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Here's how mature children can help your SMSF

Victoria Kuok  |  22 Jun 2017Text size  Decrease  Increase  |  
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As children mature they increase their earnings capacity and can accelerate cash contributions, and this can be helpful when it comes to SMSF cash-flow management.


It is often written throughout the media that as parents age, many become the "Bank of Mum and Dad," financially assisting their children.

In the age of high property prices, the Reserve Bank of Australia says the proportion of property buyers relying on help from their parents has more than doubled in four decades.

Family help goes both ways. How can children help with their parents' retirement lifestyle? An engaging way is to be part of the parents' nest eggs, joining the parents' SMSF as members.

The children who are in accumulation phase are generally working. They start contributing into super through the Superannuation Guarantee.

As they progress in their working lives with increased income, they may increase contributions through salary sacrifice. A member may make an annual concessional contribution of up to $25,000.

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Living in this uncertain economy, there is no guarantee of regular and consistent employment, especially when the youth unemployment rate is above 12 per cent.

But hope abounds for better years and increased savings as income goes up--the Australian Bureau of Statistics says the unemployment rate in the general population is less than 6 per cent.

From 1 July 2017, a member may save up their unused concessional contribution limit and use it in later years. A member may also make personal concessional contributions besides the usual superannuation guarantee and salary sacrifice, whether the member is self-employed or is an employee.

Other popular forms of contributions are government co-contributions for low-income earners and spouse contributions for low-income spouses.

These government measures encourage people to continue saving during lower-income years when there is a change in employment pattern, for example, changing into part-time employment or during child-rearing years.

For parents transitioning towards retirement, they may be disappointed to hear they only have up until 30 June 2017 to enjoy a tax exemption on earnings over their transition-to-retirement (TTR) income streams.

After this time, TTR accounts are back to the accumulation account tax rate, concessionally at 15 per cent. TTR account holders over 60 will be relieved to hear their income stream payments are still tax-free.

During pre-retirement years, many parents experience empty nesting, with the home mortgage paid off and bank balances bulging. Having achieved financial liberty, this is the best time to accelerate savings and get ready for retirement.

One way is to maximise non-concessional contribution (NCC) limits and trigger the three-year bring-forward rule before 30 June 2017, while the cap is at a favourable $180,000 for the financial year.

After this time, the annual NCC limit reduces to $100,000 and the three-year bring forward rule will be phasing out.

The significance of making superannuation contributions is to save and accumulate wealth in a tax-effective environment: accumulation accounts are concessionally taxed at 15 per cent and pension accounts are tax-free.

The multiplying effect over the years can make a significant improvement in wealth accumulation.

Retired parents who are in pension phase will have reduced or even stopped making contributions. While pensioners can receive in-specie lump sum payments, for example, transferring shares out, they can only receive pension payments in cash.

Cash contributions from children become a cash buffer for the parents who rely on regular and consistent cash payments from their SMSF to make ends meet.

As pension account members age, the SMSF will be required to make additional pension payments, according to their pension percentage factor.

At the same time, maturing children, being accumulation account members, will increase their earnings capacity and accelerate cash contributions. This is helpful when it comes to SMSF cash flow management.

Furthermore, the significance of a variety of sources of contributions over income-producing years is that it is independent of investment returns of the SMSF itself. In times of negative investment returns, contributions can cover outgoings. The SMSF will not be forced into a fire-sale to meet pension payments.

This is a significant consideration because with the population ageing and the increasing popularity of lumpy assets such as direct property in SMSF, trustees may be reluctant to liquidate the entire lumpy asset just to make income stream payments, which are merely a fraction of the asset's value.

A liquidation event becomes more complicated in terms of taxation since the introduction of the $1.6-million transfer balance cap, as large-balance pension member accounts may need to have their excess rebalanced to an accumulation account.

This means they may no longer be able to enjoy full capital gains tax (CGT) exemption while they were in full pension account. Some hope the CGT cost base reset can reduce the impact as it allows members to use the 30 June 2017 market valuation, which is supposed to be much higher than the original cost base.

As for the accumulation members, being part of a part-pension SMSF, they enjoy a percentage of tax exemption. Sharing resources among members running an SMSF is also efficient and effective in managing this long-term asset. Also, the SMSF is limited to four members so it is a close-knit setup.

Many will use the end of financial year as a great opportunity to revisit their retirement plans. Pass the baton around--may the elderly assist in making the future bright for the young, and may the young contribute towards fulfilling retirement years in return.

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Victoria Kuok is an SMSF specialist advisor at the SMSF Association. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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