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SMSF assets will not need segregating

Doug McBirnie  |  23 Jun 2016Text size  Decrease  Increase  |  

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The Turnbull government's first budget has aimed its sights squarely at the superannuation accounts of wealthier Australians.

But the changes highlight how a self-managed superannuation fund (SMSF) may be well-placed to take advantage of the changes by providing retirees with the ability to plan and manage their tax settings in a single vehicle.

How much income does it provide?

Changes proposed to take effect from 1 July 2017 limit the amount that can be held in the tax-free pension phase to $1.6 million.

Analysis of Accurium's database of SMSF trustees preparing for retirement suggests this will impact around a fifth of trustees over 65.

This begs the question of what level of spending in retirement is sustainable for someone with $1.6 million in savings.

Around a quarter of SMSF trustees using Accurium services have indicated a desired annual budget in retirement of over $100,000.

Accurium's research shows that superannuation savings of $1.6 million would be sufficient to give a 65-year-old male 55 per cent confidence of spending $100,000 per annum without outliving his savings.

This assumes an asset allocation in line with the average SMSF and average Australian life expectancies.

Due to their longer life expectancy, for 65-year-old females, the confidence level drops to 47 per cent.

These calculations have been done using the Accurium retirement healthcheck and allow for tax and age pension entitlements.

Many retirees will think a close to one-in-two chance of outliving their savings and falling back on the age pension is too great a risk.

Retirees looking for greater confidence, say reducing that risk to only a one-in-twenty chance, would need an annual spending level of $65,000.

 

Retirement spending level supported by $1.6m in savings*

  Annual spending level,
indexed with inflation
Probability of
lasting for life
Annual spending level,
indexed with inflation
Probability of
lasting for life
65-year-old male $100,000 55% $65,000 95%
65-year-old female $100,000 47% $64,000 95%

* Methodology in line with that used in Accurium's SMSF Retirement Insights Volume 3 - Bridging the prosperity gap. Refer to paper at www.accurium.com.au for details.

 

Transfer cap is not a limit on superannuation or saving

On a practical note, the $1.6-million cap on the amount that can be used to commence a pension does not restrict the amount retirees can hold in superannuation. It is just a limit on assets that will preserve a tax-free status.

The excess can continue to be held in superannuation with earnings taxed at a concessional rate of 15 per cent. For most people this remains an effective and relatively simple tax-efficient structure.

Some commentators have raised concerns about the complexities such as capital gains tax impacts of complying with the cap, particularly for those already in pension phase.

However, this is where the flexibility of having an SMSF really comes into its own. With an SMSF there is no need to sell or transfer particular assets in order to comply with the new limit.

A member of an SMSF can have both accumulation and pension accounts supported by the same unsegregated pool of assets.

SMSF trustees moving into pension phase will need to commence a pension with an amount below the cap, leaving the rest in accumulation. There is no need to identify which of the SMSF's assets are supporting the pension.

For those already in pension phase, excess amounts can be rolled back to accumulation without the assets needing to be sold or allocated specifically to different accounts, provided they are accounted for appropriately.

In order to continue to receive tax-fee earnings, the SMSF will simply need an actuarial certificate providing the split of the SMSF's income between tax-free and taxed at 15 per cent.

This will provide plenty of flexibility in terms of withdrawals. Retirees who have balances in excess of the cap may want to keep additional withdrawals from the pension account to a minimum.

They can continue to draw on their accumulation assets in the form of lump sums if additional cash flow (above the minimum) is needed.

While the introduction of this cap will potentially limit the tax concessions, SMSFs are well placed to manage this change.

A retiree with $2 million in superannuation is likely to pay around $3,000 a year more in tax, although they will still be able to use the franking credits from the whole portfolio.

The added complexity of the proposed changes will make retirement planning more difficult. The silver lining for those in the SMSF industry is that the flexibility that SMSFs can provide may continue to make them a popular option.

There will also be a wealth of opportunities for advisers and accountants in helping their clients navigate these changes.

Asset "location" in SMSFs may become almost as important as asset allocation for many SMSF trustees and advisers alike.

More from Morningstar

Caution on tax warranted ahead of 30 June

Is your self-managed super fund at risk?

 

Doug McBirnie is a senior actuary with Accurium. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. This article was first published on cuffelinks.com.au.

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