Simplifying Statements of Advice. Retirement strategy example SOA

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1 Simplifying Statements of Advice Retirement strategy example 10 February 2009

2 Development of FPA example Statements of Advice () Financial planners, politicians, and regulators alike share the common goals of ensuring that disclosure documents are understandable, useful, practical and cost effective for consumers. ever, most would agree that many Statements of Advice (s) are lengthy, challenging for consumers to understand, and costly for financial planners to produce. In June 2008, the Financial Planning Association (FPA) released an example Statement of Advice () for Transition to Retirement advice which identified and simplified the key requirements that should be included in a. The FPA also established a Working Group of life risk specialist practitioners to develop an example on personal insurance protection which was released for member feedback in December The FPA has now released two further example Statements of Advice for member feedback. As with the Transition to Retirement example, these Statements of Advice do not include information considered unnecessary to client understanding of the advice. They are focused on the key sections that help clients make informed decisions about the advice given. The examples utilise referencing to remove the need to include education material, unnecessary product information, background research and other information, leaving the advice and costs as the focus of the document. This approach promotes the role of the Financial Services Guide (FSG) and Product Disclosure Statement (PDS) as valuable sources of more detailed information. There may be a number of additional professional requirements planners may need to consider. Client history Bill and Susan Retiree have been managing their own financial affairs but with retirement planned for the end of next year, they are keen to seek professional advice because they find the legislation complex. Essentially, Bill and Susan have worked hard to bring up their family, pay off their debts, put some savings aside and contribute to super. They have been hearing their friends talk about the Age Pension and Allocated Pensions and want to ensure that they get the best outcome for themselves.

3 Bill and Susan Retiree STRATEGY STATEMENT OF ADVICE RETIREMENT PLANNING Date: 5 February 2009 What this Document is About This document sets out the advice requested arising from our discussion dated 2 February 2009 and details about the costs of implementing the advice. This advice has been provided by John Planner is an authorised representative (no ) of ABC Financial Planning Pty Ltd an Australian Financial Services Licensee (No ), of 75 Castlereagh Street, Sydney NSW Tel: Please note that all documents or sources of information that are referenced in this document are available free of charge from ABC Financial Planning. The scope of this advice This advice provides strategies to maximise your financial position upon Bill s planned retirement in December This does not include any specific product recommendations, rather these will need to be addressed at retirement in a separate Statement of Advice. Where you are now Here are your relevant personal details that you provided to me at our meetings, and which I took into consideration when developing your strategy: You are a married couple, Bill aged 64 and Susan aged 58, with no dependants. Bill is the sole income earner for the family and proposes to retire on 15th December 2009 which is his 65 th birthday. Bill has already used all his long service and other leave benefits. You reside in a home which you intend to maintain as your residence for the foreseeable future. You both have current wills in place as well as enduring power of attorney documents. You have private health cover in place. You have indicated that you don t wish for life risk issues to be analysed as part of this advice. The table below summarises your current financial position: Bill Susan Gross salary per annum $65,000 (excluding 9% super) $Nil Investment income per annum $160 $8,210 Estimated annual tax $13,250 $Nil Current top tax rate paid 31.5% 0% Investment assets $4,000 (joint bank account) $ 4,000 (joint bank account) $115,000 (term deposit due 01Dec08) Superannuation assets $620, % taxable $0 Life Insurance $Nil $Nil Property value $500,000 shared jointly Other Personal assets $ 49,500 contents, car, boat and caravan Centrelink assessable assets $792,500 based on current position Cash requirements Lifestyle expenses $40,000 per annum Page 1

4 What you want to achieve Here is what I understand to be your primary objectives: Objective Detail When Retirement Bill to retire on his 65 th birthday 15 th December 2009 Maximise Age Pension Obtain the maximum Age Pension for Bill possible December 2009 Income at Retirement Target $40,000 per annum to maintain current lifestyle December onward you get there and why Here is a summary of what I recommend to you: Step 1: Susan Put your term deposit proceeds into a cash account ready for retirement. Balance in joint account now approximately $140,000 including interest from the matured term deposit. Step 2: Bill Withdraw your super benefit of approximately $620,000 and deposit into your cash account. Balance now approximately $760,000. Step 3: Susan Invest $450,000 from the cash account into a super fund in your name. Balance in cash account now around $310,000. Step 4: Bill Use $300,000 of your cash reserves to invest back into your super fund. This is called a re-contribution strategy and leaves around $10,000 in your joint account for contingencies. Step 5: Bill From your super create an Account Based Pension (ABP) and draw a pension equivalent to $31,000 per annum. Step 6: Bill You are now in a position to apply for the Age Pension. Step 1: Deposit Susan s Term Deposit into the Cash Account When Susan s Term Deposit of $115,000 matures on 1st December 2008, deposit the proceeds into your joint account. We want to keep these funds accessible to incorporate in the strategy to provide you with a tax effective retirement income. Please refer to Step 4 for further details of this strategy. As your Term Deposit has matured, you will not lose any accumulated interest upon withdrawal. Given the term deposit interest rate of 6.1%, the interest received upon maturity will be approximately $7,015. Step 2: Withdraw Bill s Super Withdraw all Bill s super benefit of approximately $620,000 and deposit this into your joint account. This allows Bill to form a tax free super facility and maximize his Age Pension entitlement at age 65. Please refer to Step 3 and 4 below for further details. Bill, as you will be 65 at retirement and therefore access to your super benefits which can be withdrawn without paying any tax. Step 3: Invest $450,000 in Superannuation for Susan Using cash accumulated in your Based on your estimated level of assets Bill should come under Centrelink's Assets Test to calculate his Age Pension entitlement. Susan, as you will not be Page 2

5 joint account make a $450,000 nonconcessional contribution into a super fund for Susan. eligible for the Age Pension until age 65, any super assets you hold will not be assessable by Centrelink and will thus increase Bill s Age Pension entitlement. Non-concessional super contributions are those on which no tax deduction is claimed. These contributions are limited to $150,000 per year however as Susan is aged under 65, you can contribute up to $450,000 in the same financial year by choosing to bring forward the next two years contribution limits. Any excess contributions will be taxed at 46.5%. This strategy reduces your Centrelink assessable assets by $450,000 and I have estimated that this will then increase Bill s Age Pension entitlement from $1,035 per annum to approximately $9,615 per annum (or $ per fortnight). Step 4: Re-contribution Strategy for Bill Use $300,000 from your cash account to make a nonconcessional contribution back into Bill s super fund immediately. Bill, as and when you reach age 65 you will need to meet the work test to be able to make contributions to super. As you have been working full time up to your retirement on 15 th December you will pass this test in the 2008/2009 financial year. Bill, it is also important that you make the non-concessional contribution to super in this financial year as you are now over age 65 you only have until 30 th June 2009 to access the $450,000 cap. From then you can no longer bring forward the two years of contributions, limiting your contribution to $150,000. If Bill died then these funds would be paid to Susan tax free. ever, if you were to pay taxable benefits to a non-dependant (ie. your children) then 16.5% tax may be payable. By using this strategy we can reduce this liability should you both pass away. If we left the $300,000 in Bill s super any non-dependant receiving these funds would pay almost $50,000 in tax. Step 5: Create the Account Based Pension Bill s super should now be transitioned into an Account Based Pension (ABP). Pension payments made from the Account Based Pension are tax free, as are any lump sums withdrawn. No tax is levied on investment earnings in the ABP compared to investments held privately, which may be taxed at your marginal tax rate. Investments in super will be taxed at 15%. This also means that your ABP will receive a refund for any imputation credits generated by exposure to Australian shares. Although the value of the ABP will be included in your assessable assets when Centrelink determines Bill s Age Pension entitlement, income is concessionally assessed under Centrelink s incomes test. The amount assessed is based on the amount of income drawn from the ABP less a deductible amount calculated commencement of the ABP. In Bill s case, I estimate the deductible amount to be approximately $16,949 per annum. You will be able to nominate Susan as a binding beneficiary should anything happen to you meaning that Susan would then take over this ABP. Step 6: Achieving your Retirement Income Bill s estimated Age Pension entitlement Based on my recommendations, I have estimated Bill s Age Pension entitlement to be approximately $10,060 pa (or $ per fortnight). This is taxable income. ever with various tax offsets available, your tax liability will be nil. Draw the minimum income level from Bill s Account You have the flexibility to draw any level of income from the ABP above the minimum of 5% of your ABP s asset value. This is approximately $14,250 in the first year based on an investment value of $285,000. Page 3

6 Based Pension. Bill, your pension payment will be entirely tax free as you are over age 60. Drawing the minimum from the ABP allows you to retain more of your funds in a tax-free environment. Make regular withdraws of $16,000 from Susan s super. Earnings in superannuation are taxed at 15% compared to 0% in an ABP. By making withdraws from Susan s super fund rather then withdrawing from the ABP more of your funds will be in a tax free environment. Based on your retirement income need of $40,000 pa, Bill s Age Pension entitlement of $10,125 and the minimum ABP income of $14,250, I estimate that you will need to make total annual withdraws of about $16,000 pa. As Susan is not working and is over age 60, she is able to access her super benefits tax free. Bill, as an Age Pensioner, you will also be eligible for the Pensioner Concession Card which entitles you to certain concessions when purchasing medication. Additional information on the concession card and its other benefits is included in the supporting information section of this Statement of Advice. In summary, here s how this strategy fulfils your objectives Objective the strategy fulfils the objective When Retirement By maximising Bill's Age Pension over the next seven (7) years until Susan becomes eligible, we are able to reduce the reliance on your own assets to fund retirement. Therefore Bill can retire on his 65th birthday without feeling that he needs to work longer. 15th December 2009 Maximise Age Pension Income Retirement at These recommendations reduce your overall assessable assets and hence maximize Bill s Age Pension entitlement. Between the Age Pension and ABP payments you will achieve your desired income of $40,000 per annum. December 2009 Retirement Onward Risks and disadvantages General Risks Everything we do in life has some level of risk attached to it but some level of risk has to be accepted if you re to meet your objectives. Here are the key risks of the strategy: (a) Rule changes. Rules governing Account Based Pensions and super could change. ever, in my experience there are usually transition provisions, allowing those already using a particular strategy to adapt that strategy to legislative rule changes. (b) Funds out of the market. During any rollover periods, your funds will be out of the market. If the market rises during that period, you will not have the same purchasing power. If the market falls however, then you will be able to purchase more for your money. I recommend you read the enclosed Financial Planning Association booklet, "The Trade-Off - Understanding Investment Risk". Superannuation Savings If Susan decides to work at some stage and contribute to her super, then this may affect the accessibility of the benefits. Account Based Pension Your ABP may not last for the rest of your life. Your allocated pension will be invested based on your risk profile. It will rise and fall based on investment returns and pension payments. Once the balance is used up, your pension payments will stop. The pension of $31,000 per annum is approximately 10.3% of Bill's ABP value, however we have set aside $450,000 in Susan's name so this is growing as Bill's ABP is reducing. Page 4

7 What this advice will cost you and how we are paid Advice costs In providing this strategy advice to you we have charged a fee of $3,300 as follows : When Description Paid Amount (includes GST as applicable) Initial Initial financial planning fee for work involved in the research and preparation of the strategies. An invoice is enclosed with this Statement of Advice. Fee $ 3,300 NET FEE PAYABLE $ 3,300 As Licensee, ABC Financial Planning ("ABC") receives the payment, retains 2% (or $66) and pays the remainder to us as the financial planner ($3,234). Additional information to assist your decision making Title Description Financial Services Guide (FSG) Working materials Educational materials Ongoing brochure service The FSG that has already been provided to you provides information on a range of issues including the services we offer, how we operate, how we get paid, and any interests, associations or relationships that could influence them. A copy of the spreadsheet workbook used to determine the financial figures and strategy contained within this can be made available to you upon request. As above, we recommend that you read the Financial Planning Association booklet, "The Trade Off - Understanding Investment Risk". We have also included a brochure on general information on superannuation, account based pensions and Centrelink benefits. The brochure that has already been provided to you details the ongoing service you can expect from us in the upcoming years. Services being provided to you and next steps It s very important that you take full ownership of your financial decisions. I can assist you to make the appropriate decisions, but those decisions remain yours. If you don t feel totally comfortable with what s in this, you should seek further information and advice. 1. Product Advice This advice is strategic in nature and I have not recommended any specific product to meet your needs. I would be pleased to issue you with a further Statement of Advice to make appropriate product recommendations closer to Bill's retirement date. There will be no charge for the preparation of any product advice; our implementation fees, product fees and any ongoing fees will be disclosed in the Statement of Advice. 2. Age Pension for Susan As this advice is relevant for the period from Bill s retirement until Susan becomes eligible for Age Pension we will need to review your financial affairs in the lead up to Susan's 65th birthday. Of particular importance is the fact that Susan s superannuation benefits will become assessable under Centrelink s assets test which will impact on your combined Age Pension entitlement. Financial planning is a dynamic process and your financial development needs to be regularly monitored for changes in your circumstances, as well as economic conditions, government legislation and a range of issues that may impact on your financial wellbeing. Should you receive other income, or have any other change in your financial position, you should notify me immediately so that your strategy can be reviewed to ensure it remains in step with your objectives. If you have any questions, don t hesitate to contact me. Page 5

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