1. Centrelink & Account Based Pensions Kim Guest Senior Technical Manager FirstTech

2. Agenda Account based pension – income and asset test Reversionary v binding nomination Lump sum withdrawal vs increased pension payment First year is different…. Rules of thumb

3. Age Pension Current statistics 41% of age pensioners receive a part Age Pension 32% are reduced due to the income test 9% are reduced due to the assets test Income tested clients lose 50 cents of Age Pension for every dollar of account based pension payments over the deductible amount Asset tested clients lose $1.50pf for every $1,000 invested in an account based pension

4. Account based pension - Asset Test Asset Test = Account balance When is the account balance determined? If account based pension is paid once a year – 1 July If account based pension is paid more than once a year – twice a year at 1 July and 31 December

5. Reviews August ReviewFebruary Review Applies to most clientsOnly applies to pensioners who are asset tested or within $10,000 of asset test Account balance at 1 JulyAccount balance at 31 Dec Commutations Annual payment Many large superannuation funds send data electronically

6. Strategy Tip If the account value falls significantly clients can request a re-valuation of the account balance at any time.

7. Account based pension - Income test Assessable Income = Annual payment – Deductible Amount Annual payment = sum of all payments received and expected to be received for current financial year. Deductible amount = (Purchase price – commutations) / relevant number Relevant number is the life expectancy of the owner at commencement or longest life expectancy of both beneficiaries if reversionary

8. Reversionary pensions Reverts to the nominated beneficiary with no break in payment Only one beneficiary can be nominated Must be nominated at commencement and cannot be changed without commuting the pension Potential loss of anti-detriment payment Centrelink assessment DA calculated at commencement using longest life expectancy – may be reduced if partner is female and/or younger DA continues unchanged when reverts

9. Binding nominations Binds the trustee to pay to the spouse however may not bind the form of benefit If paid as an income stream, it is not a continuation of the original income stream – may be break in payment More than one beneficiary can be nominated Nomination can be changed without commuting the pension Centrelink assessment: DA based on primary clients life expectancy On death, new pension commences with a new DA

10. Taxation Draft TR 2011/D3 caused concern that once the person dies, the pension ceased. CGT implications Ruling stated that a reversionary pension or binding nomination specifying a pension is paid may cause a continuation of the pension MYEFO and subsequent exposure draft confirms tax exemption on assets supporting a pension will not cease as long as paid as soon as practicable

11. Case Study John age 65 commences an account based pension for $500,000 on 1/7/2007 If reversionary to wife Janice age 64, deductible uses longest life expectancy John’s life expectancy 17.70* Janice’s life expectancy 22.00* Deductible amount = $500,000 / 22.00 = $22,727 At age 74, John passes away. As reversionary pension, Janice continues to receive deductible amount of $22,727 * 2000-2002 life tables

12. Case Study If John had used a binding nomination, deductible amount based on John’s life expectancy Deductible amount = $500,000 / 17.7 = $28,428 When John dies, the deductible amount is recalculated Account balance on death $300,000 Janice’s life expectancy 15.03 Deductible amount = $300,000 / 15.03 = $19,960

13. Assessable income over time….

14. Pension payment vs Commutation Client requires more than minimum annual payment Notify super fund of withdrawal type before payment is made Notify super fund of withdrawal type before payment is made Increased pension payment Amount treated as income for the financial year. No change to DA. Timing important Amount withdrawn not treated as income for the financial year. Permanent reduction of DA Lump sum commutation

15. Case Study - Stan Stan commenced his account based pension 2 years ago Elects to receive $4,000 per month in pension payments Annual payment = $4,000 x 12 = $48,000 Assessable income = $48,000 - $25,350 = $22,650 Stan needs an additional $20,000 to buy a car

16. Case Study - Stan 1 July30 June Annual payment = $4,000 x 12 = $48,000 $48,000 - $25,350 = $22,650

17. Case Study - Stan 1 July 30 June Assessable increases from $22,650 to $42,650 from August Age Pension significantly reduced for remainder of financial year Extra $20,000 in August

18. Case Study - Stan 1 July 30 June Assessable increases from $22,650 to $42,650 for June only Extra $20,000 in June

19. Strategy Tip Increased pension payment in last 14 days of financial year and notify Centrelink at the same time as providing a new income stream schedule for the following financial year – increased pension is effectively ignored

20. First year is different…. To calculate the annual payment in the first year: (Sum of all payments received and to be received) x (Number of days in financial year Number of days from commencement until 30 June)

21. Case Study – Identical monthly payments Peter elects to receive $4,000 per month and commences a pension on 1 January Annualised payment is: ($4,000 x 6) x (365/181) = $48,397.79 If Peter had received $4,000 per month for a full financial year the result would be $48,000 so its close to the expected result

22. Case Study - Large pension payment George age 65, commences an account based pension with a purchase price of $470,000 George wants to draw a single annual payment of $48,000 If George commences pension on 1 April, annualised payment is: $48,000 x (365 / 91) = $192,527 If George commences pension in 1 August, the annualised payment is: $48,000 x (365 / 334 ) = $52,455

23. Alternatives Starting the pension earlier in the year Starting the pension with a smaller purchase price and retaining the required funds in a bank account Taking a higher pension payment in the next financial year Making a lump sum withdrawal

24. Lump sum withdrawal Not counted as income Permanently reduces deductible amount Deductible amount = (Purchase price – commutations) Relevant number May not reduce pension much initially but cumulative effect may be worse than choosing an increased pension

25. Case Study - Comparison Russell is 65, retired and eligible for the Age Pension Deemed financial investments $103,000 Commences an account based pension with $300,000 Requires an annual pension payment of $40,000 to meet retirement income needs Deductible amount = ($300,000/18.54) = $16,181

26. Options Option 1 Draw regular pension payment of $40,000 Centrelink treatment: Pension payment in excess of DA assessed as income, $23,819p.a. Age pension reduces by $11,909 in current year Option 2 Draw regular pension equal to DA $16,181 Lump sum withdrawal $23,819 Centrelink treatment: No assessable income Lump sum withdrawal permanently reduces DA from $16,181 to $14,896 Option 3 Draw regular pension equal to DA $16,181 Irregular pension payment $23,819 in mid June Centrelink treatment: No assessable income Irregular pension payment taken in the last 14 days of the FY will not affect Age Pension

27. Case Study - Comparison What is the payoff period? Under option 1, Russell loses $11,910 in one year Under option 2, he loses $642.50pa Assuming Russell remains income tested, it takes his life expectancy of 18.5 years for option 2 to result in the same reduction as option 1 But what if Russell lives 30 years....$19,275 reduction

28. Rules of thumb Level of income or assets Increased pension payment Lump sum withdrawal Asset testedNo impactNo impact although permanently reduces DA if becomes income tested later Income testedReduces age pension – timing important Permanently reduces DA

29. What about starting a new pension? Deductible amount may be increased if commute the income stream entirely following the lump sum withdrawal and re- commence. May be effective if income stream experienced significant market growth since commencement. Life expectancy reduced which increases deductible amount

30. Case Study – Remember Russell…. Lump sum withdrawal permanently reduced his DA from $16,181 to $14,896 If account balance is now $350,000 and Russell is now age 68, new deductible amount is: $350,000 / 16.24 = $21,551 But what if account balance had fallen to $200,000, new deductible amount is: $200,000 / 16.24 = $12,315

31. Conclusions Need to way up increased pension payment v lump sum commutations Increased pension payment in last couple of weeks of financial year can work Be careful in the first year of the pension, avoid drawing large pension payments, particularly if starting late in year If making a lump sum withdrawal, consider commuting and starting a new pension

32. This presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352 (Colonial First State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (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 26 458 298 557 and interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial First State Pooled Superannuation Trust ABN 51 982 884 624. 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 13 13 36. 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 2011. Disclaimer