(03) 9020 2905PORTFOLIO POINT: You’ve turned 60 and you’re not ready to retire? Well, you don’t have to, but you MUST start taking advantage of a super pension.
Superannuation, like life, keeps getting better with age – until that point where we must accept that we’re over the hill and the slope becomes a little slippery.
If you’ve looked after your super properly throughout your early working life, made appropriate contributions in the middle of your work life, then you should be in a position to be the cat with the cream as you approach the end of your employment.
In recent months, we’ve been looking at “transition to retirement (TTR)” and “salary sacrifice” arrangements, particularly as to how two laws weave through each other to create good tax and super outcomes. If you’d like to go back and have a look at those articles, then you’ll find the series here (“Retire your tax bill” and “Super’s magic years”).
But we’ve had a focus in the series on the early stage of TTR/Sal Sac arrangements. That is, those who have turned 55 and are ready to start taking a tax-advantage pension from their super fund.
There’s definitely something to be said for turning 60. And while I’ve been harping on about how if you’re over 55 and aren’t doing it, you’re throwing away money, or donating more than you need to to the Tax Man, then it’s many, many more times more important to do when you turn 60 (if you didn’t do so earlier).
Turning 60 is a big milestone in superannuation terms because in 2007, Treasurer Peter Costello made superannuation tax-free for the over 60s, as part of a raft of changes designed to simplify super and make it more appealing as a retirement vehicle.
What happens when you turn 60?
The major change is that the income stream that will come your way once you turn 60 is totally tax free, whereas between 55 and 59, the income stream is tax-advantaged in that it receives a 15% tax rebate.
If a 59-year-old is taking a TTR pension, then he/she will be taxed at a maximum of 31.5% on that income. The day they turn 60, they will be taxed at … well, nothing. Not a cent.
So, if you were on a TTR pension and you turn 60, then you may well need to make a few recalculations to your pension income stream and how much you are salary sacrificing to your super.
What’s the same?
For a start, you are still restricted to how much money you can take out of super (until such time as you hit a condition of release, which includes permanent retirement).
That is, if you are on a TTR pension (aged from 60 and 65), you must take between 4% and 10% of the portion of your fund that has been moved to pension. (Although there is still a temporary minimum of 2% for the 2010-11 financial year, as a result of the GFC’s impact on asset prices.)
You will also have the other benefits of having your super fund’s earnings being tax free. That is, anything it earns in the way of income (interest, dividends, distributions, etc) are tax free and there is no tax to pay on capital gains. See here (Jamie: point to 20/10/10) for how geared property can lead to great, untaxable, gains in super.
What’s different?
If you’re not paying tax on the pension income stream, then it will potentially have a significant (positive) effect on any TTR/salary sacrifice combination you’ve got going.
If you have been running such a strategy prior to turning 60, then it will probably need adjustment when you turn 60, because of the decrease in tax to zero from your pension income stream.
If we use the example from a few weeks ago, which was …
Let’s take a 55 year-old male employee. He earns $90,000 a year, with $300,000 in super ($50,000 of which is non-concessional). After tax (assuming no other deductions), our 55 investor is taking home about $67,400. On top of that, he receives another $8100 into his super fund, which will be taxed at 15%, leaving $6885 to be invested inside super.
We’ll assume for the moment that he is not living beyond his means and that his net salary of $67,400 is enough for him (and his family).
Except, we’re taking his older sister, who’s just turned turned 60. She earns the same amount of money.
In order to achieve the same after tax income in her hand, our 60yo will salary sacrifice to his limit of $41,900 (which is $50,000 minus his employer SG contributions of $8100) and he will take a pension from his super fund of $28,000.
This will leave her with the same after tax salary of $67,400.
She’ll end up with an almost identical after tax salary. But there’s now an after-tax total of $42,500 going into her super fund (compared to the previous SG contributions of just $6885) and just $28,000 coming out of the fund as a pension. Plus there are all the other benefits as outlined in this article in December (December 8, 2010) about the benefits of turning your super fund into a pension and a zero-tax environment.
Total benefit: Same salary, but a net extra $7615 into your super fund. If you’re intending to work through until 65, then you will have added $38,000 extra to your super fund (although how you make that perform is up to you).
I can’t say it often enough. If you are over 60 (or even 55) and you’re not on a TTR/Salary Sacrifice strategy, you’re donating extra to the tax office. Sit down with a professional (financial adviser or accountant) today to make sure you’re making the most of your run to retirement.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.