Case studies

Slide 3

What are Clive and Julie's options?

Debt repayment

Clive and Julie can increase their Death and TPD cover to ensure their home loan debt is repaid in the event of either spouse passing away or disability at a minimum.  This would mean an increase in Clive and Julie’s cover of approximately three units and two units respectively.  At a cost of $1 per week per unit this is a minimal outlay (for a large return) for the certainty it provides should a major life changing event occur.

Their Adviser also explains that they may need to consider increasing their Death and TPD cover outside superannuation to provide sufficient capital for them to continue meeting their children’s education costs and living expenditure.  This is recommended as Clive and Julie will only receive replacement of their income for a period of up to two years.  They will therefore need to consider how they will replace their income for the remaining time until retirement.

Replacement income

Clive could also consider establishing additional income protection through an external insurance provider in order to have replacement income (of up to 75%) until he turns age 65.  Julie may be unable to obtain additional income protection in this manner as she is employed on a part-time basis and may not meet the minimum work hours required by most insurers to obtain income protection.  For Julie, her Adviser considers TPD cover as a way of covering this shortfall.

Slide 3

Jane's decision:

Jane decides to undertake a combination of increased salary sacrifice contributions and commencing a regular managed fund savings plan. 

Jane’s Adviser recommends using $2,000 of her surplus income towards pre-tax contributions to superannuation and given Jane’s marginal tax rate (including Medicare levy) of 31.5% her actual gross contributions are equivalent to approximately $2,900 per annum. 

Her remaining $5,000 per annum surplus is used to begin a regular savings plan into a managed fund.  Jane is advised to use existing cash savings of $6,000 to kick-start her investment and to contribute $416 per month towards her new investment portfolio. 

Jane’s managed funds portfolio at age 55 is estimated at approximately $57,100 and is considered to be sufficient to meet her $28,000 per annum income need until she turns age 57.  Jane’s contributions to her investment total $41,000 over the 7 years including her initial lump sum investment of $6,000. 

At age 57 Jane could access her superannuation to continue meeting her income needs for the long-term given she has also been contributing to her superannuation along the way. 

Of course over the two years from age 55 to age 57 her managed funds portfolio would continue to be invested so therefore she may be able to continue drawing income from her managed funds portfolio for longer or draw additional income if required.

Notes:

Rate of return for Growth managed funds portfolio and superannuation – 8% per annum

MTR – 31.5%

Capital gains tax not taken into consideration given gradual drawdown from investment at retirement and given Jane is likely to be retired at that time

Jane’s current superannuation - $100,000 – Accumulation account

Jane’s income $60,000 pa

5% contributions = $3,000 per annum

Slide 3

Withdraw and re-contribute a portion of the account balance

Alice sought advice from a Q Invest Financial Adviser to implement a strategy that reduced the potential tax payable by beneficiaries of an estate on superannuation benefits by increasing the amount of tax-free component within the account. This strategy could save Alice’s children up to $59,400 in tax and Medicare Levy based on her current account balance. 

As Alice is over age 60 there is no tax payable on the withdrawal of a lump sum from the superannuation environment.  Alice is also eligible to contribute to superannuation as she is under age 65 and not required to meet a work test. 

The amount of tax and Medicare Levy that Alice’s children could save would be dependent on the amount that Alice withdraws as a lump sum and re-contributes as a non-concessional contribution to a new accumulation account.  If Alice was to withdraw:

$150,000 this would increase her tax-free component to 43.7% of her benefit

$300,000 this would increase her tax-free component to 77.5% of her benefit

$398,000 (leaving $2,000 to maintain membership) this would increase her tax-free component to 99% of her benefit

The amount Alice is able to re-contribute depends on any past non-concessional contributions Alice has made that may have triggered the 3 year bring forward rule already.  If this is the case, then Alice can only contribute the amount that will keep her within the limit of $450,000.  If Alice has not made any past contributions within the last 3 years, then she is able to make use of the bring forward rule and contribute the maximum amount to superannuation.

Slide 3

Reduce pension income and draw income needs from other assets

Centrelink assess purchased superannuation income streams like the QSuper Pension account under both the income and the assets test.  100% of the pension account balance is assessed under the asset test and part of the income is assessed under the income test.  The income amount that is assessed is the income over the Centrelink Deductible Amount (DA) based on the commencement value of the pension and the life expectancy of the primary pensioner or a reversionary beneficiary, if any.  The Centrelink DA is the amount of income excluded from the income test.

The Centrelink DA is calculated by: 

Original Purchase Price less residual capital value less commutations

Longest life expectancy at commencement 

With the current market volatility, Joan’s current account balance has reduced with negative market growth.  However, the Centrelink DA has remained unchanged as it is based on a fixed commencement value.  Conversely, when there is positive market growth this growth does not change the Centrelink Deductible amount of the allocated pension. 

In Joan’s case, she is single and commenced the QSuper Pension account 10 years ago with $400,000 at retirement.  Joan’s Centrelink DA is $17,079 per annum.  Assuming Joan has made no lump sum withdrawals from her account her Centrelink DA would be the same today. 

Joan is currently drawing an income of $25,000 per annum from her QSuper Pension account.  Therefore the amount above the Centrelink DA of $17,079 is assessable income under the income test, representing $7,921 per annum.  Joan also has deemed income from investment assets outside superannuation.

As Joan is primarily income tested, one way to improve Joan’s Age Pension benefit would be to reduce the amount of assessable income from the QSuper Pension account.  However, Joan would like to maintain the same level of income to maintain her current lifestyle.  Therefore if Joan reduced her QSuper Pension account income she could top up her income by way of capital withdrawals from her investment assets to meet the short fall in her regular pension income.  As Joan is a Senior Australian she may be eligible for tax offsets, like the Senior Australians Tax Offset, to help her with any capital gains tax that may be payable on selling certain investment assets.  This strategy will help Joan to preserve money within her QSuper Pension account which is tax free on her death to her adult children. 

Slide 3

Restructure (consolidate) their debts to reduce interest and repay debts sooner

To reduce their total interest bill and make their position more manageable, Kevin and Sally could consolidate all their debts into their home loan at one low interest rate. To repay their mortgage sooner, they need to maintain the same level of repayments.

By consolidating their debts into their mortgage with the same level of repayments, Kevin and Sally would save approximately $11,800 and reduce the total loan period by approximately two years and two months, without paying any additional tax.

Their decision

Kevin and Sally think restructuring their debts to reduce interest and repay debts sooner is the best option for them, as this option will not affect their superannuation balance, and it will not change their current income needs or cost them any additional tax.

Important Information: This article has been prepared by Q Invest Limited (ABN 35 063 511 580 AFSL 238274) and is for general information only. It does not take into account your individual objectives, financial situation or needs. You should consider these before you make any investment decision based on this information.