SMALL STEPS FOR SUPER BENEFITS
I plan to retire at 55 in a couple of years and draw from my super fund as well as an income from a share portfolio, investment property and term deposits. I will be in a high tax bracket. Will the income from the share portfolio, investment property and term deposits be taxed differently (that is, at marginal rates) from the income from the super fund? I have no debts. M.K.
At 55, if you start a super pension, the income has the taxable component taxed as income, along with your other income, but with a 15 per cent tax offset. Thus, if you are in the 32.5 per cent tax bracket this year (for an annual income between $37,000 and $80,000), you will in effect pay 17.5 per cent, plus 1.5 per cent Medicare on the taxable portion of your super pension. However, with lump sums withdrawn from super between age 55 (the earliest that super benefits generally become "non-preserved") and 59, the first $175,000 is taxed at a zero rate. This is known as the "low rate cap amount". Accordingly, if you need money from your super to top up your income from other sources and wish to minimise tax, I suggest you withdraw it in small lump sums during the five-year period while planning to keep the cumulative amount less than $175,000. Your super fund will remain taxed at 15 per cent but I assume this will be well below your personal tax rate and you will have more than enough income to live on.
GOOD AND BAD IN RISK-AVERSE
I am a single home owner, just turned 65 and fully retired. I have $400,000 superannuation in the "cash" option, still in the accumulation phase. I also have $40,000 in term deposits. Centrelink assumes an income of $19,196 a year and will pay me an age pension of $8704 a year. Having been badly burnt by the markets in previous years, I am risk-averse and thinking of placing $250,000 into ANZ Progress Saver at a variable rate of 5.26 per cent and moving $150,000 into the pension phase of a capital stable-growth option. This strategy will keep me in a tax-free bracket. I have talked to a few financial advisers who all say they can do better for me, but won't actually say how until I pay a fee of $1500 to $4000. Do you think my strategy is OK? M.O.
ANZ's Progress Saver account gives you an interest rate of 0.01 per cent and a bonus of 5.25 per cent provided you make a single deposit of at least $10 in a month and have no withdrawals or debits in that month. You have one free transaction but a second deposit counts as another transaction, attracting fees if it's not via the internet and eliminating the bonus interest that month. My experience is that Australians like flexibility. This account is fine as long as you understand it and treat it as a variable term deposit that requires a monthly donation. It pays more than any ANZ term deposit, although a handful of competitors' term deposits beat it. I'm not comfortable with the capital stable-growth option in a super or pension fund right now because such funds tend to contain about 20 per cent in equities and 80 per cent in fixed interest. The latter sector has done well in the past year as rates fell but I'm put off by the fact the problem in Europe centres on government bonds, and markets have yet to focus on the amount of debt paper put out by the US government. There is a huge problem in that sector, but when it will hit us and what the effect will be is uncertain. Also, equities are yet to cease falling. See if your pension fund offers a high-paying cash fund or term deposit.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.
Frequently Asked Questions about this Article…
How is income from a super pension taxed if I retire at 55?
If you start a super pension at 55, the taxable component of the pension is taxed as income alongside your other income but receives a 15% tax offset. For example, someone in the 32.5% tax bracket (annual income between $37,000 and $80,000) would effectively pay 17.5% plus the 1.5% Medicare levy on the taxable portion.
Will income from shares, investment property and term deposits be taxed differently from super pension income?
Yes. Income from a share portfolio, investment property and term deposits is taxed at your marginal rates without the specific 15% super pension offset. Super pension income’s taxable component is taxed as income but benefits from the 15% offset (and different lump‑sum rules), so overall tax outcomes can differ between those investment sources.
What is the 'low rate cap amount' and how can it help reduce tax on super lump‑sum withdrawals between age 55 and 59?
Between ages 55 and 59, the first $175,000 of lump sums withdrawn from super is taxed at a zero rate (the low rate cap amount). To minimise tax, you can consider taking small lump sums during that five‑year window so the cumulative amount remains below $175,000 and benefits from the zero‑rate threshold.
What should I know about ANZ Progress Saver if I’m considering it for retirement cash?
ANZ Progress Saver offers 0.01% base interest plus a 5.25% bonus if you make a single deposit of at least $10 each month and make no withdrawals or debits in that month. You get one free transaction a month; a second deposit counts as another transaction (which may attract fees if not done online) and will eliminate the bonus interest that month. It can pay more than ANZ term deposits, though some competitors’ term deposits beat it.
Is a capital stable‑growth option in my super or pension fund a low‑risk choice for retirees?
Capital stable‑growth options typically hold about 20% in equities and 80% in fixed interest. The article’s view is cautious: while fixed interest has benefited from falling rates, concerns about government bond markets in Europe and large amounts of US government debt make that sector uncertain, so a capital stable option may not be risk‑free.
How can my super and term deposits affect my Centrelink age pension entitlement?
Centrelink uses deemed income rules to assess pension entitlements. In the article’s example, a person with $400,000 in super (cash) and $40,000 in term deposits was assumed to have $19,196 of income and therefore received an age pension of $8,704 a year. Your actual assessed income and pension will depend on your specific balances and Centrelink’s deeming rates.
Should I pay for financial advice to arrange my retirement savings, and what should I expect on fees?
Financial advisers in the article were asking between $1,500 and $4,000 and typically won’t outline detailed recommendations before a paid engagement. Whether to pay depends on the value you expect from personalised advice; if you do pay, be clear upfront about scope, fees and deliverables so you know what you’ll receive for the cost.
Where can I get help or lodge a complaint about super, pensions or financial advice?
The article lists help lines including the Financial Ombudsman (for complaints) and a pensions help line. If you need assistance or want to raise an issue about advice or a fund, contact the Financial Ombudsman and your relevant pensions helpline as a first step.
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