Martin Breckon

A ban on exit fees, the ATO helping you track down lost or forgotten super and no insurance for young people with low balances are among changes in the 2018 federal Budget that will help people get more out of their super.

Martin Breckon, IOOF Head of Technical Services, said: “After some major changes this decade it’s gratifying to see the Coalition continuing to bed down superannuation policy, as well as helping people – especially young people just starting out in the workforce – build their retirement nest egg.

“Every penny you put in in the early years compounds nicely at the other end of the pipeline and will help build a sustainable retirement.”

IOOF also welcomed the announcement that the ATO will help reunite workers with their lost or forgotten super.

“With today’s mobile workforce it’s very easy for time-poor breadwinners to lose track of their super, and this move will help people to consolidate their accounts and minimise account fees.”

In other changes, all Australians of Age Pension age will have access to the improved Pension Loan Scheme. The Pension Work Bonus will be increased and extended to the self-employed.

Super also got attention with a series of integrity reforms, changes to self-managed super funds (SMSFs) and small APRA funds (SAFs).

From 1 July 2018, SMSFs and SAFs can increase to six members and SMSFs with good track-records can move from annual to three-year audits.

From 1 July 2019:

• Members over age 65 will not have to meet the work test to make contributions to super in the first year after they stop working. This is so long as their super savings are less than $300,000.
• Exit fees will be abolished on all super accounts.
• For super accounts under $6,000, administration and investment fees will be limited to 3%, measured half-yearly, and capped at $90 per six months.
• Inactive accounts under $6,000 will be transferred to the Australian Taxation Office (ATO) to be consolidated with the member’s active account.
• Opt-out insurance will be banned for those under 25 or if there is less than $6,000 in the super account.
• The ATO will undertake a review of the section 290-170 Notice system to ensure that members put in their notice before getting a tax deduction for personal contributions.

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Martin Breckon

The 2017 Federal Budget contained several proposals that will raise people’s engagement with their super. When contrasted with the 2016 Federal Budget, the changes in the most recent Budget were not of a similar magnitude, nevertheless, some changes will increase the level of engagement certain types of clients have with their super.

Martin Breckon, IOOF Head of Technical Services, said: “The proposed changes have more of an effect on both young and old people, with middle-aged people being somewhat left alone. This presents advisers with a great opportunity to focus on nurturing a pipeline of younger clients and to continue demonstrating their value to their older clients.”

First home super saver scheme will boost super engagement

This scheme will help people save for their first home by using their super account to build savings for a deposit in a tax-advantaged environment. People will be able to contribute a maximum of $30,000 over two years and this can be a mixture of concessional and non-concessional contributions, although the new concessional cap of $25,000 per year still applies.

This change will increase people’s engagement with their super because they are allowed early access to their money. This will sharpen their focus on super because the result of their saving and investment decisions will have an effect on their wellbeing in years and not decades. This behaviour is well-described by psychologists and is referred to as present bias.

Despite the saver scheme being limited to only $30,000, people will transfer the lessons they learned when thinking about their home saver account to their broader super account.

Mr Breckon commented, “A client who is more engaged is likely to make better financial decisions and to follow a plan more diligently, resulting in better outcomes, which leads to a higher likelihood of you receiving more high-quality referrals from satisfied clients.”

Older homeowners likely to seek advice when downsizing

Starting from July 2018, homeowners aged over 65 will be able to contribute up to $300,000 of the proceeds from selling their home into their super without affecting their lifetime cap of $1.6 million.

To successfully navigate this policy it’s very likely that people will seek financial advice because the process is quite complicated.

Mr Breckon said, “While older people may not always be the most attractive type of client for an adviser, it does provide an entry point for an adviser to build relationships with other, younger, family members. In addition, it could also present advisers with an opportunity to demonstrate their expertise in dealing with other financial advice issues, including aged care and social security.”

Complexity continues to increase

In concluding, Mr Breckon said “In the eyes of clients, one of the major benefits of using a financial adviser is their ability to explain and navigate the often complex rules that exist in super and social security. The level of complexity is steadily increasing, raising the perceived value of a financial adviser from a client’s perspective.

“A related opportunity that is fostered by complexity is providing financial advice to multiple generations of the same family, as it is now common for three generations of a family to all be clients of the same adviser. This means advisers need to consider using platforms that offer fee aggregation and fee capping when they have multi-generational clients in the same family.

“Finding persuasive ways to get people to seek financial advice is a challenge, but the 2017 Budget provides a number of new potential avenues that could be used to demonstrate the value of advice to existing and potential clients.”

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Martin Breckon

On 1 July 2017, some of the widest-sweeping reforms to super since 2007 will come into effect. These reforms aim to limit the amount of money people can contribute to super and transfer to the tax-free pension phase.

There has been a lot of focus on the complexities around the $1.6m limit on funds in pension phase, but the changes to contribution limits are also important to understand – especially given that some people may never again be able to contribute as much money super as they can this financial year.

Concessional contributions

To this end, from 1 July 2017 the cap on concessional contributions is dropping to $25,000 per annum – down from $35,000 for those over 50 and $30,000 for everyone else. This limits the ability to use super as a tax-effective vehicle to save for retirement. As a benefit however, the 10% maximum employment test regarding making personal concessional contributions is being removed, meaning anyone can claim a deduction for personal contributions they have made.

This will provide flexibility for many individuals who cannot currently salary sacrifice but are also not eligible to make personal tax-deductible contributions. Note however the requirement to lodge a notice of intent to claim a tax deduction with the fund (commonly referred to as s290-170 notices) still exists – so clients must be aware of the consequences of rolling out or withdrawing their super monies before they lodge their notice.

Additionally, from 1 July 2018 it will be possible to ‘carry forward’ unused portions of your concessional contributions cap which accrue after this date. The maximum period that can be carried forward is the previous five financial years – allowing for a potential carry-forward of $125,000 if someone has not made any concessional contributions through that period.

Non-concessional contributions

After-tax contributions have also been limited. The current annual non-concessional contributions cap of $180,000 is being reduced to $100,000 from 1 July 2017. The ability to use the bring forward provisions will still apply for those under age 65, allowing for a maximum contribution of $300,000 averaged over a three year period, which is significantly less than the $540,000 available today.

On top of this, the non-concessional contributions cap for people with more than $1.6m in total super assets including all accumulation funds, pensions and ‘transfer values’ for capped defined benefit pensions paying a benefit will be nil. This measurement will be applied based on the value of all super and pension assets at 30 June and will determine the cap for contributions for the following year – so eligibility for clients close to the cap may vary year to
year.

This limit also impacts the ability for those under 65 to bring forward future years’ contribution caps, to stop the case of a person accruing $1.59m in total super benefits and then triggering the full three year averaging. The table below shows the availability of the bring-forward for those under age 65.

Once within a bring-forward period, the above ‘tiering’ does not apply – however the ability to make a contribution within a future year is impacted by the $1.6m test.

It is important to note the changes to non-concessional contributions do not impact contributions which do not count towards the cap, such as personal concessional contributions, personal injury contributions and small business CGT contributions. However these contributions may count towards your future total super balance amounts and limit your ability to make further contributions in future years. Timing of contributions is becoming a bigger consideration with the introduction of annual balance tests which limit your ability to access contribution concessions.

On top of this, we have seen the re-introduction of the Low Income Super Contribution – the refund of up to $500 of tax paid on concessional contributions for those who have taxable income of less than $37,000 – as well as an increase in the spouse contribution threshold from $10,800 to $37,000. Both of these changes are more ‘quality of life’ changes which do not fundamentally change the contributions landscape, but open up the benefits of making contributions for lower income partners.

By Martin Breckon, Head of Technical Services

The post Understanding the upcoming changes to super contribution limits appeared first on AdviserVoice.

Martin Breckon

After receiving feedback from industry, the federal parliament has passed amendments giving effect to regulatory change, continuing the implementation of changes to superannuation that were announced by the Turnbull government in the 2016 federal budget.

Martin Breckon, IOOF’s Head of Technical Services said “We are pleased to see the Government continuing to refine the operation of its super reforms through passing changes that are fair and sustainable.

“While providing increased certainty, ongoing changes to superannuation have made it incredibly complex. In turn, this has made it incredibly difficult for individuals to manage their superannuation themselves, driving an increased need for them to seek advice.”

The regulatory changes confirmed by the passing of the amendments are effective from 1 July 2017 and include:

• Retail super funds will be able to establish a new accumulation interest for the payment of a super lump sum as a result of a commutation authority issued under the transfer balance cap system, without requiring an application form at the time of commutation. This provides a ‘safety net’ for individuals who do not have an existing super benefit and do not take action before the ATO issue their super provider with a commutation authority as the provider can simply transfer the commutation into an accumulation account, keeping it in the super system.
• Fund-capped contribution limits are to be removed, reflecting the increased complexity with administering this arrangement under the new non-concessional contributions cap, particularly around overseas transfers with a sizable applicable fund earnings component.
• Commutations from income streams will not count towards a pension’s minimum drawdown requirement, and similarly it will not be possible to elect a pension payment to be taxed as a lump sum withdrawal. Going forward a lump sum withdrawal will reduce a person’s transfer balance account, whilst a pension payment will count towards the minimum payment required from an income stream.
• Certain defined benefit funds can elect out of offering personal deductible contributions to their members. These schemes may not have the ability to adjust their benefits based on additional personal contributions, or may simply not be able to handle the administrative complexity in dealing with these contributions.
• A death benefit is only considered a roll-over super benefit so long as it is paid as to a dependant entitled to receive a death benefit income stream. This will allow the ability to rollover a death benefit from one provider (who may not offer a death benefit income stream) to a different provider who is able to pay a death benefit income stream.
• Death benefit income streams, by definition, must be cashed as ‘retirement phase’ income streams to meet the requirements under the Superannuation Industry (Supervision) Act.

After consultations with the industry, the following proposed changes were removed from the final version of the amendments:

• The drafted ability to commute from certain commutation-restricted income streams has been removed from the final regulations. This could potentially introduce an inability for members with significant Term Allocated Pensions (TAP) interests to rollover from their existing product from 1 July 2017 as after this date a rollover of a TAP will not be considered a capped defined benefit interest. Thus TAPs with more than $1.6 million rolled over post 1 July 2017 will cause a transfer balance excess to be created which cannot be commuted. It is understood that reversionary capped defined benefit interests will remain as capped defined benefit interests on death of the original owner, as the income stream was in the retirement phase on 1 July 2017 and continues past death.
• The proposed relief from having to retain actuarial certificates for Self Managed Super Funds (SMSFs) and SAFs using the proportionate method to calculate their Exempt Current Pension Income (ECPI) where the fund was only paying account-based pensions or TAPs has not made law. This relief was mentioned as part of the explanatory memoranda for the Bill which introduced the transfer balance cap system, however the proposed approach for calculating ECPI under the non-actuary method was seen to be more expensive than obtaining the certificate in many instances, which may have led to the removal of the exemption.

At this time it is not known if the Federal Government plans to introduce any further regulation or legislation in relation to the super reforms.

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Martin has been a key member of IOOF’s technical services team since 2012 and has over twenty years’ experience in technical advice services. Prior to joining IOOF in early 2012, Martin held technical management roles at AXA, Aviva and MLC. He is an active member of industry bodies and provides regular technical commentary across the industry and in specialist publications.

Mr Renato Mota, Group General Manager Wealth Management, said, “Succession planning and mentoring is fundamental to the development of IOOF’s Advice business.

“The promotion of Martin is testament to this. Martin is highly capable, extremely knowledgeable and has an expert understanding of best practice provision of financial services advice and strategies. He is highly respected by licensees, advisers and his peers across the broader industry.

“IOOF’s technical services team is an industry leader, widely acknowledged for its superior understanding and insights into the constantly changing financial services environment. I am confident Martin will ably lead the TechConnect team and continue to keep IOOF and our Advice network at the forefront of industry developments.”

Martin’s appointment is effectively immediately.

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Martin Breckon

This change will also remove the contentious provisions that would look back and take into account contributions made since 2007. Neither the Coalition backbench nor the ALP Opposition were ever persuaded that the lifetime cap proposal as announced in the 2016 Budget was not retrospective.

Dropping the $500,000 lifetime cap and removing its contentious retrospectivity is likely create a one-off opportunity for clients to contribute this year under the current non-concessional contributions cap of $180,000 or $540,000 (using the current bring forward rules). The proposed new non-concessional contributions cap will apply from 1 July 2017.

Under the current rules, a client under age 65 who has not already triggered the “bring forward” rules can contribute up to $540,000 in this financial year without breaching the non-concessional contributions cap. This is $240,000 more non-concessional contributions than will be permitted from 1 July 2017.

Also the Treasurer’s new changes will prohibit a client from making non-concessional contributions after 1 July 2017 where their account balance is over $1.6 million. If a client already has $1.6 million in superannuation and had intended to make further non-concessional contributions, he/she can make non-concessional contributions this financial year, before the commencement of the new rules.

These opportunities will depend on how the new legislation is drafted. If the Government (as expected) takes a simple approach to amending the current tax legislation, clients will be able to contribute this year under more generous rules. Draft legislation on changes to the con-concessional contributions cap are expected later this year.

By Martin Breckon, Technical Services Manager

The post IOOF: Dropping the retrospective super cap creates new opportunities for clients appeared first on AdviserVoice.

Martin Breckon

According to IOOF, this weekend’s Federal Election outcome typifies the challenges that the Australian financial services sector continually faces – a desire for clarity and certainty. However, the reality is that this may be unattainable regardless of which party eventually forms Government.

Martin Breckon, IOOF Senior Technical Services Manager, said the policy direction of superannuation in particular remains unclear.

“Although central to the core purpose of superannuation, we still have not yet addressed major societal issues such as women’s economic security and older Australians’ workforce participation, which correlate in superannuation terms to adequacy of funding and longevity.”

Mr. Breckon went on to cite the transition to retirement pensions and the non-concessional contribution caps as examples of areas which need to be addressed by Government through consultation.

“The May 2016 Budget announcements outlined that investment earnings on transition to retirement pensions will be taxed. It seems reasonable that we then need to consider the broader issues like the flow-on impacts for anticipated fund reporting requirements; whether this means a new form of benefit payment (and hence tax) within the accumulation division in the fund; and whether there would be any type of grandfathering?

“The $500,000 non-concessional contribution cap lifetime limit also presents certain issues concerning their retrospective treatment (looking back to contributions made since 2007). Furthermore, the subsequent exemptions given for certain small funds being partially through the completion of an LRBA[1] transaction, creates additional complexity. How for instance we might recognise these these exempted amounts on a rollover when a small fund closes?

“It is critical that whichever party forms Government in the following weeks ahead, consults widely and constructively with the industry to ensure clarity of purpose is achieved, as superannuation funds and financial advisers have serious obligations to fulfil to their members and clients.”

Commentary from IOOF Senior Technical Services Manager, Martin Breckon

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[1] Limited recourse borrowing arrangement

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