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Going into pension mode – the pros and cons

Going into pension mode – the pros and cons

Current as of August 2016

 

With the proposed significant superannuation reforms announced in the May 2016 Federal Budget, the pros and cons of going into pension mode need to be considered.

Transition to Retirement (still working and under age 65)

A Transition to Retirement (TTR) pension can be commenced in conjunction with a salary sacrifice strategy by drawing a pension and salary sacrificing into your Self Managed Super Fund (SMSF).

Pros:

  • Provides you with a flexible pension income stream where you can choose the amount of income you require (within government set annual limits) and how often you wish to receive it (e.g. monthly, quarterly, bi-annually or annually). This gives you the flexibility to reduce your working hours while continuing to receive the same level of income from your TTR.
  • If you have a tax free component in your pension, this proportion will be tax free and you will be entitled to a 15% tax offset; the remaining taxable proportion will be included as your assessable income and taxed. Upon turning age 60, the full pension payment will be exempt from tax and no longer need to be included in your tax return.
  • Minimising your tax liability, as the investment earnings and capital gains derived from the TTR are tax free (note that the Federal Budget proposed changing this by making all earnings supporting a TTR taxed at 15% from 1 July 2017 – this is not yet legislation).

Cons:

  • Your TTR may count as an asset under the Assets Test of the Aged Pension which may adversely affect your eligibility for any other government pensions or allowances.
  • You cannot increase the capital supporting the TTR using contributions or rollovers once the pension has commenced. So any new contributions or rollovers would need to be made into a new accumulation account.

 

Account Based Pensions (retirement)

An Account Based Pension (ABP) can be commenced once a member “retires”. The definition of retirement depends on one’s age:

Aged 55 and less than age 60

  • You’ve met your preservation age; and
  • Ceased gainful employment (i.e. stopped meeting the work test); and
  • Have no intention of returning to work for 10 hours or more each week.

Aged 60 and less than age 65

  • You’ve met your preservation age; and
  • Ceased gainful employment (i.e. stopped meeting the work test).

Aged 65 and over

  • You are deemed “retired” irrespective of your working status.

Preservation Age

DOB from DOB to Preservation Age Reached?
30 Jun 1960 55 On or before 30 Jun 2015
1 Jul 1960 30 Jun 1961 56 1 Jul 2016 – 30 Jun 2017
1 Jul 1961 30 Jun 1962 57 1 Jul 2018 – 30 Jun 2019
1 Jul 1962 30 Jun 1963 58 1 Jul 2020 – 30 Jun 2021
1 Jul 1963 30 Jun 1964 59 1 Jul 2022 – 30 Jun 2023
1 Jul 1964 60 On or after 1 Jul 2024

Pros:

  • If you are over age 60 at the time of retirement, the pension payments to you will be tax-free and will not need to be included in your personal tax return.
  • Minimising your tax liability, as the investment earnings and capital gains derived from the ABP are tax free (note that the Federal Budget proposed introducing a $1.6m cap on benefits in retirement phase whereby the excess over this cap would be maintained in an accumulation phase account and as such earnings would be taxed at 15% from 1 July 2017 – this is not yet legislation).

Cons:

  • Your ABP will count as an asset under the Assets Test of the Aged Pension, which may adversely affect your eligibility for any other government pensions or allowances.
  • You cannot increase the capital supporting the TTR using contributions or rollovers once the pension has commenced. So, any new contributions or rollovers would need to be made into a new accumulation account.

So, if you are thinking of retiring or semi-retiring soon, give us a call today to talk through your options.

 

DISCLAIMER
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation. 

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