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Before I kick off, let’s set the scene – An account based pension (ABP) is an income stream drawn from an individual’s superannuation balance. A condition of release must be met before an ABP can be drawn, that being 55 years of age and retired, or have entered into a transition to retirement strategy where a person continues working and contributing to super, but draws an income to a maximum of 10% of their balance per annum.
This strategy is beneficial as the income drawn is either concessionally taxed, or not taxed at all and once it begins the individual’s super balance ceases to pay tax on its earnings or realised capital gains within the fund.
Every person’s superannuation is made up of two components, taxable and non-taxable. Taxable components generally comprise of pre-tax contributions, such as employer contributions. Generally speaking, this means that at some point tax will be deducted by the Government when the money comes back out (either by way of income tax or at the death of the member). Non-taxable components comprise of contributions made post tax, such as sale proceeds of a house after capital gains tax is deducted.
When drawing an ACP we generally want to provide an outcome whereby taxable components are exhausted and we are left with only non-taxable components in the fund. But how can we do this? Once both taxable and non-taxable components are mixed up in the fund together we are unable to select where we draw the ACP from. It MUST be drawn proportionally from each component, unless we can somehow isolate these separate components…
The most effective strategy available is to begin separate pensions as various contributions are made to super. For example, a pension could be started using the accumulation of super contributions, in this case $600,000, throughout the working life of an individual (majority being taxable component). This balance is now isolated in pension number 1. No further contributions can be added to this pension.
In addition, an investment property is sold and after tax, a $400,000 contribution is made to super (non-taxable component). A second pension is then established from this contribution. Within this fund there are now two pensions operating independently of each other. The superannuation member and/or their Financial Adviser have flexibility in determining where their withdrawals will come from, subject to the statutory minimums being met.
Considering that an ABP drawn from the taxable component is included as assessable income to a person between 55-60 years of age, it may be advisable to maximize withdrawals from pension number two, however, once 60 years of age all ABPs become non-taxable to the member, therefore maximizing the drawdown on pension number one makes most sense.
Furthermore, once retired and assuming the member is under 65 years of age, operating two pensions allows the member the flexibility to make a lump sum withdrawal of around $450,000 from pension one and re-contribute to their super fund as a non-taxable contribution. The result being the vast majority, if not all, of their super balance is now a non-taxable component!
Final word – for ease of administration and account keeping, when preparing the year end accounts, some Accountants choose to commute/rollover these pensions into one. It is important to consider implications of this action as it could spell the end to the effectiveness of the above strategies.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email firstname.lastname@example.org or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.