Damian Hearn
Technical

IOOF Pursuit provides added strategy benefits

By Damian Hearn

The IOOF Pursuit product has many unique features that advisers may not be aware of. These unique features can compliment a strategy and improve a client's overall financial position.

In this article we focus on how your clients can maximise the investment potential of their concessional contributions and reduce the capital losses on the investment portfolio when transferring from super to pension within the IOOF Pursuit superannuation fund.

A. Reducing capital losses when transferring from super to pension

It is a common strategy for advisers to delay restructuring a client's investment portfolio when commencing a pension. Once the pension is commenced, the portfolio can be restructured free of any capital gains tax (CGT) implications.

On the other hand, an adviser usually gives no consideration to unrealised capital loses within the client's portfolio prior to commencing a pension. In fact, any realised capital losses within the tax-free pension will be lost.

A unique opportunity exists within the IOOF Pursuit super product range to allow a client to take advantage of these unrealised capital losses within their super account and recoup some of their lost retirement savings.

To do so, an adviser must realise the capital losses (ie selling the investments) within the client's super account before transferring to a pension. The trustee of the fund will apply the realised capital losses against other member's capital gains1 within the fund. A client like Graeme, in the following case study, may receive a cash credit of $12,000 by taking advantage of this opportunity.

Case study

Graeme (age 60) has a Pursuit Select super account valued at $500,000 which has unrealised capital losses of $120,000. As part of his retirement strategy, his adviser recommends that Graeme commences a transition to retirement (TTR) strategy from 1 July 2010.

Prior to commencing the pension, Graeme's adviser sells the investment options with the capital loses within his super account. The trustee applies the $120,000 capital loss against capital gains made by other members within the fund's tax return.

Investment capital losses

Trigger capital losses in super account

Trigger capital loss in pension account

Realised loss

$120,000

$120,000

Tax benefit

$12,000

$0

Net realised loss

$108,000

$120,000

Since Graeme has excess capital losses of $120,000 when commencing his pension, he may receive a cash credit of $12,000 (ie $120,000 x 10%) in his super account. This means Graeme's net realised loss will reduce to $108,000 (ie $120,000 - $12,000) and has recouped some of his loses.

Important: The cash benefit may not be paid into the client's account in the financial year the capital loses are realised. The cash benefit could be paid in a future financial year as this is dependant upon the capital gains position of the fund as a whole. As shown within the case study, the cash benefit is still available even if your client moves to pension phase. However, it is important to note that it cannot be accessed if your client decides to leave the fund.

B. Maximise the investment potential of concessional contributions

The trustee will deduct contributions tax and tax on investment income from a client's account at the time the trustee needs to pay it to the Australian Tax Office (ATO). At the present time, the tax is deducted when required by the ATO. This means that your client's super account will keep receiving earnings on investments right up to when tax is required to be paid, in contrast to the tax being withheld from contributions when received at the maximum rate of 15 per cent.

To minimise transaction costs and avoid selling growth assets to fund the tax, an adviser needs to give consideration to how the tax will be paid from the client's portfolio. A number of alternatives are available to pay this tax as follows:

  1. Retaining cash from future contributions: concessional contributions received into the client's account could be retained in the cash account to avoid transaction costs (ie buy/sell spreads).
  2. Automatic top up of the cash account: the defensive assets within a client's portfolio could be drawn upon to top up the cash account by using a pecking order or pro-rata option.
  3. Active portfolio management: the payment of the tax can be factored into the active portfolio management by leaving sufficient funds within the cash account.

Another added advantage of the IOOF Pursuit super product is the calculation of the tax on investment earnings and concessional contributions which is completed at the member level (ie within the client's account). The calculation method for contributions tax takes into account deductible expenses such as administration fees, insurance premiums (ie TPD and life insurance) and imputation credits from listed Australian shares. This means the contributions tax rate will be reduced below the maximum amount of 15 per cent when deducted from the client's account and paid to the ATO.

Important: Again, the opportunity exists for an adviser to focus on reducing the tax rate applied to contributions and investment earnings when constructing the client's investment portfolio.

Conclusion

It is essential that financial advisers continue to demonstrate how you can add more value to your client's retirement savings. In the current market conditions, these unique product features contained in the IOOF Pursuit product range can certainly assist you and your clients. If you are interested in more details on these product features or others, please contact your BDM.

1 The rate of ten per cent or 15 per cent will apply depending on the type of capital losses and gains. The trustee will apply the realised capital loss with the corresponding type of capital gains. For example, a loss and gain generated from asset held for greater than 12 months using the tax rate of ten per cent.