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Allocated Pensions and Centrelink

The relationship between Allocated Pensions and Centrelink is important to understand.

Your allocated pension will affect the level of Age Pension that you are entitled to.

This article explains how your Allocated Pension affects your Centrelink entitlements and what can be done to improve your benefits.

It also details how the change in rules, as of 1 January 2015, affected the assessment of Allocated Pensions.

Basic Eligibility Assessment for Centrelink Age Pension

The level of Centrelink Age Pension that you are entitled to is based on two tests:

Whichever test results in the Government paying you the lowest level of Age Pension entitlements is the test that will be applied.

It should go without saying that the higher your income and/or assets, the lower Age Pension benefit you will receive.

Allocated Pension Centrelink Assessment – Income Test

In relation to Centrelink, an Allocated Pension is assessed in the following manner:

The annual income that you receive from your Allocated Pension is assessed under the Income Test for Centrelink purposes. However, the income that you receive is reduced by the Centrelink deductible amount

The deductible amount is intended to represent the capital component of your Allocated Pension income stream and is therefore not assessed as Income. The Annual Deductible Amount is calculated as follows:

(Purchase Price of Pension – commutations since inception)\ relevant number

This amount will generally remain static throughout the life of the pension, however should definitely be recalculated at the beginning of each year, as it will be affected and change as a result of any commutations that are made.

The Income that is assessed is the gross pension payment less the Deductible Amount.

For example, it you received pension payment of $2,500/month and the Deductible Amount was $14,500 p.a. The only income that would be assessed for Centrelink purposes would be $15,500 p.a.

 

How to increase the Deductible Amount

As you get older, the Relevant Number used in the calculation of your Deductible Amount will reduce, as it is based on your life expectancy.

Therefore, if the capital balance of your pension was to remain at a similar level, your Deductible Amount for Centrelink purposes could increase by refreshing the pension (rolling back your pension to accumulation phase and commencing a new pension), as the Purchase Price would be divisible by a smaller number, which would increase the Annual Deductible Amount.

You just need to ensure that any costs associated with refreshing the pension, time out of the market and other administrative and legislative requirements make this strategy a worthwhile and compliant exercise.

 

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Can I Buy a House With My Superannuation?

Buying a house with your Superannuation is possible, but there are some things you need to understand before doing so.

There are actually two parts to the question, ‘Can I buy a house with my Superannuation?’.

There is buying a house “to live in” as your home and then there is buying a house “as an investment property”, or maybe even a holiday house.

Depending on what you are trying to achieve, the answer may differ.

Can I Buy a House With My Superannuation To Live In?

If you plan on using your Superannuation to purchase a house to “live in”, you must first withdraw however much you need from your Super account into your personal bank account, then use that money to buy a house.

You are unable to purchase a house to “live in”, if that house is owned within your Super account, even if you have a Self Managed Superannuation Fund. 

So, how do you withdraw your Super? In order to have full access to your Superannuation and withdraw into your personal bank account, you must first meet a Superannuation condition of release. The most common forms of full conditions of release are ‘retirement’ and ‘reaching age 65’.

Retirement can include stopping work after reaching your preservation age with no intention of returning to full time or part time work, or having an employment arrangement come to an end after age 60 but reaching age 65 is self-explanatory.

Can I Buy a House With My Superannuation For Investment?

You are able to use your Superannuation savings to buy an investment property or rental property; however, there are strict guidelines on how you must do this.

In order to buy a house or commercial property for investment using your Superannuation, you would need to setup a Self Managed Superannuation Fund, as most other Superannuation funds have limited investment options that generally do not include direct property investments.

Furthermore, you need to ensure that the trust deed of the SMSF allows it, as well as the SMSFs investment strategy.

A SMSF is a Superannuation fund managed by you, whereby you are the trustee of the Super fund. There can be large costs associated in setting up and ongoing management. Consider the myriad of administrative and legal responsibilities associated; so this is something you should research thoroughly before getting into.

Importantly, a property owned within a SMSF is unable to be used for personal purposes, unless it is business real property, which can be rented to your business, provided it is done at arm’s length and for the benefit of the members of the SMSF. Again, purchasing business real property within a SMSF has many rules and limitations, so you should research thoroughly and obtain professional advice before exploring this option.

Can I Use My Super To Buy My First Home?

You are unable to use your Superannuation to buy your first home to live in, unless you have met a full Superannuation condition of release, as noted above.

However, you can use the First Home Super Saver (FHSS) to save towards your home deposit. This is done by making voluntary concessional or voluntary non-concessional contributions into your Super account, then applying for a release and withdrawing up to $15,000 plus earnings from any one year or $30,000 plus earnings across all years.

Voluntary concessional contributions include salary sacrifice contributions and personal concessional contributions. Voluntary non-concessional contributions are after-tax personal contributions.

The benefit of the First Home Super Saver Scheme is that voluntary concessional contributions can reduce your personal income tax. Also, both types of contributions, when invested within Super, will have earnings taxed at a maximum of 15%, which may be lower than your individual tax rate, allowing you to save for your deposit sooner.

Make sure you understand the FHSS rules in full before using it to save towards your first home.

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What is a Recontribution Strategy?

A superannuation recontribution strategy involves withdrawing some or all of your super balance and recontributing back into super as a non-concessional contribution. 

It is a reasonably common strategy recommended by financial advisers to their clients under certain circumstances.

So, what is a recontribution strategy?

To understand a recontribution strategy, it is important to first understand superannuation tax components.

Your superannuation balance is made up of taxable components and/or tax free components. 

The reason tax components (or tax elements) are important is because they determine the validity of a recontribution strategy.

Ultimately, you want your super balance to have a high level of tax-free components and a lower level of taxable components.

If your super balance consists of a high level of taxable components, a recontribution strategy can be used to replace them with tax-free components.

What Are Superannuation Tax Components?

When a contribution is made to your superannuation accumulation account and a tax deduction is not claimed (after tax contribution) it forms part of  the “tax free”component. Such contributions are referred to as non-concessional contributions.

To work out the ‘Taxable Component’ of your superannuation balance, you simply add up all of the Non-Concessional Contributions that have been made to your account and deduct it from the total balance of your account.

Whatever is left is considered the Taxable Component.

Why Do Tax Components Matter?

Ideally, you want your account to have a higher Tax Free Component than a Taxable Component for the following reasons:

  1. If you pass away and your balance is paid to a non-dependent (e.g. child over 18), 15% death benefits tax will be payable on the Taxable Component
  2. If you are under age 60, the Tax Free component is received tax free on any withdrawals, including income payments (assuming you can access your super); whereas the Taxable Component is assessable.
  3. If there are future changes in legislation whereby the Taxable Component is once again taxed on withdrawal for those over aged 60, you will be better positioned if you have more of a Tax Free Component.

How Does a Recontribution Strategy Work?

Let’s go with the same balance stated above. A $300,000 super account made up of $250,000 Taxable and $50,000 Tax Free. Our intention is to convert the Taxable component into a Tax Free component.

For the purposes of this, we will assume that you are over age 60, but under 65, and have met a full condition of release of your total benefits. Therefore, you should have the ability to withdraw your total balance tax free as a lump sum (check to make sure you don’t have any Taxable-Untaxed component – this may result in tax).

We will also assume that you have not triggered the bring forward rule for Non Concessional Contributions in the previous two financial years.

All withdrawals must be made proportionately. This means that we should not simply withdrawal the $250,000 Taxable Component and recontribute it, as this would contain part of the Tax Free Component and would leave part of the Taxable Component inside super and we would not be maximising the strategy.

We must withdrawal the total $300,000 and recontribute it back in as a Non Concessional Contribution.

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Australian Budget updates rates for 2019/2020

The 2019/2020 financial year introduces some new opportunities to allow you to save for your retirement through super. In this article we cover these and also provide an overview of the ‘protecting your super’ legislation and personal income tax changes.

Claiming a deduction on personal super contributions

Since 1 July 2017, employees as well as the self-employed, can claim a tax deduction on personal super contributions.

If you are aged between 65 and 74 you can make a contribution to super but you need to meet a work test. To pass the work test, you need to have been ‘gainfully employed’1 for at least 40 hours over 30 consecutive days during the financial year in which you plan to make the contribution. That’s a little over one week’s worth of full-time work in a single month.

Also, if you’re aged between 65 and 74 and have a ‘total super balance’2 under $300,000, you can make personal contributions to super in the first financial year in which you no longer meet the work test. This is likely to be the first year following your retirement.

Unfortunately, if you are 75 or over you are not eligible to make a personal contribution to super.

Generally, the cap on concessional contributions is $25,000 each financial year.

What if you didn't contribute last financial year - do you miss out?

For the first time this financial year, if you have a total super balance of under $500,000, you can contribute the unused portion of your concessional contributions cap, or ‘carry-forward’ amount, from last financial year. That is, if you didn’t contribute in the 2018/19 financial year, you may be able to carry forward $25,000 to this financial year and contribute up to $50,000.

Currently, only the unused concessional contribution cap amounts in the 2018/19 financial year can be carried forward. Then, for future financial years, the unused concessional contribution cap amounts can be carried forward, on a rolling basis, for five years.

So, if you’ve accrued a carry-forward concessional contribution amount, you may want to start, or increase your salary sacrifice contributions, or make a personal concessional contribution to super. This can be particularly beneficial for your tax bill if you’ve significantly increased your income, for example, if you’ve sold an asset with a large capital gain.

Protecting your super legislation.

The ‘protecting you super’ legislation came into effect on 1 July 2019 and is designed to protect people’s super balances. The three main changes are:

    • Insurance in super – if you have an inactive super account, defined as an account where you have made no contributions in the last 16 months, your insurance will be cancelled unless you take action. You can retain your insurance by contacting your super fund and ‘opting-in’ to retain your insurance or having a contribution made into your account every 16 months.
    • Low super balances – if your super account balance is under $6,000 there is a cap placed on fees, limiting them to no more than 3% per year. Also, if you have an ‘inactive low balance’ account, the Australian Taxation Office (ATO) is now responsible, where possible, for consolidating this money with your active super account. An inactive low balance account is broadly defined as an account with a balance of under $6,000 where no activity has occurred in the last 16 months. This includes where no contributions have been made to the account in the last 16 months and where there is no active insurance on the account. Other new definitions apply.
    • Exit fees – when you exit a super fund you will no longer be charged an exit fee.
    • Low super balances – If your super account balance is under $6,000 there is a cap placed on fees, limiting them to no more than 3% per year. Also, if you have an‘inactive low balance’ account, the Australian Taxation Office (ATO) is now responsible, where possible, for consolidating this money with your active super account. An inactive low balance account is broadly defined as an account with a balance of under $6,000 where no activity has occurred in the last 16 months. This includes where no contributions have been made to the account in the last 16 months and where there is no active insurance on the account. Other new definitions apply.

Personal income taxes and Tax offsets

Australians can continue to enjoy the first round of personal income tax changes that started in July 2018.

From 1 July 2022, the Government will increase the 32.5% tax threshold from $90,000 to $120,000. This means there will be less people in the 37% tax bracket and more in the 32.5% tax bracket. On 1 July 2024, the 37% tax bracket will eventually disappear and the 32.5% tax bracket will reduce to 30%. It’s estimated that 94% of personal taxpayers will have a marginal tax rate of 30% or less in the 2024/25 financial year.

In addition to the changes to income tax, the Government has introduced a temporary tax offset called the low and middle income tax offset (LMITO), of up to a maximum of $1,080 per person and phases out for those earning over $126,000 per annum.

This is in addition to the low income tax offset (LITO) for those earning under $66,666 per annum.

The LMITO offsets will end after the 2021/22 financial year. However, from 1 July 2022, the Government will increase the (LITO), from $445 to $700to continue to support low income earners.

You don’t need to do anything to receive the tax offsets, the ATO will assess your eligibility when you complete your personal tax return.

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Excess Super Contributions Tax Rules

Excess superannuation contributions tax is payable on contributions that exceed the “non-concessional contributions cap” or the “concessional contributions cap”

The rate of excess contributions tax that is payable on excess contributions is dependent on the type of contribution that was being made. Your individual taxable income will also affect the level of excess contributions tax payable.

The purpose of excess contributions tax is not designed to penalise people for exceeding the relevant contribution caps, but rather to ensure that any excess contributions are taxed at the rate they would have otherwise been taxed had the excess contributions not been made.

In saying that, in some situations the excess contributions tax on non-concessional contributions can be taxed at a rate that is higher than an individual’s marginal tax rate.

What Is A Concessional Contribution?

A concessional contribution is a contribution made or received into a Superannuation fund that the contributor claimed a tax deduction for. The current concessional contribution cap is $25,000 per person, per financial year.

The new rules also allow individuals with superannuation balances to carry forward unused concessional contribution caps for up to 5 years from 1 July 2018, which can be utilised from 1 July 2019.

Keep in mind that people aged over 65 will need to meet the Superannuation work test to make or receive concessional contributions. 

The ordinary contributions tax payable on concessional contributions is 15% of the amount contributed. Please note, there is an additional 15% contributions tax payable by high income earners and a low income Superannuation contribution designed to offset the standard contributions tax

What is a Non-Concessional Contribution?

A non-concessional contribution is an after-tax contribution made into a Superannuation account. Non-concessional contributions are generally made from an individual’s personal bank account into Superannuation for the purpose of saving towards retirement in a tax effective manner. 

Superannuation can be tax-effective as all earnings on investments within are taxed at a maximum of 15%, as opposed to an individual’s marginal tax rate. The current non concessional contribution cap is $100,000 per person, per financial year.

Further, an individual with a Superannuation balance of $1.6 million or more will not be able to make any additional non-concessional contributions. There is also the ability to bring forward up to 2 additional years of the non-concessional cap for individuals under age 65.

Transitional rules apply to the non-concessional contribution ‘bring-forward’ rule in respect of the significant reduction in the cap from 1 July 2017.

Non-concessional contributions do not incur contributions tax as they are after-tax contributions and tax has already been paid on this amount prior.

Excess Contributions Tax: Concessional Contributions

Exceeding the concessional contribution cap will result in the excess being treated as excess contributions. Excess contributions are included in an individual’s assessable income and taxed at their personal marginal tax rate. An excess concessional contribution charge also applies.

As these excess contributions are taxed at an individual’s marginal tax rate, a 15% non-refundable tax offset is received in order to reimburse for the 15% contributions tax that was paid ensuring the individual is not over-taxed.

Up to 85% of the excess contributions are able to be released from Superannuation to assist with the additional personal income tax payable. Any amount released is not counted towards a persons non-concessional contribution cap.

Excess contributions that are not released will count an individual’s non-concessional contribution cap. This could result in inadvertently exceeding the non-concessional contribution cap.

Excess Contributions Tax: Non-Concessional Contributions

Exceeding the non-concessional contribution cap will result in the excess being treated as “excess contributions”. 

The excess non-concessional contributions can be withdrawn from Superannuation, plus 85% of any earnings on that amount.

The earnings relevant to the excess contributions are included in an individual’s assessable income and taxed at their marginal tax rate, minus a 15% tax offset designed to rebate the tax on those earnings.

Excess contributions that are not withdrawn from Superannuation are taxed at the highest Marginal Tax Rate (MTR), plus Medicare (currently 45%, plus 2% Medicare Levy) within the Super fund.

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How to compare super funds in 7 easy steps

Superannuation is a long-term investment but that doesn’t mean you can afford to put off thinking about it for a day that never comes.

Like any long-distance journey, you want to make sure you know where you are headed and how to reach it. That includes finding a vehicle that’s fit for purpose. Otherwise, you could end up short of funds to enjoy your destination – in this case, retirement.

Whether you are choosing your first super fund, consolidating several funds into one, or wanting to switch to something better, it pays to invest some time in thinking about what you need in a fund and then comparing what’s on offer.

Most people these days can choose their fund, unless you happen to be an employee in a defined benefit fund or covered by an industrial agreement. You may be lucky and end up in a high-performing default fund, but unless you verify that this is the case what you don’t know could be very costly.

The following 7 steps are designed to guide you through the process of comparing and choosing a fund that will get you where you want to go.

1. Know what you want

Before you start comparing the market for any major purchase, be it a car or a super fund, it’s important to think about what you want. Otherwise you could end up paying for expensive extras you don’t need.

A fund with a wide range of investment options and scope for active management and individual tailoring will generally charge higher fees. Australian Expatriate Superannuation Fund is designed for members who want a hands-off, easy to understand, no-frills fund with low fees. Personal super products are designed with the self-employed or self-directed in mind while retirees drawing down their super need a pension account.

An increasing number of Australians, particularly younger members, want the ability to choose a sustainable or socially responsible, or a fund that takes ESG (environmental, social and governance) issues into account in all investment decisions.

Your time horizon and appetite for risk is also a factor. Younger members can afford to take on more risk so a high growth option with a good track record is important. Or you may be interested in fund with a life-stage or life-cycle option which automatically adjust your asset allocation, or the mix of high- and low-risk investments, as you age. If you are near the end of your working life or already retired, you will want a fund with a highly rated pension account.

It’s not all about investments and returns. Do you want a fund with a good insurance offering, the ability to monitor and transact from your mobile, free advice or the ability to make a binding death benefit nomination? The latter provided more certainty over who inherits your super when you die.

2. Explore your options

If you are already in a fund, check its website or annual reports so you know what it does and doesn’t offer. Also check its investment performance over 3, 5, 7 and 10 years as well as its fee structure. Then go online to research and compare other funds on offer.

The three most established comparison websites are Chant West, Selecting Super and Super Ratings. All produce annual performance tables and fund ratings as well as educational material.

Most of this material is free, but Chant West and Selecting Super charge for a more detailed comparison of two or three funds. The ratings methodology of each group is slightly different, but they all use a combination of factors including returns, fees, insurance offerings and member services.

3. Survey the investment landscape

Most super funds these days offer an extensive a la carte menu of investment choices. You can mix and match your own portfolio of shares, property, fixed interest, cash and other assets, or choose from a selection of pre-mixed investment options.

‘Conservative’ pre-mixed options contain mostly lower-risk defensive assets such as bonds, cash and fixed interest investments. ‘Growth’ options hold mostly higher-risk shares and property, and ‘Balanced’ options are more equally weighted between the two. In practice though, Balanced options can hold up to 70 per cent growth assets, so drill down and check the asset allocation.

For those who want more control but may not have the account balance or inclination to run their own SMSF, many funds now allow you to buy and sell direct shares and exchange-traded funds.

4. Compare performance history

Past performance is so guarantee of future returns, but you can have more confidence in a fund with a track record of above average returns over at least five years.

You will also notice that short-term fluctuations from one year to the next tend to even out in the long run. This is particularly evident with high growth options, which invest mostly in shares, whereas conservative options produce steadier, lower returns over time.

If the thought of losing a sizeable chunk of your fund’s value in a single year makes you anxious, then a more conservative investment option might help you sleep easier at night.

When checking performance, make sure to compare like with like. For example, compare high growth options with other high growth options and life-stage options with other life-stage options. This is especially important when comparing balanced funds because the tilt towards growth assets can vary enormously.

5. Add up the costs

Small differences in fees can add up to a big dent in returns over the life of your super. The amount of money available to you in retirement will depend on your investment returns less fees and tax. It’s not uncommon for people to spend a great deal of time trying to minimise tax, while fees fly under the radar.

Superannuation funds are required to disclose their total fees and charges in their Product Disclosure Statement (PDS) and your annual statement. These include an administration fee to cover the costs of managing the fund and your account, investment fees to cover the cost of managing your investments and performance fees where applicable. While exit fees are pretty much a thing of the past, do check if there is a fee for advice and if you are getting what you pay for.

There are plenty of low-cost funds with total annual fees of less than 1% of your account balance, but fees should never be looked at in isolation. Funds with a lot of money in property and private equity, for example, tend to have higher costs than funds with mostly cash and bonds. The trade-off for higher risk and costs ought to be higher returns in the long run, but don’t assume this is the case, check it out.

6. Don’t forget insurance

Taking out insurance cover inside your super fund can be very cost effective because funds are able to negotiate group rates. Many funds offer life insurance, total and permanent disability (TPD) and income protection at competitive rates.

Do be aware though that insurance premiums inside super are paid from your account, so there is less money earning a return. This may be a price you are willing to pay if you don’t have enough free cash flow to pay premiums outside super.

For some people with a SMSF, the attraction of low-cost insurance is enough to justify keeping a small amount of money in an industry fund on the side. However, default cover in super is generally limited, so you may need to top up your cover. It can be slower to pay and unless you have a binding nomination your chosen beneficiaries may not receive your insurance death benefits.

Many employees in public offer funds will have default insurance cover. However, changes announced in the 2018 Federal Budget, due to be introduced on 1 July 2019, will make insurance opt-in for members under 25 and members with low balances or inactive account. As a result, premiums are expected to rise for members with insurance.

Changes to default cover make this an opportune time to check the type, level and cost of insurance you hold in super and compare what’s on offer elsewhere. You can find this information on your annual statement and funds’ websites.

7. Follow your leads

Once you’ve identified some promising funds, it’s time to probe deeper. Check their website, download their PDS and phone or use online chat to ask questions. Even if you don’t have questions, chatting will give you an insight into their customer service.

At this stage you might also want to check for other services and benefits that are important to you. Some may want a fund that offers free financial advice, educational tools and member information seminars. Others may want cheap insurance, the ability to make a binding death benefit nomination or a seamless transition from accumulation to pension phase.

If you decide to change funds, you can do this by filling in a rollover form and sending it to you new fund or by logging in to your MyGov account.

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Is Superannuation Included in Taxable Income?

From figuring out what income you’ll be taxed on to claiming work deductions – tax returns can feel a bit daunting. We’ve broken down what income the Australian Taxation Office (ATO) says you need to include on your tax return and clear up whether super is in or out.

In short – no, superannuation is not included as part of your taxable income according to the ATO. However, super contributions themselves are taxed. So what income does the ATO say you need to pay tax on?

What is taxable income?

Taxable income is the income that you have to pay tax on. According to the ATO, this can be calculated by taking your ‘assessable income’ and then subtracting any deductions you’re allowed to claim. The ATO says your assessable income includes things like your salary and wages, tips, gratuities and other payments for service, interest from bank accounts, dividends from investments, and pensions. Deductions are usually costs you’ve incurred that are directly related to your income and may include things like vehicle and travel expenses and home office expenses.

The ATO says that super is not included or reported as income when you lodge your tax return at the end of the financial year. So, for example, if you receive a yearly income of $75,000, your reported, assessable income will be $75,000, not $75,000 plus super.

How is super taxed?

It should be noted that some types of super contributions themselves are taxed. According to the ATO, how super contributions are taxed will depend on whether the contributions were made before or after paying income tax, whether you exceed one or both of the super contribution caps, and your level of income.

Before-tax super contributions or “concessional contributions: are generally taxed at 15% at the time they are received by your super fund. Concessional contributions are things like compulsory employer contributions and salary sacrifice payments made to your super account. According to the ATO, if you’re a low income earner ($37,000 or less) in a particular financial year, the low income super tax offset will apply so that any tax paid on these super contributions will be automatically added back into your super account (up to $500). On the other hand, high-income earners (those with a combined income and super contributions of more than $250,000), must pay either an additional 15% tax on their concessional contributions or the amount in excess of the current $250,000 threshold, whichever is the lesser amount.


The ATO’s advice is that after-tax super contributions are not taxed when received by your super fund. However, the ATO also states that if your after-tax (non-concessional) contributions exceed the cap for a particular financial year, you can then choose to either withdraw the excess amount and have it assessed as part of your taxable income, or leave it in your super account and let it be taxed at 47%. According to the ATO, after-tax super contributions include things like contributions made from your after-tax income, contributions made by a spouse to your super fund, and personal contributions not claimed as an income tax deduction.

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Findings From The Productivity Commission’s Super Report

The Productivity Commission handed down its final report on Australia’s $2.7 trillion superannuation industry in January 2019, finding that unneeded and underperforming super accounts are costing members $3.8 billion each year. We’ve rounded up some of the key findings and recommendations from the lengthy 722-page report into a short and simple overview.

What were the Productivity Commission’s key findings?

Unneeded super accounts are costing members billions

The report found that a third of super accounts, about 10 million, are unneeded as members already have a primary super fund. According to the report, these ‘unintended multiple accounts’ are costing members almost $1.9 billion a year in excess insurance premiums and $690 million in excess administration fees. Over time, these accounts can leave the typical worker with 6% (or $51,000) less at retirement. The effects were described as ‘regressive’, with younger and lower-income members most affected.

Many retail funds not performing well

According to the report, despite retail funds making up just nine of a group of 29 funds identified as underperforming, over three quarters (77%) of super accounts within these 29 funds are in retail funds. In addition, the report states that retail funds have been ‘systematically outperformed’ by not-for-profit funds.

Members are paying excessive and unwarranted fees

“Evidence abounds of excessive and unwarranted fees in the super system,” the report said. Australians pay over $30 billion a year in super fees, and this is excluding insurance premiums. The report says that high-fee products are ingrained in the system, mostly in retail funds. Interestingly, the report also found that funds that charge higher fees tend to deliver lower net returns after investment and administration fees are taken into account.

Australian super fees are higher than other countries

The report found that Australians are paying higher super fees compared to those in many other OECD countries. While the report did not discuss specific countries, OECD countries are developed nations like the United States, Canada and the United Kingdom. However, the report does note that part of this could be due to the higher expenses that Australian funds face.

Not all members are getting value out of insurance in super

Approximately 12 million Australians have insurance through their super. According to the report, this can provide workers with more affordable insurance than they would be able to get from a stand-alone policy. However, the report also notes that not all members are getting good value from this. For instance, it states that some members end up with their balance eroded by over $50,000 by duplicate or unsuitable policies.

Default super funds can create an ‘unlucky lottery’

Up to two-thirds of members are put into a default MySuper account when starting a new job. The report noted that while default super funds are necessary in our compulsory super system, this can create an ‘unlucky lottery’. According to the report, at least 1.6 million of these member accounts are currently held in underperforming products. This can have a big impact on retirement – according to the report, if a worker is placed in a bottom-quartile MySuper fund they will retire with $502,000 less than if they had been placed in a top-quartile one.

What were the Productivity Commission’s super recommendations?

Based on its findings, the report proposed a raft of changes to Australia’s superannuation system. Notably, it recommended that long-term underperforming super funds be ‘weeded out’ and that new employees should be presented with 10 ‘best in show’ super funds to choose from. If all 31 recommendations were implemented, the report said a 55-year-old today could gain $79,000 by retirement and a new worker could retire with an extra $533,000.

Here’s a quick overview of the report’s 31 recommendations:

  1. Default super accounts should only be created for people who are new to the workforce or who don’t have an existing super account.

  2. New workers or workers without a super account should be presented with a shortlist of 10 ‘best in show’ super funds to choose from. If no choice is made within 60 days, they should be defaulted to one of the shortlisted funds.

  3. The ‘best in show’ shortlist should be selected by an independent expert panel.

  4. All super funds regulated by the Australian Prudential Regulation Authority (APRA) should undertake annual outcomes tests for their MySuper and choice offerings. If a fund falls noticeably short over eight years on average, it should have a 12 month remediation period or if this is not possible, the fund should be withdrawn from the market with members transferred to better-performing funds.

  5. All super accounts with balances under $6,000 and 13 months or more of inactivity should be automatically consolidated into the member’s active account.

  6. The government should require funds to publish simple, single-page product dashboards for all super products.

  7. The Australian Taxation Office (ATO) should be required to link to the relevant product dashboard on a member’s existing account.

  8. The Corporations Act should be amended to ensure the term ‘advice’ can only be used in association with ‘personal advice’ – that is, advice that takes into consideration personal circumstances.

  9. The government should evaluate its financial literacy programs, with a view to targeting funding towards effective programs, and defunding ineffective ones.

  10. The government should reassess the need for a Retirement Income Covenant, a code that requires super funds to consider the needs and preferences of their members.

  11. When members reach 55 years of age, the government should prompt them to visit specific pages on the Australian Securities and Investments Commission (ASIC) website and the Department of Human Services website in order to obtain information that could help them in the pre-retirement stage of their lives.

  12. The government should create stronger safeguards for consumers in self-managed super funds (SMSFs), for example requiring specialist training for persons providing SMSF set up advice.

  13. The government should roll out the Consumer Data Right to super. The Consumer Data Right, which is part of the open banking initiative allows banks to share member data with accredited service providers with member consent.

  14. All fees charged by APRA-regulated super funds should be levied on a cost-recovery basis meaning fees reflect the actual cost of providing service. Trailing financial adviser commissions, that is annual fees paid to an advisor over the life of an investment product, should be banned.

  15. Insurance through super should be opt-in for members under 25. Trustees should stop all insurance cover on accounts where no contributions have been made for 13 months.

  16. APRA-regulated super funds should be required to articulate and quantify the balance erosion trade-off determination they have made for members in relation to group insurance.

  17. A regulator task force should be established to monitor the Insurance in Superannuation Voluntary Code of Practice and maximise the benefits it can offer consumers.

  18. The government should fund an independent public inquiry into insurance in super.

  19. APRA should amend its standards for regulating board directors of superannuation trustees.

  20. Trustee boards of APRA-regulated super funds should be required to disclose to APRA any merger activity.

  21. The government should make capital gains tax relief for mergers permanent.

  22. The government should be clearer on what it means for a trustee to act in its members’ best interests.

  23. APRA should focus more on matters relating to licensing and authorisation.

  24. ASIC should focus more on the conduct of super trustees and financial advisers, and the appropriateness of products and disclosure.

  25. The government should clarify the roles of APRA and ASIC in relation to super.

  26. The government should immediately initiate an independent capability review of APRA, and publish the outcome before the end of 2019.

  27. The government should establish a permanent super data working group, comprised of APRA, ASIC, the ATO, the Australian Bureau of Statistics (ABS), the Commonwealth Treasury and the new member advocacy body suggested under Recommendation 28.

  28. The government should fund an independent super members’ advocacy and assistance body.

  29. The government should require ongoing reviews of the super system, by requiring APRA and ASIC to jointly produce a report every two years, commissioning an independent review every five years, and commissioning an independent public inquiry every 10 years.

  30. The government should commission an independent public inquiry into the role of compulsory super in the broader retirement incomes system. This inquiry should be completed before any increase in the Super Guarantee rate.

  31. The government should implement these recommendations by establishing a Steering Group of departmental and agency heads to oversee.

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How To Transfer A UK Pension To Your Australian Super Fund

Transferring UK pension money to your Australian super fund can be tricky, especially in the wake of several legislation changes in both countries. Here’s our guide on how to do it.

 

If you lived and worked in the UK for any period of time, you will likely have accrued savings in a UK pension. And if you’ve moved to Australia – either for the first time or as a returning resident – you may (understandably) not want to see that money go to waste. You may be able to have that money transferred to your super fund, but it’s not the most straightforward process.

 

Am I eligible to transfer my UK pension to my super?

According to the Australian Taxation Office (ATO), you’ll generally need to take into account both the Australian and UK rules for any transfer. The ATO suggests there are three key criteria for moving your UK pension funds into your superannuation account while minimising fees and tax:

  • You must be under 75 years at the time

  • You must meet the Australian ‘work test’ if you are aged between 65 and 74. The ATO has more details about the ‘work test’ available on its website.

  • The maximum UK pension balance you can transfer using the Australian superannuation non-concessional contributions bring-forward rule is $300,000, based on figures for the 2018-19 financial year.

It’s important to note that, according to the ATO, if you’re 65 years of age or older, you’re not able to make use of the bring-forward rule even if you do meet the work test. This means you can choose to either only transfer the yearly non-concessional limit of $100,000, or attract a 47% tax rate on the portion of the transferred amount which exceeds $100,000.

You may also want to consider that, as outlined on the UK Government website, ‘accessing benefits (directly or indirectly) before the age of 55 will result in a liability to UK tax charges in all but the most exceptional circumstances’.

If you choose to leave your pension in the UK, in the time remaining until you turn 55 it may be prudent to actively manage your UK pension, including making sure you’re not paying too much in fees.

Can my super fund receive a UK pension transfer?

Changes to the UK pension laws made in 2015 rendered a significant number of Australian super funds unable to receive UK pension amounts. This was because UK pension laws now require that a super fund unconditionally guarantee an absolute minimum access age of 55, with limited exceptions, such as in certain cases of ill health. Australian funds which didn’t provide this guarantee were barred from accepting UK pension transfers.

 

As detailed by the ATO, many Australian funds, including some of the biggest retail and industry funds, also allow members to have early access on other grounds, such as financial hardship, in line with local superannuation laws. As a result, many of these funds are no longer eligible to receive UK pension transfers.

 

In order to be able to accept a UK pension transfer, the super fund in question needs to be registered in the UK as a Qualifying Recognised Overseas Pension Scheme (QROPS) – the registration of QROPS is managed by the UK pension regulator, Her Majesty’s Revenue and Customs (HMRC). If you’re looking to transfer your UK pension to your super fund, you should check with your fund to find out if it’s registered as a QROPS or not.

My fund isn’t a QROPS – what are my options?

If your fund is not permitted to receive UK pensions, ATO information suggests you have three main options:

  • Make use of an SMSF

  • Sign up with the Australian Expatriate Superannuation Fund (AESF)

  • Wait until you’re 55 and then have your pension money transferred to an Australian or British bank account from which you can access it

Let’s look at these three options in more detail.

Using an SMSF

Because the rules of an SMSF are set by the trustee(s) – who are also members of the fund – they are relatively flexible, although they must still comply with Australian superannuation and tax laws. It can be a simple matter to set an SMSF up for yourself and have it registered as a QROPS to transfer your UK pension to.

However, unless the amount of money you’re looking to transfer is significant, setting up an SMSF purely for the purposes of transferring your pension across may not be cost-effective. The administrative costs of setting an SMSF up, combined with any specialist advisory services you may require, can stack up quickly.

If you decide that setting up an SMSF will be a cost-effective way of recouping your UK pension, you will need to:

  • Set up your SMSF, making sure that the wording of the trust deed is compliant with UK pension regulations and that the SMSF is correctly set up under Australian law.

  • Lodge a request for your SMSF to be registered as a QROPS with HMRC – this can be done online, and in order to do so you will need to provide the details of your SMSF along with its trust deed.

  • Wait for between four and eight weeks for your request to be processed.

  • Once/if your SMSF is registered as a QROPS, obtain, complete, and submit the required paperwork to release your UK pension and have it transferred to your SMSF.

Once you’ve received your pension funds, you can either carry on using the SMSF, or roll your pension money into your regular super fund and shut down the SMSF in order to avoid dealing with its ongoing administrative requirements.

Source: QROPS Specialists

Signing up with the Australian Expatriate Superannuation Fund (AESF)

The AESF is a fund tailor-made for those looking to have their UK pension transferred to Australia – it had more than 100 members as of December 2017, and will manage the entire pension transferal process for you. However, it does charge fees which are not insignificant, including initial set-up fees, transfer fees, and investment management/administration fees. Check the AESF’s PDS for exact figures.

Transferring your pension money into a bank account

Once you reach 55 (Britain’s current preservation age), you can simply have the money paid out into an Australian or British bank account. However, both options might have tax implications:

  • If you choose to have your whole pension paid out into a British bank account, the UK government’s Pension Wise advises that while the first 25% will likely be tax-free, the remainder will be taxed at your regular marginal tax rate by adding it to the rest of your income earned in Britain.

  • If you choose to have your whole pension paid out into an Australian bank account (which only some pension providers will do), the UK government warns you may be subject to fees or other financial penalty.

Will my transfer be taxed in Australia?

The ATO advises that you may have to pay tax as a result of transferring your UK pension if any portion of the transferred amount was accrued after you became an Australian resident.

I have been an Australian resident for no more than six months

The ATO advises that if you receive your pension payout within six months of becoming an Australian resident, the entire payment should be tax-free if all of the following apply:

  • The entirety of the lump sum was earned/accumulated by you when you were not an Australian resident, or during a period which began after you became an Australian resident but ended before you received the payment.

  • The total sum transferred doesn’t exceed your ‘vested’ amount (i.e. it doesn’t include any top-up or discretionary payments, and consists only of mandatory contributions along with their associated earnings) – the ATO offers examples of how this applies here.

I stopped being employed overseas less than six months ago

The ATO also notes that your transfer should be tax-free if it is made within six months of your employment in the UK terminating.

It has been more than six months since I became an Australian resident and/or since my foreign employment was terminated

If you do not meet the above criteria, received the lump sum more than six months after gaining Australian residency or ceasing employment in the UK, and were an Australian resident when you received the payment, there may be tax implications.

You will need to add some or all of the payment to your assessable income for the financial year it was paid to you, and the assessable portion of the payment should be treated as normal income for taxation purposes according to the ATO. However, if you instead choose to transfer the whole of your UK pension fund directly to a complying Australian super fund, the ATO advises that it will be taxed as assessable income of the superannuation fund rather than as your personal income. The ATO notes that if you choose to have your sum assessed as part of your complying super fund’s assessable income, it will generally be taxed at 15%, which may be less than your marginal tax rate, depending on your income.

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4 Ways The Royal Commission May Change The Superannuation Sector

Australia’s $2.7 trillion plus superannuation industry could be in for a major shake-up, following the banking royal commission’s investigations.

At least a dozen superannuation funds, the majority being bank-owned entities, may have committed misconduct or breached laws, according to the counsel assisting the royal commission’s final submissions report, based on two-weeks of superannuation hearings held earlier this month.

It is now up to Commissioner Kenneth Hayne, AC QC, to deliver findings and make recommendations for the sector.

Canstar Group Executive of Financial Services Steve Mickenbecker said it won’t be just the banks the royal commission would impact, but also the wider superannuation industry.

 

He said there were four key issues the royal commission had raised that he expected would lead to reform:

1. Fees for no service

A number of bank-owned super funds have admitted to charging fees for no service, where fees were taken from members but no service was delivered. This included charging fees for financial advice when no advice was given. Some super fund entities were accused of misleading or deceptive conduct for not clearly explaining fees and for failing to inform members they could opt out of paying fees such as a plan service fee. The relationship between trustees and financial advisers was a major area of concern for the royal commission. A number of superannuation funds and trustees were seen as acting in ways that benefited financial advisers to the detriment of members. This included maintaining grandfathered commissions (allowing an old rule to continue while a new rule applies) without considering whether the trustee was legally required to stop paying those commissions. It also included instances of charging members’ accounts with ongoing adviser fees without putting adequate systems in place to assess if the services were being provided.

Potential reforms: The report questioned whether there needs to be legislative changes, including a law that bans all commissions payable from superannuation products and puts an end to ‘grandfathering’ in relation to superannuation. Other possible changes raised included banning ongoing service fees, including advice fees. These changes could mean financial advisers would only be allowed to be paid for once-off advice from a member’s superannuation account, however consumers could decide whether to arrange ongoing payments from their account for financial advice.

2. The role of trustees

Trustees are obliged to act in the best interest of their superannuation fund members, however the royal commission found conflicts of interest where trustees were concerned, including the influence shareholders of industry super funds had on decisions.

Potential reforms: The report questioned whether a civil penalty should apply if trustees’ obligation to act in the best interests of members was contravened. It also raised the possibility of extending the obligation to shareholders of trustees and any other related bodies that could affect the interests of superannuation fund members.

3. Industry regulators’ effectiveness

The royal commission examined how the two key super industry regulators, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC), policed the sector. APRA said it did not publicly identify specific super funds’ wrongdoings and instead worked with the trustee to resolve the issue.

Potential Reforms: The role and power of the regulators will likely be up for further debate and potential changes. The final submissions report said APRA’s and ASIC’s approach to the regulation of superannuation entities was not sufficient to deter wrongdoing and questioned what could be done to encourage regulators to act promptly on cases of misconduct or potential misconduct.

4. Underperforming super funds

The royal commission heard evidence around underperforming super funds, including negative returns for some superannuation customers with cash investments. Of particular concern was the underperformance of some low-cost MySuper products. Super funds are required by law to transfer existing default funds, an employer-nominated fund, to a no-frills low-fee account under the federal government’s MySuper regime.

Potential reforms: APRA is the body tasked with authorising MySuper products – however, the final submissions report said it would be preferable to have a separate expert panel to regularly review outcomes for MySuper products.

What is next for the royal commission?

Commissioner Hayne will submit an interim report by 30 September 2018 and will provide a final report that is expected to contain key recommendations by 1 February 2019.

The royal commission will turn its attention to insurance with hearings to start on 10 September 2018.

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