What is a Transition to Retirement Pension (TTRP)?
A TTRP is an income stream that can be accessed before retirement. Generally, an individual can only access their superannuation benefits when the following conditions are met:
With the TTR pension, an individual does not need to be retired to access the benefits offered by a retirement income stream. Importantly, once the second condition is met (being retired), the income stream automatically reverts to a normal allocated pension. A feature common to both allocated pensions and TTR pension is that no tax is charged on earnings.
The main benefits of implementing a TTR strategy are:
Advantages of implementing a TTR Strategy
Disadvantages of implementing a TTR Strategy
Upon retirement, superannuation fund and Transition to Retirement Pension consolidate into standard Account Based Pension (no maximum limit on annual amount
As many of my clients are small business owners I am often asked for advice about insurance planning and ways to ‘protect’ you business. I.E. what measures can be taken to ‘protect’ the business against important issues such as a loss of major business assets or key personnel.
To do this the business should take out risk protection on Buy/Sell agreements. If the business owner is unsure how to answer any of these questions – or the thought of the event sends a chill through them, then they need to seriously consider the implementation of the business succession protection NOW in order to secure the future viability of their business.
Such business that has implemented a solid succession plan will have that fact work in its favour when dealing with bankers and financiers in these times of tighter liquidity and greater difficulty in obtaining finance.
33 per cent of small business owners are aged over 50, posing a real issue of succession planning.
If the unthinkable happened to your business associates or key employees ask yourself these questions:
The income must keep coming or the bills are not paid and bankruptcy ensures.
Life Insurance is the payment of a lump sum on death and can be used by the remainder of the family to pay off mortgages and debts without bankruptcy or a forced sale.
When asked what their most important assets are, most business owners initially think of physical assets.
Yes, they are valuable to every business, but it’s the intellectual capital and personal exertion provided by the key people, like you and your business associates, that typically makes these assets generate the business’ profits.
Their continued contribution is critical to the long-term success of any business.
Material things can always be replaced or repaired but a key person’s death or disablement can result in a financial loss more disastrous than any loss of, or damage to, physical assets.
When a key person dies, or is permanently disable, they’re lost to the business forever, which can create immediate financial problems.
Without the security provided by the key person, the business may be forced to sell assets to maintain cash flow if creditors press for payment and debtors hold back payment.
The assets of the business and the personal assets of the business owners securing business loans may be at risk.
Customers and suppliers may not feel confident in the trading capacity of the business, and its credit rating could fall if lenders are not prepared to extend credit.
Outstanding loans owed by the business to the key person may also be called up for immediate repayment.
This can provide the business with enough cash so it can repay debts to preserve its asset base, protect the owner’s personal assets, free up cash flow and maintain its credit standing if a business owner or loan guarantor dies or is disable.
Most businesses have one or more key persons whose skill, knowledge, experience and leadership generate significant revenue ensuring the success of the business.
These may be business owner or key employees.
A key person in any business may generally be defined as one whose death, disablement or critical illness would have an adverse financial effect on the business.
A drop in the revenue is often inevitable when a key person is no longer there.
If there isn’t a suitable replacement within the business it may take substantial time and financial inducement to find and train a successor; let alone restore any loss of revenue during a very stressful time.
This may, in turn, affect the management of key business relationships, or affect the confidence of lenders or key trade creditors.
For example losses may result:
This can provide your business with enough money to compensate for the loss of revenue and associated replacement costs to replace a key employee or business owner should they die or become disabled.
The aim is to maintain the business in the same, or substantially similar situation as it was prior to any or all of these events.
People don’t plan to fail, but they typically fail to plan.
This age-old truth has particular relevance where the death or disability of an owner can result in the demise of an otherwise viable business simply because of the lack of business succession planning.
While the owners are alive they can at least negotiate a buy-out amongst themselves; for example, on an owner’s retirement.
But what if one of them dies?
The remaining owners must now negotiate with the deceased owner’s legal personal representative, who may well be more concerned about the needs of the estate then the needs of the business.
Alternately, the surviving business owner/s may find themselves in business with the unwelcome relatives of the deceases, who potentially have no experience or expertise to offer, which could result in a loss of control of the business but a sharing of the profits.
Many business owners mistakenly believe that this contingency has been catered for in the business; constitutional documentation.
Often there is no buy-out provision or, if there is, it’s usually ineffectually drawn up and inadequately funded.
As part of business succession planning Ownership Protection can provide for you, your family and your business associates should one of the owners die, be disabled or suffer a critical illness.
Ownership Protection ensures the continuity of the business through the orderly and certain transfer of ownership and, importantly, that it is funded.
Ownership Protection also ensures the exiting party receives fair value for their equity in the business. While the surviving owner gets certainty about their control of the business, entitlement to profit and their business’ future.
This can be risky as it assumes your profits will be sufficient to absorb the loss at the time of the event. A reduction in revenue and therefore profit is often inevitable, potentially resulting in a loss of income for owners and a reduction in the value of the business. Profit deterioration may raise concern with lenders and the tightening of credit terms.
Creating a contingency reserve or emergency fund would mean locking away critical working capital otherwise available for business growth or distribution to the business owners. It would generally take many years to accumulate an adequate cash reserve.
Borrowing the cash is an option may business could consider, but lenders may not be prepared to extend credit after a key person’s death or disablement because the future of the business and its ability to re-organise is uncertain. Your business may not have the cash flow or security for additional lending. The interest on any lending sees this solution costing more than 100 cents in every dollar.
Stripping the business of hard earned and valuable assets at such a critical time may in fact make matters worse as these assets are generally required to generate the business’s revenue. Often these assets have borrowings against them, or are security for business loans, therefore the owners may not have the discretion to sell them without their lender’s approval. Your personal assets, including your home, may already be encumbered for personal borrowings and may not be readily realisable to cover business needs.
The forced sale of assets may see them sold for only a fraction of their value with taxes and charges incurred representing a significant cost to the business and its owners.
Without a Succession Agreement granting the continuing owners the option to buy a deceased or disabled owner’s interest in he business and at a pre-determined price, continuing owners may find themselves in business with the unwelcome relatives or heirs of the exiting party, and sharing the profits with them. Alternately the exiting owner’s interest could be sold to the highest bidder including your competitors.
It might be possible to pay off the spouse or heirs of the exiting party over a number of years but only if they agree to it. Often these parties require full settlement of the purchase to meet their own financial needs making any vendor terms impractical. You might also find it difficult to come to mutually agreeable terms given your business priorities do not align with their personal needs. If terms can be agreed you are still saddled with a debt to repay plus interest, seeing this solution costing more than 100 cents in every dollar.
Business insurance can provide a unique and cost-effective solution to fund these problems.
It’s cost-effective because it can provide the right amount of money, for the right person, at the right time, and at only a fraction of the cost of the alternatives which, at a minimum, would cost at least 100 cents in the dollar.