1. Retirement in 2007: Time for a rethink! Tim Wedd Managing Director, Financial Essentials 24 November 2006

2. A focus on ‘total wealth’ Agenda  Issue 1: Lifestyle Transition (how & why)  Issue 2: Retirement (before or after age 60)  Issue 3: Lump sum v Income (a new challenge)

3. Federal Budget 2006 Fundamental shift Lower effective MTRs Plus super reforms  How will you optimise the benefits?  What’s the impact on retirement? Taxpayer TypeTax-free $ Individual taxpayer (< pension age) $10,000 Age Pensioner (single) $24,867 Age Pensioner (couple) $20,680 each Super pension (< age 60) $32,900 each Super pension (age 60+) $ unlimited

4. Realigning perceptions Previously…From 1 July 2007…  Surcharge impostJ Max 15% contribution tax  Tax-advantaged savings ?J 0% exit tax (over 60)  RBL & LST problemsJ Fund tax (< 15% or 0%)  Lack of super accessJ Super contribution splitting  Constantly changing rulesJ Greater access from age 55  ComplexityJ Individual ‘choice’ required

5. The Core Tax Package A fundamental baseline… + $uper …what else?

6. Alternative options Gearing stock take  Relies on tax savings to offset project costs both assessable income & capital growth required  Generally long-term proposition  Often property centric  Test assumptions & perceptions

7. Savings analysis  Target similar annual net cash flow cost each year  Salary sacrifice $ increases with higher MTR  Assume 7% pa net super fund returns* Savings Plans (gross incomes) Gross Salary Cost (inc. ML) Net Super Cont (pa) After-tax Equiv. cost < $75,000 (30%)$14,599$12,409$10,000 < $150,000 (40%)$17,094$14,530$10,000 > $150,000 (45%)$18,692$15,888$10,000 * cash distribution = 3.3% pa. (50% franked) plus 4% pa. growth

8. Testing the theory Illustrates the gap between super and non-super savings at higher MTR for a total cost of $100,000. Considers : All CGT, super taxes; no indexation of savings; geared loan of $325,000 at 8.6% pa. $208K

9. Key observations No longer just an annual ‘tax savings’ story  0% lump sum tax changes the relativities  Self-employed & employed finally equal Tax-advantaged strategies need tax benefits  Dramatic shift in incomes to reach 45% MTR Franking credits & CGT discounts  Protect 30% MTR clients (income < $75,000)  Narrow the savings gap (under age 60) Maximise Gov’t Co-contribution (income < $58,000)

10. Lifestyle Transition Why the fuss?  Helps extract the value at the end  Over age 55 (currently)  Tax favoured income (< age 60)  Pension premium (0% tax in fund)  Tax-exempt income (from age 60)  No RBLs & no reporting

11. Lifestyle transition Points to remember…  No work tests  Available for new flexible pensions  Non-commutable until ‘unpreserved benefits’ can cash and roll back to super at any stage  Complying pensions & annuities Relevant for purchases prior to 20/9/07 Remain non-commutable (post purchase!) Can cash and roll back during 1 st 6 months

12. Lifestyle transition If purchasing under 60  Assessable income in pensioner’s hands  New! Annual deductible amount based on the calculated exempt component ETP components still matter Draw down components in proportion  15% tax offset on taxable part of annual pension payments

13. Boosting savings levels TTR in practice…  John currently aged 55, earns $125,000 pa.  Proposes to ‘salary sacrifice’ $50,000 p.a.  Current super balance = $450,000  Assume gross fund earnings of 8% pa. (i.e. 7% pa. net of 12.5% average fund tax) What actually happens over the next 10 years?

14. TTR illustration John @ $125,000 pa.Salary as cashSal Sacrifice + Pension Gross Salary125,00075,000 Salary Sacrifice (40%)0(50,000) FAP Income (Gross)040,000 Taxable Salary/Income125,000115,000 Income Tax (excl. ML)(37,850)(27,850) Target Net Income (pa)$87,150

15. TTR illustration The bottom line… Change in Super BenefitsTotal $ New Salary Sacrifice +50,000 Less Contributions Tax-7,500 Less Pension Gross Payments-40,000 Plus earnings tax saving (at 12.5%)+4,500 = Net savings in super$7,000 pa.  Pension income can reduce to $30,000 pa from age 60 = Net savings in super $17,000 pa.

16. TTR results Now project forward 10 years... Strategy position (at age 65)Totals $ Remaining TTR pension balance450,249 Plus – new super contributions ($50,000 pa)609,234 Total accumulated super assets1,059,483 Less: existing accumulated $450,000 super(885,218) Additional (TTR) strategy benefits$174,265

17. Retiring: Before/After 60 Does it matter?  Consider short-term funding issues $1M contributions prior to 30/6/07 Ongoing access to $450k limits (3 yrs)  Pensions favoured under age 60  Debt management strategies  Using tax-deductible contributions  Contribution splitting (reverse order)  New! Small business CGT concessions

18. What about debt management? Potential Options Continue with existing mortgage/loans for current terms and capital/interest repayments Or Pay interest only now and ‘salary sacrifice’ balance (extra cash) as additional super contributions Target 10 year repayment plan in both cases (equal cash flow)

19. Case study: Mary currently age 50 Potential combinations considered:  Earning $175,000 with $200,000 loan balance  Earning $125,000 with $150,000 loan balance  Earning $75,000 with $100,000 loan balance Originally, 25 year P&I mortgages set at 7.5% pa. Assume:Interest only loan rate = 8.0% pa. Net super fund return = 7.0% pa. Debt Illustrations

20. Debt v Super Outcomes Remaining Loan $ Gross Salary Super Gain/Loss $200,000$175,000+ $78,400 $150,000$125,000+ $41,400 $100,000$75,000+ $9,400 Assumes all lump sum withdrawals occur tax-free after age 60.

21. Management Issues Using debt  Key is pre-tax dollars and 0% tax  Similar principles for extra debt repayments  Consider contribution caps Generally only $50,000 pa. available What else will contributions be used for?  Assess risks (interest rates, legislative)  Note super preservation issues

22. Lump Sum v Income Some of the challenges…  Cash out and/or re-contribution?  Model portfolios, guarantees?  Super v Pension tax rates  Super v Non-super income (MTR?)  How much to leave outside super?  Estate planning for non-tax dependants?

23. Age Pension can help Major adjustment  Removal of 50% Assets Test exemption from 20/9/07 for new complying incomes Keep existing product status (100% or 50%)  Plus 50% improvement in Assets Test  Single homeowner cut-out (circa $515,000)  Couple homeowner cut-out (circa $820,000)

24. Consider Mike (age 65) and Jan (age 63)  Mike has $480,000 in super  $70K personal contents, car and a caravan  Currently they seek income ~ $40,000 p.a. Option 1 is to simply use allocated pensions Option 2 is to consider impact of AT changes Short-term TAP revival

25. TAPs and the Assets Test Income Assessment Option 1 Now Option 1 20/9/07 Option 2 20/9/07 Allocated Pension – Male age 6540,00033,00016,800 TAP - Min income, 35 Year Term--11,250 Age Pension ($) – Eligible couple-10,60315,139 GROSS INCOME ($)40,00043,60343,189 * Assumes: current pension rates & thresholds index at 2% pa; 7% pa for all pension fund earnings. Figures reflect Assets Test impact in Year 2. Option 1 = 100% AP; Option 2 = 50% AP/50% TAP solution.

26. Capital issues What happens over time?  Improved total income returns to age 100  Improved longevity with age pension support Remaining Capital $Age 70Age 80Age 90 Option 1. 100% AP 474,023435,822259,332 Option 2. 50% AP/TAP 502,650529,058416,722

27. Now to simplification… What about it? New! transitional contribution rules New! annual contribution limits & penalties New! tax components (maximise exempt) New! death benefit issues & pensions Pre-30/6/07 & Pre-20/9/07 planning options  watch, assess & prepare to implement quickly!

28. Conclusion What will 2007 bring? An emphasis on ‘Total Wealth’ Need for annual reviews & plans Increase in debt products Focus on effective capital management Further investment options/models Removal of product boundaries Put simply, it will be all about lifestyle!