Retirement Focus

Don't break the bank

Most Australians have insufficient super, but some have plenty - so much, they're in danger of exceeding the reasonable benefit limit, and it's not just older investors. Here are two strategies to keep you under the limit ...

Superannuation is a tax effective way to save for retirement. So tax effective, in fact, the government limits how much we can accumulate in super at concessional tax rates. This limit is called the 'reasonable benefit limit' or RBL. If your super savings exceed this limit, when it's time to withdraw your super you'll pay tax at the top marginal tax rate plus Medicare levy on amounts over the limit.

There are two reasonable benefit limits, which are indexed annually. The one that applies depends on how you withdraw your super.

Stay Under the Limit - Key Points Splitting your super contributions with your spouse can save thousands in tax and keep you under the RBL. Using investment products that meet the pension and annuity standards gives you access to the higher pension RBL. Seek advice - this is a complex area and rules have changed recently.

1. Lump sum RBL = $648,946 (2005-06)
   Applies if you withdraw your super in cash or transfer it into an allocated pension, allocated annuity or other product that doesn't meet the pension RBL requirements.
2. Pension RBL = $1,297,886 (2005-06)
   Applies if you transfer at least half of the qualifying portion of all assessable benefits, or 50% of your pension RBL (whichever is less), into a product that meets the complying pension and annuity standards.

Pension and annuity standards

Among other things, to count towards the pension RBL a pension or annuity must:

• be payable for life or life expectancy
• be paid at least annually
• only be commuted in limited circumstances, and
• not have a residual capital value.

Here are two strategies to help keep you under the RBL.

Strategy 1: Contribution splitting

You must be married or in a de facto relationship to use this strategy. Same sex couples aren't recognised by the legislation for contribution splitting purposes. As of 1 January 2006, you can split your employer and personal superannuation contributions with your spouse. If your super fund provides this service (Russell SuperSolution does), after each financial year ends simply notify your fund of the amount of contributions you want transferred to your spouse's account.

If you're the main income earner and your spouse earns no, or much less, income, contribution splitting provides some big advantages:

• if you're at risk of exceeding the RBL, and your spouse isn't, spreading your super across two accounts negates, or at least reduces, this problem
• having two accounts doubles the amount of tax-free super you can withdraw as a lump sum at retirement. Under current rules, if you're over 55, and meet a condition of release, you can withdraw, tax free, up to $129,751(2005-06) from your post-June 1983 component.

What can be generally split?

• 100% of any after-tax contributions (aka undeducted contributions)
• 85% of an before-tax contributions (aka salary sacrifice contributions) - which is equal to the net contribution to super after the 15% contribution tax has been deducted

Amounts received by a fund that cannot be split includes eligible termination payments and roll-overs from a previous super fund.

Strategy 2: Term allocated pensions

If your superannuation exceeds the lump sum RBL consider investing in a product that meets the pension RBL requirements, such as a term allocated pension. As with regular allocated pensions, a term allocated pension allows you to:

• draw down your super as regular income payments, rather than as a lump sum
• potentially claim a 15 per cent tax offset on the pension income you receive each year
• Unlike an allocated pension, a term allocated pension complies with the government's pension and annuity standards, allowing you to:
• use the higher pension RBL, which doubles how much super you can withdraw at concessional tax rates
• possibly qualify for some age pension entitlements as only half of an investment in a term allocated pension counts towards the asset test.

This doesn't mean term allocated pensions are a better option than allocated pensions. With a term allocated pension, your money's locked away for the entire term, so you can't make withdrawals any time you want to. (However, some new rules came into effect on 1 January 2006 which provide more flexibility in varying the term, and the level of income you receive, and may also have tax and social security advantages while allowing you to accumulate your money over a longer period in a taxfree environment. So seek advice.)

Because you only need to invest half of your super into a term allocated pension, or similar complying product, to qualify for the pension RBL, it's possible to combine this investment with a more flexible investment in a regular allocated pension, or other such product, which gives you access to the advantages of both products.

To find out more about either strategy, request a call from us or see a qualified financial adviser to clarify your personal situation before you make a decision.

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