Superannuation Q&A

This week’s questions cover:

• I started a TRIP under the old life expectancy rules. Can I use the simpler rules?
• Should I switch my corporate super fund to more conservative investments now?
• Can I make an in specie payment of shares from my pension fund?
• Is a pension-phase fund tax-free for all members?

Simpler rules

I have a "transition to retirement" pension fund, from which I receive a pension. I have been calculating the amount according to life expectancy generating a payment factor. I hear that I can now simply choose an amount between 4% and 10%. Is this correct?

Yes. That was a central plank of Simpler Super, one of former Treasurer Peter Costello’s lasting superannuation legacies. It didn’t make super so simple that it put advisers out of a job, but it has got rid of a lot of those annoying, complex, old-style calculations (including pension valuation factors and reasonable benefit limits).

As of July 1, 2007, all old-style pensions can be automatically transferred to the new account-based pensions. You can give up all those old calculations, if you wish, and start using the 4–10% account balance calculation for transition to retirement pensions (TRIPs). The calculation can be done at the start of the year.

Not all of the old-style pensions can be converted to account-based pensions. Superannuants with fixed-term and life expectancy pensions and annuities cannot be transferred to account-based pensions. The short-lived term allocated pensions (TAPs) also cannot be converted.

Time to go conservative?

I am in a company accumulation super fund and currently have the “aggressive” investment option selected. I can only change this quarterly. The fund has performed poorly over the past two quarters. Am I better off to change to a more conservative investment option for the next quarter(s), or stay where I am and hope that the market will pick up enough to counter the negative earnings of this present quarter?

It’s now actually the end of the quarter. So my apologies, but this is the first opportunity I have had (it was Good Friday last week) to answer this question. It’s a good question, so I hope that any answer I give to this now will be taken in light of that and can be used by you, and others, in the future. With that said, I apologise but I’ve got one of those yes/no answers for you.

If you can only change once a quarter, then your super fund is unfortunately inflexible. Most funds will allow more regular changes than that. But once a quarter is better than once a year or never. The problem with once a quarter is that it is so much harder to make timely “strategic” decisions about your investment strategy. Not impossible, just harder. You only, really, have about a one-week period near the end of each quarter to make the decision, sign the forms and get them to the fund manager.

The answer to this question depends on two things. The first is your view on whether the market is close to its bottom, or still has some way to fall. The second is in regards to your age (which was not supplied).

Ideally, and obviously, you want to shift from an aggressive to a conservative investment allocation before a market tumbles – in your case, prior to the start of either the December or March quarters. In that respect, it’s probably a bit late now. The Australian and global markets have already fallen significantly. The consensus view (from what I’m reading) is that they are probably closer to the bottom now. If you believe that the Australian and global markets have another 5–20% to fall – and that fall might bottom right near the end of a quarter, which is simply not possible to know three months out – then you might wish to consider switching to a more conservative investment strategy.

It’s a very tough decision to make. If you can only change your mind once a quarter, and have that change come into effect on the last day of March, June, September or December, and you have to make that decision a week or more in advance because you have to get original signed paperwork to them, then how does anyone know? Making a call as to where markets might be in three or six months from now, on a particular date, is beyond anyone’s, predictive abilities.

The second part of the answer is in relation to your age. If you are nearing retirement and the loss of capital that you have suffered is beginning to make your retirement look a little miserable, then perhaps you might like to take the more conservative approach. If you still have an outlook of five years-plus, then you may be able to sit out a couple of years of low-growth returns, as markets have already tumbled, with the expectation that you will be rewarded in the second half of that period. If you’ve got longer – seven to 10 years or more – then you’ve probably got another cycle, including another strong run, left in your super.

I have a concern, highlighted by a recent AXA survey (See Retirement and the risk factor), that Australians don’t realise how long they are likely to live in retirement and become too conservative with their super upon retirement.

Ultimately, that’s why the once-a-quarter change requires you to either have tremendous foresight, or tremendous courage. It’s a tough call. In many senses, it’s probably too late to go from aggressive to conservative. However, if you feel that, even after the recent falls, you’ve done well with your aggressive strategy from the last bull run, then perhaps consolidating by taking a more conservative approach could work well for you. Alternatively, you could take something in between, such as a “balanced” investment approach.

In specie contributions

I understand that members' in-specie contributions to super are sanctioned by the ATO, but the ATO will not allow SMSFs to use in-specie transfers when making lump sum or pension payments to beneficiaries. Is this correct? If so, what is the rationale behind the ATO's position? Are they likely to change their mind on this?

Correct. You are able to transfer in specie shares in your personal name into your super fund. If you are doing so, you will need to be careful of the $150,000–450,000 non-concessional contributions limit. You will also need to be aware that you will be setting off a CGT event, so you might have some tax to pay. See today’s column.

When it comes to the reverse – transferring assets in specie out of the fund – you’re half right. The tax office says you can make in specie transfers out of your super fund if you are making a lump sum payment, but not if you are paying a pension.

So, if you are contemplating this, make sure that the payment you are making is a lump sum payment rather than a pension payment.

How free is tax-free?

Recently you wrote “Once a fund is flicked into pension phase, it no longer has to pay tax”. Could you please give a little more detail? For example, if there are two members in an SMSF and one starts a pension while the other one is still working, does this mean that the total earnings of the fund become tax-free?

Aha. I should have been a little more precise there, I see.

The taxation works on an individual level. SMSFs should largely have segregated assets, so that each member of the fund has an individual account balance. Most accountants can perform this task quite simply with software, without having to have different owners for each individual share or dollar in cash. There is nothing stopping you having separate owners for individual assets, but it would just increase the work required.

Pension funds are tax free – that refers to the earnings and capital gains of the fund. That is, any interest or capital gains made by a fund in pension phase are not taxed as they ordinarily would be.

If there are two members of a fund and only one is moving to pension phase, then it is only that member’s assets – or that member’s portion of the super fund’s balance – that become tax-free.

Bruce Brammall is a senior financial adviser with Stantins Financial Services.

We can provide general investment advice only. If you’re seeking specific financial advice on your particular circumstances, then you’ll need to make an appointment with a licensed financial adviser.

Do you have a question for Bruce Brammall? Send an email to supersecrets@eurekareport.com.au.