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Last week saw a renewed focus on Australia’s tax and superannuation system, led by the Federal Government. Industry bodies have weighed into the debate and one comment by Tom Garcia, CEO Australian Institute of Superannuation Trustees, in relation to Transition to Retirement (TTR) strategies stood out for me.
In an article published on 29 October in the Australian Financial Review, Garcia is quoted as saying that the ability to transition to retirement is a complete rort for high-income earners, and that TTR strategies should be limited to those more than 60 years of age.
In my opinion, Mr Garcia needs to take a step back and look closely at the system we already have in place with limits already in existence.
Current pension eligibility rules
Until 30 June this year, individuals over 55 years old could elect to receive a pension from their super fund, even if they continued to work. However, existing superannuation preservation rules increase this to 56 years old for the current financial year, and will increase the age to 60 over the next four years.
Anyone born after 1 July 1964 and who wants to start receiving a pension while they are still working will need to wait until they are 60 years old. What then would be achieved by making further changes?
Further, there is a significant disincentive for higher income earners under 60 years to start earning a pension while working, as pension payments are taxable when made to those under 60 years of age.
Case study example
To highlight my point, let’s look at the case of a 58 year old high net worth individual (HNW) on an annual salary of $300,000.
They could only salary sacrifice additional super contributions of approximately $6,500 without exceeding their contribution cap. If that same person had $1,000,000 in super, they could start a pension from the fund with the minimum annual payment being $40,000. The taxable pension would actually increase their personal tax liability by approximately $11,500 a year when taking into consideration the 30 per cent tax on the extra super contributions.
The only tax benefit this person would receive is that the investment earnings on their superannuation used to start the pension would not be taxable. Based on taxable earnings at seven per cent per annum, the super fund would save tax of around $10,500 a year.
In this example there would be a net tax cost to the person due to the extra tax on contributions, the taxable pension being taxed at the top marginal rate, and the tax savings within superannuation being in sufficient to offset these higher taxes.
Is it worth HNWs drawing a pension before age 60?
Individuals need to carefully weigh up the implications of drawing a pension out of their super fund against the tax savings on income. In some instances, it may be better to forgo the superannuation tax savings and wait until they reach 60 years of age before starting a tax free pension. For example, the same person as the aforementioned case, but instead over 60 years of age, would actually have a net tax benefit of around $11,500 per annum.
Superannuation pension strategies can be complex, particularly when taken in the context of a person’s overall wealth accumulation plans. It is important to seek advice from a professional adviser prior to actioning strategies such as Transition to Retirement pensions.
The information provided above is general information only and individuals should seek specialised advice from a qualified financial adviser. Please contact Hewison Private Wealth for more information.
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.