Retrospective change penalises some super. contributors

Press, 28 August 1982, Page 19

Retrospective change penalises some super. contributors

By

NEILL BIRSS

Some superannuation contributors are getting a rawdeal in the welter of legislation, regulations, and intended legislation, experts in the field believe. Those suffering as matters now stand are the contributors to schemes which have converted their benefits from lump-sum payments to pensions.

The attraction in New Zealand for lump-sum payments has been the fact that they have been tax free, while pensions are taxable. In his Budget this month, the Prime Minister and Minister of Finance, Mr Muldoon, announced substantial changes in legislation covering superannuation schemes. The Government Actuary, Mr Kelvin Prisk, is empowered to classify all superannuation schemes into four classes: Q Employee pension schemes © Employee lump-sum schemes © Personal pension schemes © Personal lump-sum schemes All schemes must apply for reclassification from March 31 next year. Those classified as lumpsum schemes will be taxed

at 31c in the dollar on their net investment income.

The definition of “net investment income" in the forthcoming Income Tax Bill should clarify whether capital gains accruing to lumpsum schemes will be taxed, and how accruals such as tax-free dividends will be regarded.

Pension schemes, whose incomes (as opposed to the pensions they pay out to members) will not be taxed, will have to pay out at least 75 per cent of their benefits in pensions. A scheme that does not meet the 75 per cent criterion will be able to convert to a pension scheme

or to continue as a lump-sum scheme and pay the 31 per cent tax. If it is a personal scheme (that is. one not associated with employment), it has a third option: to wind up without paying additional tax.

The problem arises, says Mr Gordon Orr, a Christchurch investment manager, for those schemes that have already converted to pension schemes from lump-sum payments. ‘hie lump-sums that members thought would have been available to them on retirement have been changed by the Superannuation Schemes Amendment BilL passed on Budget night. Examples of the different

lump-sum payments payable to someone with, say, 15 years of working life left, are shown in tables A and B. These are hypothetical, of course, and the actual amounts would depend on the rate of return obtained on investments. The tables are for a scheme which has decided to oav out threequarters of each benefit in a pension. Case A shows the position before recent legislation. The cash-benefit portion continued to amass its share of the interest earned by the fund. Case B shows the position now. The lump sum is frozen as at April 1. 1983. The total accumulation due to the member has this frozen sum subtracted from it. The figure arrived at is quartered, and this quarter is then added back to the frozen amount to give the amount that the member can take out as cash. In both A and B. the remainder of the accumulated fund is paid out in a pension. If the amount left to provide the pension is less than about $l4BO, a special provision enables this also to be taken out in a cash sum.

CASE A: Before the legislation Lump sum at April 1, 1983 $lO,OOO Value of lump sum at April 1, 1998 ' $60,000 1 Total accumulation $155,000 Plus quarter of residual value $23,750 Amount payable as lump sum (1998) $83,750 . Amount on’which pension (75pc based $71,250 L CASE B: After the legislation ■ Lump sum at April 1, 1983 $lO,OOO i Total accounted, April 1, 1998 $155,000 Lump sum payable in 1998 $46,250 ■ Amount on which pension based $108,750 I — — —