The new pension normal looms
Why you should be looking to draw the minimum pension income stream in the years to come.
Summary: As the Government cracks down on some much-loved oldies, the focus turns to maximising both immediate income as well as the amount in your superannuation pot under the new regime.
Key take-out: For those with money that will be left sitting in, or transferred back into, accumulation/superannuation you will generally want to draw the minimum from your pension fund.
Key beneficiaries: Superannuants. Category: Superannuation.
The death of the 'unlimited pension fund' will send to the dogs plenty of previously good superannuation strategies.
One that was much-loved was to draw a larger pension than ought really be required, with the express purpose of recontributing excess cash flow back into super.
First, the income that you drew from your super fund was tax free (if you were over 60). Then you had two options:
The first was to make larger-than-normal salary sacrifice contributions to super via your employer (or deductible contributions if you were self-employed) to make up for the extra cash-flow in your possession from the pension.
The second was to make extra contributions that could be recontributed back into super as non-concessional contributions (NCCs), lowering any tax that might eventually have to be paid by non-tax dependent beneficiaries.
Or combine both, which worked well also.
The old combination of 'transition to retirement and salary sacrifice' – with an emphasis on drawing a pension to assist with the salary sacrifice strategy – was a strategy with few losers.
(Except, of course, the Tax Office. Which is exactly why Treasury suggested, and the Government agreed, to take the fun out of it.)
So, instead of taking 4 per cent of your pension fund as your pension income stream, it made sense in many circumstances to take 10 per cent of the income stream, then to make higher salary sacrifice contributions from pre-tax income.
For those who had met a full condition of release, withdrawing larger amounts from super then recontributing as NCCs also made sense.
Largely, many of those strategies are now either gone, or have been neutered.
(Note: These strategies are still predominantly valid for FY17. So, make the most of them while you can.)
But it's time to put some thought into those strategies now for those who are likely to be affected.
But I need more income …
Drawing the minimum pension is going to become the new norm. To preserve the capital of the pension fund.
For those with money that will be left sitting in, or transferred back into, accumulation/superannuation (that is, you have in excess of the $1.6 million transfer benefit cap) you will generally want to draw the minimum from your pension fund. (And you must meet the minimum pension payment – it's a legal requirement.)
If your pension income stream isn't enough to live on, then you will have a couple of choices.
The first option would be to spend money outside of super. You would do this if you have considerable money outside of super, that is earning income on which you will be taxed.
Depending on your situation, older Australians are generally going to be able to earn up to $32,000 or $33,000 (with the Senior Australians Tax Offset) before they need to start paying tax. If you're earning in excess of that you're going to be taxed at around 21 per cent (including Medicare), so this should be your first spending priority.
If you're earning more than $37,000 in taxable income you'll be paying around 34.5 per cent as a marginal tax rate. Obviously, if you're earning more than $80,000 or $180,000 you move into higher marginal-tax-rate brackets.
The second choice, if you have met a condition of release and have excess money sitting in accumulation, will be to take extra money from there. Earnings on extra money sitting in accumulation will be taxed at 10-15 per cent. But the pension fund is still taxed at zero per cent.
I will write more about the 'three pots' strategy (pension, super and non-super) in the coming months.
How do I get the most into super that I can before June 30?
There are a few things to do here.
1. Make the most of your higher CC limit for FY17. That's $35,000 for the over-50s and $30,000 for the under-50s. After July 1, it's the same $25,000 limit for everyone.
2. Make the most of the higher NCC limits for FY17. No matter how much you have in super, you are still able to put in NCCs if you meet the conditions. For those under 65, that's $180,000 for this year and potentially $540,000, if you put it in before June 30, by using the three-year pull-forward rules.
3. If you're over 65 but can meet the work test for FY17, then you can still also put in $180,000 in NCCs this year.
From July 1, it goes down to $100,000 for everyone (and $300,000 under the pull-forward provisions).
But with an added restriction – you won't be able to make NCCs at all if you already have more than $1.6m in the superannuation system.
Should I start drawing the minimum pension now?
Not really. The new rules don't kick in until July 1, so make the most of the rules as they stand, particularly if you can make extra contributions to super. The 'lifetime NCC limit' was put to the sword some time ago, so that is also less of an issue.
The answer would be 'yes' to drawing a minimum pension if you aren't really able to get any further tax advantages for extra contributions, and you're able to make them.
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