income streams. What does this mean for your clients?

IOOF AdviserConnect IOOF TechConnect Technical bulletin: July 2013 1 Proposed changes to Centrelink assessment of superannuation income streams. What does this mean for your clients? By William Truong, Senior Technical Analyst 7 Asset protection and superannuation: What is the true reality? By Damian Hearn, National Manager Technical Services 9 Dealing with second marriages in super By Julie Steed, Technical Services Manager Proposed changes to Centrelink assessment of superannuation income streams. What does this mean for your clients? By William Truong, Senior Technical Analyst Traditionally, advisers have recommended superannuation-based income streams (such as account-based pensions) as a Centrelink/DVA friendly income stream for clients. But, if the Government has their way, they may soon have to think again. On 5 April 2013, as part of the superannuation reform announcements, the Government publicised the extension of the Centrelink deeming provisions to superannuation-based income streams. Grandfathering provisions, which ensure that only income streams commencing on or after 1 July 2015 would be caught under this proposal, were also outlined. How does it currently work? For those retirees whose Centrelink/DVA entitlements are affected by the income test, many choose to optimise their age pension entitlements by investing in either non-deemed investments, such as an account-based pension, or in deemed assets which provide greater returns than the deeming rates. The IOOF TechConnect team, Damian Hearn, Pam Roberts, Julie Steed, Martin Breckon, Donald Lobo and William Truong provides a comprehensive range of technical support tools for professional financial advisers. 1

From a Centrelink/DVA perspective, the reason for investing in an account-based pension is well understood. If you have clients who are paid under the income test, a non-assessable amount (which is essentially a return of capital) is currently available that reduces the chosen income payment. This often results in a much lower income assessment and a potentially higher Centrelink/DVA entitlement. What are the implications of these proposals? As a result of the proposal to extend the deeming rates to superannuation-based income streams there are a number of possible implications that are involved. These include: Under the deeming test, the deeming rates that are applied to financial investments (such as shares and term deposits) generally bear no relation to the actual returns of the investment. For example, if the actual investment return is zero or negative, Centrelink/DVA will still assess the pension as providing either a 2.5 per cent or four per cent return 1, depending on the value of the investment. For Centrelink purposes, there will be no distinction between income and capital withdrawals. Under current assessment, payments from account based pension are generally assessed as income payments, unless an election is made to treat the payment as a capital withdrawal. If the client is holding a reversionary account-based pension for the benefit of a spouse with a longer life expectancy, there will be no disadvantage in the non-assessable amount. There is potential to reduce an aged care resident s age pension entitlement and commence paying an income tested daily fee. What income streams are grandfathered? According to the Government s proposal, superannuation account based income streams commenced prior to 1 January 2015 will not be caught under the deeming rules. However, we have noted that on the Department of Human Services website 2, an additional condition is necessarily to qualify for the grandfathering rules. It states: Account-based income streams held by pensioners, allowees or Low Income Health Care Card holders prior to 1 January 2015 will continue to be assessed under the existing rules unless they choose to change products or buy new products from 1 January 2015. Hence, Centrelink s requirement appear more onerous, so to qualify for grandfathering under their rules, individuals would need to be entitled to some form of income support as well as hold a superannuation based income stream prior to 1 January 2015. This extra requirement will mean that those individuals under pension age (unless they are in receipt of an allowance or disability support for example), would not be able to voluntarily commence an income stream such as a transition to retirement pension prior to January 2015 to sneak under the grandfathered rules. Also for allowees or disability support pensioners, under pension age, who may be considering commencing an income stream prior to January 2015, need to consider that the balance of their income stream will be assessed towards their assets test. Uncertainty also exists as to the assessment of a continuing pension such as a reversionary pension commenced before 1 January 2015. This should maintain its grandfathered status, however, this has not been included in the announcements. It remains to be seen whether a primary member could start a reversionary account-based pension before 1 January 2015 to ensure they have established a grandfathered income stream for the benefit of the surviving spouse and avoid the deeming implications. Although grandfathering provisions may apply, there are risks that any changes made to a grandfathered income stream on or after 1 July 2015 would cause a move to a less generous deeming income test. These changes include: merging two or more grandfathered pensions rolling over a pension to another fund. Given the uncertainty surrounding the grandfathering provisions, it becomes questionable whether it is the Government or the Department of Human Services who is the real driver behind this dialogue. What impact may this have to clients' future retirement plans? This change has the potential to trap clients into an existing grandfathered income stream for their lifetime. It may also encourage retirees to adopt a more conservative asset allocation, which could reduce the growth in pension balances over the long term and increase their longevity risk. Further, when markets perform poorly, or fixed income investments are affected by lower interest rates, deeming exacerbates the risks for clients. 1 Deeming rates as at 20 March 2013. 2 http://www.humanservices.gov.au/corporate/publications-and-resources/budget/1314/measures/older-australians/29-10728 2

On the face of things, this measure contradicts the Harmer Report 3 recommendations on two levels: longevity risk minimisation (as discussed above), and the further complication of the retirement income stream system by targeting concessional treatment of investments that are not caught in the deeming net, such as annuities and direct properties. Naturally, this is likely to lead to a future change in consumer behaviour and a move to annuities as shown in the case studies below. Who will be affected by this proposal? When we take the assets and income tests into account, the following table outlines how couples and singles will be impacted by the proposed changes. Income stream account balance with deemed income greater than $152 4 per fortnight for singles or $268 5 per fortnight for couples Asset level 6 where asset test determines the age pension Single homeowner Couple homeowner $115,825 $202,550 $260,000 $340,000 In summary, this proposal means if you have clients with assets between the deeming threshold and the crossover points (ie the level at which asset test starts to determine pension entitlements), then this may result in a reduced age pension entitlement and possibly a greater focus on other non-deemed investments (such as direct property and annuities). These graphs demonstrate that, when lower levels of assets are held, it is the income test rather than the assets test that determines age pension entitlements. Single homeowner Age pension Couple homeowner Age pension $21,000 $18,000 $15,000 $12,000 $9,000 $6,000 $3,000 $0 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Deeming begins to reduce the age pension due to the income test when financial assets are above $115,825 0 $40K $80K $110K $140K $160K $180K $200K $220K $240K $260K $280K $300K $320K $340K $380K $420K $460K $500K $540K $580K Assets test Deeming begins to reduce the age pension due to the income test when financial assets are above $202,550 Assets Income test Cross over point at $260,000 of assets 0 $60K $120K $160K $190K $220K $250K $280K $310K $340K $370K $400K $460K $520K $580K $640K $700K $760K $820K $880K $940K $1,000K $1,050K Assets test Assets Income test Cross over point at $340,000 of assets The crossover point is the point at which the income test is replaced by the assets test in determining the level of age pension entitlements. Based on the current rules, below this point, income test friendly investments, such as the accountbased pensions, could be used to increase age pension entitlements. This result leads us to the question, does this measure appropriately target income support clients who hold lower investment balances and are, possibly, the most reliant on social security? 3 Pension Review Report 27 February 2009 The Harmer Report Finding 28: The Review finds that a deeming approach for account-based superannuation products would remove the current distortion in the pattern of payment of pensions to pensioners with such income and assist in equalising the treatment of superannuation products and other financial assets. 4 The $152 per fortnight limit is the allowable income limit that a single client may earn without loss in Age pension entitlement. Assessable income exceeding $152 per fortnight reduces pension entitlement by 50 cents in the dollar. 5 The $268 per fortnight limit is the allowable income limit that a couple may earn without loss in their age pension entitlement. Assessable income exceeding $268 per fortnight reduces the age pension by 50 cents in the dollar. 6 Assumed total assets include financial assets and personal contents of $10,000 only. The amount determined is to the nearest $5,000. 3

What impact would higher deeming rates have? As you would be aware, the current deeming rates reflect the current interest rate cycle. However, by taking a longer term view, higher deeming rates can deliver a worse outcome for clients who are impacted by the changes. Single clients: Deeming full pension for singles (homeowner) Under the proposed changes, a single pensioner and homeowner with no children can have financial assets (such as an account based pension) of $115,825 7 and receive a full pension: Couples: Deeming full pension for couples (homeowner) Pensioner couples who are homeowners can have financial assets (including an account based pension) of $202,550 10 and receive a full pension: Financial assets Assessed income Financial assets Assessed income $45,400 x 2.5% = $1,135 $70,425 x 4.0% = $2,817 $115,825 $3,952 ($152 pf) 8 If the deeming rates were doubled to five per cent and eight per cent 9 respectively, the level of financial assets a client could have reduces to $66,425 before the income test starts reducing their age pension entitlement. This is calculated as: $75,600 x 2.5% = $1,890 $126,950 x 4.0% = $5,078 $205,550 (combined) $6,968 ($268 pf combined) 11 If the deeming rates where doubled to five per cent and eight per cent 12 respectively, the level of financial assets the couple could have reduces to $115,450, before the income test starts to kick in, as calculated below. Financial assets Assessed income Financial assets Assessed income $45,400 x 5.0% = $2,270 $21,025 x 8.0% = $1,682 $66,425 $3,952 ($152 pf) $75,600 x 5.0% = $3,780 $39,850 8.0% = $3,188 $115,450 $6,968 ($268 pf) 7 Assuming their only source of income is from financial assets and total assets were below the relevant threshold eg $192,500 for a single homeowner 8 The $152 per fortnight limit is the allowable income limit that a single client may earn without loss in age pension entitlement. Assessable income exceeding $152 per fortnight reduces pension entitlements by 50 cents in the dollar. 9 Deeming rates as at 1 July 1996 was comparable to double the current deeming rates. 10 (assuming their only source of income is from financial assets and total assets were below the relevant threshold e.g. $273,000 for couple homeowners) 11 The $268 per fortnight limit is the allowable income limit that a couple may earn without loss in their age pension entitlement. Assessable income exceeding $268 per fortnight reduces the age pension by 50 cents in the dollar. 12 Deeming rates as at 1 July 1996 are comparable to double the current deeming rates. 4

Case Studies The following case studies compare the age pension entitlements between investment in an account based pension (assessed under the proposed deeming rule) against an investment in annuities. Case study 1: Single client Single homeowner: $120k (account based pension versus an annuity) Henry, aged 65, has the following assets: Contents $10,000 Term deposit $20,000 Managed fund $80,000 Super $120,000 TOTAL $230,000 Henry commences an account based pension with $120,000 (drawing $7,372 per annum). Assessed under deeming Assessed under current method 13 Age pension (pa) based on current deeming rates 14 Age pension (pa) based on double the current deeming rates Pension (pa) Max pension $21,018.40 $21,018.40 $21,018.40 Income test $18,935.02 $14,875.38 $20,885.02 Asset test $19,555.90 $19,555.90 $19,555.90 Actual entitlement $18,935.02 $14,875.38 $19,555.90 Difference from full pension ($2,083.38) ($6,143.02) ($1,462.50) Under the current rule and at this level of assets (slightly above the current lower asset test threshold of $192,500), the age pension is paid under the asset test. However, under the proposed deeming treatment, Henry s age pension is paid under the income test. The age pension entitlement is further reduced when the deeming rate is doubled. If Henry instead purchased the following annuities (with superannuation money), it will result in the following age pension entitlement: Purchase price $120,000 $120,000 Term 20 years Lifetime (commutation option) RCV Nil n/a Annual payment $7,372 (indexed to CPI)* $6,000 (CPI indexed) Centrelink deductible amount $6,000 $6,472 Resultant aged pension $19,555.90 (paid under the asset test) $19,555.90 (paid under the asset test) At this level of assets (slightly above the lower asset test threshold), the annuity reduces the age pension under the asset test. The income treatment of the annuities is more favourable than the proposed income treatment of account based pensions. 13 The Centrelink non-assessable amount (or Deductible amount) is $6,472 ($120,000/18.54). 14 Current deeming rate are 2.5% and 4% respectively. 5

Case study 2: Couple clients Couple (homeowner): $220,000 (account based pension versus an annuity) Jenny and Josh are both aged 65 and have the following assets: Contents $ 10,000 Term deposit $ 20,000 Managed fund $ 70,000 Super $220,000 TOTAL $320,000 Josh commences an account based pension with $220,000 (drawing $13,515 per annum). Assessed under deeming Assessed under current method 15 Age pension (pa) based on current deeming rates Age pension (pa) based on double the current deeming rates Pension (pa) Max pension $31,688.80 $31,688.80 $31,688.80 Income test $29,539.64 $23,907.00 $31,688.80 Asset test $29,855.80 $29,855.80 $29,855.80 Actual entitlement $29,539.64 $23,907.00 $29,855.80 Difference from full pension ($2,149.16) ($7,781.80) ($1,833.00) At this level of assets (slightly above the lower couple asset test threshold of $273,000), under the current income test treatment, the age pension is paid under the asset test. However, taking the proposed deeming treatment into account, the age pension is paid under the income test. If we doubled the deeming rates, the age pension entitlement is further reduced. If Josh instead purchased the following annuities (with superannuation money), it will result in the following age pension entitlement: Purchase price $220,000 $220,000 Term 20 years Lifetime (commutation option) RCV Nil n/a Annual payment $13,515 (indexed to CPI) $11,000 (CPI indexed) Centrelink deductible amount $11,000 $11,866 Resultant aged pension $29,855.80 (paid under the asset test) $29,855.80 (paid under the asset test) The current income treatment of the annuities is more favourable than the account based pension. At this level of assets (slightly above the lower asset test threshold), the annuity reduces their age pension under the asset test. Summary The industry does not expect to see draft legislation before the Parliament is dissolved for the Federal election later this year. Furthermore for this specific proposal to become law, it might require a return of the existing Government. The above case studies illustrates that if this proposal becomes law, there will certainly be a major shift in the retirement income stream landscape. However, before this happens, we anticipate that many industry participants will provide consultative feedback to advocate that different retirement products should be subject to the same rules to ensure competitive neutrality. 15 The Centrelink non-assessable amount (or deductible amount) is $11,866 ($220,000/18.54). 6

Asset protection and superannuation: What is the true reality? By Damian Hearn, National Manager Technical Services Superannuation can provide protection for clients in the event of bankruptcy, however advisers must be aware of the rules and associated complexities. The following Q&A will take a look back at the history surrounding bankruptcy and superannuation to provide context to the current rules and the impact they may have to your clients. What impact did the abolition of the reasonable benefit limit have from 1 July 2007? Prior to the abolition of the reasonable benefit limits at 1 July 2007, client superannuation account balances were protected up to the pension reasonable benefit limit. Anything over that amount was generally available to creditors. The removal of the pension reasonable benefit limit ($1,356,291 for the 2006/2007 financial year) meant the bankruptcy protection was not limited to this amount. Combining this with the amendments as at 27 July 2006 provided the added protection for contributions (and the superannuation account balance) made into superannuation as at that date. Clients would be then subject to the new rules applying 27 July 2006 (as outlined below). What relevance did the court case Cook v Benson have? Clients could make contributions into superannuation prior to bankruptcy after the court case of Cook v Benson [(2003) 214 CLR 370] and avoid the then claw back rules pursuant to the undervalued transaction provisions under the Bankruptcy Act. Prior to 27 July 2006, undervalued transactions could occur if a person transferred property within five years before bankruptcy for nil consideration, or less than market value, the property could be clawed back by creditors. In Cook v Benson, the High Court ruled valuable consideration was given and important implication of this case is that if a person transfers property to the trustee of a superannuation fund (such as a contribution) even if it is only one day before bankruptcy, the property cannot be clawed back by creditors pursuant to the undervalued transaction provision. What did the changes in July 2006 mean for superannuation? After the court case of Cook v Benson, the matter of superannuation contributions not being classified as undervalued transactions was a concern for the Government. In response to Cook, the Bankruptcy and Superannuation Acts were amended. From 27 July 2006, new rules applied to any contribution made into a superannuation fund. This means a contribution can be clawed back if the transferor s main purpose was either to: prevent the transferred property being available to creditors, or hinder or delay the process of making property available for division among creditors. If it is the client s main purpose to prevent, hinder or delay and if he or she was insolvent or about to become insolvent at the time the contribution was made needs to be taken into account. It is also important to determine whether there was a pattern of making superannuation contributions. The pattern of contributions is important to determine whether or not the contribution is classified as out of character. When determining this, consideration must be given to whether, during any period ending before the transfer, the transferor had established a pattern of making contributions to one or more eligible superannuation plans. For clients who are making regular contributions at a set amount into superannuation prior to the period of insolvency, then out of character contributions during the period insolvency would be hard to prove. Albeit, the focus is mainly on the situation where the client has only made a single contribution shortly after becomes bankrupt (or during the period of insolvency). These types of contributions would be held to be out of character. What happens if a client becomes bankrupt and makes lump sum withdrawals from superannuation? The Bankruptcy Act provides an express exclusion to any lump sum being received from a superannuation fund by a client. This express exclusion means the amount will not be subject to creditors if the withdrawal is received on or after the date of the bankruptcy. However, this protection is not afforded to pensions that are commenced on or after the date of the bankruptcy. 7

What happens if a client becomes bankrupt and commences a pension? The commencement of a pension during a period of bankruptcy means the pension is denied the protection which is applies to a superannuation fund. The pension payments received by a client is considered as income which only received a limited protection from protection from creditors. The exact level of protection afforded to pension payments is based on statutory formula and a client must pay 50 per cent of the excess income above the prescribed threshold amount (ie $59,391.88 with one dependant as at 20 March 2013). This threshold is adjusted for inflation twice a year and is adjusted for the more dependants (which includes a spouse). For this reason, there may be an advantage in keeping the bankrupt person s benefits within the accumulation phase of super and making only lump sum withdrawals (assuming they meet a condition of release). While these are the general principles, certain amounts contributed to super either by, or on behalf of the bankrupt in the lead up to bankruptcy can still be clawed back by the bankruptcy trustee. This is generally the case where the contributions have been made with the intention of defeating creditors. Whether the contributions are recoverable or not will generally depend on when the contributions were made. For contributions made from 27 July 2006, the rules have been largely derived to overcome the issues arising from the High Court s decision in Cook v Bension. What is the treatment of life insurance inside and outside superannuation? The proceeds of a life insurance policy received on or after the date of bankruptcy will be excluded from property divisible amongst creditors (as per s116(2)(d)(i) and (ii) of the Bankruptcy Act). This exclusion extends to the bankrupt s spouse in the event of death and captures non-superannuation life insurance policies. If the life insurance policy is held within a superannuation account, it will be protected in the event of death (as per s 116(2)(d)(iii) of the Bankruptcy Act) on the basis that it is a superannuation interest. What happens if the client becomes bankrupt has a self-managed superannuation fund (SMSF)? An undischarged bankrupt is a disqualified person under the Superannuation Industry (Supervision) Act 1993 (SIS Act) and is not eligible to be a trustee of a superannuation fund. If a trustee of a superannuation fund becomes an undischarged bankrupt, they would need to retire as a trustee. While this may be distressing for an individual who acts as a trustee for a retail, corporate or industry fund, it is unlikely to affect the overall management and operation of that fund. However, in an SMSF the results are far more significant. Once an individual is declared to be an undischarged bankrupt, they are no longer eligible to be a trustee of the SMSF, which also means that they are unable to be a member of that fund while it remains an SMSF. If an SMSF trustee becomes an undischarged bankrupt, they are required to notify the Australian Taxation Office (ATO) immediately and make alternative arrangements for their SMSF within six months. If alternative arrangements are not made, the SMSF risks being made a non-complying superannuation fund resulting in some assets and income of the fund being taxed at 45 per cent. This is the last thing a client needs after becoming bankrupt. In addition to the risk of non-compliance and the associated tax penalties, civil and criminal penalties may also apply. A disqualified person acting as a trustee of a superannuation fund is a strict liability offence. Does a solution exist for a client and their SMSF? To avoid subjecting the SMSF to capital gains tax (CGT), clients may choose to transfer the trusteeship to a professional licensed trustee thereby changing the structure of the fund from a SMSF to a small APRA fund (SAF). This type of fund offers clients the same level of investment flexibility and choice but without the trustee responsibilities. Appointing a new trustee is not a CGT event; the fund s entity continues and therefore no CGT is incurred. Existing cost bases and any CGT losses can be carried forward. When the client regains their ability to become a trustee, they are able to convert their fund back into an SMSF structure, again without incurring any CGT. 8

Dealing with second marriages in super By Julie Steed, Technical Services Manager When clients marry for a second time they are often keen to ensure that their second spouse is well looked after in the event of their death. However, there is often a desire to balance this with leaving assets to children from the first marriage. This can be particularly so when clients remarry later in life, have no children from the second marriage and have accumulated significant assets in their superannuation fund. In this article, we will examine a method for achieving this objective within superannuation. Overview Under the blended family strategy, a member arranges for their death benefit to be paid as a pension to their second spouse (the pension beneficiary) throughout the spouse s life. Upon the death of the pension beneficiary, the remaining capital is returned to the original member s estate. The member s estate distributes the remaining capital to the member s children or other superannuation death benefit dependants (the remainder beneficiaries). This basically provides the second spouse with a life interest in the deceased member s superannuation. The member determines how the pension benefit will be calculated and the spouse cannot commute the pension or rollover to another fund. If the pension beneficiary dies before the member, the arrangement is voided. Fund types Self-managed superannuation funds (SMSF) provide a multitude of unique opportunities for clients. Assisting clients with estate planning and intergenerational wealth transfers is a major part of their appeal. The other type of self-managed super, a small APRA fund (SAF), is essentially an SMSF with a professional trustee. SAFs provide all of the legislative advantages provided to SMSFs and in respect of the blended family solution they provide a distinct advantage the professional trustee holds the cheque book, not the second spouse. Whilst the blended family strategy outlined in this article is available in an SMSF, the concern of many clients is that things may not go to plan if there is friction between the second spouse and the children from the first marriage. If the second spouse holds the cheque book, they could disappear with the money. Whilst the children would have recourse for breach of the trust deed provisions, locating the spouse and commencing legal proceedings could be a lengthy and expensive process. Documentation This strategy requires a special purpose superannuation trust deed that supports the death benefit design. A deed of acknowledgement between the three parties (member, pension beneficiary and remainder beneficiaries) outlining the arrangement and acknowledging that they understand the arrangement is also highly recommended. Members make a written binding determination to the trustee directing them as to the identity of the pension beneficiary and the remainder beneficiaries. The binding determination also includes the calculation method of the pension beneficiary s maximum pension benefit. The trustee will also formally acknowledge and agree to the binding determination. Calculating the pension The pension is calculated as a multiple of average weekly ordinary time earnings (AWOTE). AWOTE is currently $1,396 or $72,592 per annum. The use of AWOTE provides a strong indicator of purchasing power and provides clients with a sound basis for determining the future income needs of their spouse. AWOTE figures are issued by the Australian Bureau of Statistics (ABS) biannually in May and November. For example, if a client wanted their spouse to receive an annual pension of $100,000 they would currently select an annual pension of 72 times AWOTE ($100,512 per annum). The annual pension payment will be adjusted as at 1 July each year to reflect the updated AWOTE figure. The multiple of AWOTE will not change. The only other determination in calculating the annual pension amount is that the minimum pension required by superannuation law must always be paid. If the multiple of AWOTE chosen by the member was less than the minimum annual pension required by superannuation law, the higher minimum would be paid. 9

Variation to pension calculation The pension beneficiary can vary the annual pension payment between the superannuation minimum annual pension amount and the amount previously determined by the member. However, the pension beneficiary cannot elect an annual pension payment above the amount pre-determined by the member. The pension beneficiary cannot commute or rollover the pension payment however they can forfeit their benefit and have it pass to the remainder beneficiaries at any time. On the death of the pension beneficiary Following the death of the pension beneficiary, any remaining balance is paid to the remainder beneficiaries as lump sums with PAYG tax deducted. Blended family case study Paul and Dianne Paul and Dianne have been married for 15 years and they both have adult children from previous marriages. They have a comfortable lifestyle on an income of $300,000 per annum. Paul earns $250,000 per annum, Dianne does not have paid work and they average $50,000 per annum in income from their investments. If one of them was to die they want the surviving spouse to be able to maintain a comfortable lifestyle and remain in the same home. Upon the death of the surviving spouse they want all four children to benefit. Ten years ago Dianne s sister Sue married Bill following the death of her first husband several years earlier. Sue and Bill bought a house together and they also each had two children from their previous marriages. When Sue died a few years ago all her assets passed to Bill. Bill died just recently. It was the family s understanding that when Bill died the estate would be divided between all four children. However, sadly for Sue s children this wasn t the case and Bill s children received all of the estate assets. Paul and Dianne are keen to ensure that they have secure plans in place to ensure that this can t happen to their children. Paul and Dianne have the following assets: Ownership Asset Value $ Tenants in common Family home 1,500,000 Joint Shares 200,000 Joint Cash 80,000 Paul Superannuation 1,400,000 Dianne Superannuation 400,000 Total 3,580,000 After meeting with their financial adviser and estate planning specialist, Paul and Dianne make a number of changes to their financial arrangements. They have Wills prepared which include a lifetime right to reside in the family home. Upon the death of the second of them, all four children will share the proceeds of the sale of the family home. All of the cash and shares pass to the other on the death of the first. Paul and Dianne convert their SMSF to a SAF and make binding determinations specifying each other as the pension beneficiary and their own children as remainder beneficiaries. They set the annual reversionary pension as a multiple of AWOTE, acknowledging that they can change the multiple any time prior to death if their lifestyle needs change. Five years later, Paul dies and their estate plans are activated. Dianne continues to live in the family home and she has access to the cash and shares. Paul s superannuation death benefit is paid to Dianne as a pension at the pre-determined multiple of AWOTE. Upon Dianne s death, her share of the house will pass to her two children and Paul s share of the house will pass to his two children. It is likely that the children will sell the house and receive a quarter of the proceeds each. The remainder of Paul s superannuation account is paid to his two children and Dianne s superannuation is paid to her two children. Conclusion A SAF can provide a powerful estate planning tool for blended families who wish to provide for a second spouse during their lifetime whilst maximising the opportunity to leave a residual estate to children from former relationships. For more information on this strategy please contact your business development manager. 10

For more information on the IOOF TechConnect team or IOOF AdviserConnect services, please speak to your business development or relationship manager, go to www.ioof.com.au/adviserconnect or call adviser services: For IOOF Pursuit please call 1800 659 634 For Portfolio Administrator or AssetLink please call 1800 205 951 For Spectrum Super please call 1800 333 909 This document is for financial adviser use only it is not to be distributed to clients. Issued by IOOF Investment Management Limited (IIML) ABN 53 006 695 021 AFSL 230524 as trustee of the IOOF Portfolio Service Superannuation Fund ABN 70 815 369 818 and Service Operator of the Investor Directed Portfolio Services. IIML is a company within the IOOF group of companies consisting of IOOF Holdings Limited ABN 49 100 103 722 and its related bodies corporate, and is not a registered Tax Agent. Examples contained in this communication are for illustrative purposes only and are based on the assumptions disclosed and the continuance of present laws and our interpretation of them. Whilst every effort has been made to ensure that this information is accurate, current and complete, neither IIML nor its related bodies corporate within the IOOF Group give any warranty of accuracy, reliability or completeness, nor accept any responsibility for any errors or omissions (including by reason of negligence) and shall not be liable for any loss or damage whether direct, indirect or consequential arising out of, or in connection with, any use of or reliance on, the information provided in this email. The information in this email and any attachments may contain confidential, privileged or copyright material belonging to us, related entities or third parties. If you are not the intended recipient you are prohibited from disclosing this information. If you have received this email in error, please contact the sender immediately by return email or phone and delete it. We apologise for any inconvenience caused. We use security software but dot not guarantee this email is free from viruses. You assume responsibility for any consequences arising from the use of this email. This email may contain personal views of the sender not authorised by us. PLA-6596 0713