Australia Expat Pensions

  • A) The Australian Pension System

    Australia has a three Pillar Pension System.

    The first and public pillar, is composed of a means-tested, tax-financed Old Age Pension that provides basic benefits. It operates on a non-contributory basis and is financed by general tax revenues.

    The second pillar forms the backbone of the Australian pension system. It is made up of funded individual pension accounts provided by Superannuation Funds.

    The third pillar involves individuals contributing to their Superannuation Funds or to Retirement Savings Accounts (RSA).

  • B) Australian State Pension

    Australia has more regulations regarding the Old Age Pension then many other countries.

    Eligibility & Payment Rates

    1. Age Rules

    To be eligible for Old Age Pension you must be 65 or older. Depending on your birthdate, from 1 July 2017 the pension age will be 65 years and 6 months. After that, the age will go up 6 months every 2 years until 1 July 2023.

    2. Residence Rules

    On the day you claim Old Age Pension you must be an Australian resident and be in Australia.

    To get Old Age Pension you in general need to have been an Australian resident for at least 10 years in total. For at least 5 of these years, there must be no break in your residence.

    3. Income Test

    Your gross global income can reduce your pension.

    They assess your income from all sources. This includes financial assets such as superannuation. Pensions have income and asset limits. If you’re over these limits, you receive a lower pension.

    To give a general indication; if you are single/married, there will be no pension as of an annual global gross income of $ 23.798,-/ $ 36.437,-.

    4. Assets Test

    The value of the global assets you or your partner own or have an interest in, affects if you can get Old Age Pension and if so how much you can get. There are limits to how much your assets can be worth before it affects your pension amount.

    The value of your assets is what you’d get if you sold them at market value. They’ll deduct any debt secured against the asset from its market value.

    The value of your principal home is exempted if:

    • it is on a single title;
    • the land it’s on is not bigger then 2 hectares;
    • it is not used mostly for business.

    Leaving your principal home to go into care, may affect any State income support you get.

    Regarding the possible impact of superannuations;

    If you're under Old Age Pension age, your superannuation investments don't count in the income and assets tests. This is the same for your partner if they're under age pension age. Once you reach Old Age Pension age, your superannuation investments will count in the income and assets tests.

    Most pensions and allowances have asset limits. They use these limits to work out if your assets will affect your payment rate. They calculate the payment rate under both the income and assets tests. The test that results in the lowest rate, or nil rate, will apply.

    The following assets are being exempted:

    • accommodation bonds paid on entry to a residential aged care facility;
    • some income streams depending on when you purchased them;
    • the not by you or your partner created life interest/reversionary interest/remainder interest/contingent interest;
    • most compensation or insurance payments for loss or damage to buildings or personal items.

    Finally there will be a decreased (or no) Old Age Pension to the extent that:

    • you are single, a home owner and assets as of $ 253.750,-;
    • likewise but not a home owner and as of $ 456.750,-;
    • a couple is home owner and assets as of $ 380.500,-;
    • likewise but not a home owner and as of $ 583.500,-.

    5. Payment Rates

    As mentioned they use income and assets tests to calculate how much Old Age Pension you receive.

    The full amount in case of no decrease due to income/assets amounts to:

    • for a single person annually $ 10.891,-;
    • for a couple combined annually $ 16.418,-.

    Claiming

    If you live in Australia and if you have concluded that you are entitled to State Old Age Pension, first set up a Centrelink online account through myGov to be able to claim online.

    If you do not live in Australia, check international social security agreements about how to claim.

    Information you need to hand over when you claim are your and your partner’s:

    • income from work;
    • other income;
    • real estate assets;
    • other assets;
    • investments;
    • superannuation;
    • bank account name, number and BSB number;
    • tax file number.

    If you have lived outside of Australia, you also have to mention residence details:

    • visa information;
    • the date you and your partner became Australian citizens;
    • the dates you and your partner lived in other countries.

    Submit your claim in the 13 weeks before you reach Old Age Pension age to get Old Age Pension as soon as you’re old enough.

    You may need to confirm your identity when you claim Old Age Pension. To confirm your identity you will need to visit a service centre and show your identity documents. If you've had your photo identification verified at a service centre, you can submit your remaining documents online using the Upload documents service.

    After you have filled the claim, they’ll inform you:

    • if they accept your claim;
    • if so when they’ll start paying you;
    • how much you’ll get.

    If you’ve lived or worked outside Australia, they may ask you to apply for a pension from another country and inform them about the result. Your partner may need to do this as well, even if they don’t claim Old Age Pension.

    Managing Payment Abroad

    You can normally get Old Age Pension for the whole time you’re outside Australia, even if you live in another country for a while.

    If you come back to live in Australia from another country and start getting Old Age Pension, your payment stops if you go overseas during the next 2 years.

    This is also the rule if you got payments under a social security agreement with another country while you lived outside Australia.

    If you leave Australia temporarily but stay an Australian resident, this normally counts as part of the 2 years.

    If you go to a country they have a social security agreement with, you may still get Age Pension during the 2 years.

    You need to tell them you’re leaving Australia if you:

    • are going to live in another country;
    • will be away for more than 6 weeks ;
    • get payments under a social security agreement with another country;
    • came back to live in Australia within the last 2 years and started getting Age Pension since then.

    If you leave to live in another country and do have an Australian Old Age Pension claim, you’ll get an outside Australia rate.

  • C) Australian Occupational Pension System

    Mandatory for Employees

    Australia introduced compulsion in 1992.

    Which had a good effect on the amount of participation of workers in Superannuation Fund as in 1974/1995 the percentage of participation amounted to 32% / 81%.

    As of 1992 it made contribution into the Superannuation Fund system mandatory for all employees older than 17 and younger than 70 earning more than $ 450,- a month.

    Superannuation Funds: DC

    It is a Defined Contribution (DC) system that requires a minimum contribution to a Superannuation Fund. Until 1992 guaranteed Defined Benefit (DB) plans were more popular.

    Australia has several different types of Superannuation Funds. For example Industry Wide Funds and Retail Funds. Which are offered to the public and to employers by financial service providers.

    Employer Contributions

    Employer contributions are subject to an annual maximum of $54.030,-. Employer contributions are tax-deductible up to certain limits.

    The level of employer contributions has risen over the years, from 3% to 9,5% currently and will probably reach 12% by 2025.

    Employee Contributions

    Employees may make voluntary contributions. Employee contributions are matched by a factor of 1.5 additional up to $1.000,- per year by the government. This matching contribution is made for employees earning less than $ 58.980,-. Employee voluntary contributions are entitled to limited tax breaks.

    Pension payments, too, are entitled to tax breaks, but these are under review.

    Employee Choice

    In general employees have a choice over where their super is invested and do not have to stay with the fund chosen by their employer.

    There are many comparison websites that allow investors to rate their super on a range of measures from charges and investments options to insurance and death cover.

    Newspapers frequently publish league tables of the best-performing super funds, with the top 10 accounts achieving over 10 per cent, net of investment fees, in 2017.

    However, even with this choice, many Australians will not easily shift their super out of the fund chosen by their employer. This due to their chief concern that it may be difficult to re-broke insurance or income protection attached to their super accounts.

    Superannuation Funds and Costs Optimization

    In particular, the fees paid by savers, which run into the tens of billions of dollars annually, are an area of persistent concern to policymakers and subject to fierce debate.

     The area that has had a lot of criticism has been fees and whether funds have been operating as efficiently as they could.

    One recent reform push required funds to offer a simple, low-cost default product called MySuper.

    Fees for MySuper products are around 0.8%-1%. Critics argue that, across the board, many savers spend far more.

    The average super fees in Australia are about 1% but there are huge variations across the industry, with consumers paying anywhere from 0.07% to over 2%.

    While these differences might seem small, over a lifetime, your retirement savings could be tens of thousands of dollars worse off in a high-fee super fund.

    Policymakers are paying attention. Fees are a critical area of inquiry for the Productivity Commission, an independent research and advisory body to the Australian government, which is midway through an analysis of competition in the superannuation market.

    A combination of regulation and prevailing trends in asset allocation has put the brakes on further fee reductions. Australian pension funds are proponents of investing in so-called real assets, such as property and infrastructure projects. They generally offer good returns, but are capital intensive and thus expensive for investors in comparison with more typical pension fund holdings such as bonds.

    Many say that the superannuation system has, in part, become a victim of its own success. With so many contributions pouring into the system, demand for money managers outstrips supply. The system has grown rapidly but economies of scale have not been delivered to members as strongly as they should have been.

  • D) UK Pensions transfered into Australian Pension Fund

    In the past such a transfer was quite common even though there were issues about Australian Supers that did not comply with UK regulations.

    However, the amendment of the UK law regime effectively closed transfers from UK pension funds into Australian pension funds.

    Unless the Australian superannuation fund did not allow a payment of a pension before the member reaches age 55 (or retirement) on the grounds of ill-health as defined under UK law.

    We have seen several advertorials about this issue and were somewhat surprized about its content.

    We advise you to be cautious if you might think of implementing such a transfer. 

  • E) Australian Oversight Occupational Pensions

    In General

    The Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia.

    APRA has prudential reporting standards, practice guides and other guidance and oversight relating to each kind of financial industry:

    • Authorised deposit taking institutions;
    • General Insurance;
    • Life Insurance and friendly societies;
    • Private health insurance;
    • Superannuation.

    APRA supervises Australia’s banks, building societies and credit unions (authorised deposit-taking institutions), life and general insurance and reinsurance companies, private health insurers, friendly societies and superannuation funds (excluding self-managed funds).

    After an institution is licensed by APRA, it is subject to ongoing supervision to ensure it is managing risks and meeting prudential requirements and to identify those institutions that are unable or unwilling to do so.

    The APRA Supervision Blueprint provides the strategic direction for APRA’s framework for prudential supervision. It is designed to ensure that APRA's supervisory methodologies, processes and tools are aligned with the objectives of APRA’s supervisory approach and support supervisors by providing an appropriate level of structure to guide them in the exercise of their professional judgement.

    Superannuation Funds

    APRA supervises

    • authorised superannuation funds (other than self-managed superannuation funds);
    •  approved deposit funds;
    • pooled superannuation trusts under the Superannuation Industry (Supervision) Act.

    APRA has a Register of Trustees: A register of APRA-regulated Superannuation entities (RSE) and RSE licensees under the Superannuation Industry (Supervision) Act 1993.

    Recently APRA has called for greater focus by superannuation licensees on administering outsourcing arrangements with related parties to effectively manage conflicts of interest.

    Website

    https://www.apra.gov.au/

  • F) Australian Personal Pensions

    Retirement Savings Accounts (RSA) are low-cost pension schemes which are offered by deposit-taking institutions or life insurance companies.

    They operate under the same tax rules as superannuation accounts.

  • G) Australian News July 2018

    Recently APRA has called for greater focus by superannuation licensees on administering outsourcing arrangements with related parties to effectively manage conflicts of interest.

    The recommendation is contained in the recent findings of APRA’s thematic review of related party arrangements for registrable superannuation entity (RSE) licensees.

    APRA’s review of 14 licensees, representing a cross-section fund type, size and ownership structure, took place over 2016 and 2017. It was prompted by concerns that some licensees’ management of commercial relationships with related parties could detract from the outcomes delivered to their members.

    While RSE licensees had improved their handling of related party arrangements since APRA’s 2014 conflicts of interest thematic review, APRA found room for improvement, including:

    • ensuring related party contracts are for a set period and contain clear termination provisions;
    • having contracts that contain clear and measurable performance indicators that the RSE licensee regularly monitors;
    • conducting rigorous market-based benchmarking when engaging or renewing contracts with related party providers to ensure terms and prices are commensurate with others available in the market;
    • proactively considering and documenting how decisions to use related party service providers are in the best interests of superannuation members;
    • APRA Deputy Chairman Helen Rowell said the prevalence of outsourcing in the superannuation industry to deliver key services made robust oversight of service provider relationships essential to deliver appropriate member outcomes.

    "APRA supports RSE licensees outsourcing services where they lack skills or expertise.However, using related parties increases the risk of a conflict of interest. APRA's thematic review noted wide variation in how licensees managed this challenge. Including weaknesses in some licensees' approach.

    "RSE licensees employing better practices rigorously tested the market before agreeing or renewing contracts with related parties. They assessed the contract's materiality in line with APRA's prudential requirements and documented their decision-making process that concluded the arrangement was in their members' best interests.

    "Implementing the better practices outlined in this thematic review will help RSE licensees effectively manage potential conflicts of interest and optimise outcomes for their members," Mrs Rowell said.

    The thematic review of related party arrangements was carried out in conjunction with the thematic review of board governance, which was released last week.