table 1 Income and tax position No TRAP With a TRAP Taxable salary $75,000 $57,000 Salary sacrifice contributions N/A $18,000 Tax on salary (including Medicare levy) ($17,047) ($10,927) Taxable pension from TRAP N/A $11,880 Tax on pension (including Medicare levy) N/A $0 Tax rebate on pension N/A $0 Net income after tax $57,953 $57,953 By implementing his TRAP strategy, Andrew has reduced his income tax by $6,120. (Note however in Table 2 below that Andrew he has incurred contributions tax of $2,700 on the salary sacrifice contributions he has decided to make.) Assumptions example 1 Existing superannuation contributions (e.g. 9% Superannuation Guarantee) continue unaltered and have been ignored. The net return for the accumulation account after fees and taxes is 6.5% p.a. The net return for the TRAP account after fees is 7.5% p.a. (Note that this is higher than for the accumulation account as there is no tax on the investment earnings in the TRAP account.) For the purposes of calculating earnings on contributions received into the accumulation account during the period, the total value of contributions is assumed to have been paid into Andrew s account half way through the year. For the purposes of calculating lost earnings on monthly payments from the TRAP account, the total value of the monthly payments is assumed to have been deducted from the opening balance of the account half way through the year. The marginal tax rates and income thresholds for the financial year have been used. No allowance has been made for the low-income tax offset (if applicable). No allowance has been made for the matureage worker offset (if applicable). No allowance has been made for the Medicare Surcharge Levy for people without private health insurance who earn over certain thresholds (if applicable). All amounts have been rounded to the nearest dollar. Table 2 Super position No TRAP With a TRAP Accumulation account balance at start of year $255,000 $5,000 Contributions made (salary sacrifice) $0 $18,000 Contributions tax N/A ($2,700) Investment earnings (assuming a net return of 6.5% p.a.) $16,575 $822* Accumulation account balance at end of year $271,575 $21,122 TRAP account balance at start of year N/A $250,000 TRAP income paid N/A ($11,880) Investment earnings (assuming a net return of 7.5% p.a.) N/A $18,305* TRAP account balance at end of year N/A $256,425 Total super at end of year (both accounts) $271,575 $277,547 *See Assumptions example 1 for further information on calculating earnings. By implementing his TRAP strategy, Andrew has an increased his total super savings by $5,972. The gain can be largely attributable to: 1. Net additional inflow to super of $3,420 represented by: Salary sacrifice contributions: $18,000 Less contributions tax (15%): ($2,700) Less TRAP income: ($11,880) $3, Higher net investment earnings due to the increased inflow and the TRAP investment earnings not being subject to the tax (of up to 15%) which applies to investment earnings in the accumulation account.

6 6 Example 2 Tim s profile Age 56 Existing accumulation account balance before commencing a TRAP: $255,000 Amount transferred to TRAP: $250,000 (does not include any non-taxable component) Salary: $100,000 (other income has been ignored) The existing super account and the TRAP account are invested in the same investment option. At age 56, Tim decides to continue working full time and to invest in a TRAP. He transfers $250,000 to a TRAP, leaving $5,000 in his existing accumulation account in line with Fund Rules. In his first year Tim decides to salary sacrifice $15,000 into his accumulation account and draw an income of $12,058 from the TRAP, which means that he will receive the same after-tax income as he did before commencing the TRAP. Table 1 shows Tim s income and tax position while Table 2 shows his overall super position. Assumptions example 2 Existing superannuation contributions (e.g. 9% Superannuation Guarantee) continue unaltered and have been ignored. The net return for the accumulation account after fees and taxes is 6.5% p.a. The net return for the TRAP account after fees is 7.5% p.a. (Note that this is higher than for the accumulation account as there is no tax on the investment earnings in the TRAP account.) For the purposes of calculating earnings on contributions received into the accumulation account during the period, the total value of contributions is assumed to have been paid into Tim s account half way through the year. For the purposes of calculating lost earnings on monthly payments from the TRAP account, the total value of the monthly payments is assumed to have been deducted from the opening balance of the account half way through the year. The marginal tax rates and income thresholds for the financial year have been used. No allowance has been made for the low-income tax offset (if applicable). No allowance has been made for the matureage worker offset (if applicable). No allowance has been made for the Medicare Surcharge Levy for people without private health insurance who earn over certain thresholds (if applicable). All amounts have been rounded to the nearest dollar. Table 1 Income and tax position No TRAP With a TRAP Taxable salary $100,000 $85,000 Salary sacrifice contributions N/A $15,000 Tax on salary (including Medicare levy) ($26,447) ($20,672) Taxable pension from TRAP N/A $12,058 Tax on pension (including Medicare levy) N/A ($4,642) Tax rebate on pension N/A $1,809 Net income after tax $73,553 $73,553 By implementing his TRAP strategy, Tim has reduced his income tax by $2,942. (Note however in Table 2 that Tim has incurred contributions tax of $2,250 on the salary sacrifice contributions he has decided to make.) Table 2 Super position No TRAP With a TRAP Accumulation account balance at start of year $255,000 $5,000 Contributions made (salary sacrifice) $0 $15,000 Contributions tax N/A ($2,250) Investment earnings (assuming a net return of 6.5% p.a.) $16,575 $739* Accumulation account balance at end of year $271,575 $18,489 TRAP account balance at start of year N/A $250,000 TRAP income paid N/A ($12,058) Investment earnings (assuming a net return of 7.5% p.a.) N/A $18,298* TRAP account balance at end of year N/A $256,240 Total super at end of year (both accounts) $271,575 $274,729 *See Assumptions example 2 on this page for further information on calculating earnings. By implementing his TRAP strategy, Tim has an increased his total super savings by $3,154. The gain can be largely attributable to: 1. Net additional inflow to super of $692 represented by: Salary sacrifice contributions: $15,000 Less contributions tax (15%): ($2,250) Less TRAP income: ($12,058) $ Higher net investment earnings due to the increased inflow and the TRAP investment earnings not being subject to the tax (of up to 15%) which applies to investment earnings in the accumulation account.

7 7 Additional information for Defined Benefit (DB) members considering investing in a TRAP If you are a DB member, there are three ways you can invest in a TRAP: 1. By using part or all of any accumulationstyle super you have in the Fund, resulting from past rollovers from other funds, or other accumulation amounts such as those from Short-Term Incentive Plans (STIPs) or additional voluntary contributions. 2. By transferring fully from defined benefit membership to accumulation membership of the Fund, and converting all of your accrued defined benefit into an accumulation benefit, and using part or all of this accumulation benefit to invest in a TRAP. This means you would also become an accumulation member for future Fund membership. 3. By converting part or all of your accrued defined benefit into an accumulation benefit and using this to invest in a TRAP, but remaining a defined benefit member for future Fund membership. Read on for further detail on these three options. 1. Using your accumulation-style super If you have rolled over superannuation from other funds, or made or received contributions in excess of those required to finance your defined benefits you will have accumulation-style super in the Fund. Similarly, any employer superannuation contributions on STIPs will be part of your accumulation-style super. Your last Fund benefit statement will show whether you have any accumulation-style super or not. Accumulation-style super receives investment earnings according to your investment choice. Part or all of any accumulation-style super you have can be used to start a TRAP, with your accumulation-style super being reduced by any amount transferred into a TRAP. The TRAP can be invested in the same investment option(s) as that which applies for your accumulation-style super or a different investment option(s). Example 1 Mark is a 60 year-old DB member with an accrued leaving service benefit of $550,000. This is made up of a defined benefit of $500,000, calculated as 5.0 times his final average salary of $100,000, and accumulation-style super of $50,000. He can elect to use part or all of his accumulation-style super of $50,000 to commence a TRAP. However, he cannot use any part of his defined benefit of $500,000 unless he elects to pursue either option 2 or 3 (outlined below and on page 8). If Mark decides to commence a TRAP with $30,000, his accumulation-style super will be reduced by $30,000 and a separate TRAP account will be established in the Fund s Retirement Division. If you do not have any accumulation-style super, or have a small amount, you may wish to consider the following alternative ways to invest in a TRAP. 2. Transfer from defined benefit to accumulation membership You have the option to transfer from defined benefit membership to accumulation membership at any time. The major consequences of such a change will be: Your accrued leaving service benefit at the date of transfer, which includes any existing accumulation-style super, will be transferred to an accumulation account; Employer contributions at a fixed rate, along with all member contributions, will be re-directed to your accumulation account; Investment earnings according to your chosen investment option(s) will be allocated to your accumulation account; All benefits, including death, total and permanent disablement, ill-health and leaving service, will be determined on an accumulation membership basis; and You will not have the option to return to defined benefit membership in the future. Please note that there are a range of issues that you need to consider before transferring from defined benefit to accumulation membership, as the style of benefits is quite different. The Trustee recommends that you take the following three steps. First, contact your regional Total Rewards Specialist see page 8 for contact details to arrange for a specific letter to be prepared for you covering your individual circumstances. Second, seek advice from a licensed, or appropriately authorised, financial adviser before making any decisions about your super, including transferring from defined benefit membership to accumulation membership. And third, obtain an Accumulation Division Product Disclosure Statement (PDS) and read and consider this thoroughly before making any decision. PDSs can be obtained by calling the Fund Member Helpline on or by accessing the website, Example 2 Continuing example 1, Mark could elect to become an accumulation member of the Fund, in which case his accrued defined benefit of $500,000 and accumulation-style super of $50,000 would form the opening balance in his accumulation account as an accumulation member. He could elect to use up to $545,000 of his benefit to commence a TRAP. However, he would then be an accumulation member of the Fund and would not be able to return to being a defined benefit member. Note that Mark needs to leave a minimum of $5,000 in his accumulation account. Having transferred from defined benefit membership to accumulation membership, you could then use part or all of your accumulation account to invest in a TRAP.

8 8 3. Convert part or all of your accrued defined benefit to an accumulation benefit You also have the option of converting part or all of your accrued defined benefit to an accumulation benefit for the purposes of investing in a TRAP, but still remain a defined benefit member for future Fund membership. The major consequences of such a change will be: The defined benefit multiple that you have accrued at the date of conversion will be reduced in the same proportion as the defined benefit converted to an accumulation benefit bears to the defined benefit component of your accrued leaving service benefit at the date of conversion; Once converted to an accumulation benefit, the amount cannot be converted back to a defined benefit; All defined benefits, including death, total and permanent disablement, ill-health and leaving service, will be determined in the same way as they are currently determined, but reduced by the defined benefit multiple that has been converted to an accumulation benefit; Any minimum benefits will be reduced in the same way as the standard defined benefits; and Any existing accumulation-style super could remain as is or be invested in a TRAP. Please note that there are a range of issues that you need to consider before converting part or all of your accrued defined benefit to invest in a TRAP. The Trustee recommends that you take the following steps. First, contact your regional Total Rewards Specialist see opposite for contact details to arrange for a specific letter to be prepared for you covering your individual circumstances. And second, seek advice from a licensed, or appropriately authorised, financial adviser before making any decisions about your super, including converting your accrued defined benefit to invest in a TRAP. If you need more information If you require more information about a transition to retirement pension please contact: The Fund Member Helpline (inside Australia) (outside Australia) 8.30am to 7.00pm EST, Monday to Friday Your Total Rewards Specialist Southern Region (Vic & Tas) Simon Tennant (03) Eastern Region (NSW, Qld & NT) Darren Beresford (07) Debbie Goodwin (07) Western Region (WA) Dean Gorey (08) Andrew Lucas (08) Example 3 Continuing the earlier examples, Mark could elect to convert part of his accrued defined benefit of $500,000 to an accumulation benefit in order to invest in a TRAP. Assume that he elects to convert $400,000 of his accrued defined benefit to invest in a TRAP. The reduction in his accrued defined benefit multiple would be calculated as: Accrued defined benefit multiple (5.0) x $400,000 $500,000 = 4.0 Therefore, his accrued defined benefit multiple immediately after the conversion would be 1.0. All future defined benefits would be calculated with his defined benefit multiple reduced by 4.0. Assuming that his defined benefit on death and total and permanent disablement benefit was 6.0 times salary before electing to convert part of his accrued defined benefit to invest in a TRAP, his defined benefit on death and total and permanent disablement benefit would reduce to 2.0 ( ) times salary after the conversion. Important Note The information contained in this brochure is based on the law as at July This brochure provides general information only, and has been prepared without taking into account your personal objectives, financial situation or needs. Therefore, before acting on this information, you should consider the appropriateness of it, having regard to your personal objectives, financial situation and needs. You may also wish to consult a licensed or appropriately authorised financial adviser. You should also read and consider the current Fund Product Disclosure Statement relevant to your membership which is available by calling the Fund Member Helpline on Issued by Rio Tinto Staff Fund Pty Limited (ABN ), Australian Financial Services (AFS) Licence No , as Trustee of the Rio Tinto Staff Superannuation Fund (ABN ). July 2012 April 2009 RT0264