Retirement Planning & Account Based Pensions
An account based pension is a flexible and tax effective way of transforming your superannuation benefits into a regular income stream. This sort of regular income is generally designed to take the place of your salary in retirement.
The investment earnings and capital gains made within an account based pension are not subject to tax generally for accounts with a value of less than $1.9 million.
In addition, if you are over age 60, you will be entitled to receive your entire pension payment completely tax-free. If you are under age 60 your pension amount will still form part of your taxable income, however you will be entitled to a tax deductible amount and a tax rebate that will minimise your tax payable.
Account based pensions provide you with the flexibility to alter the frequency and the amount of your pension payment in a manner that suits your needs (within some legislative parameters). You will also be able to withdraw capital from your pension at any time (although depending on your age there may be tax implications).
You may need to meet a condition of release before being eligible to commence an account based pension. However, an account based pension can be utilised in a transition to retirement strategy, which does not require you to meet a condition of release.
We suggest you discuss this strategy further with your financial planner to determine whether it is appropriate for you.
Transition to retirement
A transition to retirement (TTR) strategy can allow you to reduce your working hours and ease your way into retirement, or actually help you boost your super savings in the final years before you stop working. Providing you meet certain requirements, you will be able to access your superannuation benefits through a non-commutable pension.
There are significant tax concessions available if you receive your pension payment and are under age 60. But once you reach age 60 you will be able to receive the entire pension payment tax-free.
Regardless of your age there will be no tax payable on the earnings generated by investments within the pension, unlike superannuation in accumulation phase where earnings are subject to tax of 10%-15%.
Update; On 3 May 2016, in the 2016 Federal Budget, the Coalition (Liberal/Nationals) government announced that, from 1 July 2017, it intends to remove the tax exemption on pension fund earnings financing a transition-to-retirement pension (TRIP). The removal of the tax exemption is now law and applies to existing and new TRIPs from 1 July 2017.
If you are thinking about reducing your working hours in the lead up to retirement, you can use the transition to retirement pension to draw an income to supplement your salary and ensure you are able to maintain your lifestyle arrangements.
Even if you are not contemplating retirement, a TTR can be used to increase your superannuation benefits. This is because the income drawn from the pension will be over and above your normal employment income. Through this strategy you are able to generate extra cashflow that is taxed at a lower rate than your employment income.
The additional cashflow can be used to make salary sacrifice contributions into your super fund. By doing so, you will be receiving a concessionally taxed income from your pension and using your other income to make effective “pre-tax” contributions into super, hence maximising the overall tax effectiveness of your situation. There are certain restrictions that must be adhered to, but if properly implemented a transition to retirement strategy could end up producing a significant increase in the final retirement benefit you receive.
You should contact your financial planner to determine how a transition to retirement strategy can be used to benefit you.
Account based pensions are the most popular structures used in generating an income stream to meet ongoing lifestyle expenses in retirement. However, there are other options available to achieve your retirement income objective. One of these would be to purchase an annuity.
An annuity is an investment structure, which you to invest a lump sum amount, and in return receive a regular income payment. An annuity can be purchased using either superannuation benefits or personal funds. Annuities that are purchased with non-super funds can be used to provide a reliable cashflow for people who:
- Do not have any superannuation funds.
- Are unable to contribute into superannuation.
- Do not have access to their superannuation benefits.
There are various types of annuities, all with varying payment terms. Short term annuities usually provide an income at a guaranteed yield for a period between 1 to 5 years, while longer term annuities provide an income payment between 6 and 30 years. You can even select a lifetime annuity, which provides a guaranteed income for your entire life.
Furthermore, you can choose to have part, or all, of your initial investment repaid to you at the end of the term.
There are a number of Centrelink issues associated with holding annuities, including possible pension eligibility concessions under the income test. These issues can be very complex and are based on the type and term of the annuity chosen.
Also, non-super annuities can be a little trickier as the tax treatment of the income stream is different to the superannuation income streams. Therefore, we suggest you seek help from your financial planner before choosing this option.
Your investment timeframe is one of many key variables that are used to determine your overall tolerance to risk. The longer your investment timeframe, the more time you will have to smooth out the short-term performance volatility surrounding your assets.
When you are determining your investment timeframe it is important that you do not stop your calculation upon reaching retirement. The compulsory withdrawal restriction has been abolished, which means you can leave your benefits in superannuation indefinitely.
You may also elect to use your superannuation benefits to provide a regular income through the commencement of an account based pension, or other income stream. Under both of these options you will remain invested throughout your retirement; therefore your investment time frame could extend well beyond your initial retirement date. In fact, many people have more money invested for a greater length of time after retirement than they do beforehand.
In order to develop an investment strategy that is appropriate to your situation and allows you to achieve your future goals and objectives it is essential that you correctly establish your investment timeframe.
Your financial planner can assist you in working through your short and medium term objectives, allowing an accurate interpretation of your long term time frames. Once time frames for each objective have been established, an appropriate investment strategy can be developed.
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