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Welcome to the March edition of SuperNews.
This month there’s lots happening in superannuation and the hot topics are transition to retirement pensions, a change to the in-house asset rules and instalment warrants.
Please consider and discuss with your Macquarie adviser.
TRANSITION TO RETIREMENT
What is Transition to Retirement?
If you are 55 or over, you now have the option of easing into retirement. You can reduce your working hours without reducing your income. You can top up your reduced income with a regular “income stream” from your superannuation savings. This is called the transition to retirement measure.
Until recently, you could only access your superannuation once you turned 65 or retired. This meant it was difficult to reduce your hours of work and still maintain your standard of living. With this new measure, you can roll some or all of your superannuation into a retirement income stream. Then you can top up your reduced income by drawing on your superannuation.
However, you need to be aware what impact this measure can have on you and your personal circumstances. Some parts of this measure are complex, and equally complex to set up and maintain. You should see your adviser to help decide if this measure is right for you.
Can I Access My Superannuation Benefits in a Lump Sum?
No, this transition to retirement measure only allows you to access your superannuation benefits as a “non-commutable” income stream, not a lump sum. This means that you generally still cannot take your superannuation as a lump sum cash payment while you are still working. You will need to take your superannuation benefits as regular payments.
Maximum and Minimum
The maximum annual pension is 10% of the member’s account balance as at the beginning of the financial year. If the member’s account income is to be tax-free to the superannuation fund, the minimum pension for members aged 55 to 65 is 4% of the account balance.
How is the Pension Taxed?
The taxed portion of the pension (will be advised by your fund) is taxed at your marginal tax rate less a tax rebate of 15% for members aged 55 to 60. From age 60, the entire pension is tax-free.
Contributions
Your employer will still be required to make the superannuation guarantee contributions and you can salary sacrifice as well.
Planning Opportunity
Discuss with your adviser both salary sacrifice and transition to retirement pension to improve your superannuation benefits at retirement.
IN-HOUSE ASSETS & TRANSITIONAL RULES
What Is an In-house Asset?
The basic meaning of an in-house asset of a superannuation fund is an asset of the fund that is:
• a loan to, or an investment in, a related party of the fund
• an investment in a related trust of the fund, or
• an asset of the fund that is subject to a lease or lease arrangement between you, the trustee of the fund, and a related party of the fund
These rules were changed as the definition of in-house assets was extended. The changes also included a transitional period so some specific investment arrangements you entered into would not be included as in-house assets.
Even though the allowed level of in-house assets your self-managed superannuation fund (SMSF) holds is 5% of the market value of your SMSF’s total assets, the transitional rules allow more investments. These investments must be in existing related party assets that you obtained on behalf of your SMSF by 11 August 1999, to be made until 30 June 2009 in certain limited circumstances.
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What Will Change after 30 June 2009?
After 30 June 2009, if your SMSF has investments with related parties or related trusts that you made on behalf of your SMSF before 11 August 1999, your SMSF will no longer be able to:
• reinvest any earnings
• pay up any partly paid shares or units
• make any additional investments
If you continue to reinvest earnings or make additional investments or loans after 30 June 2009 on behalf of your SMSF, the additional investments or loans will be as in-house assets that count towards the 5% limit. This will apply even if there is an outstanding debt.
If you pay up partly paid shares or units after 30 June 2009 on behalf of your SMSF, a proportion of those shares or units (equivalent to the proportion of the payments made after 30 June 2009) will be treated as an in-house asset.
INSTALMENT WARRANTS
The range of investment choices for your SMSF has just exploded to include a whole raft of derivative products, including property instalment warrants.
If you want a piece of real estate but don’t have enough super to buy outright, you can now do so using a structured financial instrument such as an instalment warrant. Over time, you buy the investment outright with additional salary sacrificing and the super guarantee and the rent received from the property.
Be careful. As with any property choice, buy the right property. Be aware that the promoter may be a property developer and the instalment warrant lender has a vested interest.
Be wary of all the fees and charges in any instalment warrant, such as management fees, annual reset fees, excessive interest rates, initial application costs.
Understand your liabilities and ensure you can get out of the warrant if you have to.
What about shares? The options vary widely from a simple instalment warrant to self-funding warrants. Understand warrant brokerage and switching costs which can vary widely.
The moral of the story is that whilst instalment warrants have a lot of appeal due to the de facto borrowing involved, don’t be distracted from the most important issues:
• You need to buy good quality underlying investments
• Know your exit positions
• Ensure your super guarantee and salary sacrifice can cover the interest expense and can pay out the outstanding loan
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