(Part Two)

Click here to refer to Part One

While generous tax concessions are available for superannuation savings, other factors that may influence people to steer clear of superannuation include superannuation performance and the preservation rules. 

Superannuation Performance

One of the most common gripes I hear about superannuation is regarding poor performance and generalising this across all superannuation options.  I often find that people forget that superannuation is not an investment.  It is actually a vehicle via which to invest, in a similar fashion as a family trust structure is used for investment purposes.

Tip: ensure you are comparing returns of like assets AND including the implications of tax on the returns

As such, many people fall into the trap of comparing superannuation returns (which are generally declared post-tax) to the gross, pre-tax returns of similar non-superannuation investments. For example, let’s take a look at average annualised returns for two superannuation options and their identical non-superannuation investment options:

Investment Option *	5 year return (%) per annum**
	Super	Non Super
Colonial First Date Australian Share - Core Fund	8.23%	8.83%
Colonial First State Cash Fund	4.51%	5.31%

*options via the CFS First Choice Personal Super and CFS First Choice Investment platforms.

**returns to December 2008.

Looking at the return figures alone, it would appear that investments perform better in a non-super environment.  However due to Non-Super investment returns being declared pre-tax, and the super returns declared post-tax, the above figures are quite misleading.  This is because the taxman has yet to have his cut from the non-super investments.  Therefore, your marginal tax rate will determine the net, after tax return for the non-super investments.  Accordingly, if your marginal tax rate is 30% or greater, investing via superannuation will generally give you a better post-tax return.

Superannuation Preservation Rules

Getting money out of super is an area governed by many complex rules: 

Lump Sum Withdrawals

In general circumstances, to make a lump-sum withdrawal from superannuation you need to meet a condition of release as met under the Superannuation Industry (Supervision) (SIS) regulations.  These conditions also differ slightly depending on the preservation status of your superannuation benefit.  Basically, superannuation consists of three (3) preservation categories:

1. Preservation Status

Preserved amounts: For most people under age 65 and still working, it is probable that their superannuation benefit will consist mainly of preserved benefits.  As such, a lump sum withdrawal from this category is not allowable until one of the following ‘Conditions Of Release’ requirements is met:

Conditions Of Release Requirements For A Lump Sum Withdrawal From Preserved Benefits (only one needs to be met):

• Retirement on or after preservation age * see notes below
• Attaining age 65
• Death
• Permanent incapacity (as per SIS definitions)
• Terminal medical condition

*Preservation Ages
Date of Birth	Preservation Age
Before July 1, 1960	55
From 1 July 1960 - 30 June 1961	56
From 1 July 1961 - 30 June 1962	57
From 1 July 1962 - 30 June 1963	58
From 1 July 1963 - 30 June 1964	59
On or after 1 July 1964	60

*Retirement
The definition of retirement depends on your age.  If you have reached your preservation age but are not yet 60, retirement is defined as an arrangement under which you are no longer gainfully employed and intend to never again become gainfully employed for 10 hours or more each week.
If you are 60 or over, an arrangement under which you were gainfully employed must come to an end, along with one of the following circumstances:
You attained age 60 on or before the ending of employment, or You intend never to again become gainfully employed for 10 hours or more each week

Unrestricted Non-Preserved Amounts: If you are lucky enough to have some of this component in your superannuation account, it can be accessed at any time, regardless of age or work status.

Restricted Non-Preserved Amounts: These amounts are generally made up of undeducted contributions made to superannuation made before 1 July 1999.  These amounts can become unrestricted non-preserved benefit when gainful employment ends with an employer who has contributed to that same super fund prior to termination of employment. 

Tip: If you are intending to cease employment and you have a superannuation account with some Restricted Non-Preserved components, be sure to get your employer to contribute to this fund before you cease work. Note: Investment earnings on Unrestricted Non-Preserved and Restricted Non-Preserved components will be preserved.

These are the more common cashing regulations for superannuation withdrawals – there are others for special circumstances. 

We recommend always talking to your Financial Adviser before withdrawing funds from superannuation.  There are two primary reasons for this:

1. To ensure you meet a condition of release, and
2. To ensure you are aware of any tax consequences of a lump sum superannuation withdrawal.

In the next edition of Cornucopia, we will look at the tax treatment of superannuation withdrawals, along with other considerations that need to be considered.

Centrelink Deeming Rates

The upper deeming rate for social security payments will decrease by 1%, from 5% down to 4% as of January 26, 2009.  The lower deeming rate will remain unchanged.

The new rates are outlined below:

Financial Investments Value	Situation	Deeming Rate from 26 Jan 2009
First $41,000	Single	3%
First $68,200	Pensioner Couple	3%
First $34,100	Allowance Couple	3%
Remainder		4%

Centrelink Pharmaceutical Allowance

Pharmaceutical Allowance has increased to $6 (from $5.80) per fortnight for eligible single individuals and $3 (from $2.90) per fortnight for each eligible member of a couple.

Changes To Salary Sacrifice Strategies

If draft legislation is passed, the definition of income for various income tests could include reportable superannuation contributions, which includes salary sacrifice superannuation contributions.  The changes are proposed to take place from 1 July 2009 if legislation is passed.

The major impacts will be as follows:

• Co-contribution – currently salary sacrifice contributions to superannuation reduce the amount of income assessed, and therefore may increase co-contribution entitlements.  Under the proposed changes, it will make no difference whether salary is taken as cash or salary sacrificed.  The cut-out income threshold for the co-contribution in 08/09 will be $60,342.

• Pensioner Tax Offset and Senior Australian Tax Offset (SATO) – Under the proposed changes, salary sacrifice will be counted as part of a ‘rebate income’ which is the new income test for the Pensioner Tax Offset and SATO.  Currently, the income tests for these offsets are based on taxable income, which does not include salary sacrifice amounts.

• Centrelink Pension Support For Those Under Age Pension Age – Salary sacrificed income will be counted for those under age pension age when calculating Centrelink Pension entitlements.  This includes entitlements for Age Pensioners with spouses who are under Age Pension age, who are salary sacrificing.

• Spouse Contributions Tax Offset – The spouse contributions offset is assessed on the recipient spouse’s assessable income and reportable fringe benefits.  Under the proposed legislation, salary sacrifice contributions will also be counted in the assessment of income for the spouse contribution tax offset.

What is it?
The Pension Bonus Scheme is an incentive for older Australians to remain in the workforce and defer claiming the Age Pension.  As a result, a person may get a tax-free lump sum bonus when the eventually claim and receive the Age Pension.  The Department of Veterans’ Affairs operates a similar scheme for the veteran community.

Who Can Get It?
A pension bonus can only be paid if a person since reaching Age Pension Age, has not received Age Pension or any other income support payment, other than the Carer Payment.

Age Pension Age for men is 65 years of age, while for women it is between ages 60 and 65 depending on date of birth.

Women born between	Eligible Age Pension Age
Before 1 July 1935	60
1 July 1935 - 31 Dec 1936	60½
1 Jan 1937 - 30 Jan 1938	61
1 July 1938 - 31 Dec 1939	61½
1 Jan 1940 - 30 June 1941	62
1 July 1941 - 31 Dec 1942	62½
1 Jan 1943 - 30June 1944	63
1 July 1944 - 31 Dec 1945	63½
1 Jan 1946 - 30 June 1947	64
1 July 1947 - 31 Dec 1948	64½
1 Jan 1949 and later	65

Table Source: Centrelink: A guide to Australian Government Payments, Jan 2009

Key Factors For Eligibility

In general, a person may get a pension bonus if they:

• Apply to become a member of the scheme.  Generally, you must apply within 13 weeks of reaching Age Pension age; and
• Work for a minimum of 12 months from the date they become a member of the scheme.  For each 12-month period they are on the scheme, they must complete at least 960 hours of paid work; and
• Claim the bonus and Age Pension within the required period – which is generally within 13 weeks of failing to meet the scheme’s work requirements. 

The maximum deferral period that can be counted for a pension bonus is five (5) years. 
Work after age 75 cannot be counted towards a pension bonus scheme for the same individual.  However, in saying that, it can count towards the bonus of a younger partner who has not deferred to the maximum five (5) years in the scheme.

How Much Do You Get?

The amount of Pension Bonus payable depends on how long you have deferred claiming the Age Pension and how much Age Pension you are eligible for when it is granted.  For example, if you are only eligible for 50% of the Age Pension when you apply, you will only be eligible for 50% of the maximum bonus amount based on the amount of time you have deferred claiming Age Pension.  With this in mind, it is recommended that you review your asset and income position before applying for the Age Pension and Bonus.  A simple restructure of your position before applying can sometimes significantly increase your pension and bonus amounts.

Maximum Amount Of Pension Bonus Payable

Age Pension Years Deferred	Single Person	Partnered (each)
1 Year	$1,373.80	$1,147.50
2 Years	$5,495.10	$4,589.80
3 Years	$12,364.00	$10,327.10
4 Years	$21,980.40	$18.359.30
5 Years	$34,344.30	$28,686.50

Source: www.centrelink.gov.au

Who Should Apply?

Basically anyone intending to work past Age Pension age by 12 months or more and not claim the Age Pension while working.  You will also need to be eligible for the Age Pension when you finally do stop working and claim the bonus.

If you are unsure if you will be eligible for the Age Pension when you finally stop working, it still doesn’t hurt to apply for the Bonus Scheme – at least you then have a chance of being eligible!

When planning for retirement we often remember all the standard or common goals.  These are factors such as:

• How much money we need week-to-week, just to live.
• How much we need for all the extras, eg. entertainment
• Funds for new purchases/upgrades. eg. a new car
• Funds for the dream holiday

It is then the important task of implement a retirement strategy to effectively meet these goal throughout retirement.

But how many of us remember to plan for the unexpected?

One of the key issues here includes family circumstances.  I recently read an article (Retirement Planning For The Unexpected by Peter Walsh – Financial Planning Magazine, November 2008) which brought up two very interesting points:

“In the past, people approaching retirement rarely had to worry about elderly parents, but it’s something that today’s retirees must take into account.”

“They may also expect their children to have moved out before retirement, but what if they haven’t?”

With gains in medical science and the fact, that on average, people are waiting longer before having children, future retirees may not only need to fund their own retirement, but also assist Mum and Dad, while still possibly funding children through school and/or university. 

The article suggests that these factors seemed to have caused a major trend in the US, where people who have retired are returning to work in order to meet the increased financial strains caused by ‘family circumstances’.

What are your thoughts?  Will you be helping out Mum and Dad in your retirement?  And will the kids also be funded by your retirement savings?  If so, make sure your retirement plan can cater for it!

Glossary Of Terms

Building you a comprehensive glossary of terms through Cornucopia.
I’ve been getting a few questions asking about the difference between a recession and a depression.  Here are the definitions:

Recession - A slowing of business activity due to a poor economic environment, but not so severe as a depression.  The usual definition is two consecutive quarters of negative economic growth.

Depression - An extended recession identified by a decrease in economic activity including lower production and higher unemployment.

DISCLOSURE: Employees of Mainview Securities Pty Ltd currently hold shares in: ASX Codes: AMC, AMP, ANN, ATG, BHP, COH, CML, CSR, FLT, HHG, HHV, MAX, MPR, MGW, NAB,NCP, NLX, PBB, PBL, PMC, PMN, RIO, RSP, SGS, SGT, SOT, SUN, TOL, UNW, WES, WDC, WOW; Managed Funds APIR Codes: ADV0013AU, HOW0143AU, FSF0035AU, FSF0007AU, FSF0145AU, FSF0041AU, JBW0102AU, PER0038AU, PPL0108AU, PLA0002AU. This is not a recommendation

Mainview Securities trading as THE HUDSON INSTITUTE
helpdesk@hudson-institute.com | free call 1800 804 296 | | Fax 07 3368 3028 | GPO Box 1875, BRISBANE QLD 4001