Super Strategies – convert your super into a tax-effective retirement income

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Starting an account based pension with your super when you retire could enable you to receive a tax-effective income and make your savings last longer.

HOW DOES THIS STRATEGY WORK

When you retire, it can be tempting to take your super as a cash lump sum. However, using your super to start an account based pensioncould be a more tax-effective option.

This is because:

  • No tax will be payable on earnings in the fund2
  • You can receive $49,753pa in tax-free income between your ‘preservation age’4 and 59, and
  • When you reach age 60, the pension income payments will be completely tax-free5 and you don’t have to include these amounts in your annual tax return.
Maximum taxable income that can be received tax-free (pa)
Age                From investments held outside super From account based pension (taxed fund)
Preservation age4 to 59 $20,5426 $49,7533
60 to Age pension age7 $20,5426 Unlimited tax-free5 income
payments. Also, you don’t
have to include the income
payments in your annual
tax return
Age pension ageand over $32,2798 (for singles) and
$28,9748 (per member of
a couple)
As above

CASE STUDY: CONVERT SUPER INTO TAX-EFFECTIVE RETIREMENT INCOME

Warren, aged 60, has $500,000 in super and $150,000 in a bank account. He is about to retire and needs an after-tax income of $50,000 pa to meet his living expenses.

He was considering taking his super as a lump sum and investing outside super in a managed fund. However, his Westlawn Financial Adviser explains that if he uses his super to start an account based pension, he’ll pay less tax⁹ on his income during his retirement.

This is because the income payments from the account based pension will be tax-free.

As a result, Warren’s Westlawn Financial Adviser estimates he’ll use up less of his capital and will have more money left over at the end of 5, 10 and 15 years (in today’s dollars).

After year: Value of investments Value added by starting account based pension
Take lump sum and invest outside super10 Start account based pension
5 $536,067 $540,749 $4,682
10 $378,346 $388,193 $9,847
15 $217,667 $255,276 $37,609

Assumptions: Income from all sources is used to meet cashflow needs. Any deficit shall be drawn from the bank account. Warren’s super balance of $500,000 consists entirely of the taxable component. Both the account based pension and managed fund generate a pre-tax return of 7.74% (split income of 3.68%, growth of 4.06% and franking of 28.55%). The bank account provides an income of 3% pa. Warren’s after-tax income goal ($50,000 in year one) is indexed at 3% pa. Any income received above Warren’s requirement is invested in the bank account. Where applicable, age pension benefits are taken into account. Warren is a home owner and, apart from his bank account, he has no other financial assets that would impact the assets test.

Your Westlawn Financial Adviser can help you assess all the issues that need to be considered and determine whether an account based pension suits your needs and circumstances.

Contact us today:

¹ There is a limit on the total amount that can be transferred to retirement phase in a person’s lifetime. This limit is $1.6 million in 2017/18 (subject to indexation).
² Assumes you are in retirement phase.
³ Takes into account low income tax offset and 15% pension tax offset and assumes no other income is received.
⁴ Preservation age is 55 for those born before 1 July 1960 and gradually increases to 60 depending on date of birth.
⁵ Assumes the pension is commenced from a taxed super fund.
⁶ Takes into account low income tax offset.
⁷ Age where you become eligible for age pension.
⁸ Takes into account low income tax offset and Seniors and Pensioners tax offset.
⁹ This will vary depending upon individual amount of investments and circumstances.
¹⁰ These figures reflect any tax that would be payable on unrealised capital gains if the managed fund was cashed out at the end of each of these periods.

General Advice Disclaimer
All of the material published on this website is for information purposes only and does not constitute advice. This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a Financial Adviser, whether the information is appropriate in light of your particular needs and circumstances.
Westlawn Wealth Management Pty Ltd ABN 32 124 861 409 Corporate Authorised Representative of Affinia Financial Advisers Limited ABN 13 085 335 397 AFSL No. 237857. Please note that Affinia Financial Advisers Limited is not responsible for the advice and services provided by Westlawn Finance Limited, Westlawn Insurance Brokers Pty Ltd, Westlawn Life Insurance Pty Ltd or Westlawn Business Services Pty Ltd.

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