It’s taken some time but a handful of motivated licensed financial advisers have finally raised the bar and demanded that… wait for it… licensed advisers provide independent advice in the best interests of clients.

I can hardly believe it myself, but according to Matthew Ross, the co-founder of the newly-formed Independent Financial Advisers Association of Australia (IFAAA), there are only 14 truly independent financial advisers.

I’m hoping in a country of 22 million people that there are many more independent financial advisers working away for their clients too busy to have time to register for this very exclusive list. Let’s hope SuperGuide’s publication of the ‘group of 14’ inspires other independent advisers to make themselves known (if they exist), or inspires others to become truly independent.

Change from within will deliver results

In recent months, I have found the debate surrounding commissions and ownership and independence of financial advice rather depressing because the Government and financial planning industry and commentators were trying to change the industry from the bottom – dragging the worst advisers (in terms of independence) to a level that was a little bit better than ‘worst’. Such an approach is destined to countless setbacks (and ultimately failure) because the broader financial planning industry as it is currently structured is a product distribution model rather than a financial advisory model. I personally believe it is impossible to modify a structurally corrupt business model – you have to throw it in the air and create a new model.

Change will only occur when financial advisers drive the change rather than having the Government and regulator drag reluctant advisers kicking and screaming into a new professional business model. We need to reward the advisers who are operating in the best interests of clients and if this new organisation – IFAAA – can differentiate the truly independent licensed advisers from the thousands of advisers who accept commissions and/or are employed or incentivised by the product distributors (read ‘major financial organisations’), then we’re finally heading in the right direction.

What does ‘independent adviser’ mean?

So, what do you need to possess in the way of skills and independence to make this exclusive list?

According to Matthew Ross, who is also an adviser with Roskow Independent Advisory, the list of 14 advisers “satisfy the Corporation Act’s definition of independent (see s.923A) which is basically no commissions, no charging fees based on volume of product sold or advised on and no affiliation with any product manufacturer.”

Ross explains that 80% of all authorised representatives are aligned with a product manufacturer, which precludes them from describing themselves as independent. He says: “Of the remaining 20%, a large slice of them pocket commissions (on insurance and/or investments) or charge their fees as a percentage of your assets, which is commissions by another name.”

Ross argues that the big push by planners to drop commissions but to charge fees as a percentage of assets under management is simply commissions by another name. Ross says that the asset fees are usually collected through a platform, which is not considered a ‘financial product’ under the legislation, and it means the financial adviser can then describe themselves as independent.

“The issue isn’t the word ‘commission’; it’s the concept of an incentive and no matter which way you look at it, when you are paid a % of anything, there is an incentive. Incentives result in zero independence,” says Ross.

Ross hopes that the recommendations made by Bernie Ripoll to include the term ‘fiduciary’ in the Corporations Act will effectively result in the end of asset fees charged by planners. I discuss the fiduciary obligations of advisers in my column THE SOAPBOX: The 25-year super war.

IFAAA – point of difference

The IFAAA, currently administered by Daniel Brammall, promotes itself as the ‘gold standard’ of independence of financial advisers. Quoting directly from the IFAAA material:

Existing industry associations do not provide genuine independence. They represent the eighty-five per cent of financial planners associated with product manufacturers who receive commissions. According to the ASIC the typical financial planner acts as a “sales force for financial product manufacturers” and that advisers are “a product pipeline”. This is who the current industry associations are representing.  Not one of the main four planner associations represents the interests of truly independent advisers whose interests are aligned with their clients.

According to the association’s background material, the IFAAA aims to solve the definition of independence and promote the value of independent advice to the consumers, to train and develop independent financial advisers, and to represent the interests of its members to government.

Membership of IFAAA

For a financial adviser to become a member of the IFAAA they must agree to the following:

I declare that I am genuinely independent and acknowledge the restrictions of the use of the term ‘independent’ under s 923A Corporations Act (2001).

I avoid all real and perceived conflicts between my interests and my client’s interests.

I do not receive commissions for my client purchasing a financial product.

I do not receive payment or inducements to recommend financial products to clients.

I do not have in place any fee structure that means I will not be paid unless my client purchases a financial product.

I declare that I have an interest in promoting and encouraging the professional development, independence and concerns of financial advisors.

I acknowledge that membership is contingent upon payment of an annual membership fee as determined by the Board from time to time.

Financial advisers are not the only experts who can provide independent advice. Accountants, lawyers and other independent professionals can become ‘associates’ of the IFAAA.

Membership fees for licensed advisers are $1,100 and for ‘associates’ the fee is $595.

Group of 14 – the list!

According to Matthew Ross, as at 22 December 2009, there are only 14 independent financial advisers in Australia (out of over 16,000). The names of these independent advisers are:

• Phillip Thompson, ACT
• Daniel Brammall, ACT
• Fergus Hardingham, NSW
• Chris Browne, NSW
• Kevin Smith, NSW
• Bill Raffle, NSW
• Carolyn Baker, QLD
• Richard Starr, QLD
• Tony Grlj, QLD
• Neil Salkow, QLD
• Matthew Ross, VIC
• Yoni Stein, VIC
• Adrian McMaster, VIC
• Travis Morien, WA

If you believe that your name should be on the list, why not contact the IFAAA.

I invite the other financial adviser associations to write to me and present their point of view on the issue of independence.

For background information…

If you want more information about the importance of independence when seeking financial advice, check out some of the other relevant articles on our SuperGuide website:

• Independent financial advice: How do you find it?

• THE SOAPBOX: Let’s raise our glasses to Sherry

• THE SOAPBOX EXCLUSIVE INTERVIEW: Cheap financial advice now available – what does it mean for consumers?

• Six dangers when seeking super fund advice

• SMSF providers: What should I look for when setting up my DIY super fund?

• Top ten problems with our super system, and how we can fix them

• Choosing a super fund without an adviser

• Getting real super advice

Related posts:

1. THE SOAPBOX EXCLUSIVE INTERVIEW: Cheap financial advice now available – what does it mean for consumers?
2. THE SOAPBOX: Let’s raise our glasses to Sherry
3. THE SOAPBOX: The 25-year super war

We are very pleased that you’re finding the site so helpful. For the benefit of other readers I’ll first explain the different phases, and the pensions that you are referring to in your question.

Background: The two key differences between accumulation phase and pension phase are:

• Earnings on fund assets during pension phase are exempt from tax. Earnings during accumulation phase are subject to 15% tax.
• Pension phase is subject to minimum payment rules, while accumulation phase has no payment restrictions (assuming the fund member has retired or satisfied another condition of release).

Note that a fund member cannot make contributions to a pension account. A separate accumulation account needs to be opened to accept member contributions, and such a strategy requires additional compliance and administration requirements.

Entering the pension phase

A member of a SMSF can choose only from two types of pensions – an account-based pension or a transition-to-retirement pension (what I call a ‘TRIP’). If you retired before 20 September 2007 however, you may be receiving another type of pension from your SMSF.

Account-based pension: An account-based pension gives you unlimited access to your account balance but how long your money lasts depends on the investment returns that your pension assets deliver. You also must withdraw a minimum amount each year, based on your age. I explain the minimum payments in the article Pension drawdown relief extended for 2009/2010 year.

Transition-to-retirement pension (TRIP): A TRIP is available to those who have reached preservation age (currently 55) but have not retired from the workforce. You run the TRIP in a similar way to running a regular account-based pension, but you cannot withdraw lump sums from a TRIP (that is, it is a non-commutable pension), and you can withdraw no more than 10% of the account balance each year in pension payments. I explain how TRIPs work in the article Starting a TRIP takes planning.

Converting a SMSF account from accumulation phase to pension phase involves quite a few steps, and depending on your motivation, it is possible to do these steps yourself. I list what I consider to be the main steps (14) in my book DIY Super For Dummies (Wiley), although anyone running a SMSF should conduct their own research and ensure any strategy fits in with their individual needs.

How much does an SMSF cost?

You ask how much an accountant/administrator will charge for setting up a pension. You will also need to find out how much the ongoing costs will be for running a fund in pension phase.

I cover the costs of running a SMSF in detail in my book DIY Super For Dummies, but briefly here are some of the costs that you can expect for a SMSF in pension phase:

• Starting a pension: between $440 and $900, depending on service provider and package. I’m aware of one service provider that does it for free, subject to you signing over the administration of the SMSF as well. The administration fee is also very cheap for this provider so I assume most of the service is automated rather than personalised. I understand that you must use a certain bank, and a certain broker for your fund, and the administrator receives commissions from those two financial organisations for locking in clients.
• Trust deed update (if the deed doesn’t currently allow TRIPs or account-based pensions): updates can cost from $99, but major updates can cost from $500 to $700.
• Actuarial certificates (if you plan to contribute while taking a pension): between $350 and $550.
• DIY super package deal: Many service providers offer package deals that include starting the pension, and the ongoing administration of your fund. If you do some research to ensure that you’re clear about what you need for your fund, you may get a good deal especially as a new client.

Tip: Using any internet search engine such as ‘Google’, ‘Yahoo’ or ‘Bing’ type in SMSF administration and check out the services offered by the different administrators, to get a sense of what’s involved. Some of the websites list what is involved in setting up a SMSF pension and lists for other compliance issues as well, but the majority simply offer the service and indicate the fee.

Warning: Always check out the financial services guide of any SMSF provider you’re considering for fees and conflicts of interest. Keep an eye out for product disclosure statements and any services that are NOT included in a standard fee.

Related posts:

1. SMSF pensions: What happens if I don’t withdraw the annual minimum pension payment?
2. Are SMSF audits too expensive?
3. DIY super: Age Pension relief for SMSF lifetime pensions

I am pleased that you found DIY Super For Dummies useful. I should point out that the answer to your question is also in DIY Super For Dummies on pages 153 and 235-237.

Super benefits can be made up of two components – ‘tax free’ and ‘taxable’.  The components relate to the tax treatment of super benefit payments. The tax-free component is always tax-free and the taxable component may be subject to tax depending on the age of the fund member, and the size of the benefit.

The components of a superannuation pension (income stream) are calculated at the time the income stream is commenced, which means that fund earnings are split in the same proportions. For example, if a super benefit is 70% tax-free component, and 30% taxable component and the fund member then starts a pension, the components of the pension are also 70/30 for the life of the pension.

For anyone starting a pension on or after the age of 60, you may think that calculating the components is a waste of time since benefit payments are tax-free (except for some retired public servants), so why do we need to worry?

The components of a super benefit remain important after the age of 60 because upon a fund member’s death, the member’s family may end up paying tax on the super benefit depending on the benefit components. Dependants receive superannuation death benefits free of tax, but non-dependants, such as adult children, can expect to receive a reduced death benefit due to benefit tax on the taxable component. For example if a death benefit of $100,000 is payable to a non-dependant and it is 70% tax-free and 30% taxable, then $30,000 of the death benefit is subject to 15% tax plus Medicare levy.

I also explain the impact of taxes on death benefits in the following articles:

• Dear Dad: Tax for everything
• How can a SMSF live forever?
• Beware the dastardly death tax

Related posts:

1. SMSF pensions: How do I start one?
2. SMSF pensions: What happens if I don’t withdraw the annual minimum pension payment?
3. How can a SMSF live forever?

Superannuation is subject to special access rules called preservation. What this means is that you cannot access your super benefits until you retire after a certain age, or you satisfy another condition of release such as permanent disability or severe financial hardship. I explain the conditions of release in the article 12 legal reasons to access your super.

In normal circumstances, before someone retires, it is not possible to access a super account like a bank account to withdraw cash for mortgage payments. On retirement however, you can cash out your super benefits.

Note: If an individual is struggling to pay a mortgage, and the bank is about to foreclose on the property, then it may be possible to access super benefits on ‘compassionate grounds’. The Australian Prudential Regulation Authority (APRA) administers this process, according to strict criteria.

APRA may release your super for the purposes of ‘mortgage assistance’ if releasing the money will “prevent your home from being sold by the lender with whom you have the home’s mortgage”.

The grounds for early release do not include payment of rent, or a mortgage payment:

• where they may be future difficulty in paying, but the payments are not yet behind
• for payments that are behind, but the bank/lender has not yet decided to sell the property
• for a property or debt owned by one of your children or other family members or dependants
• for an investment property.

APRA also provides more details on the information required, including a special form, before such an early access application can be considered. You can view it here.

Note: If you are considering applying for early access to super, check that the specific rules of your super fund permits a fund member to withdraw money under these circumstances.

Related posts:

1. No super access for business debts or tax bills
2. Terminally ill receive tax break
3. 12 legal reasons to cash your super

First, I want to congratulate you on paying off your unit. You may not have realised it but you are better placed than many other Australians of your age because you will be entering retirement free of a mortgage, and presumably you now have surplus money that you can direct to retirement savings.

I can’t stress enough that it is never too late to improve your financial circumstances – at any age. Also, you may not have personally contributed to super but your employer is required to contribute the equivalent of 9% of your salary to your super fund each year, in 4 quarterly payments. It’s worth checking how much super you currently have.

Note that anything I write in response to your question is information of a general nature and you will need to do your own research on your financial needs and saving strategies. You can find some practical information on ‘how much is enough?’ and how to get there in the following articles:

• Retirement planning in six steps
• A comfortable retirement: how much super is enough? (this article is updated regularly with new figures)
• Moving targets: Come on, how much do I really need?

Using an example…

I am often asked to illustrate my ‘retirement planning in six steps’ process using an example. Generally, I have been reluctant to do this in case readers misconstrue the example as some concrete plan, or ‘advice’ that can be applied to their own circumstances.

My six steps are not the only way to work out your retirement needs but it can be one of many useful tools that can help you with your retirement planning. You can access a lot of free resources, including the excellent financial calculators located on FIDO, the consumer website run by the Australian Securities and Investments Commission (ASIC).

I also encourage individuals thinking seriously about retirement to seek tax advice and retirement planning advice. With those provisos, I now illustrate my ‘retirement planning in six steps’.

The story: Say we have a 53-year-old female named Betty. She earns $37,000 a year and her employer contributes 9% Superannuation Guarantee each year of $3,330, paid in quarterly instalments. Betty owns her unit outright and she plans to retire at age 65, with the expectation that she will live off the Age Pension and her super savings.

Retirement age: Based on this plan, Betty believes she has 12 years until she retires, although Betty will need to reconsider her retirement date. The Age Pension age is 67 for anyone born on or after 1 Jan 1957, and Age Pension age is between 65.5 years and 66.5 years for anyone born on or after 1 July 1952 and before 1 January 1957.

Taking into account Age Pension: Around 80% of retirees receive a full or part Age Pension so Betty can expect her retirement plans to include a substantial Age Pension, if not full Age Pension. If Betty cannot access the Age Pension until she turns 67, then Betty probably needs to plan for retirement in 14 years’ time rather than 12 years.

Planning can make dreams come true: If Betty is able to make a $100 a week super contribution starting now, until she retires, she can expect a lifestyle in retirement similar to the lifestyle she is enjoying now. Read on to find out how.

Retirement planning in six steps

Steps 1 & 2: What type of lifestyle do you want in retirement, and how much will that retirement cost?

Betty needs to think about the type of lifestyle that she wants, and can afford, when saving for her retirement. The Westpac-ASFA Retirement Standard indicates that a modest lifestyle for a single person is roughly $20,000 a year, and a comfortable lifestyle is nearly $39,000 a year (see article A comfortable retirement: How much super is enough?). The income figures assume after-tax income, although if an individual holds their money within the super system, no tax is payable on super benefits after the age of 60.

Betty may be hoping to have a lifestyle somewhere between ‘modest’ and ‘comfortable’ – similar to her existing lifestyle of $37,000. Note that in retirement, Betty won’t be paying tax if she keeps her savings in the super system, and will be paying very little tax (if any) if she has her savings outside the super system. For Betty to compare what type of income she needs, to have a similar lifestyle in retirement, she could use many different measures: for example, here are two possible measures:

1. Current after-tax income. On my calculations, Betty’s $37,000 before-tax income translates into an after-tax income of $32,050, before taking into account the low income tax offset.
2. 80% of current before-tax income. A common rule-of-thumb is to assume that retirement lifestyle costs are between 65% and 80% of pre-retirement lifestyle costs because there are usually no mortgage payments, no super contributions and less (or no) tax. Leaning towards the higher end of 80% because Betty’s income is already below the average income, Betty’s target retirement lifestyle income could then be $29,600 – no tax would be payable inside or outside the super system on this level of total income if over the age of 65.

Step 3: How much money will you need to finance these levels of income?

*Westpac-ASFA Retirement Standard (www.superannuation.asn.au)

**Includes part Age Pension, except where indicates full Age Pension

Note: Assumptions used in the above table are the same assumptions used in the table appearing in the article A comfortable retirement: how much super is enough?

Step 4: Work out how much superannuation and savings that you have now

Betty has paid off her home but her only other source of savings is her super account. Since 2002, her employer has contributed the equivalent of 9% of her salary into her super account (SG) and between 1992 and 2002, her employer’s contributions increased from 3% to 8% of her salary.

Taking an extremely conservative approach, we’ll assume that Betty has $20,000 in super savings, although it’s highly likely her existing super balance would be much larger.

Step 5: Estimate how much super and savings you’re going to have when you retire

If Betty does nothing except turn up for work, her employer must continue contributing 9% SG. Betty uses the FIDO superannuation calculator to work out what her employer contributions (less contributions tax) plus investment earnings will be in 14 years’ time starting from her initial balance of $20,000. When using the FIDO calculator, she uses the same assumptions that appear at the bottom of the table in the article A comfortable retirement: how much super is enough?

According to the FIDO superannuation calculator, Betty can expect to have $80,000 in today’s dollars. Today’s dollars means that the calculator has taken into account the effects of cost of living increases and worked out what your account balance would be worth today, which enables Betty to compare lifestyle costs.

Assuming Betty does nothing in terms of retirement planning, but turns up for work, what will that $80,000 in today’s dollars give Betty in terms of an annual income and Age Pension?

Based on the table above, Betty needs $50,000 in today’s dollars to live a ‘modest’ lifestyle until the age of 100, in combination with the full Age Pension. Using the FIDO retirement planner calculator, Betty’s $80,000 lump sum can deliver her an annual retirement income of around $23,000 until the age of 87, or $21,500 until the age of 100, including a substantial part-Age Pension.

Step 6: Take action if a gap exists between how much you want, and what your super and non-super savings are going to deliver.

Betty is pleasantly surprised by her financial position. She didn’t expect that she would be in a position to enjoy a lifestyle better than the Age Pension well into her nineties without taking any deliberate action. Betty is now inspired to improve her expected retirement lifestyle.

Looking at the table above, Betty believes that aiming for a $30,000 a year income in today’s dollars (i.e. 80% of her current pre-tax salary) is the most realistic scenario considering her current income of $37,000. She even thinks she may have a better lifestyle in retirement than she does now if she is successful in reaching this target.

Even so, Betty is pragmatic and considers that it is unlikely she’ll reach the lump sum target of $210,000 (until 87, and then reverting to Age Pension only), or $325,000 (until 100, and then reverting to Age Pension only).

She thinks that even if she was able to achieve 80% of her after-tax working income (around $26,000 a year) she would be a very happy lady.

Betty doesn’t have a lot of spare cash but believes she can contribute $100 a week to her super account, or $5,200 a year. She was contributing $200 a week to her mortgage which is now cleared, so in theory she could contribute $200 a week. Betty however is anticipating that she will need to buy a new car within the next 12 months, and may need the extra cash for the personal loan and deposit.

If Betty makes non-concessional (after-tax) contributions to her super fund, she will also be eligible for the co-contribution – a tax-free super contribution from the Government of up to $1,000 a year.

Betty uses the FIDO retirement planner calculator and discovers that she will have $192,000 when she retires at age 67, giving her the dream retirement income of $29,600 until the age of 85, and then reverting to Age Pension.

If she opts for the more pragmatic target income of $26,000 a year (80% of her current after-tax salary) she can live on that income until her 100^th year.

Betty is so excited about this news that she thinks that once she pays off her new car in 5 years’  time, she might direct the extra cash (an additional $100 a week) to her retirement savings. If she chooses this strategy, Betty will probably have $247,000 in super in today’s dollars, and have a tax-free retirement income of $30,000 a year (including substantial part-Age Pension) into her nineties.

With some planning, Betty now believes she is able to achieve a similar lifestyle to what she is enjoying now.

Related posts:

1. A comfortable retirement: How much super is enough?
2. Setting a retirement target: Living on more than $50,000 a year
3. Retirement planning in six steps

The question that you ask is in the top 10 questions that we receive at SuperGuide. The term ‘retirement’ and what that means for accessing super can mean many different things.

The short answer to your question is: generally yes, you can return to work after retiring, but at the time of retiring, the intention to retire must have been genuine. I explain this in more detail later in the response.

In the olden days, most women ‘retired’ when they married and men retired when they turned 65. Indeed, until the 1980s, women could access their super benefits when they left work to have children because the presumption was that these women would never return to the workforce.

The world had changed a lot since then, and the concept of  ‘retirement’ is now more fluid. Confusion over when someone is considered ‘retired’ has prompted dozens of questions from readers about retirement age, super access and returning to work after retiring. In this article, I answer the following three questions:

• Can I retire at any age?
• Can I return to work after retiring?
• Can I access my preserved benefits if I’m still working?

Can I retire at any age?

An individual can retire at any age if they so wish, but for the purposes of accessing super benefits, you must have reached your preservation age and retired. For anyone born before 1 July 1960, preservation age is 55. What this means is that a person who has retired and aged 55 or over, can access super benefits.

‘Retired’ for the purposes of accessing super benefits means the trustees of the individual’s super fund are reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis. Note that ‘part-time’ is defined as working up to 30 hours a week and a minimum of 10 hours a week.

In other words, if a person’s intention is to work fewer than 10 hours a week, then that person can be considered to be retired. In nearly all cases, the super fund will request that the retiring individual sign a declaration stating that he or she never intends to be gainfully employed for more than 10 hours per week.

Note: Reducing your hours with the same employer, rather than ceasing employment, is not considered retiring. I explain this scenario in the article Does changing to part-time at 60 count as retiring?

Can I return to work after retiring?

Signing a retirement declaration doesn’t preclude returning to full-time work, or deciding to work part-time, if a person’s circumstances change. The declaration relates to the person’s current intention at the time of retiring. Personal or financial circumstances can change requiring individuals to return to the workforce. For example, the devastating effect of the GFC (global financial crisis) on pension investments has forced many retirees to return to work.

Some public sector funds have special rules relating to ‘retiring’ from the public service. If you belong to one of the older public sector funds, then you need to check with your super fund about your retirement options.

Can I access my preserved super benefits if I’m still working?

Generally no, but like all rules there are some exceptions:

• Reach the age of 65. If an individual has turned 65, he or she can access super benefits without retiring from the workforce. An individual can continue working full-time or part-time and start drawing down on super benefits.
• Take a TRIP. If you have reached your preservation age (currently 55), then you can start a transition-to-retirement pension – what I call a TRIP. You can withdraw a maximum of 10% of your account balance each year, and you’re not permitted to withdraw additional lump sums. When you retire, or turn 65 (whichever comes first), you can have more flexibility when accessing your super benefits.
• If you’re aged 60 or over, and cease an employment arrangement. If an individual resigns or otherwise ceases an employment arrangement after they have turned 60, then the rules permit the individual to access preserved super benefits. The rationale behind this exception is that most individuals ceasing employment at this age are more likely to be retiring than returning to the workforce.

Note one: Merely turning 60 doesn’t give you automatic access to your preserved super benefits. You must satisfy a condition of release, as discussed above and in the article 12 legal reasons to cash your super.

Note two: If any of your super benefits are ‘unrestricted non-preserved’ benefits, then you can access these benefits at any time. I explain non-preserved benefits in the article Unrestricted access to super, sometimes.

Related posts:

1. Super for beginners, part 8: What happens to my super benefits when I retire?
2. Baby boomers delay retirement, retirees return to work
3. Does changing to part-time at 60 count as ‘retiring’?

The short answer is no, even though special rules apply when an individual is aged 63 or 64. The special rules that apply when an individual is aged 63 or 64 mean that yes, an individual can bring-forward up to two years’ worth of non-concessional contributions in the year that they turn 63 or 64, but that doesn’t mean they can make super contributions beyond age 65 without satisfying a work test.

I suggest you also read my article Maxing out the after-tax contributions cap explaining a strange quirk in the work test rules where an individual is under the age of 65 at the start of a financial year, but makes a super contribution after they turn 65 in that same financial year.

For the benefit of other readers, I will now provide a fuller response and explain how the ‘bring forward’ rules work for all age groups under the age of 65. The response I provide is of a general nature and you will need to confirm your personal circumstances with the ATO, or an accountant/adviser.

Bring-forward rules – a quick summary

The annual non-concessional (after-tax) contributions cap is currently $150,000, but individuals under the age of 65 can ‘bring forward’ up to two year’s worth of non-concessional contributions. In other words, an individual can contribute up to $450,000 in one year representing the contributions cap for three years.

If you’re under the age of 65, as soon as an individual contributes more than $150,000 (for 2009/2010 year) in a financial year, say, $160,000, or even $150,001, then such an amount automatically triggers the bring forward rules for the following two years. For example, if Bill makes a non-concessional contribution of $160,000 in the 2009/2010 year, then he can make up to $290,000 in non-concessional contributions in total over the following financial years (2010/2011 and 2011/12), taking the amount over three years to $450,000.

The following is an extract from SuperGuide’s Your 2009/10 guide to non-concessional (after-tax) contributions, where I provide three examples of how the ‘bring forward’ rules can work:

…Let’s look at three examples.

• A $450,000 non-concessional contribution in one year: If you make a $450,000 non-concessional (after-tax) contribution to your super fund during the 2009/10 year, say on 15 March 2010, you’re bringing forward two years of contributions for the purposes of the non-concessional contributions cap. You then cannot make another non-concessional contribution until July 2012 (that is, the 2012/2013 year).
• A $300,000 non-concessional contribution in one year: If you make a $300,000 after-tax contribution during the 2009/10 year, say on 15 March 2010, that only brings forward one year of contributions, but it means you trigger the bring-forward rules for the next two years. You then can only make another $150,000 in non-concessional contributions during the period that ends on 30 June 2012.
• A $180,000 non-concessional contribution in one year: If you make a $180,000 after-tax contribution during the 2009/2010 year, say on 15 March 2010, the $30,000 above the annual $150,000 cap triggers the bring-forward rules, which means over the next two years, you can make only $270,000 in non-concessional contributions.

When you’re aged 63 or 64

By making a non-concessional contribution that is greater than the annual cap, you automatically trigger the bring-forward rules.

Special rules apply if you’re aged 63 or 64 and you want to make a non-concessional contribution in a financial year that is greater than $150,000 (for the 2009/2010 year). The difficulty for an individual aged 63 or 64, who intends to contribute up to the maximum allowable in the following two years, is that they will reach the age of 65 after one year, if aged 64, and after two years, if age 63. The super rules indicate that anyone aged 65 or over who wants to make a super contribution in a financial year, must satisfy a work test in the financial year in which they intend to contribute.

For an individual who is aged 63 or 64, the bring-forward rules work in the following way: An individual can make up to $450,000 in a single year representing one or two years of contributions over a period when that person would have been 65, without having to satisfy a work test during those years (because the contribution was made when the individual was 63 or 64, under the bring-forward rules). This rule doesn’t mean that the individual can actually make super contributions as part of the bring-forward rules in those later years. A bring-forward can only be triggered, and utilised, by someone under the age of 65.

Background: Anyone aged 65 or over must satisfy a work test, before contributing. If you’re aged 65 or over (but under the age of 75), you can make super contributions if you’re at least gainfully employed on a part-time basis. In short, you must work for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which you plan to make a super contribution. For more information on contributing to super after the age of 65 see article: For over-65s: Ten super tips when making contributions.

When you’re aged 65 or over

The ‘bring forward’ rules are not available to Australians aged 65 or over. If you’re over the age of 65, and you contribute more than $150,000 in non-concessional contributions then expect to get hit with an excess contributions tax bill. What this means is that the most you can make in non-concessional (after-tax) contributions is $150,000 (for 2009/2010 year) in a single financial year, unless you’re willing to cop penalty tax of 46.5% on the excess contribution. I explain the implications of exceeding contributions caps and penalty tax in the article Super tax alert: Have you counted your super contributions lately?

Related posts:

1. Maxing out the after-tax contributions cap
2. Contributions caps relate to financial years, not calendar years
3. Wearing two contributions caps

Hundreds of thousands of Australians who are making a serious effort to save for retirement are expected to receive a financial shock after the financial year ends in June 2010. Due to the halving of the concessional (before-tax) contributions caps from July 2009, the Australian Tax Office is expected to send out tens of thousands of excess concessional contributions assessments to individuals who failed to adjust salary sacrifice arrangements in response to the halving of the concessional contributions caps.

The assessments will notify affected members that they are up for an extra 31.5% on contributions exceeding the $25,000 concessional cap (for under-50s), or the $50,000 cap (for 50-and-overs), taking the total tax take on the excess contributions to 46.5%.

For example, Beth is aged 47 and earns $90,000 a year plus super. In April 2009 she negotiated that if she enters a salary sacrifice arrangement to boost her super savings, her employer will still pay the 9% SG on the $90,000. She then diverted $40,000 of her salary to her super account, in addition to her employer’s SG contribution of $8,100 making a total of $48,100 in concessional contributions keeping her within her concessional contribution cap of $50,000 – the cap in place for under-50s as at April 2009. From July 2009, the concessional contributions cap for under-50s halved to $25,000. Beth failed to adjust her salary sacrifice arrangement and can expect an excess contributions tax assessment of $7,276 on $23,100 of excess contributions.

Confusion reigns: what contributions count towards the concessional cap?

What many Australians don’t realise is that an employer’s compulsory Superannuation Guarantee (SG) contributions are counted towards an individual’s concessional contributions cap. Concessional contributions include your employer’s SG contributions, and any salary sacrificed contributions that you arrange for your employer to deduct from your before-tax salary.

Here’s an example: in April 2009, Ivan was earning $120,000 plus SG a year and wanted to make substantial contributions to his super fund. As he was over the age of 50 he knew he could make up to $100,000 in concessional contributions each year (the previous cap before the laws halved the limit in July 2009). He couldn’t afford to use the entire cap because he had living expenses so decided to salary sacrifice $50,000 of his $120,000 salary. When the new rules halved the concessional cap for over-50s to $50,000 from July 2009, he thought he was bang-on the limit, and didn’t have to adjust his strategy. He didn’t realise that his employer’s SG contributions of $10,800 also count towards his cap. He can expect an excess concessional contributions tax assessment of $3,402 on $10,800 of excess contributions.

The Minister is listening…

At a recent industry conference in Melbourne, the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, was apparently questioned by concerned, and reportedly angry, advisers about the inequity of such heavy penalties for what often turns out to be administrative errors rather than blatant law-breaking by superannuation fund members.

The tax penalties get much worse for those individuals who also make significant non-concessional (after-tax) contributions to their super funds, while breaching the concessional cap.

Now, you may have to read what I’m about to write a few times because the terminology is confusing. Any concessional contributions in excess of the cap of $25,000 (or $50,000 for over-50s) end up counting towards a person’s non-concessional (after-tax) contributions cap under the super rules. What this means is that if an individual exceeds the concessional (before-tax) cap, and the individual has already made non-concessional contributions up to their cap, then those excess concessional contributions can then force an individual to exceed the non-concessional contributions cap. Hmmm, I know that the rules are confusing but bear with me. The excess concessional contributions are added to the level of non-concessional contributions, when assessing against the non-concessional cap. In effect, the excess concessional contributions are first hit with 46.5% (15% + 31.5%), and then hit again with another 46.5% penalty tax when they are treated as excess non-concessional contributions – a massive 93% tax on a single contribution!

In such extreme circumstances, a super contribution that was intended to help someone save for retirement has virtually disappeared in a quagmire of bureaucracy and hastily drafted policy. Thankfully, Minister Bowen has reportedly agreed to examine these ludicrous penalties. He also agreed to talk to the Commissioner of Taxation, and the Treasury department. If there is a change of heart on this matter, I will send a special email to SuperGuide subscribers.

A matter of discretion

If you happen to receive one of these excess contributions tax assessments, then all hope is not yet lost. You may be able to apply to have your excess contributions allocated to a different financial year, or disregarded for the purposes of excess contributions tax.

For the ATO to show mercy, you must apply within 60 days of receiving the assessment and you must prove special circumstances. According to the special page on the ATO website (Excess contributions tax – Applying to have your contributions disregarded or reallocated), ‘special circumstances’ are:

… legally defined as unusual, exceptional, abnormal or uncommon circumstances where applying the law would result in an unjust, unfair or otherwise inappropriate outcome. You generally will need to provide evidence of your claims. Some of the factors that may be considered are that you had no control over the amount or timing of the contribution and that it was not reasonably foreseeable that you would exceed the cap when the contribution was made. Whether your circumstances will be considered special will depend on the individual facts of your case. However, the following factors in isolation are generally not considered to be special circumstances:

• financial hardship from having to pay the tax
• not knowing the law
• incorrect professional advice
• making a mistake

The ATO has released a practice statement explaining when they would consider special circumstances for the purposes of the treatment of excess contributions. You can check out the Practice Statement ‘PS LA 2008/1: The Commissioner’s discretion to disregard or reallocate concessional and non-concessional contributions for a financial year’ by clicking here.

Related posts:

1. Wearing two contributions caps
2. Concessional contributions: SG and public servants
3. Making super contributions: cracking concessional cap means more tax

Before I respond to the question, for those readers who are not familiar with the term ‘preserved’  in relation to super benefits, the Government has rules in place to ensure that Australians don’t access super benefits before they retire or satisfy another condition of release, such as suffering permanent disability. You can read about ‘preservation’ and ‘preserved benefits’ and ‘conditions of release’ in the article 12 legal reasons to cash your super. 

Your question has two parts – the tax treatment when taking a lump sum, and the tax treatment when taking an income stream, which in the UK is often referred to as an annuity. In Australia, the term ‘annuity’ has a special meaning – it generally relates to lifetime income streams offered by life insurance companies.

Generally speaking you can expect the following tax treatment for Australian superannuation benefits received on or after the age of 60:

1. Treatment of lump sums

In nearly all cases, an individual retiring from the workforce on or after the age of 60 can withdraw super benefits as a lump sum and no tax will be payable on those super benefits. The two main exceptions to this statement are:

• If you’re a long-term member of certain public sector funds, then some or nearly all of your super benefits may be considered ‘untaxed benefits’, which means no earnings or contributions tax has been payable on these benefits yet. When the super benefit is withdrawn from the fund, a benefits tax is payable on the taxable component of the benefit, even when taken after the age of 60.
• If you’re a long-term member of certain employer-run super funds (usually major companies), you may be required to take an income stream (pension) from the fund rather than a lump sum. I believe this exception also applies to a minority of defined benefit public sector funds. Most Australians are members of super funds that permit lump sum payments.

Note: By taking super benefits out of the super system, the concessional tax rate of 15% on fund earnings no longer applies – any earnings on the lump sum invested in a non-superannuation environment, after a person withdraws the super benefit, will be subject to the person’s marginal tax rate. Marginal tax rates can range from zero to 45% (plus Medicare levy).

If an individual starts a superannuation income stream (pension), then any earnings on those super benefits funding the income stream are exempt from tax. This exemption from tax on earnings is in addition to tax-free super benefit payments for over-60s. I explain this further in the next section.

2. Treatment of income streams (pensions)

If you’re aged 60 or over and retired, you can take your super benefits as an income stream (or as a lump sum – refer earlier) and pay no tax on your benefit payments. The major exception in relation to tax-free pension payments from a superannuation income stream is where an individual is a long-term member of a certain type of public sector super fund.

The earnings on any investments financing a superannuation income stream are also tax-free, whether you retire before or after the age of 60.

Since the introduction of tax-free super benefits for over-60s in July 2007, retirement planning has definitely become easier but I suggest that anyone thinking about retirement, should check their personal circumstances with an accountant (and for our Aussie expats scattered around the world – an Australian accountant/adviser, as well as a local accountant/adviser).

Related posts:

1. Taking benefits before the age of 60
2. Super for beginners, Part 9: If I retire and take my super, can I return to work?
3. Family tax benefits: do my tax-free super benefits count as income?

Thanks for your positive words about our website. Couples are only permitted to split super benefits if they separate or divorce, but they can split certain types of super contributions. A spouse can also claim a small tax rebate when making super contributions on behalf of a low-income spouse.

Before I answer your question in more detail, I will briefly outline the contributions caps that you refer to in your question.

Contributions caps

Australians wanting to make additional super contributions to their super accounts can make two types of super contributions – concessional and non-concessional.

You can make concessional (before-tax) contributions up to $25,000 (for the 2009/2010 year), while anyone aged 50 or over can make up to $50,000 in concessional contributions each year until the end of the 2011/2012 year. Concessional contributions include compulsory employer (Superannuation Guarantee contributions), contributions made under a salary sacrifice arrangement or tax-deductible super contributions.

Individuals can also make non-concessional (after-tax) contributions up to $150,000 a year (for 2009/2010), while individuals under the age of 65 can ‘bring forward’ two years’ worth of non-concessional contributions. What this means is that an individual under the age of 65 could make after-tax contributions of up to $450,000 in one year, representing his or her limit for the next three years.

I explain the contribution rules in more detail in the following articles:

• Super concessional contributions: 2009/2010 survival guide 2009/2010
• Your 2009/2010 guide to non-concessional (after-tax) contributions

Splitting contributions

An individual cannot split non-concessional contributions with his or her spouse, but an individual can split concessional (before-tax) contributions with a spouse provided that the super fund the individual belongs to permits contribution splitting. The practical effect of such a split is that 85% of the contribution reaches the spouse account because super funds deduct the 15% contributions tax before splitting.

Splitting super contributions can be popular in the instance where a higher-income earning spouse salary sacrifices contributions (or makes tax-deductible contributions), and then splits the contributions with the lower-income earning spouse. The higher-income spouse gets the tax break and the other spouse gets a larger super benefit.

Typically there are two main advantages with the contribution splitting strategy:

1. If you’re planning to retire under the age of 60 and take all or part of the super benefit as a lump sum, then each member of a couple can access their own tax-free threshold for lump sums (relating to the taxable component) of $150,000 (for the 2009/2010 year).
2. If your partner is a few years older than you, then by splitting super contributions with an older spouse, they can access super benefits at an earlier stage. The older partner also reaches 60 first, which means tax-free super benefits.

An individual can make concessional (before-tax) contributions to a super fund, including a self-managed super fund, and arrange to split those contributions with a spouse. If an individual plans to split super contributions with a spouse, then the receiving spouse must be under the age of 65. The individual must complete a special form stating they intend to split super contributions.

Note: You can only split contributions made in the previous year. For example, contributions made during the 2008/2009 year can only be split during the 2009/2010 year, and contributions made during the 2009/2010 year can only be split during the 2010/2011 year.

Warning: If you plan to claim a tax deduction for super contributions, then that notice to claim a deduction must be lodged before the super splitting declaration.

Spouse contributions

Generally, spouse contributions are available where one of the spouses has part-time paid work or no paid work. If an individual has assessable income of less than $13,800, then his or her spouse can make contributions on behalf of the low-income spouse and claim a tax offset. If an individual receives $10,800 or less in assessable income, then his or her spouse can access the maximum tax offset of $540, provided an after-tax (non-concessional) contribution of at least $3000 is made to the low-income spouse’s super account. The tax offset is progressively reduced until the tax offset reaches zero for spouses who earn $13,800 or more in assessable income in a year.

If you’re considering taking advantage of the super splitting strategy I suggest you get some tax advice, and potentially retirement planning advice, to ensure you fully understand the financial implications of such a strategy.

Considering TRIPs

Note: An individual who has reached preservation age (currently 55) can start a superannuation pension before retiring. This special type of pension is known as a transition-to-retirement-pension (TRIP), and allows older Australians to plan, and manage, retirement in a more flexible way. Many individuals use TRIPs to maximise the tax benefits associated with super, while boosting super accounts. I explain TRIPs in more detail in the article ‘Starting a TRIP takes planning’ http://www.superguide.com.au/retirement-planning/starting-a-trip-takes-planning

Related posts:

1. Boosting your spouse’s super account
2. Super for beginners, part 8: What happens to my super benefits when I retire?
3. Super for beginners, part 3: Why aren’t my super contributions tax-free?

For the benefit of other SuperGuide readers, I’ll first explain the background to your question. I assume that you’re referring to the annual minimum pension payment associated with an account-based pension.

How account-based pensions work

The main feature of an account-based pension is that you can take out as much money as you like, as often as you like, subject to withdrawing a minimum amount each year. The annual minimum payment is calculated on 1 July each year using a percentage linked to your age and your pension’s account balance. The formula is:

Minimum payment = account balance x percentage factor.

For example, if you’re aged 64, your percentage factor is 4%, although the percentage factor has been halved to 2% for the 2009/2010 year. For example, on a $300,000 account balance, the minimum pension amount would normally be $12,000 (4%) for a 64-year-old, although for the 2009/2010 year, the percentage factors have been halved, which means the minimum amount would be $6,000 (2%), for the 2009/2010 year. If you’re aged 65, the percentage factor is 5% (but halved to 2.5% for the 2009/2010 year).

I explain the Government’s reasons for this temporary halving of minimum payments, and the relevant percentage for the different age groups, in the article Pension relief drawdown extended for 2009/2010 year.

Benefits of pension phase

A super account in pension phase doesn’t pay tax on investment earnings, including capital gains. The deal with a superannuation pension account enjoying tax exempt earnings (in addition to the member enjoying tax-free super benefit payments) is: a super fund must follow the minimum payment rules. If a pension account doesn’t pay the minimum pension amount, then the tax exempt earnings are at risk.

Superannuation benefits are tax-free regardless of whether a fund member takes a lump sum or pension (with the exception of ‘untaxed benefits sourced from certain public sector funds). If a super fund fails to meet the pension requirements, then the super account involved may not be considered to be in pension phase.

Failing to pay the minimum pension amount

You ask, if a super fund must report the breach of the super rules (failure to pay the minimum pension amount) to the ATO. The ATO uses the term ‘contravention’ to describe a breach of the super rules.

During a fund audit, if the auditor is of the view that a super fund breaches the superannuation laws, he or she must notify the trustees of the super fund upon discovery of the breach. In some cases, the process also involves the super fund’s auditor reporting the breach to the ATO, subject to satisfying some preliminary steps.

Not all super breaches have to be reported to the ATO, but an approved auditor of a self-managed super fund must follow strict guidelines to determine whether a contravention of the super rules should be reported to the ATO. You can read about the reporting criteria on the ATO website here.

Generally speaking, if a contravention involves a financially insignificant amount, and it is a first ‘offence’ then a fund auditor is not required to report the breach to the ATO, except when the auditor is concerned about the fund’s financial position, or when the auditor believes that a contravention of the super laws may otherwise affect the interests of the fund member.

Note: If a super fund is in its first year of operation, the fund’s auditor must report any breach to the ATO, regardless of the whether the breach is minor from a compliance point of view

Generally speaking, it appears failing to meet the minimum pension requirements does not automatically fall under the standard reporting tests for super breaches but it is likely that such a contravention affects the interests of a fund member. A fund auditor may then use their professional judgement and report the breach to the ATO.

Reporting the breach to the ATO doesn’t necessarily mean that a super fund will be penalised for breaking the rules, particularly if the SMSF takes immediate action to rectify the situation.

Without knowing the particular circumstances of your fund, and since SuperGuide is an information site, rather than a site providing financial advice, I suggest you contact your adviser/accountant, and your fund’s auditor about what reporting steps are required in the particular circumstances affecting your super fund. You can also contact the ATO to find out how the ATO deals with such a contravention.

Related posts:

1. SMSF pensions: How do I start one?
2. SMSF pensions: You stick with the original components
3. SMSF providers: What should I look for when setting up my DIY super fund?

We’re chuffed that you are finding SuperGuide so useful, and many thanks for taking the time to let us know.

You ask a popular question relating to tax-free super for over-60s, and the timing of superannuation pension payments in the financial year when an individual turns 60. For the benefit of other readers, at the end of my response, I also explain the minimum pension payment rules that you refer to in your question.

Background

Aged 60 or over: When an individual accesses super benefits upon retirement, he or she can take a lump sum or a superannuation income stream (the official name for a superannuation pension). If an individual is aged 60 or over when receiving a super benefit, regardless of whether it is a lump or pension, those benefits will be tax-free. The one exception to this tax-free bonanza is where an individual is a long-term public servant and they receive ‘untaxed’ super benefits – some tax applies to ‘untaxed’ benefits’ received on or after the age of 60.

Under the age of 60: If an individual is under the age of 60, then tax is usually payable on super benefits. If your super benefit includes a ‘tax-free component’ then no tax is payable on this component of a benefit even when an individual is under the age of 60. I explain the tax rules for super benefits received before the age of 60 in the article Taking benefits before the age of 60.

Waiting until you turn 60 before taking pension payments

In your question, you’re asking what happens in the year that someone turns 60, if they’re already started a superannuation pension. Do they have to take payments evenly throughout the year, so some pension payments are made before the age of 60, and taxable? Or, can they wait until the turn 60 before making the minimum pension payments, so all super benefits for that financial year are free.

According to the pension payment rules, provided the minimum pension payments are made during the financial year, it doesn’t matter whether the minimum is met in a single or multiple payments, or paid at the beginning, the middle of the end of the year. In short, in the year an individual turns 60, they can delay taking pension payments until they turn 60 in order to take advantage of the tax-free super rules.

If an individual chooses to take some pension payments before the age of 60, then those benefit payments are likely to be taxable. Note that the tax-free component of a super benefit is tax-free before or after the age of 60.

Aged-based minimum pension payments

For the benefit of other readers I will now explain the context of your question. The compulsory 4% drawdown that you’re referring to is the minimum annual payment factor for an account-based pension for an individual aged under the age of 65 (that is, for individuals aged from 55 to 64). For example, Glenda, aged 60 has $500,000 in her account-based pension account as at 1 July 2010. Under the usual rules, her minimum pension payment/s for the financial year must be 4% of her account, or $25,000.

Note: For the 2008/2009 and 2009/2010 financial years, this minimum payment factor was halved due to the effects of the global financial crisis (GFC). I explain the minimum payments rules applicable for the 2009/2010 year in the article Pension drawdown relief extended for 2009/2010 year.

Although the Government has not yet made any announcements, it may be possible that the Government will halve the minimum payment factors for the 2010/2011 year as well. If this occurs, SuperGuide will notify all subscribers of our newsletter by a special email. In the meantime, assume the minimum payment factor for a 60-year-old for the 2010/2011 year is the usual 4%. You can find out the minimum payment factors for other ages in the article Pension drawdown relief extended for 2009/2010 year.

Related posts:

1. Turning 60 means tax-free super
2. Concessional contributions: Turning 50 is all about timing
3. Temporary pension relief is… temporary