Contributions your strategy roadmap Meg Heffron Head of Customer, Heffron SMSF Solutions
Contributions roadmap The three phases: Early years : 25-45 Key saving time : 45-65 Getting the final strategies right : 65+ Dealing with mistakes
Phase 1 : under 45 Contribution Roadmap
What are the themes? The art of what s possible: Setting some contribution targets mortgage v salary sacrifice How much is enough?
Mortgage v salary sacrifice? Example: $400k mortgage (5% pa), $115k salary just increased to $120k What to do with $5k (gross) extra income? Mortgage v salary sacrifice How much wealthier does salary sacrifice make you after 10 years? Key variables : super fund earning rate v mortgage, marginal tax rate, super tax How much better is salary sacrifice? (at various super fund earning rates after tax, franking) Earning rate 4% pa 5% pa 6% pa 7% pa MRT 37% + medicare $13k $15k $18k $21k MRT 45% + medicare $18k $21k $23k $26k
The art of what s possible How much is enough? If someone starts work at 25, what retirement income could they generate? (measured as a % of what they had to spend just before retirement) Depends on: Retirement age, level of savings (just compulsory super?), various assumptions..
The art of what s possible Retire at 60 Retire at 65 Compulsory super only 30% (22%) 40% (30%) Additional 3.0% CC throughout 38% (29%) 50% (38%) Additional 6.5% CC from 45 37% (28%) 50% (37%) Additional 10.0% CC from 50 36% (27%) 50% (38%) What does this mean? At retirement, have enough saved to generate an income equivalent to 30% of what you had to spend in final year of working life (ie, after tax & just compulsory super). This is 22% of gross salary (before tax) in final year. Income lasts until 100. So extra contributions likely to be necessary. Let s not miss out by bad timing.
Phase 2 : 45-65 Contribution Roadmap
What are the themes? 1. Maximising tax concessions via concessional contributions 2. Starting to think about non concessional contributions 3. Still concerned about locking up too much in super it s not yet accessible
1. Maximising tax concessions Concessional contributions The obvious salary sacrifice Looking for opportunities to take personal tax deduction After retirement, particularly if selling non super assets Eg delay sale until eligible for personal deduction Watching the changeover date to transitional higher concessional cap Deferred allocation of contributions ( contribution reserving ) where relevant
Watching the changeover date Concessional contributions Under 50 : $30k Over 50 : $35k but when exactly? Turn 50 10 June 17 1/7/2015 1/7/2016 1/7/2017 1/7/2018 1/7/2019 $30k $35k any time $35k $35k
Deferred allocation of contributions What is it? Contribution made in June 2016 Initially held back not allocated Allocated to member by 28 July 2016 Tax deductible (if applicable) Assessed v CC / NCC cap Trigger NCC Bring forward 2015/16 (year contributed) 2016/17 (year allocated) 2016/17 (year assessed against cap) STRATEGY: Contribute $30k / $35k CC cap in April 2016 (allocate immediately) Contribute $30k / $35k CC cap in June 2016 (allocate July 2016) $60k / $70k deduction in 2015/16 but no excess CC
Deferred allocation of contributions Who s excited? It s a bring forward rather than doubling every year Next year s contributions have to wait until June locked into deferred allocation in future Not really practical for ongoing employer contributions! Generally attractive if high income this year but not next year eg: Retiree selling investment property Employee retiring (or some other break in employment) in June Self employed (not via company / trust) high income this year Think about interaction with changeover date bring $35k forward 1 year
2. Ready for non concessionals? Typical issues Dealing with large non concessional contributions Thinking about the bring forward rules
Large non concessionals Opportunities: Wouldn t it be nice to keep it separate from taxable super? Why? More effective recontribution strategy later Different estate planning decisions Flexibility in future withdrawals.. Like: Focus on taxable component to optimise estate planning? Large $ needed > 60 (nursing home)? Elderly / ill, looking to extract from super before death but leave as much there as possible Looking to rollover taxable to public offer for anti-detriment Focus on tax free component to minimise personal tax? Large amount needed before 60 Legislative change reintroducing tax on super
Large non concessionals Opportunities: Wouldn t it be nice to keep them separate from taxable super? How? Over preservation age Convert existing (taxable) super to a pension first Make NCC Convert to pension & switch off taxable pension? Near preservation age Consider delaying NCC until reach preservation age? Defer allocation? Several years short of preservation age Use a second super fund? (even another SMSF) Short term solution until reach preservation age Not aiming for perfection here just an element of quarantining
Thinking about bring forward rules Opportunities: Watch the timing of the NCC cap changes Next indexation likely to be 2018/2019 Will change bring forward amount from $540k to $630k Remember that triggering bring forward in 2017/18 will lock in $540k Watch the lead up to age 65 don t trigger bring forward at the wrong time Particularly important for recontribution! Example Starting recontribution in 2017/18 (age 60) $1.5m balance, 100% taxable
Bring forward rules Worth about $45k in death taxes if died at 65! Age One approach to recontribution A better result 60 (2017/18) $540k $180k 61 (2018/19) $0 $630k 62 (2019/20) $0 $0k 63 (2020/21) $630k $0k 64 (2021/22) $0 $630k % Tax Free 70% Component 83%
3. Still concerned about access Themes Despite a desire to maximise tax concessions / recontribution. Super may be inaccessible for several years yet Risk of legislative change? Risk of change in personal circumstances? Anything we could do?
Contribution splitting Consider this couple: DOB : 1/8/1969 (46) Preservation Age 60 DOB : 1/2/1962 (54) Preservation Age 57 7 years Super Access : 2029/30 Super Access : 2018/19 11 years STRATEGY: Split her concessional contributions to him - Access to super earlier - Risk mitigation
Recap : the 45-65 age group Themes Maximising tax concessions watch for opportunities to maximise concessionals Thinking about non-concessionals Still worried about access contribution splitting?
Phase 3 : 65 & beyond Contribution Roadmap
What are the themes? Last chance to contribute Understanding the rules around 65 Maximising final opportunities
Understanding 65 Turn 65 1 October 2015 Great recontribution zone Stop work 1 April 2016 1 July 2015 30 June 2016 Contributions can be made, no work test required Contributions can be made if work test met (40 hours / 30 days). Work could occur before or after 65 in October and contribution could occur before or after ceasing work in April. CAN CONTRIBUTIONS BE MADE AT ALL? Can trigger a 3 year bring forward period (so non concessional contributions up to $540k in any 1 year) HOW MUCH WITHOUT A CAP PROBLEM? Up to $540k in any single amount regardless of when the bring forward is triggered (although it might cause an HOW excess) MUCH IN A SINGLE CHEQUE? Contributions only allowed if return to work (and meet work test again) NCC > $180k if already in a bring forward period Max $180k in 1 amount
Time the big contributions An approach: But is it too late? Turn 65 Stop work $350k available to contribute 1 July 2015 1 July 2016 1 July 2017 Personal loan $350k to make NCC When $350k is available, repay loan (no further super conts) Net effect: use the loan to bring forward timing of contributions
Time the big contributions Turn 65 Likely to meet work test Not working 1 July 2015 1 July 2016 1 July 2017 Contribute $181k deliberately trigger bring forward $350k available to contribute but we re limited to $180k aren t we? Contribute $359k just not in a single cheque $540k locked in for 2015/16, 2016/17, 2017/18
Deferred allocation again Opportunities: Extra year of NCC Say retiring (aged 67) in 2015/16 Not in a bring forward (capped at $180k pa) Will meet work test in 2015/16 but not 2016/17 does this mean only one more $180k? STRATEGY: $180k in April 2016 (allocated immediately) $180k in June 2016 (allocated July 2016) Contributed in a year when work test was met but allocated in the next year to access another NCC cap
Recap : 65+ Opportunities: Understand turning 65! Don t miss last opportunities to contribute (or recontribute) Use of the bring forward rules Timing large contributions Deferred allocation
When it goes wrong what to do with excesses Contribution Roadmap
Exceeding contribution caps What can we do? Remember the fund capped limits, work tests: Do we have an excuse to reject it? (Very different to refunding not an excess at all) Could deferring allocation change the outcome? What if can t reject it & go through refund process? Any tips? A key it s a special kind of benefit payment No tax, no proportioning rule But it is a benefit for SIS
Exceeding contribution caps Opportunities: Tip 1 take the refund from: Accumulation account (will use up taxable, not tax free) 100% taxable pension Or for a mixed pension, roll back to accumulation first Pre release balance ($1m) Taxable 50% Tax free 50% Post release balance ($800k) Taxable 50% Tax free 50% Tax % fixed at outset Better Solution 1. Fully commute 2. Release 3. Restart pension $800k TC 37% Tax free 63%
Exceeding contribution caps Opportunities Tip 2 use the refund to offset pension payments Reduce tax for under 60s Maximise $ in super for over 60s Tip 3 don t let the refund use up the 10% limit on a TRIS Roll back enough to make the refund payment; or Roll back entire TRIS before making a payment Tip 4 don t let refund use up unpreserved super if under 65, not retired: Take it from a balance that doesn t have any; or Rollover enough preserved super to another fund accumulation and take it from there
Conclusion Different issues at different stages Early years contributions over SG WILL be needed, don t miss opportunities Key saving years maximise tax concessions, manage NCC, think about access Final years understanding age 65 and large contribution opportunities is key Mucked it up and created an excess? At least look for mitigation opportunities
Thank you
Disclaimer SMSF Association 2016 This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.