GPL Financial Group GPL Partners

Financial Planning

What falling interest rates mean for investors

The Reserve Bank of Australia's official cash rate is at a record low of 1 per cent, with further cuts predicted as the central bank strives to offset perceived economic weakness.

           

 

In the United States, the outlook is similar. The U.S. Federal Reserve, which in January was expected to raise rates, is now on a path to lower them.

What has changed so quickly, and what does it mean for investors?

Around the world, economic uncertainty has risen on concerns that a trade war might limit growth. In addition, job-market indicators signal weakness.

In Australia, unemployment is above targeted levels, and wage growth has hovered at a relatively sluggish 2.3 per cent, In the United States, where unemployment remains near the lowest level in 50 years, strong job numbers have not generated significant wage increases. That may explain why inflation, the traditional target of central banks, has lingered below expectations. Workers can't spend money they don't have. Those are the immediate conditions that shifted the conversation from rate hikes to cuts as “economic insurance.”

Over the longer-term, the 2008 financial crisis modified central bankers' approach to monetary policy. Years of low interest rates have pumped money into the global economy but have not fueled inflation. Inflation's vanishing act, combined with persistent economic lethargy, has tilted central bankers' bias toward quick action.

Over the short term, reduced interest rates tend to boost share returns because investors believe monetary stimulus will improve economic prospects. Lower interest rates also push investors to seek the higher relative return of shares.

Those are generally short-term effects, however, and investors should focus on the long run. While interest rates may potentially represent an opportunity to refinance your house, they should not cause you to veer from a carefully planned investment strategy.

Changing rates do reinforce some long-term investing principles that can be helpful to remember to maintain discipline:

  • Don't reach for return. Vanguard forecasts that share returns are likely to remain at about 4 per cent to 6 per cent, below historical averages, for the next decade. While this is a reasonable return, it may tempt some investors to increase risk in the hope of greater reward. Vanguard research suggests that strategies, such as investing in lower-quality bonds that pay higher rates of interest, rarely pay off. Instead, sticking with a low-cost, diversified portfolio that captures returns from global shares and bonds and matches your risk tolerance provides the best chance for investment success.
     
  • Control what you can. You can't control financial markets, so focus on what you can control. If you are concerned about lower returns, consider saving more or working longer. Keep investment costs low to avoid eroding returns.
     
  • Understand the role of bonds in your portfolio. Bond prices fluctuate with interest rates, but remember that income is only one reason to invest in bonds, and not the most important one. Bonds' bigger role is to protect against volatility in the share market. For example, in 2008, the Australian share market fell 38.9 per cent; Australian fixed interest, as measured by the UBS Australian Composite Bond Index, rose 14.9 per cent.

Interest rates will always move up and down. Don't let your investment strategy bounce around with them.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
30 July 2019
vanguardinvestments.com.au

 

ATO releases ‘welcome guidance’ on death benefit income streams

The ATO has provided guidance on what action SMSF trustees should take where they have failed to meet the minimum pension payment requirements for a death benefit income stream.

         

 

In an online update, the ATO has provided clarification on the interaction between compulsory cashing requirements when a member dies and the requirement to pay a minimum pension amount each year.

The ATO explained that where a member of an SMSF dies, their benefits must be cashed by the fund as soon as practicable as part of the compulsory cashing requirements.

In some cases, a dependant beneficiary may choose to receive a death benefit income stream or pension, or they may receive one automatically in the case of a reversionary pension, the ATO said.

“Pensions paid from super, including death benefit income streams, have a minimum pension payment requirement, and a number of questions have recently been raised by the SMSF sector around the interaction between compulsory cashing requirements when a member dies and the requirement to pay a minimum pension amount each year,” it said.

“Cashing a death benefit in the form of a pension only satisfies the compulsory cashing requirements as long as the interest continues to be cashed in that form. Therefore, if the pension ceases because the minimum amount hasn’t been paid, the trustees may have contravened the Superannuation Industry (Supervision) Regulations 1994 (SISR).”

However, where a contravention has occurred, if trustees act swiftly, there are steps that can be taken to ensure that death benefits are still considered to be “cashed as soon as practicable”, the ATO stated.

One of the ways this can be achieved is by immediately cashing the benefit in the form of a new retirement phase income stream as soon as they become aware of the breach, the ATO said.

It could also be achieved by cashing the benefit in the form of a lump sum, either as a single lump sum or as an interim and final lump sum, or rolling over the interest that supported the death benefit income stream pension to another complying super fund for immediate cashing as a new death benefit income stream.

The ATO clarified that these options will only prevent future contraventions of the SISR and won’t remedy the breach that’s already occurred for failing to meet the compulsory cashing requirements.

“As long as one of these actions is taken immediately, the commissioner will accept the trustee is meeting on a go-forward basis the requirement to cash the benefits ‘as soon as practicable’ and will not therefore have further contravened the SISR. Failure to resolve the matter may have significant compliance consequences,” it said.

Colonial First State executive manager of technical services Craig Day said that, before this latest guidance from the ATO, SMSFs were left in an uncertain position because where the surviving trustee had failed to pay the minimum in that year, they had technically failed to satisfy the requirement that the income stream had continued to be paid.

“One way you could read the legislation is that that would actually require the payment of the reversionary pension as a death benefit out of the system, which wouldn’t be an ideal outcome due to an inadvertent breach,” Mr Day said.

Mr Day said while the ATO has confirmed that if you fail to pay the minimum, then you have breached the compulsory cashing requirements under regulation 6.21, they have also made it clear that they are happy to allow the trustee to commence a new pension, and that would still be considered to be a death benefit pension in that surviving spouse’s name.

“That is very much welcome because it means if we’ve got a client that’s made an inadvertent breach, then that doesn’t automatically require the payment of the death benefit lump sum out of the system, which wouldn’t be a great outcome,” he explained.

The ATO has also confirmed in the guidance, he said, that where the underpayment is small, or the result of an error, the trustee may be able to self-assess whether they can apply the exception to treat the fund as having continuously paid the pension, despite the underpayment.

“If the exception can be applied, the fund has not breached the SISR,” the ATO stated.

Mr Day said SMSF trustees also need to be aware that from a transfer balance cap reporting perspective, if the underpayment of a pension does happen and the pension is ceased, then they do need to report the debit in relation to the pension ceasing, but they are only required to report the debit from the time they become aware that the fund failed the pension standards.

“So, in the context of failing to pay the minimum, you would be reporting the debit effective at the end of 30 June and the value of the debit would be the value of the pension at that time, so even though the pension stopped at the beginning of the year, the value of the debit is based on the circumstances as of the end of the year,” he said.

 

 

Miranda Brownlee
17 July 2019
smsfadviser.com

 

‘Retrospective’ LRBA measures tipped to cause headaches

With the government reintroducing its total super balance measure for SMSF loans, technical experts have warned that the retrospective nature of the change could pose issues for SMSF clients purchasing property this year.

           

 

Last week, the government introduced Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 into parliament. The bill includes a previously lapsed measure that will see the outstanding balance of an LRBA added to a member’s total super balance for certain SMSFs.  

SuperConcepts general manager of technical services and education Peter Burgess said the bill, which applies to all LRBAs entered into from 1 July 2018 onwards, was expected to pass imminently given other politically sensitive measures in the legislation had been dropped.

“The SG [super guarantee] amnesty measure has now been removed and the remaining measures are largely integrity measures, [so] this bill is no longer controversial from a political perspective, and therefore, we expect it will receive an easy ride through parliament,” Mr Burgess told SMSF Adviser.

Australian Executor Trustees senior technical services manager Julie Steed said the retrospective nature of the bill poses an issue for SMSF professionals looking at property strategies in the current financial year.

“The 1 July 2018 proposed start date for the LRBA measure may mean clients looking to undertake transactions in 2019–20 need to factor the varied total super balance calculation into their actions,” Ms Steed said.

However, Heffron SMSF Solutions head of SMSF technical and education services Lyn Formica added that not all trustees would be affected by the rule changes, so it was important to look at the specifics of the legislation before changing a client’s strategy.

“The first thing would be to identify whether the SMSF will be caught by the proposed changes — many SMSFs won’t be as the bill only captures new LRBAs… where the lender is a related party of the fund or the member has satisfied a condition of release with nil cashing restrictions,” Ms Formica said.

“Even if the member will have a proportion of the outstanding LRBA debt included in their TSB, that may not be disastrous if they weren’t planning on utilising any strategies for which TSB is relevant, e.g. making non-concessional contributions [or] utilising the catch-up concessional rules.”

For now, however, SMSFs preparing their annual return for the 2019 financial year still need to abide by previous reporting rules when it came to LRBAs, Ms Formica said.

“SMSFs should complete their 2019 annual return reporting the members’ proportion of the outstanding LRBA debt of all LRBAs, regardless of whether or not the LRBA will be captured by the new measures,” she said.

“We expect new instruction will be released if or when the bill receives royal assent, as otherwise the ATO will have no way of correctly calculating each member’s total super balance.”

 

 

Sarah Kendell
30 July 2019
smsfadviser.com

 

Downsizer Super Contribution

Australians who are 65 years old or older may make a downsizer contribution into their superannuation of up to $300,000 from the proceeds of seeling their home.

         
 
The downsizer contribution can still be made even if the contributor has a total superannuation balance (TSB) greater than $1.6 million.
 
A few points are:-
 
  • will not affect the TSB until 30 June at the end of the financial year
  • can only be made for the sale of one home
  • not tax deductible and will be taken into account in determining eligibility of the Age Pension
  • there is no requirement to purchase another home 
  • must have held an ownership interest in the home for 10 years 
  • limited to the lesser of $300,000, or the total capital proceeds received from the sale of the interest in the home
  • can be both owners (i.e. $300,000 each)
  • within 90 days of the change of ownership.
 
Early planning will ensure you don’t miss the boat.
 
 
 
 
 
AcctWeb

Keep track of how Australia is really ticking over.

The data below covers almost every aspect of life in our great country.

       

 

One great source of data about Australia. Become better acquainted with the country we love.

An up-to-date snapshot of Australia's vital statistics.  

Please click on the following link to see all this interesting information. The areas covered are:

  • Overview
  • Markets
  • GDP
  • Labour
  • Prices
  • Money
  • Trade
  • Government
  • Business
  • Consumer
  • Housing
  • Taxes
  • Climate

 

Access all this data here.

 

Insights from the 2019 Vanguard / Investment Trends SMSF survey

The annual Vanguard/Investment Trends SMSF Report collates responses from almost 5,000 SMSF trustees and close to 300 financial planners who advise SMSFs, providing a clear snapshot of the priorities and issues facing SMSF trustees today.

         

 

This year’s report reflects a period of uncertainty for SMSF trustees recently, particularly in the lead up to the federal election with the Australian Labor Party’s proposed policy to remove refundable franking credits from Australian shares.

The SMSF sector represented around $747 billion in retirement savings as at March 2019, growing at a slower pace than the preceding 12 months following the impacts of recent industry events, this compared with $1.8 trillion invested with APRA-regulated super funds.

The report delved into attitudes to other proposed changes to SMSF regulation including the increase to the maximum number of members from four to six, which more than half of advisers saw largely as a positive move, where trustees were unsure of the impact.

The proposed ban on borrowing for investment property was rejected by the financial advisers surveyed, with a majority saying it would have a negative impact on the industry. Nearly a third of trustees agreed with this sentiment.

The total number of SMSFs grew to 598,000 at the start of the year, up just two per cent from the same time last year. The average SMSF balance is $1.2 million, with report findings over recent years showing a trend of lower fund balances and younger trustee ages at the time of establishment.

Despite declining establishment rates, there is still significant appetite among Australians to set up an SMSF, with one in five super fund members planning on setting one up in the future, citing greater control and better returns as the main motivators.

SMSFs are defensive and aiming to diversify

In an uncertain investment climate, more SMSF trustees are taking a defensive stance in their asset allocation.

The report showed investors’ outlook for market returns was low at 1.4 per cent – this prediction sat well below the expectations of many economists, including Vanguards (who have a 10 year outlook for Australian equities of 4.5-6.5%).

Despite this, SMSF trustees remained most inclined to invest further in individual bluechip shares, with 54 per cent citing this as a likely investment choice over the next 12 months.

SMSFs’ allocation to cash increased slightly over the past year to 25 per cent, largely at the expense of unlisted managed funds which dropped by two per cent.

While many SMSFs have adopted a defensive mindset, their appetite for diversifying investment products has increased.

This is highlighted by SMSFs’ use of exchange traded funds (ETFs) with the number currently investing, or planning to invest in ETFs in the year ahead, surging from 140,000 to 194,000 in the last 12 months.

The findings also showed that SMSFs are seeking greater exposure to overseas assets, especially through ETFs, however 52 per cent of respondents cite lack of knowledge about overseas markets and currency risk as the top barriers to obtaining more exposure.

Looking forward, while building a sustainable income stream remains a key investment goal for many SMSFs, a growing proportion (15 per cent) say protecting their assets against market falls will be their key focus for the year ahead.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
16 July 2019
vanguardinvestments.com.au

 

The global economy at midyear: How our views have changed

A lot has happened since Vanguard published its global economic and market outlook for 2019 at the end of last year.

           

 

Decelerating global growth, increasing U.S.-China trade tensions, and disagreement in the United Kingdom on how best to exit the European Union frame an environment in which major central banks have signaled a readiness to loosen monetary policy to support growth.

“Despite these events, our forecasts have not meaningfully changed,” said Jonathan Lemco, Ph.D., principal and senior investment strategist in Vanguard Investment Strategy Group. “We expected a global deceleration to take place, and we expect economic growth to continue to slow for the rest of 2019.”

Even in this uncertain environment, fixed income markets have remained strong and equity markets have approached record highs, factors Mr. Lemco attributed to a shift toward accommodative policy stances by major central banks. For the first half of 2019, the FTSE All-World Index returned 16.25% in U.S. dollars, and the Bloomberg Barclays Global Aggregate Float-Adjusted Composite Index returned 6.22%.

At some point, Mr. Lemco said, markets may need to consider the underlying strength of economies in the context of further stimulus. “There's a limit to markets interpreting bad news as good news because it may result in interest rate cuts,” he said. Comments from the U.S. Federal Reserve after its July 30-31 policy-setting meeting may shed some light.

China's slowdown is in the spotlight

China has been at the forefront of global economic developments this year, a trend Vanguard expects to continue.

Vanguard expects China's economy to grow at a below-trend pace of around 6.2% in 2019, its lowest rate in nearly 30 years, with risks tilted toward the downside. Despite China's efforts to stabilise near-term growth, softening market sentiment and escalating trade tensions with the United States suggest that more aggressive stimulus measures might be needed to bolster private enterprise.

But with any stimulus, China would need to strike a balance between near-term growth and medium-term financial stability, said Vanguard economist Adam Schickling. “We expect China's economy to continue slowing in 2020, growing between 5.8% and 6%,” he said.

Fiscal stimulus measures have helped stabilise consumer spending, while the property and construction sectors have thus far been resilient. However, China's industrial sector faces challenges as automakers transition to new emissions standards and the risk of Producer Price Index (PPI) deflation re-emerges. (PPI deflation means producers are lowering prices, causing industrial profits to fall.) A truce in trade tensions would help boost near-term economic momentum, but, as we discussed in our 2019 outlook, structural issues affecting China's economy will be critical for the country's long-term growth trajectory.

Meanwhile, the Chinese yuan depreciated about 3% against the U.S. dollar in the second quarter, but easier monetary policy by central banks in Europe and the United States has removed further significant downward pressure. “We don't expect the yuan to fluctuate substantially in the near term, as currency valuations will remain a key component of U.S.-China negotiations,” Mr. Schickling said. Further, he said, previously enacted capital control measures “reduce the probability of a scenario in which a depreciating currency leads to higher capital outflows, which lead to further depreciation.”

Winners and losers of “deglobalisation”

Trade tensions caused in part by deglobalisation (the process of diminishing integration between countries and regions) are a big reason for Vanguard's below-consensus forecast for China's economy. “We were particularly bearish because Chinese companies had been frontloading their exports in 2018 in anticipation of escalating trade tensions,” Vanguard economist Jonathan Petersen said. “We believed the benefits of this strategy would dissipate in 2019.”

The current 25% U.S. tariffs on $250 billion of Chinese imports is likely to shave 35 points off China's GDP in 2019, Mr. Petersen said. A further 25% tariff imposition on all U.S. imports from China—though unlikely—could nearly double the impact, to 60 basis points off Chinese growth, he said. (A basis point equals one-hundredth of a percentage point.)

The U.S.-China trade dispute will likely end with only marginal changes

But any increase in tariffs will have negative repercussions.

The most likely outcome of the U.S.-China trade dispute is a modest tariff escalation (65% chance). But an escalation in tensions (25% chance) is possible, and this could have a more dramatic impact on global growth. The least likely scenario is a bilateral deal (10% chance) in which China agrees to buy more U.S. goods and the U.S. removes tariffs with a preliminary agreement on structural issues such as intellectual property rights.

Source: Vanguard estimates.

Naturally, winners and losers will emerge from increased trade tensions and a broader slowdown in China. The United States, Mexico, Africa, and Southeast Asia will generally be less affected than Europe and most emerging markets.

Vanguard expects annual growth in emerging markets overall to decelerate from its original forecast of 4.6% to 4.4% as slower growth globally, particularly in China, weighs on emerging-market industrial production.

Our view on growth in North America

The United States is likely to hold up better simply because it is less dependent on global trade than the rest of the world. Nonetheless, Vanguard in June cut its outlook for U.S. economic growth to slow to an annualised pace of 1.7% by year-end, with 2019 full-year growth around our 2% expectation.

Mexico has captured 50% of the market share of Chinese goods that have been affected by U.S. tariffs, such as LCD monitors and other electronics. A risk for both the United States and Mexico is the fate of the United States-Mexico-Canada Agreement, a trade pact that only Mexico has ratified so far. Vanguard expects all parties to ratify the deal before the end of 2020.

U.K. resilience wanes as all of Europe slows with global trade

Vanguard expects a reversal in fortunes for the United Kingdom after it showed surprising resilience earlier in the year. Investment remains subdued because of uncertainty over Brexit. “We had previously expected a Brexit deal in June and a post-Brexit bounce during the second half of 2019,” Mr. Petersen said. “But given the extension of an exit agreement to October 31, we have pushed our growth forecast for the second half from 0.4% to 0.3%.”

Mr. Petersen said the situation in China is a big reason why Vanguard downgraded its forecasted 2019 growth rate for Europe from 1.5% to 1.0%. “Our call at the beginning of the year had been slightly above trend compared with the International Monetary Fund consensus of 1.3%,” he said. “China is the EU's biggest source of imports and its second-biggest export market. Our views have shifted not only because of the key role China plays in the European economy, but also because of the elevated risk of Brexit and of fiscal tensions related to Italy.”

Developed Asian markets: Continued growth with downside risks

In Japan, domestic demand is likely to offset a global export slowdown, as severe labor shortages and higher demand associated with next year's Olympics drive infrastructure spending and other investments. For these reasons, Vanguard expects Japan's economy to grow 0.6% in 2019 and 0.5% in 2020.

In Australia, real GDP is likely to grow between 2% and 3% in 2019, in line with Vanguard's expectations at the start of the year, with risks to the downside if a potentially stronger-than-forecast slowdown in either the United States or China occurs.

What to expect with the U.S. Fed

Modest deterioration in economic fundamentals amid an escalation in trade tensions has led to a more dovish monetary policy outlook. Vanguard had anticipated one Fed rate hike at the start of the year but in April revised the assessment to no movement in target rates. “We have since changed our Fed call from no change in 2019 to two rate cuts,” Mr. Lemco said. “We have also shifted our European Central Bank and Bank of England view from one rate hike apiece over the next 12 months. We now expect the ECB to lower rates by 20 basis points and restart quantitative easing before the end of the year, and no policy change for the Bank of England with risk skewed toward further easing.”

Our outlook for investment returns

With slowing growth and easing monetary policy across much of the globe, risk-adjusted returns over the next several years are expected to be modest at best. “In the short term, expect bouts of higher volatility in the stock and bond markets,” Mr. Lemco said.

Over the next decade, Vanguard's projections for market returns have not changed, with global equity returns, from a U.S. investor's perspective, in the 5%–7% range. For fixed income, Vanguard forecasts returns over the next ten years of 2%–4%, with deterioration of credit markets a key downside risk. “Throughout the world, we are seeing increased borrowing and credit market downgrades,” Mr. Lemco said. “At some point, continued credit rating cuts could trigger a market downturn as investors dump debt from their portfolios.”

Economic growth is slowing worldwide, and investment returns are likely to be muted

Vanguard expects economic growth to continue to slow and investment returns to be muted.

*Projected annualised 10-year range.
Source: Vanguard estimates.

Investor implications

We counsel investors to focus on things they can control, including setting clear investment goals, ensuring that portfolios are well-diversified across asset classes and regions, choosing well-designed, low-cost investments, and taking a long-term view. This guidance is particularly important when global economies seem poised for change. Recent market gains present an opportunity for investors to ensure that their portfolio allocations reflect their goals.

“In the end, short-term developments are less important to investors' success than the big-picture trends that will shape markets in the years ahead,” Mr. Lemco said.

 

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest. 
  • Diversification does not ensure a profit or protect against a loss. 
  • Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

 

 

Vanguard Research
30 July 2019
vanguardinvestments.com.au

Interest rate for SMSF loans set to rise under safe harbour terms

Despite the recent cut to official interest rates, an update in the ATO’s superannuation rates and thresholds indicates that the minimum interest rate for SMSF loans under the safe harbour terms will increase for the 2019–20 financial year.

           

 

The ATO recently updated its superannuation rates and thresholds to include the interest rate amount for the 2019–20 financial year for SMSFs that want to ensure their limited recourse borrowing arrangements (LRBAs) are consistent with the safe harbour terms outlined in Practical Compliance Guideline 2016/5.

Back in 2014, the ATO confirmed that borrowings on non-commercial terms from a related party could cause non-arm’s length income (NALI). In order to avoid NALI, SMSFs had to restructure their LRBAs to ensure they were consistent with an arm’s length dealing.

To assist SMSFs in restructuring their loans on arm’s length terms, the ATO released PCG 2016/5, which set out the safe harbour provisions for what it would consider to be commercial terms.

However, the ATO also confirmed in 2016 that if the safe harbour terms were not applied, the loan would not be subject to NALI if the SMSF could demonstrate that the terms of their loan were consistent with the terms that a commercial provider would offer. 

In a recent update, the ATO stated that the LRBA interest rate for real property assets under the safe harbour terms will rise to 5.94 per cent, up from the 5.80 per cent rate that was set for the 2018–19 financial year.

The LRBA interest rate for listed shares or units will increase to 7.94 per cent for the 2019–20 financial year, up from the 7.80 per cent set for this year.

Following the decision of the Reserve Bank to cut interest rates this month, Reserve Bank governor Philip Lowe stated the board wouldn’t rule out making further cuts to interest rates this year.

“Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year,” Mr Lowe said.

“There are, of course, a range of other possible scenarios and much will depend on how the evidence evolves, especially on the labour market.”

 

Miranda Brownlee
20 June 2019
smsfadviser.com

 

Control considerations flagged with death benefit pensions for children

When starting retirement phase pension accounts, SMSF professionals and their clients should think carefully about how it might impact the amount of death benefit pension that their children will be able to receive, says a technical expert.

         

 

Australian executor trustees senior technical manager Julie Steed said that, when discussing pensions and estate planning with clients, it’s very important to think about what money will be leaving the super system.

“If we’re going to have excess amounts, do we really want to be holding insurance in super anymore? We may want it outside of super where we can direct it straight through to our estate plans through testamentary discretionary trusts that we can control,” Ms Steed explained at the Chartered Accountants Australia and New Zealand SMSF Day 2019 Workshop.

“Most parents, when faced with the choice between tax efficiency and control for their adolescent children, will nearly always choose control over tax efficiency.”

Ms Steed said that if the deceased has a transfer balance account at any time prior to their death, then the child death benefit amount will be the child’s share of the retirement phase pension accounts.

“So, if I started a retirement phase pension on 1 July 2017 with $1.6 million, and it’s grown to $2 million by the time I die, and I’ve got a single child, my child can receive $2 million as a death benefit pension, even though that’s $400,000 above the general transfer balance cap,” she explained.

Importantly, the process and formula with the child cap increment, she said, also applies to accumulation accounts.

“This means that my children can have zero amounts out of my accumulation accounts. So, if I’ve got $2 million in pension phase, and $3 million in accumulation phase, and I’ve got two children and they’re getting 50 per cent each, they can each have $1 million of my retirement phase pension, but the $1.5 million for each child in my accumulation accounts will have to come out of super,” she said.

“This is really important when thinking about starting retirement phase pension accounts.”

Ms Steed said that if the deceased had no transfer balance account, then the child cap increment is pro-rated to their proportion of the deceased’s total benefit, and insurance proceeds can be included in the deceased’s total benefit.

“I worked with an adviser last year who had a client that was in her 40s and had a really aggressive form of Parkinson’s disease. It was terminal, but her life expectancy was still 10 years. So, she didn’t qualify under terminal illness payments, but she qualified under total and permanent disability (TPD),” Ms Steed said.

“She had $120,000 in accumulated benefits and $1 million worth of insurance. She heard about the benefits of tax-free investment returns in pension phase and she wanted to maximise her benefit, so she was going to start a TPD pension with her $120,000. Now, fortunately she went and got financial advice, because if she hadn’t, she would have started that pension for $120,000.”

Unfortunately, the client did die much sooner than anticipated, only a couple of weeks after the insurance amount was actually received in the super fund for TPD.

“Now if she had started a retirement phase pension with her $120,000, each of her two children would have only been able to start a death benefit pension for $60,000 each. They would have each had $500,000 rattling around outside of super,” she said.

“Her adviser stopped her from starting the retirement phase pension and so she just left the TPD benefit in accumulation phase and it was unrestricted non-preserved, so she could access some of that money she needed for living. But when the $1 million of insurance came in, her kids were actually able to start a death benefit pension for $550,000 each.”

Ms Steed said the big issue wasn’t so much the tax consequences of that money leaving super, but rather the control issues of that money leaving the super fund.

 

 

Miranda Brownlee
25 June 2019
smsfadviser.com

 

Page 1 of 2712345...1020...Last »