Types of Superannuation Funds in Australia
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Questions and Answers

What is a primary characteristic of non-account based RIS?

  • They do not provide income streams.
  • They maintain individual account balances for each member.
  • They require regular account maintenance.
  • They are based on a lump sum purchase from an annuity provider. (correct)

    • Which of the following describes a life annuity?

  • It must provide payments for at least ten years.
  • It is less expensive than a term certain annuity.
  • It is paid out until the annuitant dies. (correct)
  • Payments are made for a fixed term regardless of the member's lifespan.

    • Which variable does NOT drive the amount of income from non-account based RIS?

  • Implicit market interest rate
  • Purchase price
  • Duration of the annuity
  • Individual investment performance (correct)

    • What does the term 'Residual Capital Value (RCV)' refer to in the context of non-account based RIS?

    <p>A value that may be available to the estate after the member's death.</p> Signup and view all the answers

    How is the pricing for a term certain annuity determined?

    <p>By the recipient’s age at commencement.</p> Signup and view all the answers

    What happens to the annuity payment as the term of the annuity increases?

    <p>The annuity payment decreases.</p> Signup and view all the answers

    What is the impact of a higher amount spent on an annuity?

    <p>It increases the total annuity amount.</p> Signup and view all the answers

    Which type of annuity is focused on during the pricing discussion?

    <p>Term certain annuities.</p> Signup and view all the answers

    What tax rate is applied to earnings on the accumulation account of a pension fund?

    <p>15%</p> Signup and view all the answers

    How are annuities characterized with respect to the timing of payments?

    <p>Payments occur at the end of each interval.</p> Signup and view all the answers

    What is the role of the Age Pension for retirees?

    <p>It functions as a safety net for those who have other retirement savings.</p> Signup and view all the answers

    What variable remains fixed for the term of the annuity according to the pricing model?

    <p>The interest rate per payment interval.</p> Signup and view all the answers

    What does the formula $A_n = R[1 - (1+r)^{-n}]/r$ calculate in relation to annuities?

    <p>The regular payment amount under the annuity.</p> Signup and view all the answers

    What must financial planners maintain knowledge of regarding the Age Pension?

    <p>How the Assets Test and Income Test apply to determine entitlements</p> Signup and view all the answers

    What does a retiree's reluctance to take market risk with their lump sum imply?

    <p>They avoid investing in equities or property.</p> Signup and view all the answers

    What type of contributions are taxed at a concessional rate?

    <p>Concessional contributions</p> Signup and view all the answers

    Which of the following statements about non-concessional contributions is true?

    <p>Investment earnings on them are taxed at a concessionally low rate.</p> Signup and view all the answers

    How does the interest yield on the lump sum affect received annuity?

    <p>A lower yield results in a lower annuity payment.</p> Signup and view all the answers

    What is a key factor in the interaction between the Age Pension and superannuation?

    <p>Reliance on the Age Pension by many retirees</p> Signup and view all the answers

    Which of the following represents one of the stages related to tax incentives on superannuation?

    <p>Investment income from super fund investments</p> Signup and view all the answers

    What is a responsibility of the fund trustee when managing a pension account?

    <p>Maintaining distinct accounts for different purposes</p> Signup and view all the answers

    What regulation primarily oversees most superannuation funds in Australia?

    <p>Australian Prudential Regulation Authority (APRA)</p> Signup and view all the answers

    Which type of superannuation fund is typically run by a company for its employees?

    <p>Corporate fund</p> Signup and view all the answers

    What is a key characteristic of a Self-Managed Superannuation Fund (SMSF)?

    <p>Each member must be a trustee.</p> Signup and view all the answers

    Which of the following is true regarding small superannuation funds?

    <p>The SMSF sector is the largest in the industry.</p> Signup and view all the answers

    Who regulates Self-Managed Superannuation Funds (SMSFs)?

    <p>ATO</p> Signup and view all the answers

    What is a defining feature of Industry superannuation funds?

    <p>They are run for employees of a specific industry.</p> Signup and view all the answers

    Which type of superannuation fund comprises holdings in groups of funds?

    <p>Master funds</p> Signup and view all the answers

    Which organization handles the regulation of most entities within the superannuation industry?

    <p>APRA</p> Signup and view all the answers

    What is a common reason for a tax liability on superannuation benefit payments?

    <p>The timing of the payment</p> Signup and view all the answers

    Which component of a superannuation benefit is generally tax-free when accessed after a condition of release?

    <p>Tax-free component</p> Signup and view all the answers

    Who is considered a death benefits dependant under superannuation rules?

    <p>Spouse or partner</p> Signup and view all the answers

    What factor does NOT influence whether a withdrawal from superannuation is taxable?

    <p>Whether the individual has previously withdrawn super</p> Signup and view all the answers

    What percentage tax is typically applied to the taxable component of a death benefit paid to a non-dependant?

    <p>15%</p> Signup and view all the answers

    Which of the following circumstances would NOT generally result in tax being applied to super benefits upon withdrawal?

    <p>Accessing after meeting a condition of release</p> Signup and view all the answers

    In the case of reversionary pensions, what factor primarily determines the tax implications?

    <p>The age of the reversionary beneficiary</p> Signup and view all the answers

    What generally dictates whether an individual may receive tax offsets on a superannuation withdrawal?

    <p>The withdrawal method chosen</p> Signup and view all the answers

    What is the primary difference between fixed term annuities and life annuities?

    <p>Life annuities provide payments that last as long as the member is alive.</p> Signup and view all the answers

    Which of the following variables does NOT affect the amount of income received from non-account based RIS?

    <p>Residual Capital Value (RCV)</p> Signup and view all the answers

    What pricing basis is used for term certain annuities?

    <p>Recipient’s age at the start of the annuity</p> Signup and view all the answers

    Which type of non-account based RIS payment is least likely to provide a capital value upon death?

    <p>Life annuity</p> Signup and view all the answers

    In the context of non-account based RIS, what does 'minimum standards' refer to?

    <p>The guaranteed minimum income payments that must be provided</p> Signup and view all the answers

    What is the primary reason retirees should be cautious about how they spend their accessed super funds?

    <p>To ensure funds last through their retirement</p> Signup and view all the answers

    Which condition of release allows access to an accumulated super lump sum without any age restrictions?

    <p>Reaching age 65</p> Signup and view all the answers

    Which of the following conditions of release is usually very strictly interpreted?

    <p>Severe hardship</p> Signup and view all the answers

    What does the ASFA Retirement Living Standards help determine for retirees?

    <p>Amount of income needed based on personal circumstances</p> Signup and view all the answers

    In the context of accessing super funds, which situation does NOT meet a condition of release?

    <p>Experiencing severe hardship without documentation</p> Signup and view all the answers

    What is the minimum preservation age for individuals born before 1 July 1960?

    <p>55 years</p> Signup and view all the answers

    Which of the following is considered a ground for accessing super on 'compassionate grounds'?

    <p>Terminal illness requiring palliative care</p> Signup and view all the answers

    What is a characteristic of the 'transition to retirement' arrangements?

    <p>Permits partial access to super funds while still working</p> Signup and view all the answers

    What distinguishes pensions from annuities in the context of superannuation?

    <p>Pensions draw directly from the retiree's superannuation fund.</p> Signup and view all the answers

    Which term refers to income payments made by third-party providers under a personalized contract?

    <p>Non-account-based RIS</p> Signup and view all the answers

    For retirees, what is an assumption regarding the specified comfortable lifestyle income amounts?

    <p>They assume ownership of their home outright.</p> Signup and view all the answers

    What is categorized as account-based RIS?

    <p>Income payments made directly from a retiree's superannuation fund.</p> Signup and view all the answers

    Which statement about annuities is correct?

    <p>Annuities can be purchased by anyone at any age.</p> Signup and view all the answers

    How are income payment specifics determined for account-based RIS?

    <p>By the terms defined in a trust deed.</p> Signup and view all the answers

    What is a significant characteristic of superannuation pensions?

    <p>They are influenced by the retiree's eligibility conditions.</p> Signup and view all the answers

    Which factor impacts the ability to purchase an annuity?

    <p>The age of the purchaser.</p> Signup and view all the answers

    What will typically determine the taxation consequences of accessing super fund benefits?

    <p>The circumstances, nature and timing of access</p> Signup and view all the answers

    Which component of a superannuation benefit may incur a tax liability even after a condition of release is met?

    <p>Taxable component</p> Signup and view all the answers

    Who will receive a tax-free lump sum death benefit payment?

    <p>A death benefits dependant</p> Signup and view all the answers

    What factor is NOT required to determine how super withdrawal will be taxed?

    <p>Your marital status</p> Signup and view all the answers

    What tax rate is applied to any taxable component of a death benefit paid to a non-dependant?

    <p>15%</p> Signup and view all the answers

    Which of the following situations could necessitate a tax offset on superannuation withdrawals?

    <p>Accessing the benefit after the preservation age</p> Signup and view all the answers

    What is a condition that may exclude superannuation benefits from tax obligations upon withdrawal?

    <p>A condition of release has been met</p> Signup and view all the answers

    Under what circumstance is the taxation of a reversionary pension determined?

    <p>By the age of the reversionary beneficiary</p> Signup and view all the answers

    What is a fundamental legal requirement for the establishment of a super fund?

    <p>It must be set up as a trust</p> Signup and view all the answers

    What is one of the fiduciary obligations of trustees in a super fund?

    <p>Act in the best interest of beneficiaries</p> Signup and view all the answers

    Which statement correctly describes the requirements for SMSF trustees?

    <p>Members must not have been disqualified by any regulatory body</p> Signup and view all the answers

    Which of the following is NOT a requirement for corporate trustees of SMSFs?

    <p>The company must be deregistered for compliance</p> Signup and view all the answers

    What must super fund Trust Deeds include to comply with the SIS Act?

    <p>A written investment strategy</p> Signup and view all the answers

    What is a key consideration for trustees in managing a super fund?

    <p>They should avoid conflicts of interest</p> Signup and view all the answers

    Which of the following best describes a situation when a corporate trustee is used for realising the 'all members are trustees, all trustees are members' rule?

    <p>All fund members must be directors of the trustee company</p> Signup and view all the answers

    Which of the following describes a responsibility of SMSF trustees?

    <p>To seek advice on investments when necessary</p> Signup and view all the answers

    What describes the relationship between a super fund's trustee and its members?

    <p>The trustee has a fiduciary duty to act in members' interest</p> Signup and view all the answers

    Which of the following is NOT a permitted action for SMSF trustees?

    <p>Invest in non-compliant assets</p> Signup and view all the answers

    Study Notes

    Types of Superannuation Funds

    • There are six main types of Superannuation Funds in Australia: Corporate funds, Industry funds, Public sector funds, Public offer or retail funds, Small funds, Master funds or trusts.
    • Corporate funds are run by companies for their employees.
    • Industry funds cater for entire industries.
    • Public sector funds cater for public sectors employees.
    • Public offer funds are open to the public.
    • Small funds are the largest sector in the industry.
    • Master funds or trusts comprise holdings in groups of funds - Corporate, Industry and Public offer funds.
    • As of June 2020, there were 846 corporate funds, 196 industry funds, 116 public sector funds, 236 public offer funds, 48,512 small funds and 10 master funds.

    Superannuation Fund Asset Allocation

    • Superannuation funds invest in Australian equities, international equities, fixed interest, property, infrastructure and cash.

    Regulation of Superannuation Funds

    • Superannuation Industry Supervisory Act 1993 (SIS Act) regulates all except Self-Managed Superannuation Funds (SMSFs).
    • Australian Prudential Regulation Authority (APRA) regulates all superannuation funds except SMSFs.
    • APRA also oversees banks, credit unions, building societies, life insurance, general insurance and reinsurance companies, friendly societies as well as most members of the superannuation industry.
    • The Australian Taxation Office (ATO) regulates SMSFs.
    • The ATO sees itself as “protecting the integrity of the system”.

    Self-Managed Superannuation Fund

    • Self-Managed Superannuation Funds (SMSFs) are regulated by the Australian Taxation Office (ATO).
    • SMSFs can only have a maximum of six members (it was four before 1 July 2021).
    • The members of an SMSF are usually the trustees, who cannot be remunerated.

    Non-Account Based Retirement Income Streams

    • Purchased from an annuity provider by a member with a lump sum.
    • Annuities pay an income stream that is payable either for the life of the member or reversionary beneficiary, or for a specified fixed term.
    • Non-account based Retirement Income Streams must meet minimum standards.
    • Payments are made from funds that are pooled.

    Types of Non-Account Based Retirement Income Streams

    • Fixed Term (term certain) annuities are commutable income streams payable for a fixed term.
    • Life (lifetime) annuities are payable for as long as the annuitant is alive.

    Choosing the Appropriate Retirement Income Stream

    • The amount of a Retirement Income Stream received from annuities depends on the purchase price, the term of the annuity, and the implicit market interest rate.
    • The higher the amount spent on the annuity, the higher it will be.
    • The longer the term of the annuity, the lower will be each annuity payment.
    • The higher the interest rate level, the higher the amount of RIS received.

    Pricing of Annuities and Pensions

    • Annuities are priced as an ordinary annuity.
    • The periodic payments occur at the end of regular intervals (e.g. at the end of each month or year).
    • The effective rate of interest per payment interval remains fixed for the term of the annuity.
    • The term is a fixed number of regular intervals.
    • The formula for pricing of an ordinary annuity is An = R[1- (1+r)-n]/r

    Superannuation and the Age Pension

    • The Age Pension operates as a ‘safety net’ for retirees who provide for their own pension from a lump sum.
    • Australian retirees rely on the Age Pension for at least some of their retirement incomes streams.
    • Financial planners should have a detailed knowledge of the Assets Test and Income Test that applies to determine Age Pension entitlements in different circumstances.

    Taxation of Superannuation Benefits

    • There are four stages of tax on superannuation:
      • Concessional contributions
      • Non-concessional contributions
      • Investment income on super fund investments
      • Superannuation benefit payments

    Taxation of Superannuation Benefit Payments

    • The tax system applicable to benefits from superannuation funds is distinct from income tax for individuals.
    • As a general rule, no tax will apply to benefits accessed once a ‘condition of release’ has been met.
    • However, some components of an accessed benefit might be taxed, depending on circumstances.
    • There is a distinction between “taxable component” and “tax-free component" of accumulated super benefits.

    Taxation of Death Benefits

    • Lump sum death benefit payments will generally not be taxed if paid to a dependent of the deceased.
    • A lump sum paid to a non-dependents will be taxed at 15% on the taxable component.
    • The taxation of a death benefit that is paid as a ‘reversionary pension’ will depend on the age of the reversionary beneficiary.

    How Tax Applies to Super

    • People should know their preservation age and the age they will be when they get their super payment.
    • They should know whether any of the money in their account is taxable.
    • They should know whether they will get the payment as a lump sum or an income stream.

    Super Funds: A Comprehensive Overview

    • Superannuation funds are trusts regulated by the SIS Act and Commonwealth and state trust laws.
    • Super fund trustees have a fiduciary duty to the fund members.
    • Super fund Trust Deeds act as the fund's constitution and contain provisions in compliance with the SIS Act.

    Self-Managed Superannuation Funds (SMSFs)

    • SMSF trusteeship requires all members to also be trustees.
    • Individuals can be SMSF trustees if they meet specific criteria, including being over 18, mentally sound, not bankrupt or insolvent, and not convicted of dishonesty or offenses involving superannuation legislation.
    • SMSF corporate trustees (companies) can be used to meet the "all members are trustees, all trustees are members" requirement.
    • Corporate trustee companies must meet specific requirements, including not being deregistered, having no disqualified directors, and not having a receiver or provisional administrator appointed.

    Trustee Duties

    • Trustees have a broad range of duties, including acting impartially, investing promptly and prudently, exercising discretions properly, seeking advice, obeying trust deed terms, protecting assets, avoiding conflicts of interest, acting personally, unanimously, and avoiding compliance errors.

    Accessing Superannuation Benefits

    • Superannuation benefits can be accessed upon meeting a 'condition of release,' which includes reaching preservation age, termination of employment at age 60 or older, attaining age 65, death, permanent incapacity, severe hardship, or compassionate grounds.
    • The most common conditions of release are retirement at age 60 or reaching age 65.
    • The final three grounds (severe hardship, compassionate grounds, and temporary incapacity) are strictly interpreted and taxed differently from other benefits.

    Retirement Income Streams (RIS)

    • Superannuation benefits can be used to purchase an RIS, providing retirement income.
    • ASFA's 'Retirement Living Standards' provide guidance on estimated annual living costs for a comfortable or modest lifestyle for retirees.

    Superannuation Pensions and Annuities

    • Pensions are retirement income streams directly drawn from a super fund.
    • Annuities are purchased from an annuity provider, such as a life insurance office, bank, or commercial provider.
    • Annuities can be purchased by anyone at any age to provide an income stream.

    Account-Based vs. Non-Account-Based RIS

    • Superannuation pensions are considered account-based RIS, where income payments are made directly from the retiree's super fund account based on trust deed provisions and eligibility.
    • Annuities are non-account-based RIS, where income payments are made through a personalized contract with a third-party provider.

    Non-Account Based RIS

    • Non-account-based RIS are purchased from an annuity provider with a lump sum.
    • The annuity provider does not maintain a specific account balance for the member and pays from pooled funds.
    • Payments can be made for a lifetime or a specified fixed term.
    • A Residual Capital Value (RCV) may be available to the estate.

    Types of Non-Account Based RIS

    • Fixed-term or term certain annuities provide a commutable income stream for a set period.
    • Life or lifetime annuities are paid for as long as the annuitant lives, ending upon their death.

    Taxation of Super Fund Benefits

    • Super fund benefits are subject to a separate tax system from individual income tax.
    • Taxation depends on the circumstances, nature, and timing of accessing benefits.
    • Most superannuation benefits that are accessed after meeting a condition of release are tax-free.
    • However, there may be a tax liability on certain components, depending on specific circumstances.

    Taxation of Death Benefits

    • Lump-sum death benefit payments are generally tax-free if paid to a dependant.
    • Taxable lump-sum payments to non-dependents are taxed at 15%.
    • Taxation of reversionary pensions depends on the age of the reversionary beneficiary.

    Tax Considerations for Super Withdrawals

    • Understanding preservation age, age at withdrawal, the taxable component of the account, and whether a lump sum or income stream is received is crucial to determining potential tax implications.

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    Description

    Explore the various types of superannuation funds available in Australia, including corporate, industry, public sector, public offer, small, and master funds. Understand their specific purposes and how they contribute to the superannuation landscape. This quiz will enhance your knowledge of Australia's superannuation system.

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