Simplifying Statements
of Advice
Retirement strategy example SOA
10 February 2009
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Development of FPA example Statements of Advice (SOA)
Financial planners, politicians, and regulators alike share the common goals of ensuring that disclosure documents
are understandable, useful, practical and cost effective for consumers. However, most would agree that many
Statements of Advice (SOAs) are lengthy, challenging for consumers to understand, and costly for financial
planners to produce.
In June 2008, the Financial Planning Association (FPA) released an example Statement of Advice (SOA) for
Transition to Retirement advice which identified and simplified the key requirements that should be included in a
SOA. The FPA also established a Working Group of life risk specialist practitioners to develop an example SOA on
personal insurance protection which was released for member feedback in December 2008.
The FPA has now released two further example Statements of Advice for member feedback. As with the
Transition to Retirement example, these Statements of Advice do not include information considered unnecessary
to client understanding of the advice. They are focused on the key sections that help clients make informed
decisions about the advice given. The examples utilise referencing to remove the need to include education
material, unnecessary product information, background research and other information, leaving the advice and
costs as the focus of the document. This approach promotes the role of the Financial Services Guide (FSG) and
Product Disclosure Statement (PDS) as valuable sources of more detailed information.
There may be a number of additional professional requirements planners may need to consider.
Client history
Bill and Susan Retiree have been managing their own financial affairs but with retirement planned for the end of
next year, they are keen to seek professional advice because they find the legislation complex. Essentially, Bill
and Susan have worked hard to bring up their family, pay off their debts, put some savings aside and contribute to
super. They have been hearing their friends talk about the Age Pension and Allocated Pensions and want to
ensure that they get the best outcome for themselves.
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EXAMPLE
SOA
ABC Financial Planning Pty Ltd
Bill and Susan Retiree
STRATEGY STATEMENT OF ADVICE
RETIREMENT PLANNING
Date: 5 February 2009
What this Document is About
This document sets out the advice requested arising from our discussion dated 2 February 2009 and
details about the costs of implementing the advice. This advice has been provided by John Planner is an
authorised representative (no. 11111) of ABC Financial Planning Pty Ltd an Australian Financial Services
Licensee (No. 789123), of 75 Castlereagh Street, Sydney NSW 2000.
Tel: 02 9999 9999. Email: [email protected]
Please note that all documents or sources of information that are referenced in this document are available
free of charge from ABC Financial Planning.
The scope of this advice
This advice provides strategies to maximise your financial position upon Bill’s planned retirement in
December 2008. This does not include any specific product recommendations, rather these will need to be
addressed at retirement in a separate Statement of Advice.
Where you are now
Here are your relevant personal details that you provided to me at our meetings, and which I took into
consideration when developing your strategy:
• You are a married couple, Bill aged 64 and Susan aged 58, with no dependants.
• Bill is the sole income earner for the family and proposes to retire on 15th December 2009 which is his
65th birthday. Bill has already used all his long service and other leave benefits.
• You reside in a home which you intend to maintain as your residence for the foreseeable future.
• You both have current wills in place as well as enduring power of attorney documents.
• You have private health cover in place.
• You have indicated that you don’t wish for life risk issues to be analysed as part of this advice.
The table below summarises your current financial position:
Bill
Gross salary per annum
Investment income per annum
Estimated annual tax
Current top tax rate paid
Investment assets
Superannuation assets
Life Insurance
Property value
Other Personal assets
Centrelink assessable assets
Cash requirements
Susan
$65,000 (excluding 9% super)
$160
$13,250
31.5%
$4,000 (joint bank account)
$Nil
$8,210
$Nil
0%
$ 4,000 (joint bank account)
$115,000 (term deposit due 01Dec08)
$620,000 – 100% taxable
$0
$Nil
$Nil
$500,000
shared jointly
$ 49,500
contents, car, boat and caravan
$792,500
based on current position
Lifestyle expenses
$40,000 per annum
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Prepared by John Planner CFP®
Date: 5 February 2009
Page 1
EXAMPLE
SOA
ABC Financial Planning Pty Ltd
What you want to achieve
Here is what I understand to be your primary objectives:
Objective
Detail
When
th
Retirement
Bill to retire on his 65 birthday
15th December 2009
Maximise Age Pension
Obtain the maximum Age Pension for Bill possible
December 2009
Income at Retirement
Target $40,000 per annum to maintain current lifestyle
December onward
How you get there and why
Here is a summary of what I recommend to you:
Step 1:
Susan
Put your term deposit proceeds into a cash account ready for retirement.
Balance in joint account now approximately $140,000 including interest from
the matured term deposit.
Step 2:
Bill
Withdraw your super benefit of approximately $620,000 and deposit into
your cash account. Balance now approximately $760,000.
Step 3:
Susan
Invest $450,000 from the cash account into a super fund in your name.
Balance in cash account now around $310,000.
Step 4:
Bill
Use $300,000 of your cash reserves to invest back into your super fund.
This is called a “re-contribution strategy” and leaves around $10,000 in your
joint account for contingencies.
Step 5:
Bill
From your super create an Account Based Pension (ABP) and draw a
pension equivalent to $31,000 per annum.
Step 6:
Bill
You are now in a position to apply for the Age Pension.
Step 1: Deposit Susan’s Term Deposit into the Cash Account
How
Reasons
When
Susan’s • We want to keep these funds accessible to incorporate in the strategy to provide
Term Deposit of
you with a tax effective retirement income. Please refer to Step 4 for further details
$115,000 matures
of this strategy.
on 1st December
• As your Term Deposit has matured, you will not lose any accumulated interest
2008, deposit the
upon withdrawal. Given the term deposit interest rate of 6.1%, the interest
proceeds into your
received upon maturity will be approximately $7,015.
joint account.
Step 2: Withdraw Bill’s Super
How
Reasons
Withdraw all Bill’s • This allows Bill to form a tax free super facility and maximize his Age Pension
entitlement at age 65. Please refer to Step 3 and 4 below for further details.
super benefit of
approximately
• Bill, as you will be 65 at retirement and therefore access to your super benefits
$620,000
and
which can be withdrawn without paying any tax.
deposit this into
your joint account.
Step 3: Invest $450,000 in Superannuation for Susan
How
Reasons
Using
cash • Based on your estimated level of assets Bill should come under Centrelink's
accumulated in your
Assets Test to calculate his Age Pension entitlement. Susan, as you will not be
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Prepared by John Planner CFP®
Date: 5 February 2009
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ABC Financial Planning Pty Ltd
joint account make
a $450,000 nonconcessional
contribution into a
super
fund
for
Susan.
EXAMPLE
SOA
eligible for the Age Pension until age 65, any super assets you hold will not be
assessable by Centrelink and will thus increase Bill’s Age Pension entitlement.
•
Non-concessional super contributions are those on which no tax deduction is
claimed. These contributions are limited to $150,000 per year however as Susan
is aged under 65, you can contribute up to $450,000 in the same financial year by
choosing to bring forward the next two years contribution limits. Any excess
contributions will be taxed at 46.5%.
•
This strategy reduces your Centrelink assessable assets by $450,000 and I have
estimated that this will then increase Bill’s Age Pension entitlement from $1,035
per annum to approximately $9,615 per annum (or $369.80 per fortnight).
Step 4: Re-contribution Strategy for Bill
How
Reasons
Use $300,000 from • Bill, as and when you reach age 65 you will need to meet the work test to be able
your cash account
to make contributions to super. As you have been working full time up to your
to make a nonretirement on 15th December you will pass this test in the 2008/2009 financial
concessional
year.
contribution
back
• Bill, it is also important that you make the non-concessional contribution to super
into Bill’s super
in this financial year as you are now over age 65 you only have until 30th June
fund immediately.
2009 to access the $450,000 cap. From then you can no longer bring forward the
two years of contributions, limiting your contribution to $150,000.
•
If Bill died then these funds would be paid to Susan tax free. However, if you were
to pay taxable benefits to a non-dependant (ie. your children) then 16.5% tax may
be payable. By using this strategy we can reduce this liability should you both
pass away. If we left the $300,000 in Bill’s super any non-dependant receiving
these funds would pay almost $50,000 in tax.
Step 5: Create the Account Based Pension
How
Reasons
Bill’s super should • Pension payments made from the Account Based Pension are tax free, as are
now be transitioned
any lump sums withdrawn.
into an Account
• No tax is levied on investment earnings in the ABP compared to investments held
Based
Pension
privately, which may be taxed at your marginal tax rate. Investments in super will
(ABP).
be taxed at 15%. This also means that your ABP will receive a refund for any
imputation credits generated by exposure to Australian shares.
•
Although the value of the ABP will be included in your assessable assets when
Centrelink determines Bill’s Age Pension entitlement, income is concessionally
assessed under Centrelink’s incomes test. The amount assessed is based on the
amount of income drawn from the ABP less a deductible amount calculated
commencement of the ABP. In Bill’s case, I estimate the deductible amount to be
approximately $16,949 per annum.
•
You will be able to nominate Susan as a binding beneficiary should anything
happen to you meaning that Susan would then take over this ABP.
Step 6: Achieving your Retirement Income
How
Reasons
Bill’s estimated Age • Based on my recommendations, I have estimated Bill’s Age Pension entitlement
Pension entitlement
to be approximately $10,060 pa (or $386.92 per fortnight). This is taxable income.
However with various tax offsets available, your tax liability will be nil.
Draw the minimum • You have the flexibility to draw any level of income from the ABP above the
income level from
minimum of 5% of your ABP’s asset value. This is approximately $14,250 in the
Bill’s
Account
first year based on an investment value of $285,000.
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Prepared by John Planner CFP®
Date: 5 February 2009
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ABC Financial Planning Pty Ltd
Based Pension.
•
•
Make regular
withdraws of
$16,000 from
Susan’s super.
•
•
•
EXAMPLE
SOA
Bill, your pension payment will be entirely tax free as you are over age 60.
Drawing the minimum from the ABP allows you to retain more of your funds in a
tax-free environment.
Earnings in superannuation are taxed at 15% compared to 0% in an ABP. By
making withdraws from Susan’s super fund rather then withdrawing from the ABP
more of your funds will be in a tax free environment.
Based on your retirement income need of $40,000 pa, Bill’s Age Pension
entitlement of $10,125 and the minimum ABP income of $14,250, I estimate that
you will need to make total annual withdraws of about $16,000 pa.
As Susan is not working and is over age 60, she is able to access her super
benefits tax free.
Bill, as an Age Pensioner, you will also be eligible for the Pensioner Concession Card which entitles you to
certain concessions when purchasing medication. Additional information on the concession card and its
other benefits is included in the supporting information section of this Statement of Advice.
In summary, here’s how this strategy fulfils your objectives
Objective
Retirement
Maximise Age
Pension
Income
Retirement
at
How the strategy fulfils the objective
By maximising Bill's Age Pension over the next seven (7) years until
Susan becomes eligible, we are able to reduce the reliance on your own
assets to fund retirement. Therefore Bill can retire on his 65th birthday
without feeling that he needs to work longer.
These recommendations reduce your overall assessable assets and
hence maximize Bill’s Age Pension entitlement.
When
15th
December
2009
Between the Age Pension and ABP payments you will achieve your
desired income of $40,000 per annum.
Retirement
Onward
December
2009
Risks and disadvantages
General Risks
Everything we do in life has some level of risk attached to it but some level of risk has to be accepted if
you’re to meet your objectives. Here are the key risks of the strategy:
(a) Rule changes. Rules governing Account Based Pensions and super could change. However, in my
experience there are usually transition provisions, allowing those already using a particular strategy to
adapt that strategy to legislative rule changes.
(b) Funds out of the market. During any rollover periods, your funds will be “out of the market”. If the
market rises during that period, you will not have the same purchasing power. If the market falls
however, then you will be able to purchase more for your money.
I recommend you read the enclosed Financial Planning Association booklet, "The Trade-Off - Understanding
Investment Risk".
Superannuation Savings
If Susan decides to work at some stage and contribute to her super, then this may affect the accessibility of
the benefits.
Account Based Pension
Your ABP may not last for the rest of your life. Your allocated pension will be invested based on your risk
profile. It will rise and fall based on investment returns and pension payments. Once the balance is used up,
your pension payments will stop. The pension of $31,000 per annum is approximately 10.3% of Bill's ABP
value, however we have set aside $450,000 in Susan's name so this is growing as Bill's ABP is reducing.
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Prepared by John Planner CFP®
Date: 5 February 2009
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EXAMPLE
SOA
ABC Financial Planning Pty Ltd
What this advice will cost you and how we are paid
Advice costs
In providing this strategy advice to you we have charged a fee of $3,300 as follows :
When
Initial
Description
How Paid
Amount (includes GST as applicable)
Initial financial planning fee for
work involved in the research
and preparation of the strategies.
An invoice is enclosed
with this Statement of
Advice.
Fee
NET FEE PAYABLE
$ 3,300
$ 3,300
As Licensee, ABC Financial Planning ("ABC") receives the payment, retains 2% (or $66) and pays the remainder to us
as the financial planner ($3,234).
Additional information to assist your decision making
Title
Description
Financial
Services
Guide (FSG)
The FSG that has already been provided to you provides information on a range of
issues including the services we offer, how we operate, how we get paid, and any
interests, associations or relationships that could influence them.
Working materials
A copy of the spreadsheet workbook used to determine the financial figures and
strategy contained within this SOA can be made available to you upon request.
Educational
materials
As above, we recommend that you read the Financial Planning Association booklet,
"The Trade Off - Understanding Investment Risk".
We have also included a brochure on general information on superannuation,
account based pensions and Centrelink benefits.
Ongoing
brochure
service
The brochure that has already been provided to you details the ongoing service you
can expect from us in the upcoming years.
Services being provided to you and next steps
It’s very important that you take full ownership of your financial decisions. I can assist you to make the
appropriate decisions, but those decisions remain yours. If you don’t feel totally comfortable with what’s in
this SOA, you should seek further information and advice.
1.
Product Advice
This advice is strategic in nature and I have not recommended any specific product to meet your
needs. I would be pleased to issue you with a further Statement of Advice to make appropriate
product recommendations closer to Bill's retirement date. There will be no charge for the preparation
of any product advice; our implementation fees, product fees and any ongoing fees will be disclosed
in the Statement of Advice.
2.
Age Pension for Susan
As this advice is relevant for the period from Bill’s retirement until Susan becomes eligible for Age
Pension we will need to review your financial affairs in the lead up to Susan's 65th birthday. Of
particular importance is the fact that Susan’s superannuation benefits will become assessable under
Centrelink’s assets test which will impact on your combined Age Pension entitlement.
Financial planning is a dynamic process and your financial development needs to be regularly monitored for
changes in your circumstances, as well as economic conditions, government legislation and a range of
issues that may impact on your financial wellbeing. Should you receive other income, or have any other
change in your financial position, you should notify me immediately so that your strategy can be reviewed to
ensure it remains in step with your objectives. If you have any questions, don’t hesitate to contact me.
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Prepared by John Planner CFP®
Date: 5 February 2009
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