Life expectancy crucial for retirees’ planning

The advent of term allocated pensions (TAP) from September 20, 2004, presents important planning opportunites for your existing retiree clients.

If you review your ‘reasonable benefit limit (RBL) sensitive’ clients with existing allocated pensions you may identify cases where alternative complying income stream strategies are now worth considering.

If these clients wish to restructure their current pension arrangements, you will need to assess not just the tax, RBL and social security implications, but also the new life expectancy tables. In some cases, it may be beneficial to bring forward any restructuring to this calendar year.

Age pension considerations for clients with declining asset values

Some of your RBL sensitive retiree clients will have decided against investing in complying income streams, typically because:

n they were initially so far away from qualifying for any age pension that they would not have contemplated investing in an income stream which provided some assets test exemption; or

n they were not prepared to lock up a large proportion of their investable funds in a complying income stream just to qualify for some level of age pension.

Many of these clients will have chosen to invest in allocated pensions, which of course are both assets tested and income tested.

However for some of them, the decline in their allocated pension account balance (as well as the value of their other assets), together with the new contribution rules and the arrival of TAPs, may now make it worth reconsidering their social security position.

If they are eligible, they might now consider investing non-superannuation means tested amounts into superannuation in order to purchase a TAP. Alternatively, they may choose to commute all or part of their existing allocated pensions and transfer the proceeds to a TAP in order to qualify for at least a partial social security benefit.

Importantly, there are good reasons for them to consider these opportunities in this calendar year.

Restructuring pension arrangements — flag for immediate action

Any decision to restructure a client’s existing pension arrangements may be influenced by one or more of the following three key (re)-calculations:

1. the deductible amount for tax purposes;

2. the deductible amount for social security purposes; and,

3. the RBL assessment.

A critical planning point for either of the deductible amount calculations is that new life expectancy tables (the 2000/02 tables) will replace the current 1995/97 tables from January 1, 2005.

So if a client is considering their pension arrangements, they may wish to bring forward the transfer of existing allocated pensions to this calendar year in order to make use of the current life tables and so achieve a higher deductible amount.

What’s the term in a term

allocated pension?

One of the useful, but potentially confusing, features of TAPs is that there are multiple options when it comes to setting the term of the pension. To advise your clients properly, you will have to know what the options are.

Here is a step by step method, showing the different calculations for single life and reversionary pensions.

A. Single life pension

1. Determine life expectancy based on beneficiary’s gender and age at date of purchase and round up to nearest whole year.

2. Determine life expectancy based on beneficiary’s gender and age at date of purchase if beneficiary was five years younger and round up to nearest whole year.

3. Range of terms is effectively the years from steps one and two and any whole year in between.

B. Reversionary pension

(if life expectancy of reversionary is greater than the expectancy of the beneficiary)

1. Determine life expectancy based on reversionary’s gender and age at date of purchase and round up to nearest whole year.

2. Determine life expectancy based on reversionary’s gender and age at date of purchase if reversionary was five years younger and round up to nearest whole year.

3. Range of terms is effectively the years from steps one and two and any whole year in between.

4. Alternatively, the client can choose a term from the range at step A3 (if different).

Note: When calculating the term, all fixed term complying income streams purchased from September 20, 2004, to December 31, 2004, may be based on either the 1995/97 or the 2000/02 life tables. From January 1, 2005, onwards, all new fixed term complying income streams will be based on the 2000/02 life tables.

David Shirlow is head of technical services, Macquarie Financial Services .