FPC003_T7_v14

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Document classification: Confidential Topic 7: Superannuation strategies Disclaimer These materials are issued by Kaplan Higher Education on the understanding that: • Kaplan Higher Education and individual contributors are not responsible for the results of any action taken on the basis of information in these materials, nor for any errors or omissions; and • Kaplan Higher Education and individual contributors expressly disclaim all and any liability to any person in respect of anything and of the consequences of anything done or omitted to be done by such a person in reliance, whether whole or partial, upon the whole or any part of the contents of these materials; and • Kaplan Higher Education and individual contributors do not purport to provide legal or other expert advice in these materials and if legal or other expert advice is required, the services of a competent professional person should be sought. The views expressed by presenters delivering course material by lecture or workshop may not necessarily be those of Kaplan Professional. Copyright Published by Kaplan Professional Sydney. © Kaplan Higher Education Pty Ltd 2023 trading as Kaplan Professional. All rights strictly reserved. No part of these materials covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, taping or information retrieval systems) without the written permission of Kaplan Higher Education. Kaplan Higher Education makes every effort to contact copyright owners and request permission for all copyright material reproduced. However, despite our best efforts, there may be instances where we have been unable to trace or contact copyright holders. If notified, Kaplan Higher Education will ensure full acknowledgement of the use of copyright material. Acknowledgements All ASX material is © ASX Limited. All rights reserved. All ASX material is reproduced by the publisher with the permission of ASX Limited. No part of this material may be photocopied, reproduced, stored in a retrieval system, or transmitted in any form or by any means, whether electronic, mechanical or otherwise, without the prior written permission of ASX Limited.

Topic 7: Superannuation strategies Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education FPC003 Superannuation and Retirement Advice Contents Overview .......................................................................................................................... 7.1 Topic learning outcomes ....................................................................................................................... 7.1 1 Introduction to superannuation strategies ............................................................ 7.2 2 Superannuation fund recommendations and consolidation .................................. 7.5 3 Case study 1: TTR income swap strategy ............................................................... 7.8 4 Case study 2: Retirement optimisation strategy .................................................. 7.10 5 Case study 3: Retirement income strategy .......................................................... 7.17 6 Case study 4: Death benefit strategy ................................................................... 7.23 Summary ........................................................................................................................ 7.28 Suggested answers ......................................................................................................... 7.29 Reference list ................................................................................................................. 7.31

7.1 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Overview This topic introduces students to the concept of advice and recommendations in relation to superannuation accounts in the accumulation and drawdown phases. The topic covers structuring superannuation, choice of fund, income stream strategies and death benefits. Using case studies, issues, recommendations and outcomes are considered in different situations. This topic specifically addresses the following subject learning outcomes: 2. Critically analyse key elements of superannuation including the contribution, accumulation and payment of benefits. 3. Identify and critique retirement planning strategies and formulate solutions for client situations. Topic learning outcomes On completing this topic, students should be able to: • evaluate strategies for combining superannuation funds • outline optimal structuring in terms of tax, e.g. recontribution • discuss transition to retirement strategies • evaluate strategies for using retirement income stream products • discuss the strategies relating to superannuation death benefits • articulate the benefit of a recontribution strategy in minimising superannuation death benefit tax.

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7.2 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education 1 Introduction to superannuation strategies Most clients will have existing superannuation savings and it is important to help ensure that they are making the most of them. In ‘ Topic 3: Contribution strategies ’ we covered ways to increase superannuation through contributions; now we will look at the important aspects of the actual fund, composition of the money in the superannuation accounts, the use of income streams, as well as the death benefit potential outcomes. When considering superannuation for clients, advisers need to consider the following issues with regard to a client’s current accounts: • Are the superannuation funds invested in an option that reasonably matches the client ’ s preferred or required risk tolerance? • Does the client have multiple superannuation accounts? • Has the performance been adequate, given the asset allocation? • Are the fees and charges acceptable? • Are the client’s goals, priorities and perceived needs/desires realistic and achievable within their desired asset allocation and risk tolerance? • Can inexpensive life and/or total and permanent disability (TPD) and/or income protection insurance (if required) be purchased within the superannuation fund, and is that cover adequate? • Are the client’s estate planning wishes structured appropriately especially where the $1.7 million transfer balance cap may limit the amount that can be used to purchase retirement phase income streams to the individual and/or their beneficiary? • Will health issues mean the client will not be able to get insurance outside superannuation? • Does each partner have an appropriate balance? • Does either partner have more than one superannuation account, and is this appropriate? • What are the components of the client’s existing funds (taxable and tax exempt)? • Are there any estate planning issues that should be reviewed? As a result of these discussions, advisers may realise the client has not been managing their superannuation savings effectively and may be able to recommend some changes in order to maximise the client’s savings capabilities, including: • switching funds — but only where necessary. Any fees and lost benefits must be fully justified and disclosed to the client • switching investment options — but only where necessary and aligned with the client’s risk profile • exploring potential budgeting and cash flow enhancements • applying favourable superannuation and tax rules to the client’s situation to potentially enhance their retirement situation. Once changes to their existing superannuation fund structure have been finalised, there are a number of superannuation-specific strategies to consider other than contributions, such as: • SMSFs • limited recourse borrowing • recontribution strategies • transition to retirement (TTR) income streams (covered in more detail in section 3).

7.3 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education In view of the superannuation strategies considered above, when developing recommendations in relation to superannuation, advisers should: • ensure the clients can afford the strategy, especially if the strategy is ongoing, such as salary sacrifice • ensure that sufficient liquidity remains outside of superannuation in the form of an investment such as a cash managed trust, and that there is adequate insurance • where possible, ensure that there is a personal savings program in place when superannuation assets are expected to be preserved for a significant period • not recommend starting a self-managed superannuation fund (SMSF) unless it is appropriate to do so, considering issues including an assessment that: – the clients have significant superannuation savings that are expected to increase – the clients can develop and work within an investment strategy in their own fund – the clients have expressed interest in an SMSF – the clients’ objectives include investment in assets that cannot be held in a publicly offered fund (such as owning direct property) – the clients are committed to giving the time and taking the responsibility to manage the SMSF – the clients understand the implications of the sole purpose test and are not expecting to inappropriately use assets within the fund – there are sufficient compliance processes or expert support in place to ensure proper management – the client has sufficient time prior to retirement to gain experience in running the fund – the costs involved can be justified – a full cost – benefit analysis can be provided to the client – the client understands the risks involved.

7.4 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Example: Timing a recontribution before an income stream It is early May 2023 and Alice is aged 63 and about to retire. She has a total of $440,000 in her superannuation fund, entirely made up of taxable taxed components. Alice intends to roll this money over into an income stream. Because she is over aged 60, Alice can receive all income payments and lump sums tax free. On her death, any amount paid to a death benefits dependant is paid tax-free, but amounts paid to non-dependants such as adult children will be taxed up to 17%. If Alice dies with $440,000 in an account-based pension, her adult children will pay tax up to $74,800. To avoid this, Alice could cash out the $440,000 tax free before starting the income stream. She then makes a recontribution of $110,000 back to superannuation as a non-concessional contribution on or before 30 June 2023 and contributes the remaining $330,000 using the bring-forward rule to make a non- concessional contribution on or after 1 July 2023. This amount is then rolled over to an account-based pension, now with entirely tax-free component. On her death, there will be no tax payable by a non-dependant. If Alice had substantially more than $440,000 in superannuation, then she could consider having two separate pensions. One pension consists of an all-taxable component which she can commence after withdrawing the $440,000 but before making her non-concessional contributions. She can commence the second pension right after the non-concessional contributions totalling $440,000 (all tax-free component) are made. From a cash flow perspective, she would draw as much as she needs from the pension that consists of an all-taxable component and receive minimum pension payments from the pension that has all tax-free component. This may assist with more planning options to reduce the impact of the death benefit tax paid by her non-dependent beneficiaries. As discussed in Topic 3, often there are many options available to clients and more than one strategy may work, so it becomes important to consider which is the best for the client, that is, which best aligns with their goals, needs, available resources, risk tolerance, timeframes, and so on. When it comes to recontribution strategies, an assessment of the following key factors is usually required: • Can the client make a withdrawal and a subsequent contribution, and if so, what kind? • What tax applies to the withdrawal and what benefit does it achieve? • Can extra cap space be utilised by timing contributions? • How will the client fund their retirement income? • What happens if the client dies prematurely?

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7.5 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education 2 Superannuation fund recommendations and consolidation Replacing products or recommending that clients consolidate their superannuation into one fund, or choosing one fund over another for contributions, constitutes providing advice and all require best interests obligations to be met. ASIC refers to this advice collectively as ‘ super switching adv ice’, which is not a technical or legal term, but covers: • the transfer (in whole or part) of an existing superannuation account balance from one superannuation fund to another superannuation fund • the redirection of future contributions away from one superannuation fund to another superannuation fund. Although it is reasonable to offer limited (scaled) advice to clients when they want it, ASIC notes that they will ‘look closely at the files of advisers who seem to have a number of clients who only want advice about the “ to ” fund, although they are still eligible to remain in their “ from ” fund’. Further, they will also ‘ look closely at the files of advisers who have a number of clients only wanting advice limited to specific comparative information (e.g. fees and costs) ’ (ASIC 2013). They also recommend that the adviser will need to know: • client’s age • dependants • intended retirement age • future financial needs and goals • insurance needs • desire to minimise fees and costs • risk tolerance • financial literacy • existing investments (including superannuation) • tax situation. ASIC also recommends that if the adviser knew (or should have known) that: • the overall benefits likely to result from the ‘to’ fund would be lower than under the ‘from’ fund, unless outweighed by overall cost savings, or • the cost of the ‘to’ fund is higher than the ‘from’ fund, unless the ‘to’ fund better satisfies your client’s needs, then the advice is likely to be inappropriate (not in the client’ s best interests). All this emphasises the need to know the client and know the product; it is not enough to simply roll over a fund to one you can provide recommendations on from one you do not have on your approved products list (APL). According to RG 175 ‘Licensing: Financial product advisers— Conduct and disclosure ’ (ASIC 2021), the statement of advice (SOA) should show that the client’s existing product has been properly considered, and should include information about: • the cost of the recommended action (i.e. the disposal of the existing product and acquisition of the replacement product) • the potential benefits (pecuniary or otherwise) that may be lost • any other significant consequences of the switch for the client (such as insurances).

7.6 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education RG 175 states that the SOA should include information about: • the loss of access to rights (e.g. insurance cover) or other opportunities, including incidental opportunities (e.g. access to product discounts) associated with the existing product (also including rights or opportunities not presently available to the client but which may become available in the future) • the entry and ongoing fees applying to the replacement product (ASIC 2021). The adviser needs to conduct adequate research on superannuation funds being replaced, and those being recommended. Some key sources of information are: • a superannuation fund’s MySuper product dashboard (showing the return target, the returns for previous financial years, a comparison between the return target and the returns for previous financial years, the level of investment risk, and a statement of fees and other costs) • the product disclosure statement (PDS) (fund issuer, benefits, risks, costs, return of each investment option associated with the superannuation product) • Target Market Determination (TMD) (who the fund is designed for, key attributes of the fund, including specific options within a fund, how the fund is distributed) • research and ratings sites like Morningstar, Lonsec, SuperRatings, Chant West etc (fund rankings are usually based such things as investments, member services, fees and organisational strengths) • member statements held by the client, or if not held by them, accessible to them and the adviser with authority from the client (actual returns, components in fund, eligible start date/service period, details of specific insurance cover and costs, options for retirement etc). Example: Superannuation swapping for Jess Young It is early July 2023 and Jess Young is now 22. She has been saving away for her home deposit and is concerned that the superannuation fund she is in is not really up to scratch. Jess has a superannuation fund that came from her previous part-time employment and she recently read an article in the paper about funds that were not doing well, and she thinks it may be one of them. Jess has an average risk tolerance and is currently invested in a MySuper product suited to her age. She has no insurance in the fund. Her main concerns about her current fund are: • the fees seem high • performance does not seem very good • lack of transparency in investments — she would prefer ethical investments that help the planet • investment choices — she would like to maybe park some money into safer investments and some into riskier ones to protect the deposit she has saved so far.

7.7 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education As the adviser, you do some research into her current fund and at least one alternative that you think would suit her and compare: • investment objectives, strategy and performance • level of investment choice • ethical credentials and options • fees and charges (in the funds and to leave or join either) • availability of insurance, including cost of premiums • ability to make further contributions • types of death benefit options • types of death benefit nomination options • other benefits available from the fund. You put together a summary of how the new fund is superior to her existing fund in the areas that matter most to Jess, such as lower fees, more investment choices aligned with her ethical goals and a solid track record of performance. You include ratings research and opinions about the quality of the fund managers in the new fund and present all of this to her for approval. Jess is happy and decides to go ahead. Before you can roll over the existing fund to the new fund, you may need to open a new fund account to enable the rollover and to provide to the employer so that they can start making the salary sacrifice and superannuation guarantee (SG) contributions to the new fund. Under the SIS regulations, a superannuation fund licensee must complete a standard rollover as soon as practicable but not later than three business days after receiving the request containing all mandated information. Apply your knowledge 1: Super consolidation If Jess had more than one superannuation fund, and one had insurance in it and the other didn’t, what would be a key consideration in determining what to do?

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7.8 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education 3 Case study 1: TTR income swap strategy The following is an example of a case study based on a client who is close but not yet ready to retire and some strategies that may be relevant for him. Case study: Anton Bing It is 1 July 2023 and Anton, aged 60, has $300,000 in his superannuation fund. He is earning $70,000 per year working full-time and is currently not salary sacrificing. He has heard that he can start a TTR income stream, although he is not sure how this could help him to maintain an equivalent take-home pay while salary sacrificing up to his concessional contributions cap. He needs his current take-home pay to meet his preferred lifestyle but he would love to save some tax if he could. You show him how this could work by looking at the maximum amount he can salary sacrifice under current caps, and under carry-forward provisions to maintain the same after-tax income he has now. The strategy essentially works by converting the $300,000 superannuation account into a TTR pension account and adding money into superannuation through SG and salary sacrifice, and taking money out under the TTR rules. Two options were considered: • Salary sacrifice up to the current concessional contributions cap and generate enough income from the TTR to leave his net income unchanged. • Salary sacrifice a greater amount using his carry-forward concessional contributions cap space and generate the maximum income from the TTR to leave his net income unchanged. Can Anton make contributions to superannuation? Yes, Anton is eligible to make concessional and non-concessional contributions up to the relevant caps. He could access carry-forward contributions if needed. Anton needs to make sure any concessional contributions do not exceed the caps by including his SG amounts in the calculations. Anton has only made SG contributions to his fund in the last five years. He has a carry-forward amount available of $90,900 that could be used in 2023/24 (see Table 1 below) in addition to his remaining concessional contribution cap of $19,800 after taking into account his SG of $7,700 (i.e. $27,500 less $7,700). Table 1 Anton carry-forward concessional cap space Year Concessional cap Anton cap used (SG) Anton cap remaining 2022/23 $27,500 $7,350 $20,150 2021/22 $27,500 $7,000 $15,700 2020/21 $25,000 $6,650 $18,350 2019/20 $25,000 $6,650 $18,350 2018/19 $25,000 $6,650 $18,350 Total unused concessional cap $90,900

7.9 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Is the strategy worthwhile? The strategy does achieve a reduction in the income tax paid by Anton, with either option, while maintaining his after-tax income at the same level as before the strategy. This is shown in Table 2 below. Table 2 After-tax position no salary sacrifice vs salary sacrifice with TTR income Item No salary sacrifice Salary sacrifice to annual CC cap + TTR Salary sacrifice using carry forward + TTR Salary $70,000 $70,000 $70,000 Salary sacrifice $0 $19,800 $48,116 Taxable income $70,000 $50,200 $21,884 Tax payable (including LITO and Medicare) $14,617 $7,539 Nil TTR pension amount (tax free) $0 $12,722 $33,499 After-tax income $55,383 $55,383 $55,383 Income tax saving n.a. $7,078 $14,617 Extra contributions tax cost n.a. $2,970 $7,217 Net tax benefit n.a. $4,108 $7,400 Using both of the income swap strategies, Anton has been able to replace the reduced cash flow from salary sacrificing by receiving tax-free TTR income as he is over age 60. By implementing either strategy, Anton has been able to save significant tax. These tax savings are effectively channelled into superannuation as net contributions to boost his retirement savings. Clearly the larger salary sacrifice gives him the bigger tax saving but it could only be achieved for about two years before he runs out of cap space and the salary sacrifice amounts would need to be reduced. Although the contributions to the fund are taxed at a rate of 15%, the amount being put into the fund after tax is still larger than the amount being taken out of the fund (Table 3 below). This means that even though Anton is drawing an income from the TTR pension account, he is not depleting it. Table 3 Impact on superannuation (TTR) account from strategy Item Account balance Opening balance $300,000 Contributions including SG (net of tax) $23,375 TTR income paid $12,722 Amount in fund at end of year (not including returns) $310,653 What about access to funds and tax consequences? As Anton is over 60, he has reached preservation age and can access whatever funds he needs if he has met a full condition of release. If not, he has to wait until he reaches age 65. All his withdrawals are tax free as he is over 60. On the whole, it may be a strategy worth considering for Anton.

7.10 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Apply your knowledge 2: Pros and cons of TTR income swap strategy 1. Why would you not recommend Anton salary sacrifice more to his TTR than the amount recommended in the analysis? 1. What would be different if Anton was age 59? 2. What would you recommend if Anton decided to cut back his work hours, and his income fell to $55,000 before tax? 4 Case study 2: Retirement optimisation strategy The following case study is based on a couple who are retired but have had a change of circumstances. They had some advice when they retired but now need more appropriate advice. Case study: The Medelålders Imagine it is still 1 July 2023, but 20 years have passed for the Medelålders family (Lars and his wife Amanda), and Lars is now 61 and Amanda is 55. Since you last saw them, they have cleared the mortgage and continued to contribute to their superannuation funds almost entirely via tax- deductible contributions and SG. They are now ready for Lars to retire, as his work has become too hard. Amanda intends to keep working in her current part-time role until she reaches 60. At that time, they expect both children will have left home and they can reduce expenses, and maybe consider moving to a smaller house. Their cash flow position if Lars stops work is shown in Table 4 below. They need at least $21,477 income from Lars to meet their expenses. Table 4 Amanda ’s and Lars ’s income and expenses Item Lars Amanda Combined Salary $0 $75,000 $75,000 Salary sacrifice/deductible contributions to super $0 $0 $0 Allowable deductions $0 $1,500 $1,500 Taxable income $0 $73,500 $73,500 Tax payable (including LITO and Medicare) $0 $15,825 $15,825 After-tax income $0 $59,175 $59,175 Mortgage $0 $0 $0 Other expenses $40,326 $40,326 $80,652 Net income after tax and expenses – $40,326 $18,850 – $21,477 Their goals are: • pay as little tax as possible on their income • invest in line with their balanced risk profile • retire completely in seven years with an income of at least $66,000 after tax, at least until Lars ’ s life expectancy is reached, and ideally until Amanda ’s is reached • gain a clear understanding of how long their assets will last, based on their desired income in retirement. See Table 5 below.

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7.11 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Table 5 Amanda ’s and Lars ’s superannuation accounts Superannuation balance Lars Amanda Combined Superannuation balance $740,792 $484,520 $1,225,312 Tax free $20,000 $15,000 $35,000 Taxable taxed $720,792 $469,520 $1,190,312 Taxable untaxed $0 $0 $0 Total account balance $740,792 $484,520 $1,225,312 You consider the following: • a recontribution strategy for Lars to improve the tax position in his superannuation or a withdrawal from Lars’ s superannuation account and a non-concessional contribution into Amanda’s superannuation account • g enerate enough income from Lars’ s account-based pension to make up the shortfall or start salary sacrifice (or concessional contributions at the end of the year) to Amanda’s superannuation, up to her concessional contributions cap and draw more from Lars’ s income stream to make up the difference. Of course there will be interaction between these options, as lowering Lars’ s account balance will reduce his minimum required pension amount and will reduce the time it lasts, particularly if he is covering more of the expenses. See Figure 1 below. Figure 1 Strategy options for Lars and Amanda

7.12 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Can Lars and Amanda make contributions to superannuation? Yes, they are eligible to make concessional and non-concessional contributions up to the relevant caps. As they have made no non-concessional contributions in the last three years, they could access bring-forward non-concessional contributions up to $110,000 each. They have been making concessional contributions but have not utilised any carry-forward allowances in recent years. Amanda could split her SG or personal contributions to Lars if desired, but he would then need to maintain an accumulation phase account. This option is not being considered. Lars or Amanda could make a spouse contribution and potentially there could be a tax advantage for Amanda to do this; however, again, this option is not being considered as it would require Lars to have an accumulation account. Now that Lars is moving into the retirement income phase, what investment mix is suitable? Lars will be invested for the long term, so maintaining his investment mix in line with his balanced risk profile makes sense. Assume Lars ’ s fund asset allocation is as shown in Figure 2 below. It is around 77.50% growth and 22.50% defensive assets. Figure 2 Asset allocation for Lars ’s account-based pension With this mix of assets, he could generate around $15,000 in income (dividends, interest, rent) and his cash and fixed interest balance would be around $140,000. This should provide some buffer for him in the event that markets are volatile; however, if the investments are not managed individually and income payments cannot be directed from the cash first, then fixed interest, he may end up having to sell growth assets when the markets are low. Similarly, if this is a managed fund with automatic rebalancing, growth assets will be sold when they are performing well and cash/fixed interest assets may be used to buy into growth assets, reducing the buffer. For this reason, it may be better to have these investments as separate investments within a wrap where the mix can be managed more specifically to suit Lars’ s needs. 23% 26% 7% 16% 6% 2% 3% 15% 4% Australian shares International shares Private equity Infrastructure Unlisted Property Listed Property Credit Fixed interest Cash

7.13 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education What does the recontribution achieve? The recontribution strategy will increase the tax-free components of the superannuation. As Lars is over 60, withdrawals are tax free and he can therefore withdraw what he likes without tax consequences in the short term (condition of release is met). Withdrawal and recontribution to his own superannuation, or entirely to Amand a’s super annuation would limit Lars to a withdrawal of $330,000, whereas if both accounts are used, he could withdraw up to $660,000 and recontribute $330,000 into each fund. However, if he did this, his account balance would fall to $410,792 and Amanda’s would increase to $814,520 (Table 6 below). The question then would be whether the account balance would be too low to achieve their goals and whether the clients would be happy with these differences in account balances. Table 6 Superannuation account balances and tax-free components Withdrawal and recontribution Lars ’s account balance Lars tax-free component Amanda account balance Amanda tax-free component $330,000 withdrawal and all back to Lars $740,792 $341,090 $484,520 $15,000 $330,000 withdrawal and all back to Amanda $410,792 $20,000 $814,520 $345,000 $660,000 withdrawal and half each $410,792 $332,181 $814,520 $345,000 An advantage of this final option in the table could be increased eligibility for the age pension as Amanda’s account balance would not be assessed as she is under age pension age. However, as Lars is also under age pension age, this is not a real advantage right now. However, over time this could become relevant, particularly as Lars depletes his account. There is no current tax advantage for Lars in increasing his tax-free component as he is able to withdraw lump sums tax free (he has no untaxed elements) and he has a spouse who could receive death benefits tax free. The only real benefit is longer term, in the event that he has no tax-dependent beneficiary. Making a smaller recontribution to Amanda’s superannuation could help to even up their account balances; however, Amanda will continue to work and grow her superannuation for several more years, whereas Lars will be depleting his, so this may not be of much benefit either. Is it worthwhile to take more income from Lars’ s income stream and have Amanda salary sacrifice? The balance here is between running down Lars’ s account balance faster but saving income tax, or keeping his account going for longer but paying more tax. The tax benefit is shown below in Table 7 below.

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7.14 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Table 7 Superannuation account balances and tax-free components No salary sacrifice Item Lars Amanda Combined Salary $0 $75,000 $75,000 Salary sacrifice/deductible contributions to super $0 $0 $0 Non-assessable non-exempt income $22,000 $0 $22,000 Allowable deductions $0 $1,500 $1,500 Taxable income $0 $73,500 $73,500 Tax payable (including LITO and Medicare) $0 $15,825 $15,825 After-tax income $22,000 $59,175 $81,175 Other expenses $40,326 $40,326 $80,652 Net income after tax and expenses – $18,326 $18,849 $523 With salary sacrifice Item Lars Amanda Combined Salary $0 $75,000 $75,000 Salary sacrifice/deductible contributions to super $0 $19,250 $19,250 Non-assessable non-exempt income $35,000 $0 $35,000 Allowable deductions $0 $1,500 $1,500 Taxable income $0 $54,250 $54,250 Tax payable (including LITO and Medicare) $0 $8,997 $8,997 After-tax income $35,000 $46,753 $81,753 Other expenses $40,326 $40,326 $80,652 Net income after tax and expenses – $5,326 $6,427 $1,101 The salary sacrifice has reduced their tax to $8,997, and even when the contributions tax of $2,888 for the extra contributions to superannuation is included, they are $6,109 better off with this approach. This seems to be worthwhile for the couple to pursue as it is also helping to top up their overall superannuation. If the withdrawal recontribution strategy is just used to reduce the taxed element of Lars’ s fund but not to top up Amanda’s , then the income needed from Lars’ s fund can readily be met from his account balance, without the likelihood of it depleting too much. For example, see Figure 3 below for Moneysmart ’s estimate for Lars, showing his pension running out at age 72 for the lower account balance and $35,000 per year income, and at age 81 with the higher account balance and $35,000 per annum.

7.15 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Figure 3 Comparison of Lars’ s account-based pension based on recontribution to his fund only (higher account balance) and recontribution to both Lars’ s and Amanda’s funds (lower account balance) Source: Adapted from Moneysmart n.d. Note: Assumed 5% return before fees and taxes, 1% indirect cost ratio, and results in today’s dollars . What does the longer term outlook show? Although it is probably somewhat speculative to project longer term, Amanda and Lars have asked about their long-term prospects. Assuming Amanda continues with her current income, and contributes up to the current concessional caps until she retires in five years ’ time, some predictions can be made about their account balances and hence income generation from their pensions. Amanda and Lars indicated that they could cut back expenses once Amanda retires as the children will be fully independent. They suggest that they would be comfortable with $70,000 per annum. They would also like access to some form of emergency funds, so would want a somewhat flexible income in retirement. Based on this goal, using the same return assumptions as above, their balances will be as shown in Table 8 below. Figure 4 below shows their income and account balance, without any potential age pension. Table 8 Account balances when Amanda retires Lars ’ s account-based pension Amanda ’ s superannuation account Combined $562,684 $811,997 $1,374,681 $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 Lower Account Balance Higher Account Balance

7.16 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Figure 4 Account balances once both couples retire on $70,000 per annum Source: Adapted from Moneysmart n.d. Note: Assumed 5% return before fees and taxes, 1% indirect cost ratio and results in today’s dollars . As Figure 4 above shows, their income can comfortably last until Lars is age 85 without any age pension support. The couple also spoke of potentially downsizing, which could further extend the longevity of their income stream. Apply your knowledge 3: Pros and cons of wealth accumulator contribution strategy 1. Would a recontribution strategy be better for Lars if he was to retire at age 59? 2. Return and income predictions for the clients ’ future rely heavily on assumed rates of return remaining in line with average returns . What is a way to structure Lars’ s investments in the account-based pension to further minimise this sort of risk? $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85

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7.17 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education 5 Case study 3: Retirement income strategy The following case study is based on an individual looking to grow their retirement savings and reduce their tax. Case study: Victor Yang It is now 1 September 2023 and you are further assisting Victor Yang, aged 66, whom you have already assisted with a strategy for contributions from downsizing and selling his business. He has settled all of the sales and is now ready to start an income stream from his superannuation and needs more advice. Victor’s primary goals in order of prior ity are now: • optimise his superannuation savings to provide him with $65,000 per annum for his lifetime • provide some form of stable or guaranteed minimum income to provide security • protect his superannuation account against inflation but not invest in high-risk assets • maybe access some age pension or other government concessions or benefits • leave a decent inheritance for his two adult children, Lily and Rose. Victor has the following in his superannuation account thanks to the strategies undertaken by you (Table 9 below). Table 9 Victor ’s assets to support retirement Savings account balance Savings account $1,207,000 Superannuation account balance $2,730,000 Total assets $3,937,000 Superannuation account components Tax free $2,530,000 Taxable taxed $200,000 Taxable untaxed $0 Total account balance $2,730,000 You consider the following: • Use his superannuation account to start an account-based pension now up to the transfer balance cap. • Use his savings account to provide a stable income from the interest and capital withdrawals, and defer the start of the account-based income stream, leaving the superannuation account balance for now. • Consider purchasing an ordinary annuity to provide certainty of income. • Determine an appropriate asset allocation in his superannuation/account-based pension accounts to provide security of cash flow and some growth.

7.18 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Although Victor is concerned about security of income, he has a large superannuation account balance so he can afford to take some risks with it while keeping his money outside superannuation in a low-risk investment, generating minimal taxable income and providing a buffer. It is therefore worth considering two main options: start an account-based pension now, or defer the start and use his assets outside superannuation to provide an income while his account balance grows inside superannuation (see Figure 5 below). Figure 5 Strategy options for Victor Can Victor start an account-based pension, and can he make withdrawals from superannuation? Yes; however, he is only able to transfer $1.9 million to an account-based pension and the rest has to remain in the accumulation phase. Deferring the rollover may in fact allow him to take advantage of any indexing in the transfer balance cap, whereas transferring the entire $1.9 million now means he will not have access to any increases as a result of indexation. Victor is retired and past his preservation age so he can make withdrawals from his superannuation account as and when he likes. He will pay no tax on any withdrawals as he is over 60. What are the tax consequences of each option? The first consideration in both circumstances is the tax payable under each scenario. An income stream from superannuation will be tax free, whereas income generated outside superannuation is liable to tax. Similarly, assets supporting a pension have no tax on growth or income, whereas assets in his own name will be taxed at his marginal tax rate, with capital gains tax concessions available, and assets in the accumulation phase will be taxed at 15%. Consider the first year of the two options, in which Victor generates $65,000 after tax (Table 10 below). Both options result in no tax for Victor thanks to tax-free thresholds and his tax - free retirement income stream. Option 1 delivers slightly better overall returns, despite the maximum 15% tax applied to investments in the accumulation phase. The main advantage being that option 2 uses income from an asset that has no growth: the savings account.

7.19 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Table 10 Victor’s income, tax and account balances after one year Option 1 Option 2 Account-based pension of $937,900 (minimum payment 5% for 2023/24) $46,895 $0 Savings account (1.5%) $18,105 $18,105 Capital withdrawal from savings account $0 $46,895 Taxable income $18,105 $18,105 Tax payable $0 $0 Income after tax $65,000 $65,000 Superannuation account balance (4.7% after tax)* $1,876,330 $2,858,310 Savings account balance (no growth) $1,207,000 $1,160,105 Account-based pension account balance (5.2% after tax)* $937,340 n.a. Total assets end of year $4,020,670 $4,018,415 * Growth rates based on 15-year average returns above CPI for balanced superannuation funds, and 5.2% for pension-phase balanced fund assets. Source: SuperGuide 2022. Would an annuity be beneficial to Victor? As Victor mentioned security of income, the purchase of an annuity could be considered, either from some of the money he has inside super, or from the funds he has outside of super in his savings account. The lifetime annuity can be set up to have payments that increase with inflation. However, as interest rates are currently low and are expected to rise, locking in a rate now with a lifetime annuity may be a bad idea as it will make it much harder to take advantage of rate rises that he could potentially capitalise on if he was able to control where his money is invested. Also given that Victor has a fairly large asset base and reasonable income expectations, he is unlikely to need to effectively transfer risk and ownership of capital into an annuity. The use of annuities outside superannuation will be explored in Topic 9 where we look at more integrated strategies. How long could/should Victor delay the start of the account-based pension? Victor can comfortably continue option 2 for around 20 years due to his large account balance and assuming interest rates do not go up. Of course the issue is that there is no growth in the capital value and hence it is likely that inflation will mean his income may need to increase and he will have to eat into the capital more quickly. Usually when modelling scenarios, a rate of return net of inflation, like that used for the superannuation and pension accounts, compensates for inflation on the income side; however, with a cash investment, with 0% growth and all interest being used, this inflationary effect is not accounted for. To model it correctly, really either a negative growth rate for the cash account or an increased income expense should be used. Regardless, Victor could carry on with his strategy for many years. The biggest risk to Victor would be legislative risk (changes to rules relating to tax-free pension income, or rules that currently allow indefinite accumulation phase accounts) and the tax for his adult children would be liable for if he was to pass away. See Table 11 below.

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7.20 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Table 11 Depletion of Victor’s savings account for income purposes End of year Account balance savings account Interest income 1.5% p.a. Capital withdrawal Increase 1.5% p.a. Account balance super 1 $1,160,105 $18,105 $46,895 $2,858,310 2 $1,112,507 $17,402 $47,598 $2,995,583 3 $1,064,194 $16,688 $48,312 $3,139,448 4 $1,015,157 $15,963 $49,037 $3,290,222 5 $965,384 $15,227 $49,773 $3,448,238 6 $914,865 $14,481 $50,519 $3,613,842 7 $863,588 $13,723 $51,277 $3,787,400 8 $811,542 $12,954 $52,046 $3,969,293 9 $758,715 $12,173 $52,827 $4,159,921 10 $705,096 $11,381 $53,619 $4,359,705 11 $650,672 $10,576 $54,424 $4,569,083 12 $595,432 $9,760 $55,240 $4,788,517 13 $539,364 $8,931 $56,069 $5,018,489 14 $482,454 $8,090 $56,910 $5,259,506 15 $424,691 $7,237 $57,763 $5,512,098 16 $366,062 $6,370 $58,630 $5,776,821 17 $306,552 $5,491 $59,509 $6,054,257 18 $246,151 $4,598 $60,402 $6,345,018 19 $184,843 $3,692 $61,308 $6,649,742 20 $122,616 $2,773 $62,227 $6,969,101 Should Victor make a withdrawal from superannuation to reduce potential death benefit tax? Victor is unable to make a recontribution to superannuation due to his account balance. So any withdrawal he makes will be permanent unless he reduces his total superannuation balance to below $1.9 million. Given that he has around $2.73 million, this would require a withdrawal of $830,000, of which he could then only put $110,000 back in three years time when he has cap space. What would this do for him? This is not a simple question to answer. He would of course be able to withdraw this amount tax free, but the delay in timing to put funds back in may mean he needs to withdraw more to compensate for any growth so that the account balance is still below $1.9 million at the end of the financial year before he makes the recontribution. This will also mean he will potentially pay tax (income and or capital gains) on the withdrawn amount if it sits in his name for a few years. Ignoring these two factors, and just looking at the potential tax reduction for his beneficiaries (Table 12 below), we see that he can reduce the potential tax by about $11,400.

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7.21 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Table 12 Withdrawal and recontribution for Victor Superannuation account components now Tax free $2,530,000 Taxable taxed $200,000 Taxable untaxed $0 Total account balance $2,730,000 Tax for adult dependant if Victor passed away now $34,000 Superannuation account components after withdrawal/recontribution (assuming no growth on investments) Account balance after $830,000 withdrawal $1,900,000 Tax free $1,760,805 Taxable taxed $139,195 Tax for adult dependant if Victor passed away after withdrawal $23,663 Account balance after $110,000 recontribution (not including any investment returns) $1,900,000 Tax free $1,870,805 Taxable taxed $29,195 Tax for adult dependant if Victor passed away after recontribution $4,963 As Victor appears to have more funds than he needs, he may want to consider helping his children by lending them some funds, or giving them some funds. He has no real likelihood of obtaining an age pension any time soon as his assets stand, so this is unlikely to be an issue under gifting rules, unless he tried to give away enough assets to access the pension. What asset mix is appropriate for Victor in his superannuation? Victor’s risk profile make s him suited to a balanced investment mix. However, there are two concerns with balanced investments for a client in retirement: one is volatility and the impact it can have on generating the required income in years of negative returns; the other is longevity risk as a result of insufficient growth in the portfolio to outpace inflation over time. In Victor’s case , the size of his portfolio compared to his income needs, and his large cash balance outside superannuation means that he could afford to take more risk in the superannuation investments and still have a balanced portfolio overall (see Table 13 below).

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7.22 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Table 13 Asset allocation in superannuation and total portfolio Asset class Percentage in super fund Superannuation Portfolio overall Percentage in super fund Australian shares 25.0% $682,500 $682,500 17.3% International shares 27.0% $737,100 $737,100 18.7% Private equity 5.5% $150,150 $150,150 3.8% Infrastructure 16.1% $439,530 $439,530 11.2% Unlisted property 5.6% $152,880 $152,880 3.9% Listed property 1.9% $51,870 $51,870 1.3% Credit 0.0% $0 $0 0.0% Fixed interest 15.0% $409,500 $409,500 10.4% Cash 3.9% $106,470 $1,313,470 33.4% TOTAL 100.0% $2,730,000 $3,937,000 100.0% Growth 81.1% $2,214,030 $2,214,030 56.2% Defensive 18.9% $515,970 $1,722,970 43.8% From the analysis above, we know Victor will not need to access his superannuation for well over 10 years, and hence managing any potential longevity risk by taking a more aggressive investment approach inside superannuation seems reasonable. Apply your knowledge 4: Pros and cons of retirement income strategies 1. What are the risks to Victor in gifting assets to his children? 2. Why couldn’t Victor just start an account -based pension and take out a few dollars each year? 3. Would it be worth considering an insurance bond for Victor for some of his money outside superannuation instead of just holding cash?

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7.23 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education 6 Case study 4: Death benefit strategy The following is a case study based on a widow looking to simplify her situation and make the best decisions for herself and her adult children. Case study: Sally Albright It is 1 August 2023 and you are assisting Sally, aged 67, after the recent death of her beloved husband, Harry, aged 67. They have two non-dependent adult children, Jess, aged 33 and Marie, aged 32. Sally and Harry did not seek full financial advice when they retired and just relied on the superannuation fund advice to commence account-based pensions. Sally is the reversionary beneficiary of Harry’s pension account. Harry had commenced his account-based pension last year when he retired. His account balance at the time of death was $380,000. Sally also has an account-based pension worth $280,000 that she started last year when she retired. Harry did not have any life insurance at the time he died and there is no untaxed element in his fund. Furthermore, neither Harry nor Sally triggered bring-forward contributions caps, and they made only SG contributions to superannuation for the last three financial years. Table 14 below shows the current account balances of their pensions, the components and their net income. Age pension eligibility and income is not being considered in this example, although the couple would qualify. Table 14 Sally ’s and Harry’s pension account components Item Harry pension account Sally pension account Tax-free component $50,000 $75,000 Taxable taxed component $300,000 $205,000 Taxable untaxed component $0 $0 Total $350,000 $280,000 Income taken prior to Harry ’ s death $17,500 $14,000 Tax on income $0 $0 *Net income $17,500 $14,000 * Not including age pension. In reality, this would form part of a strategic analysis, but for this example, to keep it simple we will not include it. However, we will look at this situation again in Topic 9 and consider the age pension then. Sally has expressed the following wishes, needs and objectives: • She is not happy about having to manage and worry about two pensions and wants to know what she can do about this. • She would like to make sure her assets are best structured in case she too passes away. • She wants a simple solution with minimal complications. • She and Harry were just managing on the $31,500 they were drawing as a combined income, with their pension income providing a good buffer. She would like to continue with this level of income if possible.

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7.24 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education When analysing the best options for the clients, you consider: • What is the best way to deal with the death benefit to Sally now? Does she cash it all in, or some of it, or simply have two pensions? • Can Sally contribute to superannuation and if so how much? • What could be done to benefit her children in the future? • You consider three options for Sally (see Figure 6 below): – Option 1: Improve the tax-free components of her own account-based pension to benefit the tax situation for her future beneficiaries. – Option 2: Live on Harry’s income stream and withdraw her own to invest outside superannuation to reduce tax for future beneficiaries. – Option 3: Do nothing, and keep two account-based pensions. Figure 6 Strategy options for Sally

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7.25 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Can Sally commu te Harry’s pension and can she make contributions to superannuation? Yes, she can commute his pension, and she can take the benefit as a tax-free lump sum. She is not currently under a bring-forward period, and as she is under 74, with a total super balance below the threshold, she can make use of this now to enable up to $330,000 in non-concessional contributions. Also, as Sally was working last year, and has not used the one-time exemption to the work test, she is able to make a concessional contribution and use her carry-forward allowance, as her superannuation account balance was under $300,000 at the end of the previous financial year (2022/23). This means she can make a concessional contribution up to her available cap. As she has made only SG contributions, she has over $30,000 available in concessional cap space. This means that Sally can in fact recontribute all of Harry’s account -based pension into her own account and start a new pension with a larger account balance and larger tax-free component (see Table 15 below). What are the tax consequences in each option? In this scenario, there is no tax on the reversionary income stream for Sally as Harry was over age 60. There is also no tax on her own income stream as she is over age 60. However, as Sally no longer has any tax dependants, when she dies there will be tax applicable (unless one of them is a financial dependant at the time of death) and the children will have to receive lump sums. Option 3 has been eliminated as an option as it does not meet with Sally’s objectives . However, there would be no change to her current tax situation from maintaining two account-based pensions both paid to her. They are both non-assessable non-exempt income. The investment held outside superannuation will only be subject to tax when assets are sold with a capital gain. This could be relatively low if she invests into a conservative investment that is designed to produce income to support her. As Harry’s pension is currently producing $17,500 per annum, Sally needs an additional $14,000 after tax. If Sally earns this income from an investment outside superannuation, it will be tax free as it is under the tax-free threshold. Hence this strategy provides flexibility, and a tax-free income. Tax on realised gains will be taxed at the beneficiaries ’ marginal tax rates, with a 50% discount on the gain assessable assuming the gains are from assets held by the deceased for longer than 12 months. This could result in tax on the gain of up to 47% including Medicare where no discount applies, or 23.5% including Medicare where the discount applies. However, this only applies to growth amounts, and if Sally is using the asset to provide income, she is unlikely to accumulate large capital gains. Option 1 has the advantage that Sally will be able to cap the tax on any assets left to her children to 17% once she passes away as they will all remain inside the pension account and only the taxable component of the lump sum death benefit will be taxed. Option 1 also improves the tax outcome for her children compared with option 3 because the tax-free component of her account-based pension will increase (see Table 15 below). Furthermore, options 1 and 2 allow her assets to remain in the tax-free earnings environment of the account-based pension for longer, only being taken out when minimum pension amounts increase as Sally ages.

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7.26 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Table 15 Tax components and account balances after tax Item Option 1: 1 combined account-based pension Option 2: 1 account-based pension and 1 investment Option 3: 2 existing account-based pensions Lump sum from Harry ’ s account-based pension $350,000 $0 $0 Lump sum from Sally ’ s account-based pension $280,000 Non-concessional contribution to Sally ’ s super $330,000 $0 $0 Concessional $20,000 $0 $0 Tax $3,000 $0 $0 Investment outside super $0 $280,000 $0 Resultant account-based pension(s) Tax-free component $405,000 $50,000 $125,000 Taxable taxed component $222,000 $300,000 $505,000 Taxable untaxed component $0 $0 $0 Total $627,000 $350,000 $630,000 Potential tax if Sally died immediately after strategy is implemented Death benefit tax $37,740 $51,000 $85,850 Option 3 results in the best use of the superannuation system as there is no loss from contribution tax. However, it is not what the client wants, and does add a level of complexity to her situation that may not be desirable as she ages. It also results in the worst outcome for her beneficiaries due to the higher levels of taxable components (see Table 15 above). Option 1 results in a small tax of the amount recontributed as a concessional contribution, and as there is no tax payable against which she can actually offset this concessional contribution amount, there is no immediate tax benefit for her from this. The only purpose in using that cap is to get as much money back into the account-based pension account as possible and significantly improve the tax-free components, and hence potential tax on her death. As Table 15 above shows, she has reduced the potential tax by almost $50,000. Option 2 would result in the middle level of tax to her beneficiaries as capital gains would be nil if she died immediately, and potentially only small if she died at a later date; however, the tax on the taxable taxed component is higher than in option 1. It should be noted that her investment portfolio is likely to be taxed at a higher rate than an equivalent portfolio inside her account-based pension where the rate of tax is nil and hence this investment outside superannuation may not last as long. Realistically though, as she is aiming to earn $14,000 a year, even realising short-term capital gains to generate this income will still result in nil tax as she will be under the tax-free threshold (including SAPTO and LITO). The biggest risk to this strategy is legislative changes to taxation outside superannuation.

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7.27 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Can Sally meet her income needs in each option? Yes; in option 3, she maintains the status quo and can continue to draw the $31,500 total income, and it is estimated that she will be able continue to do so until she is 90. With option 1, although the account balance is slightly lower, she will still be able to take this income as there are no maximum allowable pension amounts and it is estimated that she could still continue to draw this income until she is aged 90. These are based on Moneysmart estimates that do not take into account forced increases in withdrawals or any age pension. As a strategy, option 2 has the advantage that as Sally ages, she will not be forced to take increased income from the investment held outside superannuation, whereas the pension minimums increase as she ages, possibly encouraging her to spend more and have less to invest for long-term growth. In option 2, Sally could continue to take $17,500 from Harry’s account-based pension and use the investment outside superannuation to provide the additional $14,000. If Sally simply invested the $280,000 in a 100% cash and fixed interest, generating 1.5%, she could draw $14,000 in today’s dollars for about 23 years (or until age 90), assuming a flat rate of 2% inflation. Each year, she would have almost nil capital gains, and her taxable income would be more than $4,200 (or 1.5% of her account balance). She would therefore pay no tax on this income. This means in theory that option 2 gives her the best tax outcome now and when she dies. What about a fourth option: a hybrid of options 1 and 2? Yes; this is a possible best-of-both-worlds solution. Assuming Sally has no more cap space available than the caps she used in o ption 1, Sally could still have a better outcome if she took Harry’s pension as a lump sum, made the recontribution of it into superannuation and cashed out the $280,000 from her own account (see Table 16 below). Table 16 Tax components and account balances after tax Item Option 4 (hybrid of 1 and 2) Investment outside super $280,000 Account-based pension $347,000 Total $627,000 Resultant account-based pension(s) Tax-free component $330,000 Taxable taxed component $17,000 Taxable untaxed component $0 Total $347,000 Potential tax if Sally died immediately after strategy is implemented Death benefit tax $2,890 There are also infinite options as to how much of her own account she could withdraw, and this may depend on how much minimising tax liabilities for her children versus flexibility versus optimal tax in the pension phase matter to her. In Topic 9, we will consider Sally’s a ge pension situation and further analyse her situation.

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7.28 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Summary This topic has covered some of the key situations clients may present and some strategies that could be used to help them achieve their goals using superannuation. It considered the pros and cons of various options and the importance of considering clients’ needs and goals , then helping clients to see ways that superannuation strategies, asset allocations, income streams and lump sum withdrawals can assist in meeting objectives. Like Topic 3, this topic showed there are many options available to clients, and often more than one strategy may work. I t is the adviser’s skills in considering alternatives, modelling them and consulting with clients that will result in the best advice for the client.

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7.29 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Suggested answers Apply your knowledge 1: Super consolidation The comparison between the two funds would still need to be made, but including the insurance options and costs in each fund would be very important. It is essential not to roll over a fund with insurance until the new insurance is in place. If Jess had any health issues, there may be a need to keep the fund with insurance, or at least keep paying contributions to that fund to keep the insurance, even if the account balance was mostly rolled over to a better/more suitable fund. Apply your knowledge 2: Pros and cons of TTR income swap strategy 1. Firstly, Anton is limited to 10% of his account balance in income and any more salary sacrifice would result in a reduced after-tax income for him. Secondly, as Anton is already at a very low tax rate as a result of the strategy, more salary sacrifice is only going to deliver small tax benefits. 2. If Anton was 59, he would still be eligible for the TTR strategy as he is past his preservation age, but he would pay tax on the income from the TTR. As his superannuation is all-taxable taxed component, the income will be taxed at his marginal tax rate less 15% tax offset. This additional tax means the strategies need to be adjusted to maintain his desired after-tax income and the tax benefits reduce somewhat (see Table 17 below). In both cases tax savings and increased contributions to his TTR account can still be achieved. Table 17 Strategies for Anton if he was 59 not 60 Item No salary sacrifice Salary sacrifice to annual CC cap + TTR Salary sacrifice using carry forward + TTR Salary $70,000 $70,000 $70,000 Salary sacrifice $0 $15,900 $36,950 TTR pension amount (taxable) $0 $12,946 $30,000 Taxable income $70,000 $67,046 $63,050 Tax payable (including LITO and Medicare) $14,617 $11,656 $7,665 After-tax income $55,383 $55,390 $55,385 Income tax saving n.a. $2,961 $6,952 Contributions tax cost n.a. $2,385 $5,543 Net tax benefit n.a. $576 $1,409 3. You could either recommend to Anton that he stops salary sacrificing and just uses the TTR income to supplement his work income, or that he adjusts the salary sacrifice amounts and TTR pension amounts to fund his expenses.

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7.30 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Apply your knowledge 3: Pros and cons of wealth accumulator contribution strategy The answers below are not exhaustive. 1. If Lars was 59, he would pay tax on his income stream and the more tax-free components that he has, the less tax he would pay until he reached age 60, when the income would be tax free anyway. However, if Lars made a withdrawal at age 59, he would be liable for 15% tax plus Medicare on the amount withdrawn over the low rate cap ($235,000), meaning that he would have to balance the tax saved on the income with the tax paid on the withdrawal. 2. Lars is invested in line with his risk profile in a balanced fund. This means his assets are more or less evenly spread between growth and defensive assets. Ideally, funding the income component from defensive assets would help to allow growth assets time to recover when markets are not performing well. A conservative approach would be to quarantine three years of income into cash, and then adjust the remaining portfolio further towards growth investments to keep the asset allocation balanced overall. Apply your knowledge 4: Pros and cons of retirement income strategies 1. The risks are mostly that he may need the assets if something was to happen to him, for example if he needed in-home care and did not wish to go to a nursing home. Or if Victor has under-estimated his income needs, he may find that he falls short of his desired lifetime income if he has given away assets. The use of a trust or other arrangement could enable these risks to be managed, for example through a loan to the children to buy a home tied to a lifetime free tenancy if needed. There is minimal risk to his status as an age pension recipient, as he has too many assets to qualify. However, if he is hoping to qualify in the future, giving away assets early is a good choice as deprivation only looks back for five years. However, if he is looking to increase his chances to access the age pension, an adviser would be more likely to recommend he spend money improving his house, buying a larger one, buying a funeral bond and buying annuities, rather than giving away assets. 2. Once the account-based pension commences it is subject to minimum withdrawals. He could start the account-based pension but he would be generating more income than he needs and this would ultimately be likely to attract more tax. On the plus side, however, it would increase assets outside superannuation that would be tax free to his dependants should he die. 3. An insurance bond would be taxed at company tax rates and would therefore attract more tax than his cash account in the short term. However, it would offer the opportunity for growth if needed (not really needed in this case) and would not add assessable income to him. There seems little benefit to him at the moment.

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7.31 Document classification: Confidential FPC003 Superannuation and Retirement Advice | FPC003_T7_v14 © Kaplan Higher Education Reference list Australian Securities and Investments Commission (ASIC) 2021, Regulatory Guide RG 175 ‘Licensing: Financial product advisers —Conduct and disclosure’, 15 June, viewed 6 July 2023, < https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-175-licensing- financial-product-advisers-conduct-and-disclosure >. Australian Securities and Investments Commission (ASIC) 2023, INFO 182 ‘ Super switching advice – complying with your obligations ’, 10 March, viewed 6 July 2023, < https://asic.gov.au/regulatory- resources/superannuation-funds/superannuation-advice/super-switching-advice-complying-with- your-obligations-info-182 >. Moneysmart n.d., Account-based pension calculator , Australian Securities and Investments Commission, viewed 6 July 2023, < https://moneysmart.gov.au/retirement-income/account-based- pension-calculator >. SuperGuide 2022, Super fund performance over 30 financial years (to June 2022) , 19 July, viewed 6 July 2023, < https://www.superguide.com.au/comparing-super-funds/super-funds-returns- financial-year >.

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