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A FEDERAL Government scheme requiring retirees with modest superannuation nest eggs to ”buy” a pension would be the most efficient way of ensuring self-funded retirees do not run out of money during their old age, research for the Henry tax review says.

Modelling commissioned by the Henry panel found a $100,000 lump sum could ”buy” a single retiree a lifetime annuity or pension ranging from $5444 to $10,225 a year, depending several assumptions.

The University of NSW research found these pensions would be larger if they were provided by the Government rather than by the private sector and if retirees were required by law to invest a slice of their lump sums in a lifetime annuity.

As I understand from my days as a financial planner, the problem for companies providing lifetime annuities is that the only people who consder buying them are those who expect to live a very long time. The actuaries have to work out how much the company needs to charge for then, to ensure that the company can fulfil its obligation to make the contracted payments for life. They can’t, however, use normal life expectancy tables as only people who believe that they have a higher than average life expectancy are interested in buying the annuities. As a result, annuities tend to be very expectancy. This reduces the pool of potential buyers even more.    

This is the reverse of the normal problem for life insurance companies. For annuities,they would, of the face of it, rather have more unhealthy customers and less healthy ones.

The UNSW researchers appear to be trying to reduce the price of annuities by using compulsion to everyone covered.

The Minister for Superannuation, Chris Bowen MP, and Minister for Small Business, Craig Emerson MP, last week announced that the Government will deliver its free superannuation clearing house service for small business through Medicare Australia.

The clearing house service will be available for small businesses with less than 20 employees from July 2010.

“To meet their choice of fund obligations, small businesses currently face the time and paperwork burden of paying contributions into numerous funds. The super clearing house will cut this red tape burden by enabling small businesses to pay their superannuation contributions electronically to a single location,” Minister Bowen said.

“Medicare Australia is well placed as one of the Commonwealth Government’s key service delivery agencies – with significant electronic and payment processing capacity whilst ensuring the privacy of information and the security of funds.”

Key features of the superannuation clearing house for participating small businesses include:

• Superannuation contributions made to numerous funds will be electronically paid to a single location (the clearing house) which will process the transactions;
• Small businesses that choose to use the clearing house service will have their legal obligation to make superannuation contributions discharged when payment of the correct amount is made to the clearing house;
• The clearing house facility will be offered free of charge to small businesses with less than 20 employees; and
• The clearing house will manage employers’ choice of fund obligations.

Source: Media Release from Minister for Financial Services, Superannuation and Corporate Law

Peter Costello, in one of his last public appearances before retiring from Parliament, has sought to defend his record on the superannuation system. He says that scrapping taxes on super payouts and overhauling contributions taxes were as significant as the introduction of compulsory superannuation.

However he admitted that he regretted introducing, nearly a decade ago, the now defunct super surcharge. The surcharge (which he always denied was a tax) was levied on the super funds of high income earners and sought to introduce equality into the super system but imposed too much regulation.

”I regretted it ever after – the complexity of the system was just awful,” Mr Costello told a Super Ratings conference in Melbourne.

Mr Costello was speaking at the Super Ratings conference in Melbourne

The ATO is contacting taxpayers to advise of lost super that may belong to them.

Lost members register

The ATO maintains a lost members register (LMR) that records super accounts reported by super funds as lost.

You may be a lost member if:

• a super provider has received returned mail for the you and has been unable to contact you, as they do not have current contact details for the you
• their super provider has not received contributions or a rollover for you in the past five years, or
• the your account was transferred to a fund as a lost member.

More information

For more information about the lost members register, refer to Finding your lost super.

You can use the SuperSeeker tool to look for lost super.

The ATO says its recent audit activity has identified a high rate of incorrect claims for deductions for personal super contributions in 2008 tax returns. According to the ATO, many of the incorrect claims are attributable to a failure to consider the new legislative requirements now governing this deduction.

You are eligible to claim a deduction if:

• you satisfy the ‘maximum earnings as an employee’ condition
• you meet the age-related conditions
• you made personal contributions to a complying super fund or a retirement savings account (RSA)
• you made the contributions in order to obtain super benefits for yourself, or for your dependants in the event of your death
• you have written to your super fund or RSA provider, in the approved form Deduction for personal super contributions (NAT 71121), and advised them of the amount you intend to claim as a deduction, and
• your super fund or RSA provider has acknowledged your notice of intent and agreed to the amount you intend to claim as a deduction.

The drop in investment values has caused problems for many self-managed superannuation funds with in-house assets.

Partners Superannuation Services research has revealed 11.25 per cent of self managed superannuation funds (SMSFs) breached in-house assets limitations during 2008.

Under the Superannuation Industry Supervision (SIS) Act, an SMSF is not allowed to hold in-house assets that total more than 5 per cent of the value of the fund.

In-house assets include loans to, investments in, or the lease of equipment to businesses owned by the fund or those associated with the fund.

The rule had presented itself as a problem to SMSF trustees in the past, with 10 per cent of funds transgressing in 2007.

However, one of the main reasons for the breaches of the limit last year was the fall in investment markets.

“For example, if your fund previously had $100,000 worth of assets, a 5 per cent loan would be $5000. However, should the value fall to $50,000, $5000 would in effect translate to 10 per cent,” Partner Superannuation Services director Martin Murden said.

Despite these breaches SMSFs were improving their compliance track records, according to Murden.

“Clearly fund trustees are making a much greater effort to truly understand what is expected of them in their roles,” he said.

“They’re reading the literature which is now readily available through the Australian Tax Office and they’re attending seminars … which aim at informing and educating trustees about their rights and obligations.”

The survey was based on a sample size of over 500 SMSFs audited during 2008.

Treasurer Wayne Swan and Senator Nick Sherry, Minister for Superannuation and Corporate Law, today announced relief from minimum account-based pension draw down requirements.

The measure responds to concerns that meeting the minimum draw down amount in 2008?09 will mean having to sell investments assets and realise losses in a depressed market.

“The Government recognises that the significant downturn in global financial markets has had a negative effect on retirees’ superannuation capital in account-based pensions,” the Treasurer said.

“In response to these legitimate concerns, the Government will suspend the minimum drawdown requirement for account-based pensions for the second half of 2008-09,” Minister Sherry said.

“This will occur through a 50 per cent reduction in the minimum payment amount for 2008?09,” Minister Sherry said.

The temporary relief also addresses the concern that the minimum draw down requirement was set based on asset values as at 1 July 2008, when equity values were higher.

For those people who have already taken half of the current minimum payment for 2008-09, the annual nature of the minimum payment rules means that a further payment will not be required until the end of the 2009-10 year.

“The Government will continue to closely monitor market conditions and examine options for a longer term solution to this issue following the Australia’s Future Tax System Review,” the Treasurer said.

Currently, it is a requirement that minimum payments be made from a superannuation account-based pension at least annually. Minimum payments are determined by age and the value of the account balance as at 1 July each year. The minimum annual payment rule is designed so that retirees draw down on their superannuation capital over their retirement. This rule recognises that superannuation is designed as a retirement savings vehicle with substantial tax concessions.

The temporary suspension of the minimum payment requirement will apply to account?based annuities and pensions (payable since 1 July, 2007); allocated annuities and pensions (pre-dating the Better Super changes); account-based and allocated pensions payable from Retirement Savings Accounts, and market-linked (term allocated) annuities and pensions.

Senator Nick Sherry, Minister for Superannuation and Corporate Law, has reminded super fund members that in the wake of the devastation caused by bushfires in Victoria, those affected may, depending on their circumstances, be able to claim either death or Total and Permanent Disablement (TPD) insurance attached to their superannuation or seek early access to superannuation.

“The circumstances in Victoria are simply appalling and I would like to express my condolences to all those who have suffered and lost loved ones.”

Insurance

“At such a time, some people may not immediately recall that they are likely to have TPD and death insurance via their superannuation fund. I strongly encourage those that are able, to consider this option. Claims should be made directly to a person’s super fund.”

“Today, I have spoken with the Australian Prudential Regulation Authority, and asked it to communicate with super funds and their insurers about prioritising bushfire-related life insurance and TPD claims.”

“I have also spoken with Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia, who has confirmed super funds will do everything they can to assist,” said Minister Sherry.

Early access

Usually, superannuation savings cannot be accessed before an individual is at least 55 years old. However, under limited, prescribed circumstances, the law allows early access. This includes applications under ’severe financial hardship’ provisions. Such applications must be made directly to your super fund and strict conditions for this early release must be met.

“A person should contact their superannuation fund directly to apply to access their superannuation in circumstances such as ’severe financial hardship’,” Minister Sherry said.

APRA separately administers applications for early release of superannuation on prescribed ‘compassionate grounds’. These grounds include mortgage assistance in the case of threat of foreclosure, certain medical expenses, modifications to a home or vehicle in the case of severe disability, and expenses associated with a dependent’s death or funeral.

“I have also asked APRA to prioritise any access requests arising from an area where the Natural Disaster Relief and Recovery arrangements apply. This will include Victorian bushfire-related and Queensland flood-related applications for early access to superannuation on specified ‘compassionate grounds’.”

It is important to note that all early access cases are assessed on objective criteria subject to the law and trust deed rules.

For further information on early access to superannuation, contact Centrelink on 13 10 21 or visit www.centrelink.gov.au.

For information on applications to APRA visit www.apra.gov.au and follow the links under superannuation.

Alternatively, you can call the APRA Contact Centre on 1300 131 060 Monday to Friday from 9am to 6pm AEDST

ASIC has launched a new financial literacy program Your Money Starter- Insurance and Super designed to assist young Australians in making decisions about insurance and superannuation.

It is a resource for secondary schools in each state and territory and is currently being distributed to every high school in the country.

“Young Australians who understand insurance as a way to protect their assets and superannuation as an effective way to save for retirement will get a head start on two key areas of personal finance”, Superannuation and Corporate Law Minister Nick Sherry said

“Your Money Starter includes a variety of innovative classroom materials, activities and multimedia elements designed to make learning about financial services relevant and attractive to teenagers,” ASIC chair Tony D’Aloisio said.

The materials are available in hard copy and on CD-ROM and can be downloaded, free of charge, from ASIC’s consumer website, FIDO, at www.fido.gov.au/yourmoneystarter.

The Tax Office has written to 3,122 trustees of self managed super funds offering them a new tax file number (TFN) for their funds.

The funds’ existing tax file numbers were on a CD of scanned letters being sent to the Tax Office via an authorised (door to door) courier from the company contracted to print the letters. The courier received the CD but it was not delivered to the Tax Office and has gone missing.

Tax Commissioner Michael D’Ascenzo said he wanted to assure the community the Tax Office takes the privacy of their personal details very seriously.

“Nothing is more important to the community and fundamental to good tax administration than the security of taxpayer information,” Mr D’Ascenzo said.

“I am concerned that this parcel containing taxpayer information has failed to be delivered, even though the courier believes the parcel is still within their warehouse facilities.

“While there is no evidence the information has fallen into the wrong hands or been misused, I am taking the matter seriously.

“As there is a risk the information could be misused if the courier is unable to locate the CD, we are providing the relevant trustees the opportunity to ensure that there is no unauthorised use of their funds’ relevant tax records.

Tax office Media release 2008/53