In our experience, a financial adviser needs to have an investment philosophy to give structure and consistency to their advice. In this video, James explains the basics behind Steward Wealth’s Low Volatility Investment philosophy.
Financial advisers to some of Sydney and Melbourne’s richer families say they believe their clients mostly accept that tax incentives on superannuation need to be be better targeted even though are likely to have to pay more tax.
If you are in receipt of Centrelink or DVA benefits, important changes to deeming rules will come into effect on 1 January 2015 which may have a significant impact on you. The good news is, with some planning, you still have time to avoid this.
An Account Based Pension (ABP) is a form of regular income that you receive in retirement or when you reach preservation age that is paid out of your super fund. At the moment an attraction of an ABP is that it is not included under the Incomes Test when assessing Centrelink or DVA entitlements. However, for those who commence an ABP from 1 January 2015, the government will apply a ‘deeming rate’ to the income you receive when assessing against the Incomes Test.
At the moment, ABPs are not fully assessed against the Incomes Test. The assessable portion of a pension is reduced by an amount based on the return of your super fund. This is determined at the commencement of the ABP and is based on the account balance and life expectancy.
Account Balance / Life Expectancy
As an example, Bob, a 63 year old single male is looking at commencing a $450,000 ABP in October this year. At that age, the government says Bob has a life expectancy of 20.14 years. Therefore, the annual pension payment that is not assessed is $22,343 p.a. (i.e. $450,000 / 20.14). So if he elects to take the minimum pension of $18,000, none of that income is currently assessable under the Incomes Test.
Under the new deeming provisions, all financial investments, basically the balance in your super fund, are assumed to earn a certain rate of income as shown in Table 1, regardless of the return that is actually generated.
| Client | Threshold* | Deeming Rates* |
|---|---|---|
| Single | Up to and including $48,000 | 2.0% |
| Above | 3.5% | |
| Member of a couple | Up to and including $79,600 (combined) | 2.0% |
| Above | 3.5% | |
| Member of allowee couple | Up to and including $39,800 | 2.0% |
| Above | 3.5% |
*Rates and thresholds are effective as at August 2014
In our example above, if Bob commenced his ABP from 1 January 2015, the amount assessable under the Incomes Test from his $450,000 super fund will be $15,030 (i.e. $0-48,000 at 2%, with the balance at 3.5%). Not only do the deeming provisions not recognise the actual return on the super fund, nor does it take into account how much pension is being paid out by the ABP.
If you expect to commence an ABP on or after 1 January 2015 you will be subject to the new deeming rates. Whether it will affect your Centrelink benefits will be determined by three factors.
There are instances where you may actually be better off under the deeming provisions. For example, those taking a pension well in excess of their non-assessable pension will benefit from the changes.
If you think it’s likely you will be negatively affected by these changes some straightforward financial planning may help you. You might be able to commence an ABP prior to 1 January 2015. Also, for those who have been considering moving from one ABP provider to another, it could be advisable you do so before 1 January 2015, as moving from one provider to another is considered a new ABP and will be assessed under the deeming provisions.
We are the first to acknowledge that these provisions can be complicated and changes can make things even less certain. So, you may want to speak with a financial planner to work out how the upcoming changes may affect you and what you can do about it.
Some good news for those taking advantage of the tax benefits of making super contributions: under wage indexation provisions the government is increasing the contributions caps in the forthcoming 2014/2015 financial year.
There are two types of superannuation contributions you can make:
Both kinds of contributions are subject to a cap to stop people pouring too much money into superannuation and so reducing the amount of tax the government would get. It is that cap that is being increased. The table below shows the new concessional contribution limits.
| Financial year | Under 50 | 50 to 59 years | 60 years and over |
| 2012-13 | $25,000 | $25,000 | $25,000 |
| 2013-14 | $25,000 | $25,000 | $35,000 |
| 2014-15 | $30,000 | $35,000 | $35,000 |
As usual the Tax Office hasn’t lost the opportunity to make things a little complicated: the new caps are available if you reach the age limit during the financial year. So, if you are 49 years or older on 30 June 2014 you will be eligible for the new higher cap of $35,000 because you will be 50 years old at some point during the 2015 financial year. Likewise if you were 59 years old on 30 June 2013 you are eligible for the higher cap of $35,000 for this financial year.
The annual non-concessional cap will increase from $150,000 in 2013-14 to $180,000 in 2014-15.
This makes a big difference to the ‘bring-forward rules’, which allows people who are under 65 years of age to pay the current year’s worth of contributions as well as the next two all in the one year. That means you will be able to contribute as much as $540,000 in one hit into your super fund, compared to the current maximum of $450,000.
However, you need to be aware that if you want to pay three years’ worth of non-concessional contributions in this financial year (2013-14), you cannot take advantage of the higher amounts for the next two years. That is, you will be limited to $450,000 for the three years – a meaningful difference of $90,000.
If you want to maximise the amount you can get into your superannuation fund and you’re the right age, you can consider a non-concessional contribution of $150,000 prior to 30 June 2014, and then make another contribution of $540,000 in July 2014. That would be a total of $690,000 that you can get into your super fund.
It is important you receive advice prior to making contributions into superannuation, as the cost in getting it wrong is significant. So don’t hesitate to call Steward Wealth to discuss whether this is an appropriate strategy for you. You definitely want to maximise your opportunities in superannuation, but you also definitely don’t want to overdo it because you risk getting whacked with penalty taxes.
