Going into pension mode – the pros and cons!

Created on August 4, 2016 1:32 pm

It has been only a few weeks since we’ve known the outcome of the 2016 Federal Election yet there is still a lot of uncertainty surrounding the proposed changes to superannuation. With the significant superannuation reforms announced in the May 2016 Federal Budget, the pros and cons of going into pension mode need to be considered.

Transition to Retirement (still working and under age 65)

A Transition to Retirement (“TTR”) pension can be commenced in conjunction with a salary sacrifice strategy by drawing a pension and salary sacrificing into your SMSF.

Pros:

  • Provides a flexible pension income stream where you can choose the amount of income you require (within government set annual limits) and how often you wish to receive it (eg. Monthly, quarterly, bi-annually or annually). Hence you can have the flexibility to reduce your working hours whilst continuing to receive the same level of income from your TTR;
  • If you have a tax free component in your pension, this proportion of your pension payments will be tax free and you will be entitled to a15% tax offset; the remaining taxable proportion will be included as your assessable income and tax. Upon turning age 60, the full pension payment will be exempt from tax and no longer need to be included in your tax return;
  • Minimising your tax liability as the investment earnings and capital gains derived from the TTR are tax free (Note: the Federal Budget proposal was to change this and make all earnings supporting a TTR to be taxed at 15% from 1 July 2017 – this is not yet legislation)

Cons:

  • Your TTR may count as an asset under the Assets Test of the Aged Pension which may adversely affect your eligibility for any other government pensions or allowances;
  • You cannot increase the capital supporting the TTR using contributions or rollovers once the pension has commenced. So for any new contributions or rollovers these would be made to a new accumulation account.

Account Based Pensions (retirement)

An Account Based Pension (“ABP”) can be commenced once a member “retires”. The definition of retirement depends on one’s age:

Aged 55 and less than age 60

  • you’ve met your preservation age*; and
  • ceased gainful employment ie. stopped meeting the above work test; and
  • have no intention of returning to work for 10 hours or more each week

Aged 60 and less than age 65

  • you’ve met your preservation age*; and
  • ceased gainful employment ie. stopped meeting the above work test

Aged 65 and over

  • you are deemed retired irrespective of your working status

Preservation Age

DOB from

DOB to

Preservation Age

Reached?

30 Jun 1960 55 On/before 30 Jun 2015
1 Jul 1960 30 Jun 1961 56 1 Jul 2016 – 30 Jun 2017
1 Jul 1961 30 Jun 1962 57 1 Jul 2018 – 30 Jun 2019
1 Jul 1962 30 Jun 1963 58 1 Jul 2020 – 30 Jun 2021
1 Jul 1963 30 Jun 1964 59 1 Jul 2022 – 30 Jun 2023
1 Jul 1964 60 On or after 1 Jul 2024

Pros:

  • if you are over age 60 at time of retirement, the pension payments to you will be tax-free and will not need to be included in your personal tax return;
  • Minimising your tax liability as the investment earnings and capital gains derived from the ABP are tax free (Note: the Federal Budget proposal was to introduce a $1.6m cap on benefits in retirement phase whereby the excess over this cap is to maintained in an accumulation phase account and as such earnings will be taxed at 15% from 1 July 2017 – this is not yet legislation).

Cons:

  • Your ABP will count as an asset under the Assets Test of the Aged Pension which may adversely affect your eligibility for any other government pensions or allowances;
  • You cannot increase the capital supporting the TTR using contributions or rollovers once the pension has commenced. So for any new contributions or rollovers these would be made to a new accumulation account