Toolbox: Making the most of a changing retirement system

The job ahead for those planning their impending retirement has just become a bit more complicated.

In February this year, the Government announced some significant changes to the superannuation and social security rules which are likely to have a profound impact on the decisions facing individuals and couples who retire in the near future.

Two reforms in particular will change the way some traditional retirement strategies work:

n The first is a proposal for all complying pensions purchased on or after September 20, 2004, to be eligible for a 50 per cent exemption from the assets test, rather than the current 100 per cent exemption. This 50 per cent exemption is also set to apply to the new market-linked income streams, which, it is intended, will be available from this date.

n The second is a measure to address the changing work preferences for older Australians. From July 1, 2005, retirees will be able to access their preserved super money in the form of a non-commutable income stream once they have reached their preservation age, irrespective of their employment status.

All indications have suggested the new market-linked complying pensions will receive the 50 per cent asset test exemption once the pensioner reaches pension age, regardless of the age at which the pension was commenced. It is assumed that the other complying pensions will be treated similarly.

These changes and the timing of their proposed introduction will put many potential retirees in a dilemma. Should they retire before September 20, and commit significant amounts of their capital to existing complying income streams in order to access the 100 per cent asset test exemption, and therefore some age pension entitlement?

Or should they continue to work, and access the new market-linked complying pension, but with only a 50 per cent asset test exemption, when they are truly ready to retire?

If this was not enough food for thought for those close to retirement, the Government also announced, with effect from May 12, 2004 (the day after its announcement on Federal Budget night), the closure of one of the avenues open to retirees to commence a complying income stream. From this date, ‘defined benefit pensions’, including lifetime and life expectancy term complying pensions, cannot be provided by self-managed superannuation funds (SMSFs).

So, from a practical point of view, what will impact the decisions of future retirees?

Firstly, the Budget announcement in relation to SMSFs effectively means only complying annuities can be purchased between now and September 20, 2004, in order to access the full 100 per cent asset test exemption. Note — the Assistant Treasurer’s office has suggested it may offer an exclusion from these regulations for clients who cannot otherwise take a complying pension until September 20.

Secondly, there is the problem of accessing superannuation money. Under the current preservation rules, many potential retirees will be unable, or will find it extremely difficult, to unlock their preserved superannuation before September 20. And for those who can and want to retire before September 20, the option of continuing to work while receiving a non-commutable income stream will not yet be available.

Accessing super before September 20

Unless clients already have unrestricted non-preserved super money, they need to meet a condition of release in order to commence any form of income stream. Those over 55 years of age but less than 60 can use the retirement condition of release so long as they retire permanently. Currently, this means they must cease working altogether or be working less than 10 hours per week.

Those under 55 cannot satisfy the retirement definition. One way they can access preserved super money is by purchasing a non-commutable lifetime pension or annuity, which is capable of qualifying as complying for social security purposes. However, this can only be done where they have terminated employment with an employer who has contributed to the same superannuation fund on their behalf.

These options are unavailable to self-employed people and passive income earners who can only access their preserved superannuation at age 65.

Employer ETPs

Leaving aside the Government’s proposal to preserve rolled over employer Eligible Termination Payments (ETPs) received on or after July 1, 2004, golden handshakes will remain unrestricted non-preserved if they are cashed out. This offers some opportunity for clients who receive an employer ETP before September 20 to invest an amount of capital in a fully exempt complying annuity, especially where their super is otherwise tied up.

Clients who choose to undertake this strategy should be aware of the possible ETP tax, RBL and surcharge implications of doing so.

Ordinary money annuities

It should not be forgotten that both lifetime and life expectancy term annuities can be purchased with other non-superannuation money. These income streams do not attract the 15 per cent rebate, but then for those under 55 years of age who purchase a non-commutable income stream with superannuation money, the rebate is not available either.

Lastly, for those thinking of commencing (or who have already commenced) a complying income stream and then transferring to a new market linked product (or any other complying product) after September 20, 2004, it is unlikely that the 100 per cent asset test exemption will transfer to the complying pension or annuity purchased with the rollover money.

Peter Hogan is head of technical services with Colonial First State.