MU - S1 2000 - Pension and Financial Planning

MU - S1 2000 - Pension and Financial Planning - MONASH...

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Unformatted text preview: MONASH Elli/ins Semester One Examinations 2000 Faculty of Business and Economics EXAM CODES: AFC3440 AFC3444 TITLE OF PAPER: PENSION AND FINANCIAL PLANNING EXAM DURATION: 180 minutes writing time READING TEVIE 10 minutes THIS PAPER IS FOR STUDENTS STUDYING AT:( ofl'lce use only - lick where applicable) Berwick El Clayton Peninsula El Distance Education L'l Open Learning El Caulfield El Gippsland El Sunway El Enhancement Studies El Other (specify) [:1 Candidates are reminded that they should have no material on their desks unless their use has been specifically permitted by the following instructions. AUTHORISED MATERIALS CALCULATORS YES El N0 El OPEN BOOK YES [:1 N0 El SPECIFICALLY PERMITTED ITEMS YES El N0 E A FORMULA SHEET IS ATTACHED TO THE PAPER Marks allotted to each question and each question part are shown. These total 150. Please take account of these allotments when composing your answers. This paper represents either 80% of your assessment or 100% depending on whether or not you chose to be assessed by optional assignment. , Candidates ustclete is sn ifequiredso answer in this paper DESK NUMBER Oi HER NAMES (m full) ................................................................................................................................ .. Page 1 of 8 eats; (a) In 1992 the Keating Labor government introduced the superannuation guarantee scheme. . QUESTION 1 What did this enjoin upon employers? (b) What tax is paid on contributions into a complying superannuation fund (you should mention the superannuation contributions surcharge)? I (c) What bodies regulate and administer superannuation funds? (d) What lax is payable on (i) income earned (ii) capital gains (in light of the Ralph report) in a complying superannuation fund? (o) How are pensions (paid out of a super fund) taxed? (f) How are lump sums taxed (in general terms; no need for precise figures)? (g) Superannuation funds are established as trusts. What general obligation do trustees have towards beneficiaries? (b) When can employees access their superannuation monies? (i) What is the 'sole purpose test'? (i) What body of legislation specifically regulates superannuation funds? Marks (2+3+2+2+2+2+2+2+2+2=21) QUESTION 2 An investor accumulates funds for 30 years investing $3,000 pa. in arrears at an effective average afterdtax rate of 8% pa. (i) Find the accumulation after 30 years. (ii) The first $100,000 of the lump sum is tax-free. The remainder is taxed at 15%. What is the actual lump sum in the investor's hands? (iii) The investor in fact paid contribution tax of 15% on money going into the fund and an average rate of 10% on combined earnings and capital gains in the fund. (a) How much p.a. was paid into the fund? (b) What was the average annual pre-tax earning rate of the fund? 2.51832, Find the amount of the 30-year accumulation of untaxed contributions into this fund if earnings and capital gains were untaxed. By expressing the total taxed accumulation as a percentage of the total untaxed accumulation, find the effective rate of tax on super earnings under these circumstances. Find the altered rate if every dollar of contributions was taxed at 30% instead of 15%? Marks (2+2+2+2+2+6=14) QUESTION 3 (i) List five advantages (as against direct investment) of using a fund manager for investing superannuation assets within a DIY fund. (ii) List five disadvantages of using a fund manager for investment of superannuation assets within a DIY fund . Marks (5+5=10) QUESTION 4 (i) What are three requirements of Complying Superannuation Funds? (ii) List five tax concessions available to complying funds. (iii) What are ‘Reasonable Benefit Limits”? Mention both lump sum and pension RELs. What is the tax treatment of excess benefits? (iv) Regarding structure of the superannuation industry, list five different sorts of superannuation entity which may enjoy concessional tax treatment. Marks (3+3+3+3=12) QUESTION 5 (i) Find the fortnightly cash flows deriving from a deferred life annuity purchased by (55) for $50,000 deferred 10 years. The rate of interest offered is 8% pa. Assume 155 = 31685, 155 = 27443, and a“ = 7.5000 (at 8%). A beneficiary (45) is bequeathed a life interest in an estate of $1m. of financial assets which earn 6% p.a. The residual interest goes to X (or X's estate). Find the value of the residual interest. The relevant experience at 6% pa determines that A45 = 0.20311, a45 z 13.078. Marks (6+6=12) Page 3 of 8 asltsa QUESTION 6 (a) You can provide yourself with a complying (life) annuity by financing it through your own 0 DIY fund. List four benefits of doing so. What compliance costs will be involved? (b) Comp are the cash flows (calendar monthly in arrears) available under the following investments of $100,000 at 8% pa. to (55): (i) Living off the capital alone (assume the interest payment of $8,000 is available at the start of each year; thus $8,000 represents the present value of the monthly annuity payable for one year). (ii) How is your answer to (i) altered if the $8,000 interest is only available at the end of each year? (iii) The $100,000 is invested in an annuity certain for 25 years, payable monthly in arrears (iv) The $100,000 is invested in a life annuity (assume an experience is consulted for which :155 = 9.6000 at 8%) Marks (5+4t-2-t-4+4=19) QUESTION 7 (a) A client comes to you for advice regarding financial planning. Outline six steps in the financial planning process. (b) This client already has diversified assets and some available disposable cash flow. The client is interested in taking out a margin loan for $100,000 with a bank to buy equities or some alternative investment. List some 'pros and consr of margin loans. What further information would you elicit from the client? Suggest three alternative investments, which prima facie might suit this investor. Marks (6+4+2+3 =15) QUESTION 3 Gretel Johnson (née Waldheim) was born in Vienna, Austria on 3 September 1937. She migrated to Australia with her parents in the early 19505 and became an Australian citizen in 1960. She married Alan Johnson in 1962 and they had three children. For most of his life Alan worked as an electrician. Alan passed away in 1988 at the age of 56. Fortunately, Alan and Gretel had paid off the mortgage on their home not long before Alan’s death. In his will Alan left everything to Gretel except for a donation of $5000 to the Royal Melbourne ' Hospital. Following Alan’s death, Gretel set up a small business working as a dressmaker. The income from dressmaking enabled her to live reasonably well, particularly after the children had left home. Indeed, things have gone sufficiently well that last year Gretel was able to give each of the children $7000. Page 4 of 8 2d ((5'). Gretel has allowed her business to run down quite a lot in recent years and she is now (May 2000) .onsidering the possibility of retirement. Last month she discussed this possibility with her friend Ruth, who advised her to purchase a life expectancy annuity. Gretel took Ruth’s advice and purchased a life expectancy annuity of fifteen years’ duration. The annuity cost $36 000 and will pay her $4000 each year. Gretel has prepared a table listing her real assets: Insured for : Value if sol Ave, R arsh, Vic) - ; 5 Gretel also has an ANZ Bank fixed deposit of $10 000, paying interest of 4.5% pa, and 20 000 shares in Montgomery Mining. The shares were bought several years ago on the recommendation of her son Peter, who is a consulting geologist. The shares cost 30 cents each and their current market price is 95 cents. Montgomery Mining is exploring for diamonds in Tasmania and has never paid a dividend. (a) What are life expectancy annuities? What do you consider to be their major advantages and disadvantages from the viewpoint of a retired person? Explain. (b) According to the rules currently in force, will Gretel qualify for the Commonwealth age pension? If so, how much will she receive? Show any calculations and explain your reasoning. How much will Gretel’s before-tax annual cash inflow be after she retires? Show any calculations. Marks (12+19+ 6:37) QUESTION 9 (i) What are insurance bonds? (ii) Describe the tax treatment of insurance bonds. Include in your discussion, amounts by which additions to the original investment amount may be made without changing the essential nature of the tax treatment. Marks (3+7 = 10) Page 5 of 8 Formula sheet and tables .flnuity formulae Present value of an ordinary annuity: am; = (1—V“)/i = v+v2+ . . . v“ Present values of related annuities Annuuity due Kiwi: (i/d)x am, Annuity payable ptth a(*"-’=(i/i®)>< an, i@’=p{<1+i)“P-1} n21 Annuity payable ptth in advance 5(3) = (Vd@))x and, d3”) = vlfpiq’) fiJ Annuity payable continuously Em,- = (il5)>< am Life contingencies D x+n Pure endowment or discount factor with survival Ax; = 'fl (m)=ax+ m—l Present value of a life annuity payable mthly a x 2 m Life annuity-life assurance relation: 1— diix = Ax Pension Valuation Factors (PVFs) for Allocated Pensions i 2 PVF __ P --i- - ' .' 16 2 . i —7.9 - i Life Expectancies 24.22” = 23.36 i 25 86 ‘m-i 18.46 = 17.70 m-a ; 19. V ~:- 18.25 mu. “2 Return of Capital Components Category 2 income stream: Purchase Pr ice — RCV Term RofC = Category 3 income stream: Purchase Price Term RofC :- Income Stream Asset Value Asset Value: = Pp _ (pp _ RCV)[M] Original Term Deductible amount Undeducted PurchasePrice — RCV Tenn Deductible Amount = Page 7 of 8 Basic (full) Commonwealth age pension per fortnight as at May 2000 . Single: $377.40 Couple: $313.20 Commonwealth Age Pension Assets Test and Income Test as at May 2000 Sinle: hmeow '7; 27 750 _ _ $25 750 ' $31$1000 - Si 1e: n-homeowner $219 250 _ $345 50* _ $3l$1000 Coule: homeowners . $181 500 _ _ $390 500 $3l$1000 Coule: non-hoowners $273 000 ' $820* $301000 Income Test .. _ __ . . Sinle _ 7 $12 $856.80 $05051 3 $180 _ $412.30 $0.5/$ __ *higher if rent assistance is received Deeming Rates as at May 2000 Single: 3.5% on first $30 800; 5.5% thereafter Couple: (joint accounts) 3.5% on first $51 200; 5.5% thereafter Couple (separate accounts) 3.5% on first $25 600; 5.5% thereafter Pensioner Bonus Scheme Bonus = 0.094x RPFx 26x Y2 M Page 8 of 8 ...
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MU - S1 2000 - Pension and Financial Planning - MONASH...

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