Try a recast to get a bigger catch

The substitution of employment income, which is contributed into super as a concessional contribution, with pension income, is a strategy that has received significant attention following the introduction of the transition to retirement rules.

The tax benefits associated with the recasting of an NCAP (non-commutable allocated pension) is something which is less widely applied.

What is the recasting strategy?

The recasting strategy requires a client to combine the “new” super balance with the funds in the NCAP. The NCAP is then recommenced with a higher NCAP account balance. This allows greater drawings, and results in larger taxation and retirement benefits for the client.

Importantly, as the balance in the “new” super cannot be transferred directly into an NCAP, the first step is to commute (or transfer) the NCAP to a superannuation accumulation account. The combined sum can be used to start a new, larger, NCAP.

Funds in an NCAP cannot be cashed out until a condition of release is satisfied, however, the funds can be transferred back into the accumulation phase.

The recasting strategy further enhances the benefits of an NCAP strategy by:

• transferring additional money to the NCAP to generate tax-free investment earnings

• allowing larger drawings from the NCAP, effectively enabling more money to be contributed to super as a concessional contribution.

The benefit of an NCAP strategy will be reduced if a client is already maximising their concessional contributions up to the cap. That is, $100,000 until June 30, 2012, and the indexed value of $50,000 thereafter.

Case study

Jason is a truck driver for a retail chain. In July 2006, Jason turned 55 and decided he needed to start planning for his retirement. Jason plans on working full-time until retirement at age 65. It was recommended that Jason commence an NCAP strategy. In July 2006, Jason was earning $80,000, and taking home $58,950 after tax and Medicare levy. Jason commenced his NCAP with $250,000 and he elected to receive the maximum pension payment of 10 per cent ($25,000 per annum). The NCAP income allowed Jason to salary sacrifice $31,934 into superannuation, while maintaining his take-home pay of $58,950.

After reviewing Jason’s situation on July 1, 2008, a recasting strategy is recommended as this will enhance his retirement benefits. Jason is now 57 and has total benefits (super accumulated plus NCAP balance) of $304,946. Jason’s salary package has increased to $84,872 due to indexation of 3 per cent per annum, and his take-home pay has increased to $63,650 after tax and Medicare levy. Jason has no excess income as his cost of living has increased in line with the increase in his income.

Jason recommences his NCAP with total accumulated benefits of $304,946 and he elects to draw the maximum pension payment of 10 per cent ($30,494). The NCAP income allows Jason to salary sacrifice $38,608, while still maintaining his take-home pay of $63,650.

After 10 years, it is estimated that Jason’s retirement benefits will increase by approximately $80,670 using the traditional NCAP strategy. By implementing the recasting strategy just one time, Jason can increase his total retirement benefits by a further $15,430 to approximately $96,100 additional wealth at retirement.

If Jason implemented the recasting strategy more than once prior to retirement, he could increase his retirement benefits even further. As Jason receives an annual review from his adviser, the recasting strategy, plus other strategies, can be discussed and implemented relatively simply.

The result from this case study was derived using the AXA NCAP strategy calculator.

Assumptions:

The projections in this strategy are based on various assumptions, including but not limited to:

• there is no change in take-home pay before/after the strategy

• superannuation guarantee is based on total salary package

• account balance is 100 per cent taxable component

• balanced risk profile: 6.1 per cent per annum for superannuation and 7.0 per cent per annum for pension, after fees and tax

• low income and mature age worker tax offset taken into account