One question I am often asked by my farming clients when considering farm succession is...
How much do I need to fund my retirement when considering retiring from my farm?
The answer to this question is quite complex but it basically comes down to two key questions;
- What are your spending needs now? and
- How will they change in retirement?
When you are trying to answer these questions and put together a budget and estimates when considering retiring from the farm, it’s important to consider the following:
- Are you single or part of a couple?
- Will you own your home outright (no mortgage) or be paying no rent?
- Do you wish to travel in your retirement, is this domestic or overseas?
- Rates, water, electricity, gas, groceries, telephone, medical – what are these costs?
- Are you willing to draw down on your investment capital to fund your income needs?
This is not an easy task and can be even harder for farming families as usually these expenses have been funded by the farm business.
I often joke to my farming clients that when completing their budget I do not want to see any costs for drenches or Round up.
However, this is breaking the habits of a lifetime and therefore more time should be spent on planning for farming families in this area. Investing the time to estimate and budget for these living costs can, with some assistance, help you formulate a monthly or yearly figure which will form the basis for funding your retirement lifestyle.
Once you have your estimate it’s now a matter of looking at the different ways to fund your ongoing income needs.
The usual options are likely to include a combination of;
- Investments, such as shares or property outside of Super
- Part-time work
- Lease from farmland
- Share farming
- A full or part Centrelink age pension (depending on eligibility)
What can complicate matters is the decision whether or not to purchase a house in town, to stay in the family farmhouse for some time before moving on or to simply remain on the farm.
Where you decide to purchase a house in town, starting this planning early is crucial as this may require assets to be sold or maybe even some short-term debt to be arranged.
If the plan is to stay in the farmhouse, while your son or daughter take over the farming business and/or farm assets, there are some other income-producing options the farming family can look at. This however, can get quite technical, so you will need to get your family solicitor, farm consultant and accountant involved to ensure that all transfers are done correctly and tax effectively.
“But My Farm is My Superannuation”
The passing over part or all of the farming business and farming assets to the next generation can be a complicated process. Especially where part of the asset value in the farm needs to be realised in order for you to secure the income you need in retirement.
There are some key points to consider, which include:
- Intergenerational transfer stamp duty concessions – transfer of certain business property between family members.
- Small business sale proceeds (capital items such as farmland) can be contributed to superannuation if certain conditions are met. The current CGT cap sits at $1,415,000.
- Even with the current ‘noise’ around changes to superannuation legislation, superannuation is still the most tax effective retirement vehicle. A couple can have up to $3,200,000 ($1,600,000 each in superannuation) at 0% tax rates on any income earned.
- $1,200,000 in superannuation could provide a minimum tax-free pension of $60,000* per year for a farmer between the age of 65-74.
- Farm leasing for additional income - Do not discount leasing part of the farm for income. Leasing can be a great way for a farmer to transition away from farming. You need to be aware however that leasing the farm long-term could impact your ability to qualify for generous small business tax and superannuation concessions.
- Superannuation can hold direct property assets including farmland.
*this figure is based on minimum pension drawdown rates Not investment returns.
Can a Centrelink Age Pension assist a Retiring Farm Owner?
The Age Pension can offer farmers some financial assistance such as fortnightly income, utility discounts and health care benefits.
Remember it is the income levels you desire in retirement which guide your decisions regarding how much you need to fund your retirement. It should be noted that some retiring farmers may not need the superannuation assets levels discussed above or there could be external circumstances that will limit the ability for the farm owner to accumulate large assets to fund their retirement.
Where this is the case there are some key points to be aware of when considering Age Pension benefits as part of your retirement income strategy including;
- The Assets Test Limit - which caps how much you can own and receive a part pension.
- Income Test Limit – which caps how much income you can receive and still be eligible for a part pension.
- Asset transfers (such as farmland) - are still counted under the assets test limit for five years from date of transfer where the assets is Gifted or part of the asset value is forgiven.
- Farmland which includes your house which you reside – all of this land which is on the one title can be exempt if you meet certain conditions.
- Forgone Wages, Unpaid Care and Capital Contributions – Can be useful in Centrelink and Farm succession planning and requires careful consideration before attempting to claim Centrelink benefits.
While the $827,000 asset limit does limit payment values for retiring farmers that have a higher asset base, there are some smart strategies that you can still use to acquire a small fortnightly pension.
It’s important to note that if you qualify for $1 of Age Pension per fortnight, this still make you eligible to the many associated benefits that Centrelink Age Pension provides.
These benefits, in addition to a combination of some of the income streams outlined above, can help achieve a comfortable retirement.
With the complexity that Farm Succession brings to a farmers retirement, it’s crucial that the process is started early and all generations work together to achieve the optimal result. This requires careful planning and professional advice.
The size and mix of the assets and liabilities of the business, tax implications and needs and wants of those involved will determine the strategies needed to guide your family through the process and produce an outcome acceptable to all parties.
Farm succession planning early is
the key message for farming families.
If you are starting to consider your retirement options and need some assistance from a team of specialists regarding farm succession planning, we encourage you to contact the specialist team at RSM who have been involved with the farming community for over 90 years..
We will walk you through the specific strategies relevant to you, assess your circumstances to see what is appropriate and tailor the solution to meet your needs.