How to increase your ‘tax-free’ super and improve age pension outcomes
The strategy and steps you need to take
The pitfalls to avoid
In preservation age). At the same time you should start thinking about a ‘re-contribution strategy’.
We’ll explain the strategy and why you might use it in a moment, but first a word of warning.
Loss of grandfathering
If your current super pension is ‘grandfathered’ (exempt) from the new age pension Income Test deeming rules (see non-concessional contributions you’ve made to your super account since 30 June 2007 plus the preservation age, but you’re under the age of 60, you’re taxed on the taxable component of any super pension, or lump sum withdrawal, at your marginal tax rate (less a 15 per cent tax offset and subject to the ‘low rate cap’ – see below).
Death benefits. Death benefits are exempt from tax if they’re paid to ‘bring forward’ (of three years non-concessional contributions) so you can potentially shift up to $540,000 in one hit (if you haven’t used it already). Those over the age of 65 will be limited to $180,000 (the current non-concessional contributions cap) and will also have to meet the work test.
Things are a little different if you’re under the age of 60, since you’re taxed on the taxable component of a withdrawal at your marginal tax rate (less a 15 per cent tax offset). So you need to be careful you don’t end up with a tax bill.
The best way to achieve this is to make a lump sum withdrawal utilising your ‘non-concessional contributions cap. Based on current limits, you can contribute $180,000 in a year, or $540,000 if you’re able to utilise the ‘bring-forward rule’. Exceeding these limits can expose you to penalties.
Over 65s. Remember, if you’re over 65, you’re no longer entitled to the ‘bring-forward rule’ and youneed to satisfy the ‘work test’ in order to make contributions to super.
Low rate cap. If you’re under 60 and withdraw more than your low rate cap, you’ll end up paying tax on any excess. Even if you’re under the cap, you should note that the zero tax outcome is achieved by giving you a tax offset (credit). This means the lump sum is still included in your assessable (taxable) income and may affect the calculation of Government benefits (eg Family Tax Benefit) and other payments. Check with a Centrelink Information Service officer or seek personal advice if you’re unsure how you’d be affected.
Anti-detriment payments. If you’re planning an anti-detriment strategy, any potential anti-detriment payments (an increase to the death benefit due to a refund of contributions tax paid during the accumulation phase) that a surviving beneficiary may be entitled to may be reduced (or lost). But anti-detriment strategies are generally the domain of large super funds and are rarely implemented in the SMSF sector as they’re not simple and come with uncertain results. Most people prefer the upfront certainty of having an increased tax-free component.
Condition of release. Remember, to access your super you must have met a preservation age and commencing a TTR pension; retiring after age 60; or reaching age 65). Withdrawing from your super without having met a condition of release is a serious breach.
Transaction costs. If you need to sell assets in order to make a withdrawal from your pension account, you may have to pay brokerage, incur a bid-offer spread or suffer other transaction costs. If you’re selling investments, there will also be a period where you are ‘out of the market’ so you may lose out if prices increase before you repurchase the investments. Make sure you assess the costs of a re-contribution strategy before implementing it.
Ideally, a re-contribution strategy will use cash your SMSF has sitting in a bank account so that transaction costs are kept to a minimum. If you’re happy to spend the time doing the paperwork yourself, you can always implement the strategy more than once if your fund doesn’t have enough spare cash. It’s a question of how much work you want to do.
The re-contribution strategy is generally low cost (or no cost) but the benefits are highly fact dependent. In Part 2 of this article we’ll run through a number of case studies to show when a re-contribution strategy makes sense and when it doesn’t.
Richard Livingston and Liam Shorte are founders of Eviser.