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) Pillar 1: 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,-.
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;
- 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.
C) Pillar 2: 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 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.
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.
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) Pillar 3: Australia Private Pension
The third pillar involves individuals contributing to their Superannuation Funds or to Retirement Savings Accounts (RSA’s).
An RSA is provided by banks, credit unions, building societies, life insurance companies as well as financial institutions which are RSA providers. It is similar to a super fund and utilized for retirement savings. They operate under the same tax rules as superannuation accounts.
RSA’s are capital guaranteed. Which means the interest and contributions to the account are only reduced by charges and fees. RSA’s are also fully portable so the account balance can be moved to a super provider or another RSA at your wish.
If you might want to compare RSA’s you can look at these aspects:
- Competitive interest rate: A higher rate of interest will help your retirement savings work harder. This is especially true if it's compounded daily. However even with a high interest rate on your retirement savings account, you'll likely earn better returns with a superannuation fund that is actively investing your balance.
- No fees: To ensure that every dollar you deposit helps you save for your retirement, you should look for an RSA that charges no account keeping fees and no annual fees.
- Account access: Your provider should provide online access.
Finally a critical aspect of RSA’s is that they are not that common anymore. RSA’s were introduced to help Australians save for retirement, before everyone had a superannuation account. These accounts are becoming increasingly more redundant as the superannuation system matures.
II] RSA TRANSFER
An RSA Transfer is the transfer of an RSA from one Pension Fund Administrator (PFA) to another, processed through the RSA Transfer System (RTS).
An RSA holder is only allowed to transfer his RSA once per year. An RSA Transfer is initiated by the RSA holder through the PFA to which his RSA is being transferred. It is based on the provision of the PRA 2014, which empowers the RSA holder to select and change the PFA that will manage his RSA.
The RTS is a computer based application deployed by the National Pension Commission for the purpose of initiating, processing and monitoring the RSA Transfer process.
The RSA transfer is free. No amount is charged by the receiving PFA to process the RSA transfer request from the RSA holder.
RSA transfer requests received are processed every quarter. However, only transfer requests received latest by the end of the second month of a transfer quarter are processed within that quarter. All transfer requests received within the third month of a quarter, will be processed in the next quarter.
Finally several often asked practical questions:
- Can a retiree on Programmed Withdrawal (PW) transfer his RSA? Yes, a retiree who is on PW is eligible to transfer his RSA from one PFA to another.
- Can a retiree on Annuity, transfer his pension funds from an Insurance Company to a PFA? No, a retiree on annuity cannot transfer his fund from an Insurance Company to a PFA. However, if the retiree is making voluntary contributions under the CPS, he can transfer that RSA from one PFA to another.
- Can a retiree on PW move to annuity while his RSA transfer request is undergoing processing? No, a retiree on PW cannot move to annuity while his RSA transfer request is undergoing processing. However, the retiree can only be allowed to transfer after 1 year with the new PFA.
- Can a Micro Pension Contributor transfer his RSA? Yes, he can transfer his RSA from one PFA to another.
- Can an employee of a State that has adopted the CPS transfer his RSA? Yes, however such employee can only transfer his RSA to any of the PFAs already appointed by the State Government to manage the RSA’s of its employees.
- Can an employer compel its employees to transfer their RSA’s to a particular PFA? No. The decision to transfer an RSA, similar to that of selecting a PFA in the first instance, is the exclusive preserve of the employee.
Can an RSA holder cancel an RSA transfer request after initiating the process? No, the RSA transfer request cannot be cancelled after its initiation.
E) UK Pensions transferred 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.
F) Australian Oversight Occupational Pensions
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;
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.
- 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.
G) Tax on Pensions
How much tax you pay on retirement income, depends on your age and the type of income.
I] National: Superannuation
For many people, an income stream from superannuation will be tax-free from age 60.
Types of Super Income
Income from a super can be an:
- Account Based Pension: a series of regular payments from your super money;
- Annuity: a fixed income for the rest of your life or a set period of time.
Part of your super money is taxable and made up of:
- Employer contributions;
- Salary sacrificed contributions;
- Personal contributions claimed as tax deductions.
Part is tax-free and made up of:
- After tax contributions;
- Government co-contributions.
If you're age 60 or over
Your entire benefit from a taxed super fund (which most funds are) is tax-free.
If you're age 55 to 59
Your income payment has two parts:
- Taxable: Taxed at your marginal tax rate less a 15% tax offset;
- Tax-free: You don't pay anything more.
If you're age 55 or younger
You can usually only access your super if you experience permanent incapacity. If this happens, you'll be taxed at the same level as people aged 55 to 59.
If accessing super for a different reason, such as severe financial hardship, your income payment has two parts:
- Taxable: Taxed at your marginal tax rate;
- Tax-free: You don't pay anything more.
Many Expats receive a pension pay-out from Australia or live in Australia and receive a pension pay-out from another country.
Australia has many Double Tax Treaties with other countries which try to prevent and or mitigate double taxation.
If you face double taxation and there is no such treaty, then you can only look for national regulations in order to prevent double taxation.
H) News April 2020
Australia Pensions: Supers Performance
The total size of Australia’s superannuation is staggering:
- The average super fund returned 15.2%, while the typical balanced fund grew by 13.8% in 2019.
- Those returns are the best since 2013.
- Analysts say lower interest rates, partly initiated by Donald Trump’s trade war with China, were a major factor in the growth.
The total pool of Australian superannuation has now hit $3 trillion and last year, at 15.2%, it produced the best return, on average, since 2013.
“Over a 15-year period we would typically expect funds to return 5, 6 maybe 7%, but we’ve had extraordinary results mainly driven by the outstanding performance of both international and domestic equities,”.
Figures from SuperRatings show the median, or typical, balanced fund produced a slightly lower return of 13.8% last year, but that was still the best in six years.
Australia’s financial markets were relatively small so, in an effort to stretch returns, local fund managers were investing more of their clients’ super in international markets, including the US.
The New 2019 Rules Of Superannuation
When you mention super, most people shake their head and mutter about the constant rule changes. Looking back over the past few years it’s a fair comment, with many significant changes occurring – and many more proposed but never legislated.
If you are wondering how those changes have affected your super and retirement plans, here’s a quick guide to the key changes and when they commenced.
Protecting Your Super reforms – starting 1 July 2019
The Protecting Your Super reform package was legislated to protect Australians’ super accounts from being eroded by insurance policy fees and premiums they may not require.
The key reforms are:
Insurance within inactive super accounts
Your super fund will be required to cancel the insurance cover that goes with your super account if your super account is deemed to be inactive. Under the legislation, super accounts are considered inactive if they have not received any contributions or rollovers for more than 13 months.
Super funds are required to inform fund members they are at risk of having their insurance cancelled and giving them the option to retain their insurance cover even if they are not making regular super contributions.
Closure of inactive super accounts
If you have an inactive super account with a balance of less than $6,000 it will be closed automatically and the balance transferred to the ATO, which will then use data matching technology to combine the low balance amount with one of your active super accounts.
Cap on fees for low balance accounts
Small super accounts with a balance of $6,000 or less at financial year-end will have their super fund fees capped at 3% per annum.
Switching funds without exit fees
Exit fees will be banned, allowing you to switch your super fund without having to pay any penalty or fee.
Other rule changes – starting 1 July 2019
Significant changes to the non-concessional (after-tax) contribution rules start on 1 July 2019, plus several changes to the threshold and payments for other super and pension areas:
No work test for contributions in first year of retirement
New retirees aged between 65 and 74 will now be able to make voluntary contributions into their super account without needing to satisfy the work test. To qualify you must have had less than $300,000 in your super account at the end of the previous financial year.
The relaxation of the work test rules only applies once and you cannot make contributions in subsequent financial years without meeting the work test. Under the new rules, after age 65 work test-free contributions are only permitted in the year immediately after the one in which you last met the work test.
Carry-forward concessional (before-tax) contributions start
From 1 July 2019, super fund members can make catch-up concessional contributions into their super account using their unused concessional contributions cap amounts from previous years.
To qualify, you must have a Total Super Balance of less than $500,000 on 30 June of the previous financial year and you must not have used all your $25,000 annual concessional contributions cap in the previous financial year.
Under the rules, you can carry-forward up to five years of unused concessional contributions caps for use in a later financial year, but the rolled forward amounts expire after five years.
The five-year carry-forward period started on 1 July 2018, meaning 2019/2020 is the first year in which you can make catch-up contributions. If you are aged 65 or over, the normal work test rules apply.
Rise in Age Pension Work Bonus
If you are receiving the Age Pension work bonus, you will get a lift in your work bonus payments from $250 to $300 per fortnight from 1 July 2019.
Pension Loans Scheme expanded
From 1 July 2019, the eligibility criteria and withdrawal amounts for the Pension Loans Scheme (PLS) will be expanded to make the scheme available to more Australians of age pension age.
Under the new eligibility rules, you must still qualify for one of the eligible pensions, but you can now have a payment rate of $0 for either of the Age Pension means tests (assets or income), or be receiving the maximum pension rate. The withdrawal amount per fortnight is increasing from 100% to 150% of the maximum fortnightly pension rate.
Lifetime annuity Means Test change
Changes to the Means Test for lifetime retirement income streams or annuities come into effect from 1 July 2019. Annuity payments are included in the Age Pension income test, but under the new rules only 60% of an annuity’s purchase price will be included in the assets test rather than the previous situation where the full purchase price is included. The assessment rate will reduce to 30% for people aged over 84.
End to anti-detriment deductions
Although anti-detriment payments were banned for any super fund member deaths from 1 July 2017, super funds could still make payments to eligible dependants for members dying prior to this date.
From 1 July 2019, no anti-detriment payment deductions are available, regardless of when the member died.
Age Pension age rises to 66
From 1 July 2019, the age at which you qualify for the Age Pension rises to 66, with the eligibility rising six months every two years until it reaches age 67 for everyone on 1 July 2023.