Top 10 tips for maximising superannuation

Crissy De Manuele offers some tips on the top 10 things to be aware of to ensure your clients maximise their full potential when it comes to superannuation.

There’s some knowledge that — though it’s handy to have — is probably not essential. For example, did you know that the term ‘google’ refers not only to the search engine but also to an amount, represented numerically by one followed by 100 zeros?

And then there are small gems of knowledge that can be of much more value. Think of the Australian super system as a mine, and the following 10 super facts as the nuggets that will help your clients set themselves up for the lifestyle they want and deserve in retirement.

1. Tax can be minimised on death benefits using the terminal illness benefit

In some situations, triggering a terminal illness payment in super may reduce tax otherwise payable on a death benefit to non-tax dependants.

Terminal illness benefits paid from superannuation are received tax-free, regardless of the age of the member and the components in the fund. Having a terminal illness benefit paid into the super fund before death (even if not withdrawn) can also significantly reduce tax for one’s children compared to a death benefit.

2. It may be possible for a super death benefit to be paid to a former spouse tax-free

Generally, super fund trustees are restricted to only paying death benefits to dependants or the deceased member’s estate in accordance with the Superannuation Industry (Supervision) Act (SIS) and it regulations.

SIS dependants include a spouse, child, financial dependant or an individual who was in an interdependency relationship with the deceased prior to their death. A ‘spouse’ includes a de-facto or married spouse, but not a former spouse.

This means if a former spouse was neither a financial dependant nor someone who was in an interdependency relationship with the deceased, they are generally not able to receive the death benefit directly.

However, it may be possible for them to receive a death benefit via the estate. If they do, they will receive the benefit tax-free. This is because a former spouse is a tax dependant even though they are not a SIS dependant.

3. A super death benefit can be paid to a financial dependant or inter-dependent (eg, mistress)

As mentioned above, superannuation death benefits can only be paid to a SIS dependant. Therefore, super death benefits are usually paid to spouse or child. However, they can also be paid to someone who was in an interdependent relationship with the member or to someone who was financially dependant on the member.

This means that it is possible for superannuation benefits to be paid to someone other than the spouse or children of the deceased. If the deceased member had an extra-marital affair, for example, their mistress can claim an entitlement to the super benefits if they were financially dependant on the deceased.

Financial dependency determinations are made on a case-by-case basis and are supported by common and case law.

A test that can be applied is: will the person be able to meet their daily needs if the financial support is withdrawn? If a mistress or toy boy were partially dependent on the deceased, they may be able to receive a death benefit from the trustee.

4. Step-children can cease to be a superannuation dependant

If the biological parent of a step-child dies before the step-parent, the child is no longer considered to be a step-child. They may no longer meet the definition of a dependant under SIS or tax law in that relationship. They can potentially miss out on receiving their parent’s superannuation benefits.

5. Age pension entitlements can be increased by commencing an account-based pension

Once a person reaches age pension age, their superannuation balance in accumulation phase is deemed for the purposes of the Centrelink income test.

By contrast, income from an account-based pension will often result in lower assessable income than leaving superannuation in the accumulation phase because of the Centrelink deductible (non-assessable) amount.

As deeming rates rise, it may be even more beneficial to convert accumulated super to an account-based pension.

6. Age pension entitlements can be increased by recommencing an account-based pension

Where the Centrelink age pension is determined by the income test, it may be worthwhile commuting an account-based pension and commencing a new account-based pension.

If a considerable amount of time has passed since the pension commenced or the account balance has changed since it was commenced, it may be possible to increase the Centrelink deductible (non-assessable) amount.

Commuting and recommencing an account-based pension may increase the age pension assuming other factors affecting the assessment of the age pension do not change.

7. Age pension entitlements can be increased by rolling over superannuation

Superannuation (in the accumulation phase) is not counted under means testing for the age pension when a person is under age pension age.

Therefore, when the older (age pension age or older) member of a couple transfers their super to the younger (under age pension age) spouse, this reduces assessable assets and income and may increase age pension entitlements.

Example

Rhonda, age 64, is married to Carl, age 60. They are homeowners and also have personal assets of $50,000, managed funds of $200,000 and Rhonda’s super of $710,000.

Total Centrelink assessable assets are currently $960,000. As this amount is over the assets test threshold for a homeowner couple, Rhonda does not receive the age pension.

However, if Rhonda withdrew $450,000 from her super and Carl contributed this into his super fund, total assessable assets would decrease to $510,000. Rhonda would then be entitled to an age pension of $335.38* per fortnight.

*Centrelink rates as at 20 March, 2010.

8. A super fund can claim a tax deduction for the future liability of paying death and disability benefits

A super fund can elect not to claim a tax deduction for the cost of death and disability insurance premiums and instead deduct an amount based on the fund’s future liability to pay death and disability benefits.

The future liability deduction may be more attractive to a self-managed super fund (SMSF) as the deduction will often be more substantial than that attributable to individual member premiums.

The tax deduction for future liability is calculated using the following formula:

Example

Karen, a member of the ABC Superannuation Fund passed away on 30 June, 2009.

The fund had an insurance policy of $400,000 on her life. Instead of claiming the tax deduction for the cost of the insurance premiums the fund elects to use the future liability deduction. Karen’s details were as follows:

• service period commenced: 1 July, 1989;
• normal retirement date: 1 July, 2014.

The death benefit consists of Karen’s account balance of $150,000 and the insurance policy proceeds of $400,000. The death benefit is paid to Karen’s husband. The fund can claim $132,080 as a tax deduction. This is calculated as follows:

($550,000 x 2,193)/9,132 = $132,080

If the fund cannot use the whole deduction in the financial year it can be carried forward to offset tax in future years.

9. Non-concessional contributions into super can exceed $150,000 after age 65

Provided a person is under age 65 on 1 July, they can trigger the bring-forward option by making non-concessional contributions into super above the standard $150,000 limit at any time in that financial year.

A person who has triggered the bring-forward option may make a contribution greater than the non-concessional contribution limit of $150,000 after age 65.

However, once an individual is over age 65, SIS rules only allow super funds to accept non-concessional contributions up to the $150,000 limit. Therefore, the non-concessional contributions in excess of $150,000 will need to be made separately.

Example

Mario turned 65 on 1 March, 2010. As Mario was under 65 for part of the year, he can use the bring-forward option. Joe made a non-concessional contribution of $200,000 in February 2010.

This means he can make non-concessional contributions of $250,000 over the next two financial years (ie, $450,000 less $200,000 contributed in 2009-10).

If he wishes to make a non-concessional contribution of $250,000 in the 2010-11 financial year (ie, up to his remaining non-concessional limit), he can make two separate non-concessional contributions of $150,000 and $100,000.

However, Mario must meet the work test to be eligible to contribute as he is now over age 65.

10. Maximum payment of a TTR pension

Account-based pensions are subject to minimum and maximum payments. Currently, pensioners with an account-based pension must receive at least 4 per cent (reduced to 50 per cent of this amount for the 2009-10 financial year) of the account balance annually.

However, if the pension is commenced part way through the year, the minimum amount of pension payable is pro-rated.

If a pensioner is receiving income from a transition to retirement (TTR) pension, they are limited to only receiving 10 per cent of the account balance each year.

However, if the pension is commenced part way throughout the year, the pensioner can still receive up to 10 per cent of the account balance. The maximum pension payment is not pro-rated.

This means that a pensioner can commence a TTR pension part way through the year and still receive a higher amount of their pension.

Despite the Government’s efforts to simplify superannuation, there are still many rules and strategies that some people are not aware of.

Crissy De Manuele is technical manager at Suncorp Life.