Superannuation and Retirement Planning
Michael is age 66 and Karen is age 62. Both are in very good health and have full private hospital cover with a $1,000 excess. Karen is an only child and she is very close to her mother and father who are both alive and quite active at ages 86 and 84 respectively. Michael’s parents and three sisters are also all alive and healthy.
Karen works full time as a receptionist in a doctor’s surgery, earning $35,000 p.a. (before tax) plus superannuation guarantee contributions. She has been with the practice for the past five years and loves her work.
Michael is due to retire in one month from his position as an OHS compliance manager with a mining company, which he has held for the past 11 ½ years. His before tax salary package is $68,000 p.a. plus nine percent superannuation. He will receive his superannuation account balance when he retires. He will also receive a payment of $22,500 from his employer upon retirement, which includes $5,400 unused annual leave accrued in the past two years and $8,600 unused long service leave accrued since Michael commenced work with this employer. The remainder is an employment termination payment for his service with the employer.
Michael and Karen have two daughters: Zoe, who is 38, widowed with two teenage sons; and Nicole, age 32 and single. Michael and Karen would like to be able to provide monetary support if needed to Zoe and Nicole.
Michael has life and total and permanent disability insurance equivalent to three times his current gross salary attached to his employer superannuation fund. Karen has $200,000 death and total and permanent disability cover attached to her superannuation fund.
Both Michael and Karen have Wills, which were reviewed four years ago. They have appointed each other as power of attorney.
They own their own home, which has no mortgage. They have comprehensively insured their car, home and contents.
Over the last few years, both Karen and Michael have been actively learning about and discussing retirement. They have been keen readers of newspaper articles and educational literature covering retirement issues and also attended seminars on retirement strategies. They both feel they have a relatively good understanding of investment, superannuation and retirement issues.
Michael and Karen have a similar approach to investing. They understand the basics, but rely on good professional advice when making decisions. They have made mistakes in the past, and want to avoid a repeat of those as they get closer to retirement. They are very keen to obtain professional advice to ensure they are able to live the life they have always wanted to in retirement. They want to ensure their money lasts as long as they do, access the aged pension if possible and minimise their tax – after all, they have been paying tax their whole lives.
Goals and objectives
Having completed a budget, Michael and Karen have determined that they currently spend approximately $50,000 p.a. net (after tax) on their day-to-day living expenses (not including travel, loans or other commitments).
Karen plans to continue to work on a full-time basis for another three years and will then retire.
The couple plans to upgrade to a new car when Karen retires and expect to spend another $30,000 doing so.
They feel comfortable with having liquid funds available of at least $25,000 for emergencies.
They are prepared to direct any surplus funds into superannuation investments to prepare for their retirement.
They plan to live in their current home for the duration of their retirement and would like it on to pass to Zoe and Nicole in their estates.
Karen is quite insistent about keeping her existing shares as she would like to leave them in equal shares to her grandchildren upon her death.
Karen and Michael would like to do whatever they can to assist their family, both now and from an estate planning perspective.
Michael and Karen Lockhart
Present situation – current assets
PERSONAL ASSETS Value
Family home (owned as joint tenants) estimated value $800,000
Family car (purchased 2006) $46,000
House contents – market value $43,000
INVESTMENT ASSETS Value
JOINTLY-OWNED INVESTMENTS
Bank account (at call)
Earning 5.2% p.a. interest $6,300
Cash management trust
Earning 7.5% p.a. interest $175,000
Investments held in Michael’s name
Personal superannuation (taxed fund) $135,500
Commenced in 1995
Employer pays into this fund
Tax-free component is 20%
Taxable component is 80%
Michael has selected a balanced asset allocation
No nominated beneficiary
Investments held in Karen’s name
Share portfolio
Assume overall dividend rate of 5.5% p.a. 100% franked
All shares have been held for at least 12 months
Company Number of shares held Average cost base per share
ANZ 1,025 $5.543
BHP 1,520 $7.615
IAG 985 $3.016
Telstra 1,485 $3.950
Woolworths 1,000 $12.025
Personal superannuation (taxed fund) $196,550
Originally commenced in 1995
Employer pays into this fund
Tax-free component is 10%
Taxable component is 90%
$10,919 is unrestricted non-preserved
High growth asset allocation
Karen has established a binding nomination naming Michael, Nicole and Zoe as beneficiaries in equal shares
LIABILITIES Balance
Credit card debt $0
Credit limit $4,000
Balance repaid each month
Assignment questions
Question 1
Michael is not sure about what he should do with his superannuation and the payments he will receive from his employer when he finishes work in one month.
a) Explain what options are available to Michael with respect to the payments he will receive upon termination of his employment and his superannuation balance.
b) Calculate the resultant tax treatment of the payment with respect to those options. Show all workings where relevant.
Note: You must address each of the four payments i.e. annual leave, long service leave, the employment termination payment and superannuation, individually.
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Question 2
The couple is concerned their current superannuation arrangements will be inadequate to provide for their future. They would like to know how they can increase the balances of their superannuation funds.
Showing calculations where relevant:
a) Estimate the total capital the couple will need to accumulate in order to achieve their preferred lifestyle in retirement.
b) Analyse any gaps between the total capital required to achieve all of their retirement goals and their current financial position.
c) Identify all of the types of superannuation contributions generally available to individuals to increase their superannuation savings.
d) Explain the rules, restrictions, advantages and disadvantages of each type of contribution individually.
e) Discuss which specific contribution types you would recommend for Michael and Karen, providing justifications for your response.
[insert student response]
Question 3
Karen has heard from friends about the transition to retirement strategy and is wondering whether it would be suitable for her.
In your own words:
a) Briefly explain the purpose and operation of the transition to retirement provisions.
b) Develop a transition to retirement strategy that would be appropriate for Karen in the context of the couple’s goals and objectives, providing complete ‘before’ and ‘after’ taxation calculations illustrating the effectiveness of the strategy you would recommend for her.
c) Outline the advantages and disadvantages of the strategy. Assume no superannuation benefits have previously been taken. Show all workings.
Your calculations must include the client’s investment income, Medicare levy liability, any applicable tax offsets and credits, the effect of the income stream payments and contributions tax.
[insert student response]
Question 4
Michael has made no nomination of beneficiary for his superannuation benefit, while Karen has nominated Michael and her daughters equally as her beneficiaries.
In your own words:
a) Briefly explain who is able to receive superannuation benefits upon the death of a member during the accumulation phase and the methods by which benefits can be paid.
b) Identify the two methods of nominating a beneficiary for superannuation members and the advantages and disadvantages of each.
c) Outline the tax treatment of superannuation lump sum death benefits.
d) Discuss the effect of Karen and Michael’s current beneficiary nominations with reference to these issues.
[insert student response]
Question 5
Michael and Karen would like to access social security payments if possible.
a) Calculate whether the Lockharts would be entitled to any Centrelink Age Pension or other Commonwealth Government benefits based on the current structure of their investment portfolio at the time of Michael’s retirement. Show all workings and include a discussion of the concession card/s they may also be entitled to.
b) Describe two current, legally acceptable strategies that could be employed by the couple to enable them to maximise any Centrelink benefits in their final retirement.
c) Describe the likely advantages and disadvantages associated in adopting those strategies.
[insert student response]
Question 6
Karen (age 62) will retire when she turns 65. Michael retired one week ago.
The clients require advice on how to invest all of Michael’s final payments and how they can boost their superannuation balances over the next three years before they are both fully retired. They would also like to know what their financial situation is likely to be at this time and if their retirement goals are achievable.
Based on the facts presented in the case study, prepare a comprehensive report describing the strategies and investments you would recommend the couple undertake to satisfy all of their stated goals and objectives both now and in preparation for Karen’s retirement in three year’s time. Your report must include detailed reasons why you feel such strategies would be suitable for the couple.
In preparing your report you must clearly address all of the following issues:
Ensure that all stated goals/objectives, concerns and issues are identified.
Make recommendations to address all of their goals/objectives and concerns, both financial and non-financial, with an appropriate strategy. Your recommendations must be explained (including the advantages and disadvantages of each one) and justified.
You must make recommendations for the next three year’s to enhance their financial position in preparation for Karen’s retirement.
You should clearly show the financial position of the couple prior to and after implementation of your recommendations using cash flow tables. Your calculations must demonstrate that their net income goals, both for the next three years and in full retirement, can be achieved.
You should discuss the couple’s likely financial position at (Karen’s) retirement and outline the income options, including Centrelink payments and income streams that are likely to be available to them at and from that time.
You must show all calculations, including those for tax, income streams and possible Centrelink benefits. Where spreadsheets or projections are used they must be explained.
You are not required to provide a complete SOA to answer this question however you are required to provide comprehensive advice to the clients on all aspects of their situation and make recommendations as to how to address all of their goals and concerns.
You must address, explain and make recommendations concerning risk management and their estate planning needs as they relate to superannuation and retirement planning.
Where assumed rates of return have not been specified, you may wish to make your own assumptions as to projected rates of return on investments that may be recommended. Any such assumptions must be realistic and have a reasonable basis which is clearly explained. These assumptions must be stated at the beginning of your response to this question.
For any existing investments you recommend Karen and/or Michael retain, the estimated rates of return provided must be used.
[insert student response]
