Going into Pension Mode – The Pros and Cons

With the proposed significant superannuation reforms announced in the May 2016 Federal Budget, the pros and cons of going into pension mode must be considered. This assessment is especially important for individuals overseeing their financial affairs with SMSF accountants.

Transition to Retirement (still working and under age 65)

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

Pros:

• It provides a flexible pension income stream where you can choose the 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 receiving the same 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 60, the total pension payment will be exempt from tax and no longer need to be included in your tax return.
• Minimise 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 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 must 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

Pros:

• If you are over age 60 at the time of retirement, your pension payments 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 the 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 must be made into a new accumulation account.

So, if you are thinking of retiring or semi-retiring soon, contact us today to discuss your options.

Kreston Stanley Williamson Team

*Correct as of August 2016

Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.