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Hewison Private Wealth - Insights
Hewison Insights

Two pensions are better than one

Glenn Fairbairn
Director/Private Client Adviser
6 Dec 2012

A common strategy for individuals over 55 is to maximise salary sacrifice contributions to superannuation, which are taxed at a flat rate of 15%, and then replace this income with a tax effective pension payment. This strategy, referred to as a ‘transition to retirement strategy’,  not only provides income tax savings but also renders the earnings within superannuation tax-free.

Although this strategy can provide an immediate tax saving, some issues are often overlooked, which can have long term estate planning implications.

Superannuation regulations state that once a pension has started, contributions or roll-over amounts may not be added to the capital supporting the pension, but need to be allocated to a separate ‘accumulation account’. In order to consolidate a pension account with an accumulation account a common practice is to ‘commute’ the existing pension back into accumulation and commence a new ‘blended’ pension.

An individual’s superannuation member balance is likely to consist of ‘taxable’ and ‘tax free’ benefits. Taxable benefits generally include salary sacrifice contributions, compulsory employer contributions, and superannuation fund investment earnings, whilst tax free benefits comprise personal after-tax contributions. Upon commencement of a superannuation income stream, the proportion of tax free and taxable benefits is locked in, as a percentage.

In the event that a pension is commuted, the taxable and tax-free portions are rolled back to accumulation and the proportions must be re-calculated. For example, assume that an individual establishes a Self Managed Superannuation Fund with a personal after-tax contribution of $500,000 and then immediately begins drawing a pension. Under this situation 100% of their superannuation benefits would remain tax-free indefinitely, regardless of investment earnings.

However, let’s also assume the same individual implements a transition to retirement strategy and salary sacrifices $50,000 to superannuation. At the end of the financial year the individual has two options: (1) consolidate their salary sacrifice contributions with their existing pension account, re-calculating the tax free/ taxable proportion to around 90%/10%; or (2) establish a new second pension with their salary sacrifice contributions, resulting in the initial pension retaining its 100% tax-free status and the second pension being 100% taxable.

Although the second option may result in multiple pensions and an additional administrative burden, it can assist with long term estate planning. By running two pensions the individual could maximise drawdowns from the ‘taxable’ pension and minimise drawdowns from the ‘tax free’ pension. Assuming the individual is over 60, the breakdown of their pension payments is irrelevant and they remain tax-free. However, by drawing down on their ‘taxable’ pension and preserving their ‘tax free’ pension they could minimise the tax paid by their non-dependent beneficiaries, including adult children, which is 16.5% on the taxable component of a superannuation death benefit.

Clearly, transition to retirement options are not always clear-cut, and we would always advise you to speak to a professional adviser to set up the most appropriate structures.


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 info@hewison.com.au 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.