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NEWS - PLANNING
Smart plans for retirement
6/2/2003
Barring a miracle, returns on retirement investments are likely to disappoint investors again this year. The average fund manager may eke out enough of a return over the remaining weeks of the financial year to produce a positive number, but it won't be enough to offset the losses of the previous year.
If the average manager produces a zero return - which may be optimistic - $100,000 invested in super on July 1, 2001 will be worth about $95,900, according to InTech Financial Services.
The same amount invested in an allocated pension could be worth much less.
However, super and private pensions are still among the best vehicles for retirement savings because the tax benefits are significant. That said, there is much more to retirement planning than simply making regular super contributions and betting on expected future gains from financial markets.
Jim Clegg, a principal with financial planners Berkley Group, says superannuation should account for only half a retirement nest egg.
"No matter how attractive super is, it is subject to regulation and flexibility constraints.
"But the tax-effectiveness of super, and franked dividends from shares or hybrid securities held outside super, means a couple can earn up to $100,000 and hardly pay any tax. It's a fantastic combination," Clegg says.
Clever investors also know how to use the complex rules of superannuation and pensions to create a generous income stream that lets them quit the workforce without fear of starvation.
The rules may seem tedious - if not downright unintelligible - but investors who fail to grasp the basics may deny themselves a substantial chunk of income in retirement.
For example, the tax cuts proposed in last month's budget mean a single self-funded retiree can earn up to $31,350 tax-free every year from an allocated pension. A couple can earn up to $54,770. This applies if the tax cuts are combined with the seniors' tax rebate and the tax benefits of an allocated pension.
It's just one of many strategies used to help self-funded retirees maximise investment earnings and minimise tax.
But self-funded retirees are not the only Australians with the potential to benefit from the rules governing super and retirement income streams. Lack of planning can result in high-income earners losing hundreds of thousands of dollars of their hard-earned retirement savings before they quit work, Berkley Group warns.
Clegg says a common strategy is to plan your reasonable benefit limit. Reasonable benefit limit is a clumsy term for a simple concept.
The federal government caps the tax benefits that any one superannuation investor can receive in their lifetime. These caps are known as reasonable benefit limits or RBLs and are adjusted each year. The cap is doubled if you take your superannuation as an income stream rather than a lump sum.
The lump sum RBL for 2002-03 is $562,195 while the pension RBL is $1,124,384.
Investors close to retirement often want to contribute significant sums to super, Clegg says, but they should be careful they do not push themselves well above their RBL. "The first big decision is whether to target the lump sum or pension RBL. But if you're just $100,000 over, there are a couple of things you can do to minimise the excess," he says. "Another strong option is to make an undeducted [voluntary] contribution to super. Undeducted contributions are not counted towards RBLs. A combination of undeducted and deducted contributions can make for a very strong income stream later on." Savings that exceed the lump sum RBL are taxed at the highest marginal tax rate of 47 per cent plus the Medicare levy. Savings that exceed the pension RBL are not eligible for the 15 per cent tax rebate on pension income available to pensioners aged 55 or above.
Good financial planners are worth their weight in gold when it comes to superannuation and pension rules or strategies. This is a highly complicated area, and an adviser who can recommend and explain strategies to bolster retirement savings is a necessity for investors.
"It's really the financial planner's role to decipher a lot of the legislation and explain it to clients in language they can understand," says Zurich Financial Services' technical services manager, Sam Wall.
But be warned: the Australian Taxation Office dislikes aggressive retirement strategies as much as it dislikes tax minimisation schemes.
Earlier this year, the ATO expressed an opinion that one of the most popular pre-retirement strategies among financial planners might amount to tax avoidance. The "recontributions" strategy involves investors who are planning to retire cashing an amount out of superannuation and then putting it back in. The money is taken from the post-1983 component of super savings because the first $112,000 of that amount can be withdrawn tax-free. When the money is put back into super, it becomes an undeducted - or voluntary - contribution. This is useful because the income tax on payments from a retirement income stream is reduced if part of the retirement income stream is purchased with an undeducted contribution.
A Berkley Group report on super says investors can still use a recontributions strategy, as long as it is reasonable. The report says a properly planned undeducted contribution strategy can provide security in retirement as well as incidental tax advantages on final withdrawal.
These are just some of the strategies commonly recommended by financial advisers. There are many, many others, including those used by operators of self-managed funds, that can bolster retirement income.
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