Sunday 30th March, 2008

 

Let’s transfer the wealth

 
 
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IN 1912, the Japanese gave to the people of Washington, DC, 3,000 cherry blossom trees which, this weekend, virtually paint the gardens around the DC memorials in the freshest pink blooms, as DC launches the Cherry Blossom Festival, with the symbolic lighting of the Japanese lantern.

In the same way that beautiful things can be transferred across oceans and generations, so, too, can wealth be transferred.

For those readers who sought clarification on the usefulness of the beneficiary in pension and annuity plans, this analogy is quite useful: the beneficiary designation is one device that allows you to transfer wealth to heirs.

The big question is for how long? The simple answer is that it depends on the selection you choose.

The other big question is how is the payment subject to tax? The last shall be first.

First the LAW

Pension payments are considered by the Inland Revenue Board to be income. Under the law, all income is subject to tax.

Under the law, the first 25 per cent of money due to you in your pension savings is exempt from tax, and can be collected as a lumpsum.

Thereafter, the balance of the money is typically paid out as monthly cheques. The pension provider, under the law, will furnish you with a statement of pension income at the end of every year.

This monthly cheque is income and is subject to tax. Currently, the tax rate is 25 per cent for everybody, after your claims have been deducted.

For example, should your pension cheque be $5,000 per month, or less, you will pay no tax, if that is all your income. That is because the law allows you up to $60,000 as a personal allowance, tax-free.

If you receive $7,000 per month as a pension, you will have to pay tax on $24,000 for the year (84,000-60,000).

If you want to pay no tax, and you fall in that income bracket, you can simply save $24,000, in a new individual annuity, and you will pay no tax at all, while you save $24,000, for a rainy day.

Then the SAVINGS

It is an incentive to save.

In all pension and annuity cases, there is something called a guarantee period.

This guarantee ensures that the monthly cheque will be paid to someone else if you die within the guarantee period.

If you select a 15-year guarantee period, and you die in year 5, the beneficiary that you name will get the cheque for another 10 years (15-5).

If you outlive the 15 years, the pension cheques will continue until you die.

The pension cheques that pass to the beneficiary are still considered income in the hands of the beneficiary.

The more substantial aspect of transferring wealth is broadly titled “estate transfer” and it deals with wills, the selection of an ownership title or the making of the deeds of ownership, and trusts.

These are mechanisms that allow individuals to perpetuate wealth through generations, and ensure that wealth stays in the family.

Like the cherry blossoms that have bloomed in DC for almost 100 years, as an act of friendship between governments, so, too, the will remains testimony to an act of love between families.

More next week.