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Self Managed Super Fund (SMSF) Article
Retiree plans - big changes
By Tony Negline.
This article may be out of date.
12th October 2005
Two weeks ago Mr Mal Brough, Assistant Treasurer and Minister for Revenue, issued a press release which potentially impacts every Australian retiree and prospective retiree who has superannuation assets.
Brough's press release contained three separate announcements. Firstly, small funds will not be able to commence new lifetime and term pensions – often called defined benefit (or db) pensions after 31 December 2005. Secondly, allocated pensions (APs) which commence after 31 December 2005 will use a new set of Pension Valuation Factors (PVFs) to determine what the minimum and maximum income can be for a particular year. Lastly, the allowable term for Term Allocated Pensions (TAPs) – which the government prefers to call Market Linked Income Streams – will be extended.
The government has taken a long time to make this final decision. As part of the 2004 Federal Budget the government announced that it would not allow small super funds to write any new db pensions from that date onwards. There were a few reasons for the immediate ban but the major argument was the government's desire to remove unintended tax concessions which very wealthy people could access by using lifetime db pensions. These concessions are still available but only in publicly available or employer sponsored super funds.
Certainly these tax concessions – provided via the Reasonable Benefit Limit assessment system – were a major reason for the popularity but it wasn't the only reason. A growing number of people liked these products because they provide a much tighter control of retirement assets and help to address the danger of running out of money if an investor lives too long. Neither TAPs nor APs adequately address this issue.
The immediate ban was very controversial and in June 2004 the government announced that it would allow some small super funds to commence a db pension before 1 July 2005 for retiring members and the Treasury Department would hold an inquiry into db pensions.
Not long before 1 July '05, the government extended the dead-line for small super funds commencing new db pensions would be extended to 31 December 2005.
The second change Mr Brough announced relates to the allocated pension PVFs. At the present point in time these new PVFs haven't been released but the Assistant Treasurer has told us that the new PVFs would be “in line with current life expectancy”. The current PVFs are based on the 1985/87 Australian Life Tables. Since that time average life expectancies have increased considerably. For example under the 1985/87 life tables a 65 year old male's life expectancy was 14.6 years. It is now 17.7 years.
Unless the government rethinks its policy decisions, these new PVFs will not apply to allocated pensions which commence before 1 January 2006 which will continue to fall under the old PVFs.
Should a person already in an existing allocated pensioner move to a new AP after 31 December 2005 to get access to the new PVFs? The answer to this is very complex and some serious number crunching needs to be done before deciding it is the best thing to do. Issues to consider include, the differences between the new PVFs and the old ones, the RBL adjustment to the existing AP and assessment of the new pension, the current account balance, the level of undeducted contributions and other tax-free amounts transferred to the new pension, your new life expectancy number compared to your original life expectancy number and resultant changes to Centrelink assessment. The cost of the move also needs to be considered.
Anyone who is planning to retire before the end of 2005 will need to do a similar analysis. Should they start an AP now or should they wait until the new year? What will they live on in the mean-time?
A small fund that wants to use the new PVFs may well need to update their trust deed because the current deed may refer to the current PVFs not the new ones.
The last change announced by Minister Brough involves an extension to the allowable terms for Term Allocated Pensions. Under current rules a TAP can only have an initial term which is based on the pensioner or their nominated reversionary's life expectancy or someone who is aged five years younger.
For example a 65 year old male, who hasn't nominated a reversionary, is allowed terms between 18 and 24 years. TAPs which commence after 31 December 2005 will be allowed to select any term between the person's current life expectancy and the period of time to their 100th birthday. This means our 65 year old would be allowed a term between 18 and 35 years. If this 65 year old male nominated his 60 year old wife as his reversionary then he would be allowed terms between 18 and 40 years.
This is a significant concession and will reduce the amount of income which has to be paid from these investments as the term selected determines the amount of income that must be paid from a TAPs' account balance. However Mr Brough has also said that TAPs that commence after December 2005 will be allowed to take a slightly higher or lower income than the factors allow. TAP investors will be allowed to increase or decrease the amount of income that must be paid by up to ten percent. A 65 year old male with $100,000 invested into a 35 year term TAP can pay himself anywhere between $4,500 and $5,500 in the first year.
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