Strategies for clients 5 years from retirement Yvonne Chu Senior Technical Manager - FirstTech September 2015

This presentation is given by a representative of Colonial First State Investments Limited AFS Licence , ABN (Colonial First State). Colonial First State Investments Limited ABN , AFS Licence (Colonial First State) is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN and interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN and interests in the Colonial First State Pooled Superannuation Trust ABN The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on All products are issued by Colonial First State Investments Limited. Product Disclosure Statements (PDSs) describing the products are available from Colonial First State. The relevant PDS should be considered before making a decision about any product. Stocks referred to in this presentation are not a recommendation of any securities. The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation. This presentation is for adviser training purposes only and must not be made available to any client. This presentation cannot be used or copied in whole or part without our express written consent. © Colonial First State Investments Limited Disclaimer

What we’ll cover... Implications of 1 January 2017 Centrelink assets test changes Pre-emptive Centrelink action Planning ahead to increase retirement funding / income Small business owners – planning for retirement

Implications of Centrelink assets test changes

Social security changes Lower thresholdCut-off limit Current (1/07/2015) Legislated - 1/01/2017 Current Estimated (1/01/2017) Single H.O $205,500$250,000 $779,000$547,000 Single N.H.O $354,500$450,000 $922,000$747,000 Couple H.O $291,500$375,000 $1,151,500$823,000 Couple N.H.O $440,500$575,000 $1,298,000$1,023,000 Legislation passed to give effect to the following changes from 1 January 2017 Taper rate increased from $1.50 to $3.00 pf per $1,000 of assets Assets free thresholds increased

Assets test changes – single homeowner Financial assets only ie. ABPs

Assets test changes – Couple homeowner Financial assets only ie. ABPs

Strategy considerations Adviser use only Reducing assessable assets will become much more valuable Currently, reducing by $1 can save 3.9% Proposed, reducing by $1 can save 7.8% Limited scope to reduce assessable assets Younger spouse’s super Principal home improvements Gifting within limits Annuity (depleted purchase price instead of balance) Pre-paid burial plot & funeral bond

Retirement savings – couple homeowner Assumptions: all figures shown in today’s dollar; based on a single pensioner on the age pension; at the end of 25 years all capital will be exhausted; capital exhausts at end of 25 years; income indexed at 3% pa, net growth of 7% pa on financial investments; Age Pension indexed at MWATA of 3.5% pa; rates and thresholds indexed at CPI of 3%; home and contents of $10,000; everything else in ABPs subject to deeming; deeming thresholds indexed at 3% pa. current deeming rate of 1.75% and 3.25%. Retirement savings required to provide for 25 years for a couple homeowner at different level of income Income required pa (includes Age Pension) Current rulesPost 1 Jan 2017 rules $55,000 $513,022$470,293 $60,000 $602,268$590,691 $65,000 $692,106$726,299 $70,000 $782,369$867,925

Assumptions: all figures shown in today’s dollar; based on retiree couples both on the age pension; at the end of 25 years capital will be exhausted; capital exhausts at end of 25 years; income indexed at 3% pa, net growth of 7% pa on financial investments; Age Pension indexed at MWATA of 3.5% pa; rates and thresholds indexed at CPI of 3%; home and contents of $10,000; everything else in ABPs subject to deeming. deeming thresholds indexed at 3% pa. current deeming rate of 1.75% and 3.25%. Retirement savings – single homeowner Retirement savings required to provide for 25 years for a couple homeowner at different level of income Income required pa (includes Age Pension) Value of ABP - Current rules Value of ABP - Post 1 Jan 2017 rules $40,000$270,193$406,480 $45,000$371,245$545,024 $50,000$480,506$665,844 $55,000$593,634$766,505

Centrelink pre-emptive actions

Gifting Gifts over $10,000 per financial year (also capped at $30,000 per 5 financial year rolling period) will be: Assets tested for 5 years Deemed under the income test for 5 years Many clients may want to gift some wealth to children / grandchildren in later life Strategy Understand and inform whether intended gift is affordable, then: Gift within allowable limits, or Gift more than 5 years from reaching age pension age

Outstanding loans Clients approaching retirement may have: Home mortgage Investment property loan Margin loan Unsecured debt (credit card) Centrelink treatment of loans varies: Does the loan reduce assessable assets? Do the interest repayments reduce assessable income? Critical consideration – what is the loan secured against?

Outstanding loans Strategy Unsecured debt should be repaid first Consider repaying mortgage before loan secured against investment property ScenarioAssets testIncome test Loan secured against principal home Does not reduce assessable assetsInterest payments do not reduce assessable income Loan secured against investment property Loan reduces investment property value Interest payments reduce net rental income of property Margin loan (secured against financial assets) Loan reduces value of financial assets Interest payments do not reduce assessable income Unsecured loan (e.g, credit card debt) Generally does not reduce assessable assets Generally does not reduce assessable income

Example Col and Cassandra have: Home worth $500,000 ($200,000 debt 1 ) Investment property 2 worth $400,000 ($200,000 debt 1 ) $150,000 each in super $20,000 home contents Retiring at age pension age in 5 years Have enough cash flow to repay one loan only 1 Interest rate of 5% on loans 2 Investment property rental income 3.5% pa At age pension age Pay off investment loan Pay off mortgage Assessable assets IP: $440,373 ABP: $414,533 TOTAL: $874,906 IP: $440,373 IL: -$200,000 ABP: $414,533 TOTAL: $674,906 Assets test result $0 pa combined$10,324 pa combined Assessable income Rent: $15,413 ABP: $12,263 TOTAL: $27,676 Rent: $15,413 IL: -$10,000 ABP: $12,263 TOTAL: $17,676 Income test result $23,623 pa combined $28,571 pa combined

Other Centrelink considerations Preparing to take advantage of Work Bonus Targeting at least some age pension Pensioner concession card Energy supplement Pension supplement Maximise younger spouse’s super Spouse contribution splitting Cash-out re-contribute super from one spouse to another

Example Pete (age 60): Salary of $80,000 p.a. Super: $500,000 Salary sacrificing up to CC cap Maggie (age 52): Homemaker Super: $20,000 Together they have: Home worth $700,000 $20,000 home contents Holiday house: $400,000 Pete retiring at age pension age in 5 years, at such time Pete will cash-out $540k of super and contribute into Maggie’s super At age pension age - Pete No spouse contribution splitting Spouse contribution splitting Assessable assets Pete ABP: $184,640 Maggie’s super: $563,033 Other asset: $420,000 TOTAL: $604,640 Pete ABP: $35,823 Maggie’s super: $711,851 Other asset: $420,000 TOTAL: $455,823 Assets test result $7,902 pa (Pete’s entitlement) $13,706 pa (Pete’s entitlement) Assessable income Deeming: $4,792Deeming: $627 Income test result $16,858$16,858 pa

Retirement funding / income

Revisiting insurance arrangements Clients who do not revisit life and TPD as they age may become over- insured as they get closer to retirement: Lower or no debt Proceeds don’t need to fund an income stream for as long Greater wealth overall Strategy Revisit insurance and reduce cover if not needed. Use income from reduced premiums to: Make concessional contributions to super (eg, increase salary sacrifice) Pay off debt Make after tax contributions to super

Best use of a lump sum Clients saving for retirement may receive a lump sum Inheritance Termination payment when changing jobs Sale proceeds when selling a property Natural action of “getting into super ASAP” may not be best Strategy Depending on client’s income tax position... Keep lump sum invested outside super, and Increase salary sacrifice to make full use of concessional cap, and Use non-super funds to meet income deficit

Example Kim (age 50) Wants to retire at age 60 Salary $90,000 No spare income available $100,000 in super Receives $250,000 inheritance Should Kim: Make $250,000 non- concessional contribution? Keep outside super to maximise concessional cap Assumptions: balanced return of 7% pa both inside and outside of super (3% income), tax rates, figures in today’s dollar, SG as per legislation. $49,624 more

Example What about if only half of $250,000 inheritance retained outside super to allow for salary sacrifice? Extra $10,752 retirement balance added Assumptions: balanced return of 7% pa both inside and outside of super (3% income), tax rates, figures in today’s dollar, SG as per legislation. $60,376 more

Planning around age 65 Plan use of bring forward rule if looking to maximise non-concessional contributions and retiring at age 65 Where asset sale will fund contribution Contribution better in “age 65 year” (may not be eligible in next year) Asset sale better in following year (less CGT) Depending on CGT difference, could consider short-term borrowing to fund contribution Trigger the bring forward provision to “buy” more time

Small business owners – planning for retirement

Importance of business succession plan Financial and tax plan to ensure: Orderly transition of ownership when one owner exits the business (eg, through buy / sell agreement) Exiting owners receive the full value of their share of the business Voluntary (eg retirement) and involuntary (eg, death) events are covered Appropriate insurance arrangements are in place where an owner dies or is permanently incapacitated Certainty around business value / ownership critical as owners get closer to retirement

Planning when retiring from business Understand the CGT concessions that may apply on the eventual sale of the business Meeting the basic conditions (depends on business structure) 15 year exemption Active asset reduction Small business retirement exemption Maximise super contributions from small business asset sales Lifetime CGT cap Non-concessional / concessional cap

Lifetime CGT cap ($1.395 million) Allows small business owners to direct eligible proceeds of their business to super without counting against NCC or CC Lifetime CGT Cap Proceeds from asset eligible for 15 year exemption Proceeds from asset that would have been eligible, but pre-CGT, no CGT or sold within 15 years due to permanent incapacity Capital gain exempt under the small business retirement exemption

Maximising concessions - example Glenda (age 55) is looking to sell her business and retire* in the near future. Business consists of: $2,000,000 commercial property (bought in 2001 for $1,000,000) $1,800,000 other business CGT assets (cost base $100,000, business started in 2001) Glenda meets the basic conditions to qualify for small business CGT relief How can Glenda: Maximise her relief from CGT? Maximise her contribution to super * Glenda would be willing to work as an employee for any new business owner for a couple of years

Option 1: Sell everything now Property and other assets sold for $3,800,000 Gross capital gain of $2,700,000 Not eligible for 15 year exemption General 50% discount reduces gain to $1,350,000 Active asset reduction (50%) further reduces gain to $625,000 Retirement exemption ($500,000) reduces assessable gain to $125,000

Option 2: Hold property for 15 years Other business assets sold now for $1,800,000 Gross capital gain of $1,700,000 Not eligible for 15 year exemption General 50% discount reduces gain to $850,000 Active asset reduction further reduces gain to $425,000 Retirement exemption reduces assessable gain to Nil Continues to work for in the business for the new buyer at reduced capacity Property 1 sold in 3 years for $2,000,000 (gain $1,000,000) 15 year exemption applies, disregard entire gain

Comparison CGTOption 1: Sell all assets now Option 2: Sell as 15 year exemption becomes available Assessable capital gain$125,000 (reduced to $90,000 if personal concessional contribution made) Nil Super contributionsOption 1: Sell all assets now Option 2: Sell as 15 year exemption becomes available Lifetime CGT cap contribution$500,000$1,395,000 Concessional contributions (over 10 years) Up to $350,000 Non-concessional contributions (over 10 years) Up to $2,070,000 Proceeds remaining outside super $880,000$0

Lifetime CGT cap considerations Contribution timeframes Lifetime CGT cap form – no later than contribution Certainty of proceeds qualifying for small business concessions Electing not to claim the active asset reduction 50% general discount for individuals or indexed cost base

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